European policymakers have to remain prepared for the worst and cannot afford to be complacent, despite the additional liquidity provided to the banking system, former European Central Bank official Bini Smaghi told CNBC Wednesday.
“In the past, so many times, we thought that the worst of the crisis was over, and then new waves of instability came in. So it’s no time for complacency—we have to prepare for the worst,” said Smaghi, who worked for the ECB during much of the ongoing euro zone crisis.
He warned that the market "will test whether politicians really mean what they said" at some point.
However, those in the markets betting on a euro break-up will be proved wrong, he believes.
"I think markets will understand that betting against the euro is not the right strategy," he said.
Still, the Italian economist, who stepped down from the ECB board last year, said that the single currency could end up as the world’s second reserve currency after the dollar, despite a turbulent year during which many have cast doubt on its future.
“It’s not in the interest of emerging markets to go back to the unipolar system with only the dollar as the safe haven. It’s not good for the world in general to have only a few safe assets. If you think about all the difficulties, all the problems we had during the last two years, the euro exchange rate is still there, and it’s in a range where I would say, it’s relatively strong,” he told CNBC. “There are many people who still believe in the euro and I think this is a currency that is safe.”
After Greece secured a deal on its debts earlier this month, the markets’ focus has turned to other euro zone economies such as Portugal and Ireland. The European authorities should make it clear that they can continue to back those countries, Smaghi said, even if they can’t come back to the markets next year as planned. He called for the European Financial Stability Fund—the euro zone bailout fund—to be made bigger.
He also gave some insight into the decision-making process at the top of the euro zone.
“Unfortunately politicians have been determined, but always a bit too late,” he said. “Most decisions were taken at the last minute…on Sunday nights. It’s just too risky…to manage a currency like this. You’re just putting too much at stake. So for politicians to be more credible, they have to anticipate the problems and take early decisions.”