The European Commission has proposed recapitalising ailing banks in Europe directly, instead of helping governments.

It has also called for a long-term banking union to reduce the impact of cross border bank failures on member states' borrowing costs.

The Commission said Spain could be given an extra year to meet its budget deficit targets, because of the country's deepening recession.

Under its new economic policy recommendations to member states, the Commission said that Ireland must continue to meet its bailout targets, to minimise the risks posed by adverse developments in the euro area and possible weaker-than-anticipated growth.

The Commission warned France that hitting its deficit target of 3% of GDP by 2013 would prove difficult and urged it to do more to rein in public finances.

Britain, meanwhile, has been urged to build more houses.

In country specific recommendations, it called on the UK authorities to implement a comprehensive housing reform to increase house supply, leading to lower housing costs.