BRUSSELS — The head of the European Union’s executive body urged the region’s leaders Wednesday to show the world that they were ready to move closer together to resolve their debt crisis.
Jose Manuel Barroso told the European Parliament that the continent is facing a “defining moment,” and he said the only way to save the union was to make it stronger and tighter.
He spoke as concerns rose that the group of 17 countries that use the euro could soon fracture and that more countries might ask for bailouts.
Borrowing costs for Spain have shot up in recent days as investors steered clear of buying its bonds. Now, Italy has been caught up, with markets worried that it will be the next eurozone economy to struggle with debts and be ultimately pushed into asking for a bailout.
Greece’s fate hangs on the outcome of an election this weekend that could see a party that wants to renegotiate — or even abandon — the country’s bailout win big. But if Athens strays from the commitments it made to secure its rescue, it could be forced to leave the euro. That would likely deepen the crisis everywhere.
Barroso added that giving Brussels more oversight of Europe’s banks and budgets would help strengthen the region.
“For the long term, I will urge the European Council to take concrete commitments towards a fully developed economic and monetary union and a process that maps out the steps how to get there,” he told representatives in Strasbourg, where the European Parliament meets.
“More than ever, we need a strong ambition for Europe.”
Greek election issues at a glance
Washington investors are dumping Spanish, Italian and even German bonds four days before a Greek election. The election results could potentially trigger financial panic not just across Europe but around the world — a process called “contagion.” Investors are also skeptical about a plan to save Spain’s troubled banks. Here’s a look at the issues:
• THE BIG FEAR: Investors are concerned that Greeks will elect a government this weekend that will reject the terms of a $170 billion bailout that has required draconian budget cuts. If Greece dumps the agreement, it would probably default on its debts and would likely have to abandon the euro, causing chaos across the EU. In part, that’s because Greek debts, now denominated in sturdy euros, would instead be denominated in far shakier Greek drachmas. Banks, businesses and investors that hold Greek debt — and depositors with savings in Greek banks — would absorb huge losses in the transition.
• COLLATERAL DAMAGE: If Greece drops the euro, other weak countries, such as Portugal, could follow. The result would be further losses for lenders and depositors. Stronger countries, such as Germany, would have to contribute heavily to European bailout funds to keep the eurozone from collapsing. Investors are worried that Germany’s debt burden would rise as a result and are driving up the interest rate on safe German bonds.
• WORST-CASE SCENARIO: What scares investors most is a repeat of what happened on Wall Street after Lehman Brothers collapsed in 2008: Banks stop lending to one another. That could happen if banks worry about one another’s solvency in light of losses on European debts. Major international banks are so interconnected that once they lose confidence in one another, fear spreads rapidly across the world. Once it does, investors tend to panic and send stock markets plunging.
• SPANISH FLU: Over the weekend, eurozone finance ministers offered to lend Spain up to $125 billion to strengthen its banks. The bailout plan was supposed to reassure investors ahead of the Greek election. It didn’t. Interest rates on Spanish government bonds have continued to rise, showing that investors lack confidence in the plan. They worry that the bailout loan increases the Spanish government’s debt burden and fear that they’ll be the first to absorb losses.
