Europe’s leaders must clarify their vision for the euro quickly or risk disaster as the European Central Bank cannot fill the policy vacuum, ECB President Mario Draghi said on Thursday.
Adding to growing pressure for dramatic policy action at next month’s EU summit, Draghi said the bloc should err on the side of doing too much rather than too little, breaking away from the incremental approach that has failed to get ahead of the eurozone debt crisis for more than two years.
“Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,» Draghi told the European Parliament. «Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no.”
With the debt crisis now centered on Spain’s teetering banking sector, Draghi said a banking union in the region would need to be supervised centrally and require the introduction of a European deposit scheme and a resolution fund.
“The financial crisis has heightened risk aversion in a dramatic way,» he said.
“I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little. In bank recapitalizations, in the assessment of needs by banks, it is better to err on the high side.”
EU paymaster Germany has so far firmly opposed any collective European banking resolution and guarantee system or any use of bailout funds to help banks without a country having to submit to a politically humiliating EU/IMF austerity program.
Draghi was speaking as head of the region’s created super-watchdog, the European Systemic Risk Board (ESRB).
Madrid has called on the ECB to revive its bond-buying program to help buy some time but that call has fallen on deaf ears so far, although it has fed banks with more than 1 trillion euros of cheap three-year money since December to avert a credit crunch.
A long-running debate about closer economic union in the eurozone has been reignited by mounting concerns that Spain, weighed down by its creaking banking system and heavily indebted regions, may need an international bailout, and fears that Greeks will vote in anti-bailout parties at elections next month, which could hasten their exit from the eurozone.
Such an eventuality could cause bank customers in other countries to fear that their money could one day be redenominated in a much weaker currency.
Asked about a potential bank run, Draghi said: «We will avoid bank runs from solvent banks. Depositors money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected.”
EU leaders will discuss a closer economic union at their end-June summit, EU Commission President Jose Manuel Barroso said on Wednesday. He too said its elements should include a banking union, joint financial supervision and bank deposit guarantees.
The Commission also floated the idea of giving Spain longer to make the deficit cuts demanded of it.
“The next step … is to clarify what is the vision a certain number of years from now,» Draghi said. «How is the euro going to look like a certain number of years from now? What is the union vision that you have a certain number of years from now? The sooner this is specified, the better it is.”