The eurozone needs to create an economic government to address internal weaknesses and make it easier to respond robustly to crises, European Central Bank Governing Council member Carlos Costa said on Monday. "We have a monetary arm (the ECB). What we lack is a solid economic arm," he told a banking conference in Lisbon.
"What we need is to establish a model of economic government that would overcome the internal inconsistency of the four fundamental principles: budgetary sovereignty of member states, no assistance, no defaults and no leaving (the euro one)." He said mechanisms also had to be found for providing liquidity to economies under stress. Costa, who is also Bank of Portugal governor, said the country's banks were still very reliant on ECB funding, a situation he considered unsustainable in the long run, and called on the banks to ensure "regular and adequate" financing.
He said it was urgent to deleverage Portugal's financial system and the economy, and to raise the savings rate to guarantee financial stability while the country implements austerity under a 78 billion euro EU/IMF bailout. Costa repeated the Bank of Portugal's recommendation that banks keep reinforcing their base capital and sell non-strategic assets and loan portfolios as well as strengthening deposits.
But he said the banks had shown resilience to adverse shocks and had adequate capital levels, adding that investor confidence in Portugal's banks should be reinforced after all four institutions passed this month's EU financial stress tests.