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Jun 4, 2012 6:01 AM GMT+0800 Spanish Prime Minister Mariano Rajoy said European leaders shouldreinforce efforts to protect euro- area banks, ratcheting uppressure on German Chancellor Angela Merkel to back new ideas for aresolution of the debt crisis. With markets bracing for further deterioration in Spain s financesector and a possible Greek departure from the 17-member euro area,Rajoy on June 2 added his voice to calls for a more robust banking union in Europe, lending his support for a centralizedsystem to re-capitalize lenders. On the same day, Merkel toughenedher opposition to euro-area debt sharing, telling members of herparty in Berlin that under no circumstances would she agree toGerman-backed euro bonds. The EU needs to reinforce its common institutional architectureso that investors regain confidence in the single currency, Rajoysaid in the Spanish coastal town of Sitges near Barcelona. Spainwill emerge from the storm through its own efforts and with thesupport of our European partners. As euro-area unemployment reached its highest level on record,manufacturing output contracted for a 10th straight month in Mayand the currency plunged close to a two-year low against the U.S.dollar, leaders continued to wrangle over the details of supportfor the currency bloc. President Barack Obama meanwhile laid theblame for sluggish U.S. employment at the feet of euro-arealeaders, saying they haven t done enough to resolve the crisis,now in its third year. Bailout Pressure Merkel s isolation was underlined yesterday by the new FrenchFinance Minister Pierre Moscovici, who said that aid for troubledEuropean banks should come through the European Stability Mechanismrather than through governments. We need to go toward a bankingunion, Moscovici said on RTL radio. Any request for bank aid must be made by sovereign states, NorbertBarthle, budget spokesman for Merkel s Christian Democrats inparliament, said in a May 29 interview, citing the need fornational governments to act as guarantors. Merkel and Finance Minister Wolfgang Schaeuble have urged Rajoy toaccept an international bailout, Der Spiegel magazine reported,without saying where it obtained the information. Spain s El Paissaid yesterday that the European Union is also pressing Spain toaccept funds, citing unidentified officials in Brussels. Merkel schief spokesman Steffen Seibert and a Spanish government officialdeclined to comment on the reports. Future of Europe Cyprus, the bloc s third-smallest economy, is also increasinglylikely to seek a bailout if recapitalization efforts for CyprusPopular Bank s fail, ECB Governing Council member PanicosDemetriades said yesterday. Greece, Ireland and Portugal havealready received assistance. Billionaire investor George Soros, speaking yesterday in Trento,Italy, said that European leaders, foremost among them Merkel, havea three-month window in which to correct their mistakes andreverse the current trends. We need to do whatever we can to convince Germany to showleadership and preserve the European Union as the fantastic objectthat it used to be, Soros said. The future of Europe depends onit. Yields on German two-year notes fell below zero for the first timeever last week as investors fled riskier sovereign debt. Spanishbonds dropped for a fourth week, pushing the country s 10-yearyields above 6.5 percent -- nearing the 7 percent threshold whichtriggered the three earlier bailouts. Cede Sovereignty Struggling to shore up confidence in Spain s banking industry,Rajoy urged euro-area nations to cede more sovereignty to acentral fiscal authority and endorsed the European Commission scall for a banking union that would entail a single regulator and adeposit-guarantee fund. Such a union, comprising a central rescue fund for lenders andcentralized deposit guarantees, would only emerge at the end of along path, Bundesbank Vice President Sabine Lautenschlaeger toldthe June 2 edition of Frankfurter Allgemeine Zeitung. The shared risk implied by a supranational euro fund can only bea success in a fiscal union with central controls and interventionrights, Lautenschlaeger told the newspaper. Facing down criticism that Germany needs to relent in itsopposition to a range of proposals from jointly issued debt tochanneling funds to banks, Merkel added nuance to her position oncentralized controls last week by welcoming a set of Commissionproposals calling for such measures and referring to possibilities for greater cooperation. The German leader meetsEuropean Commission President Jose Barroso in Berlin today. New Possibilities We could certainly make clearer to international financialmarkets what s going on in Europe in terms of new institutions andnew possibilities in order to relieve the concern that perhapsbanks are unstable, Merkel told reporters in Stralsund, Germany,on May 31, following a reference to banking insurance. She addedthat certain changes would require treaty amendments and suggesteda time line of five to 10 years. The chancellor s hard line on debt sharing has been challenged byItalian Prime Minister Mario Monti, who told Greece s To Vimayesterday that euro bonds will occur in some form. Monti will hosta meeting with Merkel, Rajoy and French President Francois Hollandein Rome on June 22, ahead of the next EU summit at the end of themonth. Euro Break-Up Those meetings take place after Greece holds its second election inas many months on June 17, with polls signaling a risk that noparty will win an absolute majority. The possibility that acoalition supporting the European bailout package will again fallshort has stoked speculation that the country could leave themonetary union and fragment a bloc designed to be unbreakable. As crisis-resolution talks continue, Obama has become morevociferous in his call to action, with the impact of Europe stroubles increasingly cited beyond the EU s borders. The U.S.president said on June 1 that the slowest month of employmentgrowth in a year was partly attributable to Europe and the cloudthat s coming over from the Atlantic. Obama dispatched Lael Brainard, Treasury undersecretary forinternational affairs, to Europe last week for a three-day visitfor talks with officials overseeing the crisis. She traveled toAthens, Madrid, Paris, Frankfurt and Berlin. Europe is having a significant crisis in part because theyhaven t taken as many of the decisive steps as were needed to dealwith the challenge, Obama said in Minneapolis. 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