HELSINKI/ MADRID (Reuters) - Failure to reform and shield weaker members threatens to divide the euro zone, the head of the European Central Bank warned on Thursday, amid fresh signs the currency bloc’s economy is losing speed.
Delivering a blunt message to political leaders, Mario Draghi urged the 18 countries that share the single currency to consider ways to support struggling members, warning of the perils should fears that some might quit the euro be revived.
“Lack of structural reforms raises the specter of permanent economic divergence between members,” Draghi told an audience at the University of Helsinki, choosing unusually frank language.
“And insofar as this threatens the essential cohesion of the Union, this has potentially damaging consequences for all.”
Draghi’s remarks were not limited to reforms in individual countries but also encouraged a rethink of a basic principle underlying the fractious currency alliance — that strong countries are not obliged to help weak ones.
His comments came as the economic clouds over the region darkened. Lending in the euro zone shrivelled further in October while price inflation, a key yardstick of economic health, is very low.
Annual price inflation in Germany, the euro zone’s biggest economy by far, slowed to 0.5 percent in November, its lowest in nearly five years. Spanish consumer prices also dropped for the fifth month running.
Yet enforcing order across the politically divided region in areas such as government spending has proven difficult. On Friday, the European Commission will tell France and Italy — the bloc’s second and third-largest economies — and smaller Belgium that their 2015 budgets risk breaking EU rules.
Nowhere is the contrast between north and south more visible than with France, which has put off reforms, and Germany, committed to not spending more than it earns.
“The biggest danger we see right now is a period of window-dressing where lip service is paid to grand projects and reforms, but no real steps are taken,” leading French and German economists said on Thursday as they proposed a package of reforms and investment.
Draghi’s message comes less than a week after he pledged to take further steps if needed to shore up the flagging euro zone economy and weeks ahead of a meeting of European leaders in Brussels to consider measures to bolster growth in the region.
Draghi would like them to break with the tradition of protecting national interests first and foremost, by forming a united front that would support the bloc’s economic weaklings.
Unlike the United States, the euro zone does not have a system of ‘fiscal transfers’ by which richer members such as Germany can aid poorer states such as Greece.
“Countries need to invest more in other mechanisms to share the cost of shocks,” Draghi said.
“Some form of cross-country risk-sharing is essential to help reduce adjustment costs for those countries and prevent recessions from leaving deep and permanent scars.”
Draghi even broached the sensitive issue of creating what he called “some form of backstop for sovereign debt”, a possible reference to joint guarantees for new debt.
Such ideas are strongly opposed by Germany, the euro zone’s biggest and strongest member, whose politicians fear it could be left on the hook for reckless borrowing by other countries.
Earlier, the ECB warned in a report of the risks that investors were taking in the hunt for return. It cited ‘froth’ in property prices, although Draghi said such bubbles would not stop the ECB from loosening its purse strings if required.
Writing by John O'Donnell; Additional reporting by Jonathan Gould in Frankfurt and Paul Taylor in Paris; Editing by Catherine Evans