ECB cannot fill policy vacuum, he warns European Parliament
Europe's leaders must clarify their vision for the euro quickly to dispel doubts about the currency's future, ECB president Mario Draghi said yesterday, warning that the Central Bank could not fill the policy vacuum.
Adding to growing pressure for dramatic policy action at next month's EU leaders' summit, Mr Draghi said the bloc should break 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," Mr 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."
In his sharpest criticism yet of eurozone leaders' handling of the crisis, Mr Draghi said they must spell out detailed plans for the euro and fiscal co-operation, something he believes will require governments to surrender some of their sovereignty to succeed.
"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," he said.
Speaking in Rome, the head of Italy's central bank issued a similar message, arguing that a clear path towards some form of political union was the only way to end the crisis.
"There are now growing doubts among international investors about governments' cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency," Ignazio Visco told the Bank of Italy's annual assembly.
With the debt crisis now centred on Spain's teetering banking sector, Mr 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 central fund that would cope with troubled lenders.
He was critical of Spain's handling of problems in its fourth biggest lender Bankia.
"What Dexia and Bankia shows is that whenever we are confronted with dramatic needs to recapitalise, the reaction of governments is to underestimate the importance of the problem, then come out with a first assessment, then a second, then a third, then a fourth," said Mr Draghi. "That's the worst possible way of doing things."
"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 recapitalisations, in the assessment of needs by banks, it is better to err on the high side."
Mr Draghi believes a three-pillared "banking union", as ECB policymakers have called it, would carry an important message that the bloc was united in support of its lenders, regardless of which country they are in, and that it would represent a symbolic first step towards closer fiscal ties.
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 programme.
Mr Draghi was speaking at a packed parliament hearing as head of the region's recently created super-watchdog, the European Systemic Risk Board (ESRB), but questions and his answers regularly centred on the role of the ECB.
Madrid has called on the central bank to revive its bond-buying programme to help buy some time but that call has fallen on deaf ears so far, although the ECB has fed banks more than €1trn of cheap three-year money since December to avert a credit crunch.
The 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. Elections next month could also see Greeks vote in anti-bailout parties, potentially leading to the country's departure from the euro.
Such a move by Athens could cause bank customers in other countries to fear that their money could one day be redenominated in a much weaker currency. (Reuters)