European leaders must act swiftly and decisively to avoid the disintegration of the eurozone, which European Central Bank chief Mario Draghi said Thursday is “unsustainable” in its current form.
With Spain facing imminent financial danger and Greece already tipped to possibly exit the single currency, Europe must set out a clear vision of how the single currency area will be run over the next decade, Draghi said.
A vital start, he told the European Parliament in Brussels, would be to complete the “banking union” it urgently needs if a four-and-a-half-year-old financial and economic crisis is not to tear down more lenders and countries.
At the base of a solution European Union leaders need to flesh out at a June 28-29 summit is more austerity, EU economy commissioner Olli Rehn said separately at a conference of economists in the Belgian capital.
Rehn said re-written labour laws and other reforms were required in a host of European nations, many of which have suffered economic recessions during the two-year sovereign and banking debt crisis.
There was only minimal scope for public investment to boost growth, he added.
“The next step… is basically for our leaders to clarify what is the vision for a certain number of years from now. How is the euro going to look,” said Draghi, speaking in his capacity as head of the European Systemic Risk Board.
Warning that the ECB cannot “fill the vacuum” as a lack of capital and risk aversion hampered the markets, Draghi said greater centralisation of oversight was essential, beginning with eurozone banks.
On Wednesday, European Commission head Jose Manuel Barroso said the “building blocks” of a full-fledged eurozone would now include “a banking union with integrated financial supervision and single deposit guarantee scheme.”
Draghi compared the troubled eurozone to a swimmer struggling to cross a river in fog.
“He or she continues fighting against the current but doesn’t see the other side,” he said. “We need to dispel this fog.”
Defining this clear, long-term vision is the single most important contribution that today’s leaders can make to lowering skyrocketing borrowing costs and bolstering growth, Draghi said.
He said the configuration of the eurozone “has been shown to be unsustainable unless further steps are being undertaken.”
The financial crisis has changed our perception of risk and heightened our aversion to it “in a dramatic way,” Draghi said.
The Frankfurt-based Italian is a firm advocate of what he calls releasing sovereignty upwards — but he said the pooling of national debts, as pursued by French President Francois Hollande, was not a priority.
Draghi’s prescription was essentially echoed by Rehn, who said there were no shortcuts available to leaders worried about their own electoral prospects. “To be frank, this is the case if we want to avoid a disintegration of the eurozone and if we want it to survive,” Rehn said.
Warning of “yet another false debate between fiscal consolidation and growth,” Rehn said “genuine stability” came from the follow-through of clear government action.
“Default or disintegration” would likely cause much greater pain for Europe’s citizens than further unpopular austerity and reforms, as it “would lead to terrible depression in Europe and around the world,” Rehn said.
The answer remained “first, by staying the course of fiscal consolidation, second, undertaking structural reforms, and third, by boosting both public and
stimulating private investment in order to provide fuel for the growth engine.”
At this “critical” juncture for the euro, Rehn said “we will not be able to overcome our problems by focusing only on joint issuance of euro debt.”
He said a “much-upgraded firewall” was required, just weeks from the entry into force of the 800-billion-euro European Stability Mechanism.