TOPWRAP 2-Brussels calls Germany naive, markets take fright

* Commission won’t propose treaty changes – Barroso

* Spain bails out savings bank.

* Euro falls 1.5 pct, lending rates rise

* IMF says Spain faces severe challenges

(Recasts)

By Brian Rowan and Judy MacInnes

BERLIN/MADRID, May 24 (BestGrowthStock) – The European Commission’s
chief accused Germany on Monday of making naive proposals to
combat the euro zone debt crisis, while financial markets took
fright after Spain bailed out a small savings bank.

The International Monetary Fund also called on Madrid to
make major economic reforms, saying it faced severe problems
including a dysfunctional labour market.

With Europe’s leaders still divided over how to safeguard
the euro project, Commission President Jose Manuel Barroso took
a swipe at German Chancellor Angela Merkel’s assertion that
changes to the EU treaty were unavoidable.

“We will not propose treaty modifications even though we are
open to good ideas,” he told a German newspaper.

“It would also be naive to think one can reform the treaty
only in areas Germany considers important,” he said in an
interview with the Frankfurter Allgemeine Zeitung. [nLDE64N17P]

European Union leaders agreed a $1 trillion safety net for
the euro currency earlier this month after Merkel dropped her
long-standing opposition. This prevented the debt crisis which
began in Greece for spreading to other euro zone countries with
big budget deficits and debt loads, such as Spain and Portugal.

But Merkel, facing anger at home that Germany would fund the
bulk of any bailout, has said the agreement merely bought some
time, and Europe had to deal with governments which threatened
the currency bloc by breaking the EU’s budget and debt rules.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on Greek bailout: http://link.reuters.com/rad45k

Graphic on the euro zone: http://link.reuters.com/fyw72j

For poll on risk of Greek default [ID:nLDE64J250]

For related news stories: [nLDE64I0RB]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Barroso suggested any attempt at rewriting the EU treaty
would open a Pandora’s box of conflicting demands.

Berlin wants to strengthen enforcement of EU budget rules
with stiffer penalties such as withdrawal of some EU funding and
the voting rights of countries that are rampant violators.

“There are already procedures by which states with excessive
deficits do not vote. Under constitutional law it would be
nearly impossible to do more, in my view,” said Barroso.

SEEKING LEADERSHIP

Financial markets seeking firm leadership from Europe in
overcoming its economic problems have not taken such public
bickering well. But on Monday a local problem with a small
Spanish bank caused jitters across markets globally.

The euro fell (Read more about the trembling euro. ) about 1.5 percent, stocks see-sawed and
bank-to-bank funding costs rose after the Spanish central bank
took over savings bank CajaSur on Saturday. [nN24251075]

Gold prices rose more than 1 percent as investors moved into
a traditional retreat during uncertain times.

“People are going into safety. Things are not going to
change overnight,” said George Goncalves, head of U.S. interest
rate strategy with Nomura Securities International in New York.

Europe ought to be in relatively good shape, with the
falling euro helping its exporters to sell into regions which
are growing more strongly such as the United States and Asia.

But analysts said there was still no confidence that euro
zone governments could solve the problem.

“Strong global growth, an expansionary monetary stance and a
falling euro would normally point to solid euro-area growth. But
the deterioration in credit markets represents an important
challenge to a fragile euro-area recovery,” said Darren
Williams, senior European economist at Alliance Bernstein.

A BAD TIME FOR SPAIN

CajaSur’s rescue came at a bad time for the Spanish
government, which last week announced a 15 billion euro
austerity package to repair public finances.[nLDE64N0AQ]

Analysts said the stability of Spain’s financial system was
not at risk. “Foreign investors could be reading the CajaSur
intervention as a signal that further bank bailouts could be on
the cards and are extrapolating the savings banks’ situation to
the rest of the system … But there is no foundation for this,”
Renta 4 bank analyst Nuria Alvarez said.

The IMF was less sanguine, saying Spain must make
far-reaching, comprehensive reforms.

“The challenges are severe: a dysfunctional labor market,
the deflating property bubble, a large fiscal deficit, heavy
private sector and external indebtedness, anemic productivity
growth, weak competitiveness, and a banking sector with pockets
of weakness,” the IMF said in a report. [nLDE64N14D]

Spain faces the threat of a general strike over the
austerity measures and unions are still trying to agree labour
market reforms to reduce its unemployment rate from 20 percent,
the highest in the euro zone. [nLDE64N0E5]

Italy, which is also carrying a huge debt burden, is acting
to combat its problems. An austerity budget which the cabinet is
due to approve on Tuesday cuts public sector hiring and pay,
temporarily delays retirement for some state workers and reduces
funds to local government, according to a draft. [nLDE64N0V4]

Stock Market Today
(Additional reporting Gavin Jones in Rome, Walter Brandimarte
in New York, Ian Chua in London, Paul Day in Madrid; editing by
Myra MacDonald)

TOPWRAP 2-Brussels calls Germany naive, markets take fright