Bundesbank board member Andreas Dombret said the European Central Bank has done its job to buy time for governments to fix weaknesses in the euro’s foundations.
“To those who ask what else the Eurosystem can do, I say that we have done our part, now it’s up to the political leaders to deliver on the fiscal and structural policy side and decide on governance issues,” Dombret said in an interview in London yesterday. “This is why it can’t be a short-term fix.”
The ECB has resisted pressure to step up its crisis response at a time when the euro region’s debt turmoil is forcing Spain to become its fourth member to seek a bailout. ECB President Mario Draghi indicated last week that neither interest-rate cuts nor additional longer-term refinancing operations would be appropriate measures for now.
The ECB “acted decisively” when it lowered interest rates to a record low of 1 percent, flooded banks with more than 1 trillion euros ($1.2 trillion) of cheap cash, and bought sovereign and covered bonds to calm down markets, Dombret said. “All of these measures contributed to stabilize the euro area and buy time to solve the underlying problems,” he said.
German Chancellor Angela Merkel and French President Francois Hollande face the challenges of fighting the crisis by pursuing the least costly way of achieving fiscal and political union while appeasing their electorates. Before a summit in Brussels this month, leaders have focused on the idea of a banking union that would include a single European regulator, euro-wide deposit insurance and a common bank resolution fund.
“A banking union in itself is not a bad idea but it needs to follow fiscal and political union,” Dombret said. “So far I’m not fully convinced that the time bought with the various bailouts and measures has been wisely invested to solve the long-term issues of the crisis.”
The intensification of the debt turmoil, now in its third year, has now forced Spain to apply for external aid. Economy Minister Luis de Guindos on June 9 asked for as much as 100 billion euros to help rescue the banking system of the region’s fourth-largest economy. That bailout will come without additional austerity requirements, European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday.
“One has to distinguish between insolvency of the government or the need for bank recapitalization -- and the solvency of the Spanish government is not in doubt,” Dombret said. “It is part of the Spanish banking system that is in urgent need of recapitalization.”
Still, “the recapitalization of Spanish banks doesn’t mean that the fundamental problems of the sovereign debt crisis in the euro area are solved,” he said.
Among persisting challenges for officials is uncertainty on the outcome of Greece’s June 17 elections, which could hand more power to parties opposed to conditions of the nation’s rescue package and precipitate its exit from the monetary union. Polls show Syriza, which pledges to cancel the terms of the rescue, and New Democracy, which wants changes made to the agreement, vying for first place in opinion polls, with neither party having enough support to govern outright.
While Greece’s potential exit from Europe’s monetary union was previously taboo for policy makers, Draghi acknowledged last month that the country could exit and signaled that the ECB won’t compromise on its key principles to prevent that outcome.
“If there were a Greek exit, purely hypothetically speaking, the first-round effects would be manageable and this would not be the beginning of a complete euro-area disintegration,” Dombret said. “We also believe that second- and third-round effects will be manageable if carefully approached.”
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