Europe Economy

Euro Zone Growth Above Potential, Not Strong: ECB's Bini Smaghi

The euro zone economy is recovering at a growth rate which is "above potential" albeit "not very strongly," European Central Bank Executive Board Member Lorenzo Bini Smaghi told CNBC on Tuesday.

European Countries Waited Too Long

"We know this crisis has a structural component so the recovery cannot be very strong," he said.

With Spain and Italy's borrowing costs once again rising in auctions on Tuesday, a new Greek bailout deal agreed among euro zone members last week appears not to have calmed investors' nerves.

"There's a general contagion issue. What's happening in the US (the ongoing debt crisis) is also influencing Europe," Bini Smaghi said of widening spreads in Europe's peripheral bond markets.

"There's a moment of uncertainty I would say. Markets want to see more closely what's going to happen," he added. "I think it's a question of implementing the programs in each country, in the case of Italy to implement a budget and stick to it."

Bini Smaghi, who is Italian, said Italy's debt-to-GDP ratio would come down now that the country had adopted tough measures.

Turning to the new bailout for Greece agreed to by euro zone leaders last week, Bini Smaghi said the ECB believed the markets "will digest and hopefully understand the deal and make it possible for Greece to get back to the markets maybe in a couple of years time".

"The problem is that we waited too long. I see the problem is the same here," he said, referring to the ongoing negotiations to reach a deal to raise to debt ceiling in the United States. "We waited too long under pressure of the markets to make a deal. And then of course when the markets lose confidence it takes time to regain it."

It was a lesson lawmakers in Washington might need to learn as well, he said.

"The more you wait, the more under pressure of the markets you are, the more the more costly in the end the deal has to be. The more you are ahead of the curve the better it is," he said.

Rates to Rise, Euro Zone Intact?

The ECB needs to bring interest rates back to a level which is "more consistent with the underlying situation", Bini Smaghi said. "Then we will see. We will see how the situation evolves over the next few months."

The ECB has signaled it could raise rates again next week after keeping rates on hold in June. It increased interest rates to 1.25 percent in April—its first rate hike in two years.

Bini Smaghi said it was not in the interest of any euro zone country to leave the monetary union.

"It would be a disaster. All the liabilities will increase in value. It will force restructuring, default which will leave the country in a social and humanitarian problems," he said.

"It's much better, maybe, to reduce expenditure and pay taxes than to have the wealth of the entire country cut in half."