In the high-stakes game absorbing the euro zone, the stronger economies have got to show their hands to help restore stability, a former central bank official told CNBC Monday.
“The stronger countries like Germany haven’t given a clear enough signal about how they see this evolving,” Andrew Sentance, former Bank of England Monetary Policy Committee (MPC) external member and senior economic adviser at PwC, told “WorldWide Exchange.”
While there has been plenty of focus on the weaker peripheral countries like Greece and Spain in recent weeks, core countries have to make their intentions clearer, he argued.
“The center hasn’t been strong enough to impose discipline on countries and to maintain the confidence of the markets,” Sentance pointed out.
Markets have been spooked this month by political uncertainty as more extreme parties won votes in Greece’s inconclusive election at the beginning of May.
Measures currently being discussed in the markets include a greater fiscal and economic union, potentially reinforced by new joint bonds known asEurobonds.
“We should think of Europe not moving to a fiscal union very quickly. Europe tends to move in stages,” Sentance warned.
“The institutions and the processes at the center have to be strengthened to restore confidence in the euro. Without this, it’ll be very difficult to find our way out of the situation.”
The European Central Bank , which previously helped steady the markets through a huge, two-stage liquidity injection known as a long-term refinancing operation (LTRO), has come under pressure to further shore up the continent’s banking system. Bankia, formed out of some of Spain’s regional banks after the credit crisis, Monday became the latest bank to need a bailout – although it looked as though Spain would be responsible for shoring it up.
“The ECB is trying to stand behind the banking system as a whole. It has to be careful in terms of specific banks,” Sentance said.
“It may be that as (the situation of) some of these other countries’ banks become clearer, we have to see more action to make sure that the financial system remains steady.”
“The time that has been bought (by the LTRO) has not necessarily been used very productively or used to resolve the underlying problems,” he added.