Mario Draghi said Thursday that the crisis had exposed the inadequacy of the financial and economic framework set up for the euro monetary union launched in 1999.
"That configuration that we had with us by and large for ten years which was considered sustainable, I should add, in a perhaps myopic way, has been shown to be unsustainable unless further steps are taken," he said in response to questions in the European Parliament.
Draghi said the central bank had done what it could to fight the 2 1/2-year-old debt crisis by reducing interest rates and giving €1 trillion ($1.2 trillion) in emergency loans to banks. But it was now up to governments to chart a course ahead by reducing deficits, carrying out sweeping reforms to spur growth and by strengthening the euro's basic institutions. The ECB cannot "fill the vacuum of the lack of action by national governments" in those areas.
He said the next step "is for our leaders to clarify what is the vision ... what is the euro going to look like a certain number of years from now. The sooner this has been specified, the better it is."
In 1989, for example, European Commission President Jacques Delors presented a landmark report that charted the initial path to the creation and launch of the euro a decade later and laid out the goals to be achieved. "The same thing should be done now," Draghi said.
He likened Europe's current struggles to those of a person crossing a river in thick fog while struggling against a strong current.
"He or she continues fighting but does not see the other side because it is foggy. What we are asking is, to dispel this fog," he said.
The euro was set up as a single currency with one central bank, the ECB, to issue the currency and set interest rates. But the different national governments continued to independently determine their budgets and manage their widely different economies. The currency union was unable to prevent some countries from running up unsustainable debt burdens as their economies lagged behind with excessive business costs and economic imbalances such as trade deficits.
European officials have worked to strengthen rules against piling up debt and to tighten surveillance over countries' budgets and economies. More wide-ranging measures — such as a common finance ministry or shared borrowing through so-called Eurobonds — have not found agreement.
Draghi said one first step would be to impose tighter central control over banks through a banking regulator that could force banks to restructure and take over the burden of bailing them out. The European Commission announced plans for such a "banking union" on Thursday.
Banks have been a key part of the government debt crisis. Bank bailouts are a further burden on financially shaky governments, and weak government finances in turn hurt the banks that hold those governments' bonds.
Currently, most powers to regulate banks have been left with national authorities, who have been seen as protective of their domestic financial services industries. The EU's existing regional regulator, the European Banking Authority, has limited powers.
Draghi said bailouts for Bankia in Spain, and before that Dexia in Belgium, show that national regulators are reluctant to admit the extent of troubles at home. That only has the effect of raising the end costs of rescuing the banks and undermining trust and transparency, he said.
"What Dexia shows — and Bankia shows as well — is that whenever we are confronted with the dramatic need to recapitalize, if you look back, the reaction of the national supervisors... is to underestimate the problem, then come out with a first assessment, a second, a third, fourth. "
"That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price," Draghi said in testimony in the European Parliament in Brussels.
Spain said last Friday it would need to put €19 billion ($23.63 billion) into Bankia to rescue it from losses on real estate loans. The company made a successful stock market flotation only last year but has since had to restate earnings and has been taken over by the government. Dexia was bailed out in October by France, Belgium Luxembourg. It was the second time the bank has needed help, as it was bailed out for €6.4 billion in 2008.
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