An urgent solution to the euro zone debt crisis needs to be found otherwise there will be widespread macroeconomic and financial disaster, Juergen Stark, one of the European Central Bank's top policymakers, warned on Friday.
That solution however, is in the hands of political leaders and not of the ECB, he said, urging the euro zone to move ahead with some sort of fiscal union.
If some countries resist that, maybe we are at the stage now where politicians have to agree on a two-speed integration of the euro zone, Stark, one of the ECB's six-member Executive Board, told investors after a presentation at the Forecaster Club of New York.
The euro zone faces a crucial time next week, when the bloc's leaders hold a crunch crisis summit and the ECB has its final monetary policy meeting of the year under growing pressure to show it is prepared to do whatever it takes to save the euro.
The lingering and expanding sovereign debt crisis must be halted to avoid macroeconomic and financial disaster, in the euro area and beyond, Stark said in his speech. A solution needs to be found urgently. No country is immune any more to a loss of market confidence in its public finances.
He pointed the finger at the United States, saying it was now essential for the U.S. to formulate a credible fiscal consolidation program that returns its government debt to a declining path towards sustainable levels.
With the debt crisis taking an increasing toll on the euro zone's economy, the ECB is expected to cut interest rates for the second month running next week by at least 25 basis points -- a move that would shunt them back down to the record low 1.0 percent they started the year at.
On top of that, it is also expected to introduce a new wave of support measures to help the bloc's battered banks, including extending the loans it gives them to up to three years and loosening its rules to make it easier to access its funding.
Stark, who will quit the ECB at the end of the year, stuck to his view that the ECB should not be given the task of solving the crisis, code for no all-out bond buying.
Monetary policy should not be overburdened. Monetary policy in the euro area was and will remain an anchor of confidence and stability. It will remain dedicated to its mandate of maintaining price stability.
Responding to market pressure for the ECB should take a bigger role in the solution of the crisis, he said the bank does not have to follow other central banks' strategy to protect markets against fallout of the crisis.
What other central banks have done does not set precedents for the ECB. What other central banks have done is not the benchmark for us, he said. We have our instruments.
Previously the ECB did not go under 1.0 percent with its main interest rate, but this time around economists believe it could be forced much closer to the zero mark.
Stark, who heads the bank's influential economics department which draws up pre-meeting recommendations on interest rate moves, warned that ultra-low interest rates carried dangers.
Maintaining very low interest rates for a protracted period may weaken the financial incentive for deleveraging for both the banking and non-financial sectors.
Very low interest rates may also discourage banks from trading in interbank money markets. This is an important market for the transmission of monetary policy, Stark said.
(For speech please click on: http://www.ecb.int/press/key/date/2011/html/sp111202.en.html)
(Reporting by Tim Ahmann and Walter Brandimarte; Writing by Marc Jones in Berlin; Editing by James Dalgleish)