KAI PFAFFENBACH
The whole euro currency project is in danger due to member states' runaway spending and subsequent sovereign debt crises, a European Central Bank study co-authored by executive board member Juergen Stark said.
The study, perhaps the most strongly-worded warning about the future of the euro by a central banker, serves as Mr. Stark's parting shot and weakened the currency, which extended falls against the dollar, dropping to a seven-month low of $1.3465 (U.S.).
The ECB said earlier this month Mr. Stark would leave the central bank for personal reasons. Sources have told Reuters that his unhappiness over the ECB's decision to reactivate its bond-buying program was his reason for leaving.
"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU (European Monetary Union) itself," the study said.
Mr. Stark has a long track record of pressing politicians to enforce stricter rules for the common currency area.
"That is exactly what they should be doing in this environment," Royal Bank of Scotland economist Silvio Peruzzo said. "Effectively they have been the only anchor of stability."
The research paper, which was published by the ECB but not expressly endorsed by it, also said countries which do not abide by the agreements on debt should surrender their economic powers to the European Union.
Countries' unwillingness to surrender powers to a common authority was counterproductive, the study said. It doubted whether the latest suggested reforms would be sufficient.
It called for strengthening fiscal governance by, among other measures, "financial receivership where adjustment programs do not remain on track."
National budget deficits should be approved at the European level if they exceed "safe levels," there should be an automatic correction of slippages and countries with budget deficits in excess of three per cent of gross domestic product should face automatic fines, Mr. Stark and his co-authors said.
So far, three euro zone countries – Greece, Ireland and Portugal – have had to resort to EU-IMF rescue bailouts after their debt servicing costs rose to unsustainable levels.
In addition, the ECB has spent more than €150-billion buying government bonds off troubled states, including Italy and Spain, to stop crisis contagion.
In addition to Mr. Stark, who remains in charge of the ECB's economics portfolio until a successor is named, the study was authored by Ludger Schuknecht, Philippe Moutot and Philipp Rother.
Mr. Stark was one of the architects of the rules governing the euro and has fought demands to relax them.