“Making the ECB measures permanent cannot solve the crisis,” Stark said today in a speech in Lucerne, Switzerland, according to a text supplied by organizers of the event. “Trust among the banks will have to be re-established and that can only be achieved by restructuring and recapitalizing the banking system,” he said. Governments must also take “radical measures to consolidate public finances,” Stark said.
The ECB has led the fight against the crisis by lending banks as much cash as they need and buying sovereign bonds as politicians repeatedly failed to stem the turmoil. Stark, who resigned in September and will step down at the end of the year, has warned that keeping the ECB’s emergency measures in place too long could undermine efforts to get the 17-nation monetary union onto a sound fiscal footing by weakening incentives for governments to reform.
The crisis “can’t be used as an excuse to throw principles overboard that ensure long-term economic stability in the euro area,” he said today. “That goes for governments and central banks. Red lines must not be overstepped, otherwise today’s crisis solution will be the basis for a crisis tomorrow.”
Stark is critical of the ECB’s bond purchases, which he says blur the line between monetary and fiscal policy. Eighteen months after starting what it described as a “temporary” bond program, the ECB is now buying Italian and Spanish debt on a weekly basis in an effort to lower their borrowing costs. Purchases so far total 183 billion euros ($252 billion).
Leaving crisis tools in place too long will “over the medium and longer term weaken governments’ incentives to implement the necessary consolidation and restructuring,” Stark said. He also said during a panel discussion at the same event in Lucerne last night he expects “that in one or two years at the latest, the crisis will be under control, if not overcome.”
The crisis does not threaten the existence of the euro, Stark said.
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