He argues that the main threat to Europe’s economy is not Greece but undisciplined and poorly capitalised banks with a complicated web of inter-connections.
Speaking at a Tokyo conference on global financial regulation, he said: “The biggest thing you need is forcefully injecting enough capital into the banking system.
“The source of current problems is not Greece. The source of current problems in the eurozone is that various financial exposures we all have in the interbank market are not yet resolved because certain financial institutions are insufficiently capitalised, insufficiently disciplined.”
Posen, considered an “arch-dove” and the member of the bank’s monetary policy committee most supportive of further quantitative easing, said action from the world’s central banks had prevented the financial crisis from getting worse. But monetary policy alone won’t solve structural problems such as those of the banking system, he said.
European markets suffered a rout last week on fears that Greece would default on its debts and leave the euro, causing a ripple effect across larger economies such as Italy and Spain and potentially leading to the break up of the single currency.
But Posen pointed to the fact that the UK and US appeared to be in a better position to weather the crisis after taking decisive action to nationalise banks as soon as they got into trouble.
His comments came as Spain admitted a nationalised bank laden with toxic real estate assets will require a fresh injection of public money of up to €7.5 billion (£6bn), but dismissed suggestions from France that the banking sector as a whole needs to be bolstered with European money. The cash for struggling Bankia will come from an existing bank rescue fund and will have to be paid back. Many Spanish lenders are heavily exposed to an imploded property bubble, and Bankia is the worst off of all, with €32bn in toxic assets.
Markets remain concerned about the state of the Spanish banking sector as well as the wider economy, which is in recession and weighed down by an unemployment rate of about 24 per cent. The country’s benchmark borrowing rate is hovering just below levels that forced Portugal and Ireland to seek a bail-out.
New French president Francois Hollande suggested recently that Spanish banks might need re-capitalisation funds from Europe, although that was strenuously denied by his Spanish counterpart.
Last week, European Union finance ministers agreed on tougher capital rules for banks, resolving years of sparring between Britain and the rest of the EU over how to craft measures to prevent another financial crisis.
Britain has been urging its banks to make contingency plans for at least six months, and the Bank of England has said that irrespective of whether there was a eurozone break-up, the way ahead would be painful for Britain as well as the rest of the EU.