Its current design means that different countries will be at different stages of the economic cycle at different times while the ECB’s mandate of price stability makes it difficult to reduce the imbalances between creditors and debtors, he told a seminar organised by the European Policy Centre.
The euro area is poorly equipped to deal with asymmetric shocks such as excessive capital inflows and bursting of construction or finance bubbles, because there are no fiscal transfers between eurozone countries that are temporarily strong or weak.
“The only alternative at present is internal devaluation which involves social damage, cutting costs, layoffs and wage cuts in public and private sectors,” he said.
The result is a lasting deterioration in human and physical capital that also erodes the growth potential of other states as well. Cuts in education, social investments and labour market policies can unleash longer-lasting economic divergence within the monetary union, increasing the disadvantages of the common currency, he said.
High unemployment and severe social problems puts pressure on public budgets and lead to social unrest.
Deeper reform of the Economic and Monetary Union is needed to safeguard the nascent recovery, he said.