FRANKFURT, Germany – The head of the European Central Bank warned Thursday that the euro currency union is "unsustainable" without stronger political and financial ties, and called for a new course to save it from a crippling debt crisis.
Mario Draghi heaped criticism on European political leaders for being slow to respond to the 2½-year crisis, saying delays and half-measures had only made the situation worse.
Speaking to the European Parliament in Brussels, Draghi said the central bank has done what it could to fight the problems by reducing interest rates and giving $1.2 trillion (€1 trillion) in emergency loans to banks. Now, he said, it is up to the 17 member countries to devise a broad vision for the future.
The ECB cannot "fill the vacuum of the lack of action by national governments," he said, urging sweeping reforms to spur growth, reduce deficits and create a Europe-wide banking regulator.
Beyond that, the euro needs a fundamental reworking of its rules and management, he said, calling the current structure "unsustainable unless further steps are taken."
Europe's leaders need to "clarify what is the vision ... what is the euro going to look like a certain number of years from now? The sooner this has been specified, the better," said Draghi, a plain-speaking Italian and MIT-trained economist.
"What we are saying is to dispel this fog."
The blunt diagnosis from the ECB chief came as the eurozone enters another tumultuous period of financial and political instability. Investors are worried that recession-hit Spain will be unable to prop up its banks burdened by toxic bad loans — and that it will follow Greece, Portugal and Ireland in asking for an international bailout the eurozone can ill afford. These jitters have sent Spain's borrowing costs soaring and stock markets plummeting.
And in just over two weeks Greece returns to the polls with the real possibility that it might elect a government that rejects the terms of its multibillion-dollar bailout. This could force the country out of the euro, irreparably fracturing the eurozone and further roiling markets.
Perhaps the clearest sign of danger is the state of the euro itself: It is at a two-year low against the dollar, as investors pull money out of euro countries.
Olli Rehn, the European Commission's top financial and monetary affairs officer, echoed Draghi by calling for a "long-term road map." He said there was "no easy fix" if EU leaders "want to avoid the disintegration of the eurozone and instead make the euro survive and succeed for its member countries, and especially its citizens."
Italian Prime Minister Mario Monti, himself a Yale-trained economist, added his voice to calls for an overhaul in the way the eurozone is managed. Speaking to an economic forum in Brussels on Thursday, he warned his fellow EU leaders that they face a backlash at the polls if they do not stop the crisis of confidence from spreading throughout the rest of the region.
"I think Europe should accelerate its efforts in order to limit the contagion, not simply because a huge financial contagion and crisis would be a frightful event, but even more because this would dismantle support for sustainable fiscal discipline," he said.
Draghi's latest comments highlight the problems at the very heart of the eurozone. The euro was set up back in 1999 as a single currency with a singe central bank, the ECB, to issue the currency and set interest rates. But the different national governments continued to set their own budgets and manage their widely different economies. The currency union was unable to prevent some countries from running up huge debts.
And whereas recent measures such as the fiscal pact have helped strengthen rules against piling up too much debt, more wide-ranging measures — such as a common finance ministry or shared borrowing through so-called eurobonds — have not found agreement.
Draghi told European Parliament leaders on Thursday that a first step to solve these problems would be to impose tighter central control over banks. The banking industry has been a key part of Europe's government debt crisis. Bailing out the banks is a huge burden on financially shaky governments, and weak government finances in turn hurt the banks that hold those governments' bonds.
Most powers to regulate banks have been left with national authorities, who have been seen as protective of their domestic financial services industries. The EU's regulator, the European Banking Authority, has limited ability to intervene.
Draghi added his voice Thursday to calls for a central authority that could take over the burden of bailing out banks and also force them to overhaul their finances. The European Commission announced plans for such a "banking union" on Wednesday.
Bailouts for Bankia in Spain, and before that Dexia in Belgium, only highlight how reluctant national regulators are to admit the extent of troubles at home, Draghi said. That in turn has raised the end costs of rescuing the banks and undermining trust and transparency, he said.
"What Dexia shows — and Bankia shows as well — is that whenever we are confronted with the dramatic need to recapitalize, if you look back, the reaction of the national supervisors ... is to underestimate the problem, then come out with a first assessment, a second, a third, fourth."
"That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price," Draghi said.
Spain said last week that it would need to put $23.63 billion (€19 billion) into Bankia to rescue it from losses on real estate loans — money that investors worry Spain does not have. The company made a successful stock market flotation only last year but has since had to restate earnings and be taken over by the government.