The euro single currency area must shore itself up with reforms or face renewed threats of a breakup when a new economic crisis strikes, a top European Central Bank (ECB) official warned on Friday.
“Even a small downturn could create large economic and social costs. It could, once again, test the cohesiveness of the currency union,” ECB board member Benoit Coeure said at a conference in Ljubljana, Slovenia.
Optimism has returned to the 19-nation single currency area in the past few months, as the economy appears finally to be climbing out of the gloom that followed the financial crisis.
GDP growth surged to its fastest pace in a decade at 2.5 percent last year, statistics agency Eurostat said this week.
However, “institutional failings that caused and perpetuated the crisis remain unresolved,” Coeure said. “These are deep-rooted issues that cannot be resolved by a few years of above-trend growth.”
He outlined three “lines of defense” that policymakers should fortify to brace the eurozone against future shocks.
First, financial and service industry markets should be more closely integrated across Europe to better absorb potential blows without calling on taxpayer funds, Coeure said, while incentives for national governments to reform their economies while the sun is shining must be rethought.
Second, governments must create “fiscal space” — reducing spending to build up a financial buffer for bad times — while the European Stability Mechanism, cobbled together during the crisis to lend to stricken states, should have a broader mandate and be turned into a formal Brussels institution, he said.
Third, the euro area “needs a fiscal instrument that can help it cope with large shocks without having to rely excessively on the ECB,” Coeure added.
French President Emmanuel Macron has made creating a eurozone budget controlled by a common finance minister a key plank of his drive to reform the bloc, and conservative German Chancellor Angela Merkel has sounded cautiously open to such plans as coalition talks come to a head with the centre-left Social Democratic Party.
Yet, there remain deep differences between Berlin, Paris and other eurozone members about whether a shared budget is necessary or desirable and what it should be used for if created.
Coeure urged at least “visible progress on the first two” of his proposed lines of defense — in part to spare the ECB from the risk of overstepping its legal bounds.
It has set interest rates at historic lows and bought almost 2.3 trillion euros (US$2.87 trillion) of government and corporate bonds, fulfilling ECB President Mario Draghi’s 2012 promise to do “whatever it takes” to safeguard the single currency.
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