Warnings mount on euro crisis, credit crunch

Thu Sep 22, 2011 7:33am EDT
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By Sakari Suoninen and David Ljunggren

FRANKFURT/OTTAWA (Reuters) - The euro currency project is in danger due to member states' runaway spending and the resulting sovereign debt crisis, a European Central Bank study warned on Thursday amid mounting global calls on Europe to take more decisive action.

The study, perhaps the most strongly-worded warning about the future of the euro by a central banker, was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank's policy of buying troubled countries' bonds.

"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU (Economic and Monetary Union) itself," the research paper said.

The report, published by the ECB but not officially endorsed by it, called for compulsory fines on states that run deficits above 3 percent of GDP and "financial receivership where adjustment programs do not remain on track."

The European Union's new super-watchdog, the European Systemic Risk Board, warned that the knock-on effects of the debt crisis that began in Greece in 2009 had led to considerably higher risks of financial instability in Europe.

"Risks to the stability of the EU financial system have increased considerably," the ESRB said in a statement issued late on Wednesday.

"The high inter-connectedness in the EU financial system has led to a rapidly rising risk of significant contagion. This threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond.

The board chaired by European Central Bank President Jean-Claude Trichet, which includes central bankers, regulators and economists from around the 27-nation EU, called for "decisive and swift action" from policymakers, widely seen as being slow in the fight to contain the crisis.   Continued...

<p>Former chief economist of European Central Bank (ECB) Juergen Stark reacts during a meeting in Vienna September 15, 2011. REUTERS/Herwig Prammer</p>