As markets eagerly await a decision from the European Central Bank (ECB), which holds its policy meeting on Thursday, Robert Zoellick, former president of the World Bank, warned that monetary easing will do little to solve the region’s debt crisis.
“Monetary policy fundamentally buys time. It doesn't deal with the fundamentals,” Zoellick told CNBC in Singapore on Monday.
Following ECB President Mario Draghi’s pledge last week to do “whatever it takes” to protect the euro zone from collapse, there were news reports on Friday that he was discussing a rate cut and new liquidity program, among other measures.
Zoellick, however, said what is most critical right now is that debt-laden nations like Spain and Italy implement fiscal and structural reforms.
“They have to make reforms. The Germans are right, they (Spain and Italy) have to fix their fiscal situation, but also structural reforms for competitiveness,” he said.
He added that euro zone nations need to ensure that Spain and Italy have access to funding as they carry out their reforms — through measures such as the European Stability Mechanism or euro bonds.
“The most difficult issue is (avoiding a) mismatch between the time that the reforms will take effect and their financing,” he said.
In addition to this, he said ailing Spanish and Italian banks must be recapitalized. The European Union earlier this month agreed to lend up to 100 billion euros ($125 billion) to rescue Spanish banks.
Role of the US in Debt Crisis
Discussing the role of the U.S. in solving the European debt crisis, Zoellick says first and foremost, America has to get its own fiscal house in order.
“The tendency is to kick the can down the path and maintain the status quo through inaction. That won't work this time,” he said. “There's over a trillion dollars in spending cuts that will be made in defense and non-defense unless you act.”
By the end of the year, if Congress and President Barack Obama cannot agree on deficit-reduction targets, a series of tax increases and automatic budget cuts are set to kick in.
If the U.S. is successful in reining in its budget deficit, it would be a big boost in confidence for global markets, Zoellick added.
—By CNBC's Ansuya Harjani