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Top EU official seeks closer political, financial union

- Associated Press - Wednesday, September 28, 2011

BRUSSELS (AP) — A senior European Union official on Wednesday called for closer political and financial unification on the Continent as fractures emerged among leaders on how to solve Greece's debt crisis.

In a State of the Union speech at the European Parliament in Strasbourg, France, Jose Manuel Barroso, who heads the executive European Commission, came down firmly in favor of the 27-nation EU having a stronger central government.

"If we do not move forward with more unification, we will suffer more fragmentation," he said. "I think this is going to be a baptism of fire for a whole generation."

Worries grew on Wednesday that cracks are reemerging within the eurozone over how to handle Greece's enormous debt burden.

A report in the Financial Times claimed as many as seven of the eurozone's 17 members want the banks to take a bigger hit on their Greek bond holdings. Citing unnamed senior European officials, the newspaper said Germany and the Netherlands are at the forefront of the calls for the private sector to take a bigger hit. France and the European Central Bank are said to be fiercely resisting the move.

"Today, we are facing the biggest challenges that this union has ever had to face throughout its history — a financial crisis, an economic and social crisis, but also a crisis of confidence," Mr. Barroso said.

As well as facing a crisis in the eurozone, the wider EU is dealing with problems afflicting its borderless travel area that many observers say call for stronger central management of the union. More integration though would mean that member countries would lose some powers they long have considered part of their national sovereignty.

Mr. Barroso also used his speech to back proposals for a tax on financial transactions, which he said could raise 55 billion euros ($74.7 billion) a year.

Also Wednesday, the head of the European Central Bank told an Italian newspaper that governments should speed up their implementation of measures to fight the Continent's debt crisis.

ECB President Jean-Claude Trichet's comments to Corriere della Sera came as lawmakers in Germany prepared to vote Thursday on measures that will give the 17 countries that use the euro more powers to fight a debt crisis that's already led Greece, Ireland and Portugal to seek bailouts. Greece is lumbered with so much debt that many in the markets think it will have no option but to default.

The measures include giving the eurozone bailout fund the ability to buy government bonds, bail out banks and lend to troubled governments quickly before they are in a full-fledged crisis.

Finland's Parliament approved the measures on Wednesday.

Mr. Trichet called on leaders "to demonstrate their sense of direction" and quickly put the new steps into effect.

He said in an interview to be published later that "now is the time for effective action, implementation, verbal discipline and a stronger team spirit."

The measures being voted on were agreed to by eurozone leaders July 21, but the delay in implementing them has been one of the main reasons for the turmoil in financial markets over the past few weeks.

While waiting for approval of the agreements, the ECB has stepped in to buy government bonds and drive down borrowing costs for Italy and Spain.

Fears that the eurozone's third- and fourth-largest economies, respectively, may get sucked into Europe's debt crisis have stoked fears they would lose access to market funding and be forced into requesting bailouts, as Greece, Ireland and Portugal already have.

The ECB launched the purchases only reluctantly, and Mr. Trichet indicated he expected the bailout fund — the European Financial Stability Facility — to be in a position to take them over.

Still, the 440 billion euros ($597 billion) available from the EFSF has not reassured markets, and so far, European leaders have resisted suggestions to increase its size.

Markets also have watched nervously as eurozone authorities pushed Greece to make more cutbacks to qualify for an installment of bailout money that is needed to keep the country from defaulting.

Greece's international debt inspectors will return to Athens on Thursday after suspending their review of the country's finances early this month amid talk of budget shortfalls.

Once the fact-finding mission has made its conclusions, the finance ministers of the eurozone will organize a special meeting in October to assess them.

A positive review is required before the International Monetary Fund, ECB and European Commission can release the next batch of rescue loans Greece needs to avoid bankruptcy.

A default by Greece or another country would send shock waves through the global economy, particularly in Europe, authorities fear. Banks would suffer such large losses on government bonds they hold that they would cut off credit to the wider economy and cause a recession.

David McHugh in Frankfurt, Germany, contributed to this report.

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