Robert Mundell, the economist known as the father of the euro, told CNBC that the European Central Bank (ECB) needs to step up to solve the euro zone crisis.
He said: “The ECB should step up to the plate, and move in. I think that (Mario) Draghi (the ECB President) has made an indication that within his mandate, he will use resources of the ECB to prevent any collapse of the euro area.
“The prime mandate, as a bank, is to avoid inflation, to keep price stability - monetary stability. Another aspect is keeping banking stability: stability of the banking system, stability of the economies.”
Draghi’s pledge to do “whatever it takes” to save the euro helped buoy European markets last week – and on Monday markets were expected to have a positive open Monday after Eurogroup head Jean-Claude Juncker promised leaders would take measures tackle soaring Spanish bond yields (related: the world's biggest debtor nations).
United States Treasury Secretary Timothy Geithner will meet euro zone leaders this week to discuss the situation in the euro zone, a sign that the U.S. is increasingly concerned.
Nobel Prize laureate Mundell is one of the growing number of people who think Spain will ultimately need a full bailout, rather than the bailout-lite which has so far been agreed.
He said: “Spain is going to need a bailout. I think it’s quite clear.
“The Spanish problem is there is a potential sovereign debt problem for Spain. There’s a debt problem for the regional structure of the Spanish system. And there’s a banking system problem.”
Other leading economists like Jim O’Neill, chairman of Goldman Sachs asset management, argue that a bailout of the euro zone’s fourth-largest economy is not inevitable.
Mundell, whose work on currency areas is credited with providing the economic foundations for the euro, said that the currency could still become a reserve currency which could compete with the euro, if proposals for jointly-issued Eurobonds go ahead.
He said: “There are trillions of dollars out there that are available for coming into Europe if they could just solve this problem of the southern flank of Europe and the weakness of the debts of these countries.”
Instead of issuing bonds for all the euro zone countries straight away, Mundell thinks that the euro zone should start with a jointly-issued bond including just the stronger countries, then phase in weaker countries.
“You could start with the stronger countries and gradually, countries could come into it as they get their fiscal things in step. It’ll be like a two-stage process,” he said.
Safe havens like German Bunds are now at historic lows, while countries perceived as more risky, like Italy and Spain, have hit euro era highs.
Retirement age is a key issue for the whole euro zone, Mundell argued. He said that the region should ultimately move the age at which people can draw state pensions forward to 67 to combat the demands of an aging population.
—By Catherine Boyle, staff writer at CNBC.com