Still much left to do, ECB's Praet says

One of the European Central Bank's top officials called for a public debate on what it means to be a member of the single currency bloc.

Otherwise, countries ran the risk of pursuing politically easy policies which in the longer-term could carry very elevated costs, ECB chief economist Peter Praet said in a speech on Thursday.

"Looking forward, in order to sustain a high level of social welfare in the long term, euro area countries need to ensure that macroeconomic adjustment occurs smoothly and to prevent the build-up of durable imbalances," he said.

To drive home his point, he held out the example of Spain, where authorities were happy to ride a construction boom before the last financial crisis while it lasted, ignoring the gradual loss of competitiveness of their economy as faster prices led to a 'real' strengthening in the country's exchange rate versus those of its euro area peers.

However, in his judgement every member country apparently still had work to do, going on to say that: "These recent developments give reason to hope that cross-country interdependencies within Monetary Union will be better internalised in national decision-making processes."

On a more positive note, in his speech the economist also called attention to the reforms which were now being put in place in France, after it too realised that it had lost competitiveness.

However, in the case of the euro area's second-largest economy the chief reason for that had been wage gains which, while moderate, had nevertheless outstripped labour productivity growth.

With more immediate implications for monetary policy and financial markets, Praet said that: "We cannot yet declare 'mission accomplished' on the inflation front, but we have made substantial progress on the path towards a sustained adjustment in inflation."

He also called for authorities in the bloc to push ahead in finalising their banking and capital markets union by setting-up a European deposit insurance scheme and a backstop to the Single Resolution Fund.

"An incomplete banking union may not be able to shield the euro area from financial re-fragmentation in a renewed crisis situation.

"Likewise, an incomplete capital markets union may impair the capacity of the financial system to share risks across Member States through private channels."