ECB President Draghi Warns of Unsustainable Euro Zone Structure

Arjun Dave
31 May, 2012
New York City

ECB President Mario Draghi offered his sharpest and direct criticism of political leaders in the euro zone and said half-measures and delays by political leaders have made the crisis worse. He also urged to regulate large banks at the European level and set up a deposit insurance fund.

ECB President Mario Draghi told a committee of the European Parliament in Brussels, “The configuration we had for ten years, which was considered sustainable, has been shown now to be unsustainable unless further steps are undertaken.”

Draghi was referring to the structure of the euro zone and offered his sharpest criticism of political leaders in six months since taking office in November. He said political leaders need to decide what kind of euro zone they want and half-measures by political leaders have made the crisis in the euro zone “worse.”

He also said to the committee that the “E.C.B. will continue to lend to solvent banks” and we will “avoid bank runs by solvent banks” but added that the central bank’s ability to support the banking system was close to its limits and political leaders need to do more if they want to.

In his stepped up criticism of the political leaders in the region, he offered stern and direct response to the question, “Can the E.C.B. fill the vacuum left by the lack of euro area governance?” and said “the answer is no.”

The central bank governor was direct in his remarks and said that the central bank can make sure that the banks have enough money to meet daily needs but it cannot help banks to replenish depleted capital reserves.

Draghi also urged lawmakers to establish a deposit insurance fund at banks in the euro zone and avoid the impending bank runs and said large banks should be regulated directly by European authorities and not by the national authorities.

Four banks in Greece also were able to access the European Central Bank funding after they were recapitalized by Greece. These banks are Alpha Bank, National Bank of Greece, EFG Eurobank and Piraeus Bank.

Draghi confirmed that Greek banks that were cut off from normal lines of credit were reinstated after Greek government recapitalized four largest banks with 18 billion euros or $22.5 billion in capital from the bailout funding that was received from the European Union.

Separately at a conference in Brussels, the European Commission’s leader Olli Rehn said that the euro zone needs stronger crisis fighting measures and tougher fiscal discipline.

In addition, Bank of Italy’s Governor Ignazio Visco added his voice to the growing chorus of pressure on Germany and said political inertia and poor economic choices had put the “the entire European edifice” at risk.

He added in a keynote speech to the bank’s annual meeting high level of Italian taxes are incompatible with strong economic growth and urged the government to sell state assets to lower government debt.