Europe’s economic outlook and market conditions remain “daunting,” and without a broader fiscal union the single currency may not survive, said European Central Bank governing council member Ignazio Visco.
“The European and global economic outlook and financial market conditions are daunting,” Visco, who also heads the Bank of Italy, said today in a speech in Venice at a conference on U.S.-Italian relations.
European governments need to take “courageous moves towards fiscal and financial union” to break the link between sovereign risk and bank risk, he said. “Without the design and implementation of appropriate governance arrangements, monetary union is difficult to sustain,” Visco said.
His remarks came as finance ministers of the 17 nations using the euro prepared for a conference call to extend emergency aid to Spain to shore up its banking system that is hobbled by billions of euros of bad real-estate loans and assets. Spain would become the fourth country after Greece, Ireland and Portugal to seek support since the outbreak of the region’s debt crisis more than two years ago.
Visco also called on leaders of the Group of 20 nations to adopt more growth policies and said the U.S. needs to avoid “a sharp fiscal tightening, such as would be produced in 2013 by the legislated automatic spending cuts and the expiry of earlier tax reductions.”
The ECB was instrumental in using its non-ordinary measures such as 1 trillion euros ($1.3 trillion) of three year loans to ease tension in banking markets. Those measures remain essential, but temporary, Visco said.
“It is crucial to observe that the euro system’s non-standard measures are temporary,” he said. “They constitute a bridge that has yet to be crossed. A complete exit from the crisis will be achieved only if all actors properly shoulder their responsibilities.”
Visco praised the government of Italian Prime Minister Mario Monti and its predecessor led by Silvio Berlusconi for implementing more structural reforms “since the summer of 2011 than during the previous decade.” Still, the crisis isn’t over and more needs to be done, particularly in cutting spending enough to reduce the country’s growing tax burden.
“The recent fiscal consolidation consisted chiefly of tax increases,” he said. “This burden can be sustained only temporarily. A stronger and more incisive fight against tax evasion and the implementation of spending cuts are the indispensable premises for the necessary reduction of tax rates.”