Euro zone member Slovakia believes it might be better for some states to leave the currency if they cannot make necessary reforms, its prime minister said on Friday, saying a de facto split already existed.
Prime Iveta Radicova said governments in some of the more indebted countries had lied to their own people and their European partners, helping create the current storm. Saving the currency bloc was vital for Slovakia and other members, she said, but it required painful choices.
Slovakia has been a vocal critic of bailouts for indebted states during the crisis and did not take part in the first aid package for Greece.
Radicova said a currency exit for some states might be the least worst option.
I do not think it would be that damaging, she told Reuters in an interview in London. You know, I like Greece. It is a wonderful country. But they have defaulted on their debt before and we can say, maybe, that it is their style. If they want to keep up that style they will have to do it from outside the euro zone... we have to ask countries if they want to play a part... it is much more broad-based than Greece.
She did not say whether she had discussed this with key euro zone members such as France and Germany. Germany in particular has denied discussing such an option -- although Radicova said a growing split already existed.
If we have a look at what is going on, we have to say that de facto breakup is already here, she said. If we look at the southern euro zone, we can see there is a systematic need for change.
Any country that left might be able to continue using the euro domestically, she said, but would no longer be part of the wider bloc. Slovakia itself, she said, was keen to remain part of the euro even if others left.
Slovakia was one of the last countries to join the 17-nation bloc, and whilst its membership remains domestically popular the cost of bailing out fringe euro zone states has been politically explosive.
Radicova saw her government fall last month after it lost a confidence vote largely over funding the European Financial Stability Facility. After initially failing to pass through parliament, the measure eventually passed but only after the ruling coalition agreed to elections in March.
Radicova herself, a former sociologist, will then stand down and play no part in the election campaign.
We have to do everything we can so that the euro does not fail, she said. Otherwise, all of us who need to ask for loans from the financial markets will have terrible problems, just like Italy, perhaps worse.
She said she did not believe it would be right for the European Central Bank to embark on quantitative easing or become a lender of last resort, saying this would be impossible without treaty changes. She also said it was wrong to expect Germany to shoulder even more of the cost of bailing out profligate borrowers.
Germany has already paid much of the price of this crisis, she said. I do not believe they can do more.
The answer to the crisis, she said, was for individual states themselves to address their debt and other problems by reining in spending, recapitalising banks and putting themselves on a more sustainable path.
Asked what the greatest mistake made by Europe's powers was, she said they had not been honest enough with their people.
The problem was that politicians were not willing to tell the truth. (Southern European states) were lying, not only to their own people but also to their European partners. That is why we have the situation we have now and we have this crisis of trust and confidence.
Slovakia had been the first country to warn that bilateral loans to Greece alone would not solve the problem, she said, as the true problem went much deeper. Globally, she said the roots of the crisis went back to deregulation under former U.S, President Ronald Reagan in the 1980s while in Europe short-term solutions to early euro zone problems had only made matters worse.
The problem was that national governments did not act according to agreed principles. Governments did not act according to the principle of no bailouts. The ECB did not behave according to its own rules. Now we are facing the need to find new principles for the euro zone and how to control them, how to monitor them... Such a decision is not so easy and I do not think we are able to find a solution to it in two or three months.
But overall, she said Slovakia had not made a mistake by joining the single currency. Membership not only allowed closer exporter ties with richer euro zone states, but help insulate Slovakia from the first round of the financial crisis in 2008-9.
We are an export-oriented economy, she said. Overall, it has brought more positives than negatives.
(Editing by Toby Chopra)