(AP) BRUSSELS - The European Union's executive office on Wednesday called on the 17 countries in the eurozone to create a "banking union" that can centrally oversee and - if needed - bail out the sector, which has become a weak link in the continent's financial system.
Bank failures have already overwhelmed the public finances of Ireland, forcing it to take an international bailout, and some fear Spain could be next. The European Commission, while recommending that Spain be given an extra year to meet its deficit targets, suggested that regulation of the entire eurozone banking sector be done centrally.
In its recommendations on how to deal with the financial crisis which has pushed the shared single currency to the brink, the commission said it wants to boost cross-border management of banks, which are currently overseen by a patchwork of national regulators with different rules.
Part of that would see the eurozone's permament bailout fund, the ESM, charged with paying for bank bailouts. That would protect individual governments from having their public finances overwhelmed by the cost of rescuing a bank.
EU Commission President Jose Manuel Barroso said the ESM should be better able to help out troubled banks across national borders if need be. In the future, "the building blocks could include a banking union with integrated financial supervision and a single deposit guarantee scheme."
"Direct recapitalization by the ESM might be envisaged," the commission's report said.
The commission also made specific recommendations to nations mired in the financial crisis on how to manage its national budgets and rein in debt and spending.
Spain, which is currently the focus of the European financial crisis, should be given an extra year - to 2014 - to get its budget deficit back within European targets.
EU Commissioner Olli Rehn said the Spanish government should be given such an extension only if it can effectively control the excessive spending in the semi-autonomous regions and present "solid two year budget plans for 2013 and 2014."
In this case, "we are ready to consider proposing an extension of the deadline to correct the excessive deficit by one year," Rehn said.
European leaders will consider the commission's recommendations before making a ruling at a summit in June.