ECB's Stark: Crisis puts euro under threat

AP News
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Posted: Sep 22, 2011 8:05 AM
ECB's Stark: Crisis puts euro under threat

The departing chief economist of the European Central Bank warned Thursday that heavy levels of government debt threatened the existence of the euro currency, and urged the EU to take much tougher steps to force overspending governments back into line.

Other economists have warned that the euro's existence is in jeopardy but Juergen Stark's statements in a paper with three other economists are unusual because they come from a high-ranking central banker. European officials have usually stressed that they will do what is necessary to preserve the euro, come what may.

Stark and his coauthors said huge levels of government debt "risk undermining stability, growth and employment, as well as the sustainability" of economic and monetary union itself.

The paper, which was published on the ECB website but does not represent the bank's official views, also dismissed steps recently agreed by European Union leaders to strengthen controls over national government spending as insufficient because they give governments too much leeway to go easy on each other.

The economists say Europe needs far tougher measures, such as appointing administrators to oversee finances in countries that need bailouts, as Greece, Ireland and Portugal have.

Stark is resigning almost three years before the end of his term amid talk that he is unhappy with the bank's crisis measure of propping up weak governments by buying their bonds.

Europe is facing a crisis brought on by some eurozone member governments running up debt approaching or exceeding 100 percent of economic output. Fears of a government default has led to sharp increases in the interest rates demanded by bond investors to loan them money. Those higher rates have in turn threatened to push countries into default.

Greece, Ireland and Portugal needed bailouts to avoid default. Eurozone government organized the rescues out of fear that a default _ failure to pay all that is owed _ would inflict heavy losses on banks that hold government bonds and leave them unable to lend to businesses.

Stark and coauthors Ludger Schuknecht, Philippe Moutot and Philipp Rother urged the eurozone to get much tougher on overspending governments. They said governments should need unanimous consent of the other 16 euro members to run deficits above the official limit of 3 percent of gross domestic product, a supposed ceiling that has been flouted by many countries since the euro was established in 1999.

Countries that failed to stick with the terms of their bailouts should be placed under a financial administrator who would approve further budgets.

They also called for a politically independent European budget office to assess government spending.