GALWAY, Ireland (Reuters) - Canadian Finance Minister Jim Flaherty urged European leaders on Thursday to move swiftly toward greater banking integration and to use public funds if necessary to recapitalize their banks, saying their "incremental" actions so far had failed.
"The risk of a disorderly crisis continues to mount. This is an escalating situation ... we're very concerned," Flaherty told Canada's CTV network, saying there was "a lot of money on the sidelines now" because of market uncertainty.
"We've seen this movie before. This could get very ugly unless they (European leaders) take clear action," he said from Ireland after giving a speech in Galway that focused on the crisis.
Flaherty, speaking as a summit of European Union leaders in Brussels began, told his audience that any plan to ease the European debt crisis should include a more effective firewall to break the link between problems in the banking sector and sovereign finances, steps toward deposit insurance for European banks, and "ensuring euro zone banks are fully capitalized, using public funds if necessary".
"And there cannot be market confidence unless there is a solid plan to address the underlying challenges in a way that's credible and believable by the markets," Flaherty said.
The minister, in Ireland to receive an honorary law degree, said that the recent stalling of the economy in Canada's top trading partner, the United States, and the political gridlock in Washington were also of "very serious concern".
But, as an outspoken critic of European policymakers for acting too slowly in the crisis, he concentrated his remarks on the summit on Thursday and Friday, which he said was Europe's chance to get it right.
"Unfortunately, the euro zone response has been incremental and, so far, has failed to break the negative feedback loops that characterize the European crisis," he said.
"The world hopes that European leaders, meeting at the summit ... agree on - and quickly begin to implement - the bold actions that they understand are needed."
Flaherty said a change in public opinion, particularly in European paymaster Germany, was also needed, urging a move away from the concept of rich electorates feeling like they are being asked "to subsidize early retirement schemes and people who don't pay taxes" in other countries.
He said a country such as Germany must realize that it profits greatly from a devalued euro and that this has been a tremendous advantage to their standard of living and quality of life.
"It is not a one way street," he said, adding that it is in the self-interest of the German population to take the necessary steps take to avoid a crisis.
Yet with EU leaders in their 20th summit since the crisis began, Flaherty warned that it might be too late by the time further rounds of negotiations come to an end.
"Unfortunately they (EU talks) will continue until the 11th hour, the 59th minute and they may take place at a time when markets have already created disorder and it may be a very difficult egg to descramble."
Writing By Louise Egan, Padraic Halpin and David Ljunggren; Editing by Jeffrey Hodgson