In an unusual departure from traditional EU language, European Commission vice-president Olli Rehn and Italy’s Prime Minister Mario Monti have issued dramatic warnings yesterday (31 May) on the euro zone, while European Central Bank chief Mario Draghi openly admitted that the common currency was fighting for its survival.
Despite unprecedented steps to safeguard financial stability since the euro zone debt crisis erupted two and-a-half years ago, “we are still in troubled waters”, Commission Vice President Olli Rehn said, admitting that the Union had managed so far to “contain the crisis, not tame the crisis”.
Addressing the annual Brussels Economic Forum, Rehn went on to issue a stark warning: “We need both a genuine stability culture in the eurozone and its member states and a much upgraded common capacity to contain financial contagion and reduce the borrowing costs for its members. This is the case at least if we want to avoid a disintegration of the Eurozone”.
Asked later on whether the statement amounted to official backing for jointly issued European debt – or so-called Eurobonds –, Rehn's spokesperson did not give a clear answer, saying that the sentence had been quoted out of context.
'Huge possibilities of contagion': Monti
After Rehn, it was the turn of Mario Monti, the Italian Prime Minister, to voice his frustration during a video-streamed speech at the Brussels Economic Forum.
Public opinion in Italy and in other peripheral countries in the euro zone is likely to turn against reforms, Professor Monti warned, as people see no market response to their hard efforts for fiscal consolidation.
The spread on Italian bonds remains high, even though everyone agrees that Monti’s government is pursuing the right reforms and is making serious efforts for fiscal consolidation. This lack of “appreciation” from the markets will likely trigger a social backlash, the Italian Prime Minister warned. That is why Europe should accelerate its efforts to limit contagion, by introducing instruments such as collective bank deposit guarantees, he argued.
"It is obviously a difficult place to be in, when you have a country displaying massive and concentrated efforts of consolidation and structural reforms, which are obviously politically and socially costly, and sees its position threatened by huge possibilities of contagion," Monti said.
Draghi: Deposit guarantee scheme 'will avoid bank runs'
Meanwhile, the President of the European Central Bank (ECB) Mario Draghi urged Europe's leaders to clarify their vision for the single currency quickly or risk disaster, warning the European Parliament that the ECB could not fill the policy vacuum:
"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," Draghi said, calling for an EU-wide banking supervision and resolution system.
"The financial crisis has heightened risk aversion in a dramatic way," Draghi 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," he added, citing the repeated failure of national regulators to correctly assess the needs of failed Franco-Belgian bank Dexia and Spain's Bankia.
Another ECB policymaker, Bank of Italy governor Ignazio Visco, went further, saying political inertia and bad economic decisions had put "the entire European edifice" at risk and only a clear path to political union could save the euro. “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," Visco told the Bank of Italy's annual meeting.
European leaders have agreed to discuss plans for deeper economic integration as part of their longer term plans to solve the ongoing debt crisis in the euro area.
European Council President Herman Van Rompuy will present a report on 28 June exploring ways to deepen economic integration, including the subject of Eurobonds, which would pool part of European debt and reduce the borrowing costs of fragile economies like Spain or Italy.
France wants Eurobonds introduced quickly but Germany opposes this, saying it could consider them only after a new stage in the EU's fiscal and economic integration. The European Central Bank has argued along the same line.
- 17 June: Greece holds parliamentary elections;
- 17 June: France holds second round of parliamentary elections;
- 22 June (date not confirmed): the leaders of Germany, France, Spain and Italy to meet in Rome;
- 28-29 June: Regular EU summit in Brussels to discuss growth;
- 1 July: Target date for the European Stability Mechanism to enter into force
- Commission:Olli Rehn speech at the Brussels Economic Forum Brussels
- Commission:Olli Rehn speech, webstreaming
- Commission:Mario Monti speech, webstreaming