Interest rates set in Frankfurt are no longer reliably transmitted to business borrowers and consumers across the euro area, the governor of the Central Bank has admitted.
Fears that one or more countries could drop out of the euro has damaged the transition mechanism by making markets more volatile and less predictable, he said.
"The emergence of redenomination risk in market perceptions and its disruptive influence have generated undesired and damaging yield volatility," Patrick Honohan said in speech to the David Hume Institute in Edinburgh last night.
"Additional corrective action, as recently announced, is clearly necessary."
Before the euro crisis "there was no great difficulty" in ensuring that the interest rate levels could be transmitted by market forces across the the euro area.
"That can no longer be taken for granted," he said.
In his prepared speech, Mr Honohan also warned that there were conflicting expectations of what might be achieved by the planned European Banking Union.
The plan should lead to more peace of mind for ordinary people about the safety of their bank deposits, but could not completely end the risk banks could be hit by "runs" – especially by larger customers pulling out their cash, he admitted.
"Greater private sector involvement in burden-sharing of future banking failures is envisaged, and if the single supervisory mechanism is sufficiently proactive and prompt, then it will not use substantial public funds," he said.