Unless the European Union (EU) formulates an effective response to the ongoing debt crisis in Europe, the continent faces a new wave of bank failures and a string of sovereign defaults, according to Willem Buiter, the chief economist at Citigroup.

In a report published in the British newspaper The Daily Telegraph, Buiter, a former member of the Bank of England, said the euro zone is trapped in a “game of chicken between the European Central Bank (ECB) and governments in charge of fiscal policy.

The market is not going to wait until March for the EU authorities to get their act together,” Buiter stated. “We could have several sovereign states and banks going under. They are being far too casual.”

Both sides, he claims, are attempting to push responsibility onto the other for financially supporting Southern Europe and Ireland, thereby raising the risk of widening contagion.

Buiter described the current malaise as “a poisonous cocktail” and the EU/IMF policy response as “woefully inadequate.”

“There is a very small pot of money for a very big crisis,” he noted.

Buiter also denounced the EU’s bailout fund mechanism as an insolvency machine because it charges exorbitant rates of 6 percent, which prevents debt-stricken countries from escaping their trap.

I don’t know why they bothered to create it, he said.

Buiter noted that the ECB has an intangible asset of 2 trillion to 4 trillion euros arising from its powers to create money and that the central bank could intervene on a grander scale if it so desired -- but such a thing would be highly unpopular in the EU’s most powerful member, Germany.

German politicians view the monetization of sovereign debt as the road to Weimar,” he noted. “They expect the ECB to be the heir to the Bundesbank and not the Reichsbank.”

Fears are growing that Portugal and perhaps Spain will need a bailout and that the EU will not have sufficient funds to help these nations.