As Greece edges ever close to a heavily anticipated default, the European Central Bank needs to step up measures to support growth if it wants to prevent the euro zone from slipping back into recession, Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley told CNBC.com.
“When restructuring takes place it does irreparable damage to Europe’s banking system and to other heavily indebted countries," Eichengreen said. That is why it is taking policymakers so long to admit that Greece needs to restructure its debt, according to Eichengreen.
“There has to be a plan to ring-fence other countries,” he said.
Eichengreen is critical of the ECB’s failure to protect countries such as Italy and Spain, whose bond markets have come under attack despite the fact that they are, in his view, experiencing liquidity problems but are not insolvent.
"There is disagreement about who should pay. It is taking time," he said, adding that "a Greek default will happen. Everyone in financial markets acknowledges that openly".
According to Eichengreen, the odds of the euro zone slipping back into recession are "quite high".
“The ECB remains slow to support growth. It needs to support growth and recognize inflation,” he said. Cutting interest rates would be one way of supporting growth, he said.
The European Central Bank raised rates in April for the first time since the 2008 crisis, brushing off concerns over slow growth and inflation, but has since then halted its tightening cycle.
“The ECB has not been a constructive force in debt restructuring. It has vacillated about supporting other European bond markets. It raised rates too early,” he said, adding that the central bank was also too slow to acknowledge this “mistake”, he said.
It is now crucial that European leaders unveil a plan to tackle the debt crisis swiftly, Eichengreen said.
G20 finance ministers are meeting in Paris on Friday and Saturday where the worsening crisis will be the main talking point, but analysts do not expect the meeting to yield any concrete plans.
“All we will hear will be statements of intent,” Eichengreen said. He expects leaders to refocus, moving away from talk of fiscal consolidation and emphasizing growth.
“It is critical that European leaders deliver something here,” he said.