The International Monetary Fund said Friday that the European economy and financial system remained weak and urged the region to quickly clean up its banks in order to advance toward a banking union.
In a first-ever assessment of the stability of the European Union financial system, the IMF said banks in the region were still weak and needed more capital strengthening.
"Much has been achieved to address the recent financial crisis in Europe, but vulnerabilities remain, and intensified efforts are needed across a wide front," the IMF report said.
"Financial stability has not been assured," it said, pointing to continued falls in asset prices, distrust of sovereign debt and the overall weak economy, which remains in recession.
The first priority, the IMF said, is to shore up banks by cleaning up their balance sheets, weighed down by large but still-unclear levels of bad assets, and put them through more stress tests.
Secondly, the EU must complete the establishment of a region-wide financial oversight mechanism, necessary to strengthen the eurozone currency union and the single market for banking, and then a regional resolution mechanism for winding up failed financial institutions.
All that needs to be done this year, the IMF emphasized, stressing that market and economic threats continued to hang over the European economy.
With those jobs tackled, it said, the region can move toward a banking union with, ideally, a road map laid down by the middle of this year.
"The crisis has shown that national decisions, even well-intended ones, have Unionwide repercussions on financial stability, and that there is a need for single frameworks for crisis management, deposit insurance, supervision and resolution, with a common backstop for the banking system."
The IMF acknowledged some significant progress toward a single supervisory mechanism and a banking union.
However, it said, as long as EU members failed to unite on an EU-wide approach to financial stability, the system remains "vulnerable to shocks, and generates incentives for national ring-fencing and fragmentation."