BRUSSELS (Reuters) - Europe's leaders must clarify their vision for the euro quickly to dispel doubts about the currency's future, ECB President Mario Draghi said on Thursday, warning that the Central Bank could not fill the policy vacuum.
Adding to growing pressure for dramatic policy action at next month's EU leaders' summit, Draghi said the bloc should break away from the incremental approach that has failed to get ahead of the euro zone debt crisis for more than two years.
"Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no," Draghi told the European Parliament. "Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no."
In his sharpest criticism yet of euro zone leaders' handling of the crisis, Draghi urged they spell out detailed plans for the euro and fiscal cooperation, something he believes will require governments to surrender some of their sovereignty to succeed.
"How is the euro going to look like a certain number of years from now? What is the union vision that you have a certain number of years from now? The sooner this is specified, the better it is," Draghi said.
Speaking in Rome, the head of Italy's central bank issued a similar message, arguing that a clear path towards some form of political union was the only way to end the crisis.
"There are now growing doubts among international investors about governments' cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency," Ignazio Visco told the Bank of Italy's annual assembly.
BANKING UNION
With the debt crisis now centered on Spain's teetering banking sector, Draghi said a banking union in the region would need to be supervised centrally and require the introduction of a European deposit scheme and a central fund that would cope with troubled lenders.
He was critical of Spain's handling of problems in its fourth biggest lender Bankia.
"What Dexia ... and Bankia shows ... is that whenever we are confronted with dramatic needs to recapitalize, the reaction of ... governments ... is to underestimate the importance of the problem, then come out with a first assessment, then a second, then a third, then a fourth," said Draghi. "That's the worst possible way of doing things."
"I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little. In bank recapitalizations, in the assessment of needs by banks, it is better to err on the high side."
Draghi believes a three pillared "banking union" as ECB policymakers have called it, would carry an important message that the bloc was united in support of its lenders, regardless of which country they are in, and that it would represent a symbolic first step towards closer fiscal ties.
EU paymaster Germany has so far firmly opposed any collective European banking resolution and guarantee system or any use of bailout funds to help banks without a country having to submit to a politically humiliating EU/IMF austerity program.
BANK RUNS
Draghi was speaking at a packed parliament hearing as head of the region's recently created super-watchdog, the European Systemic Risk Board (ESRB), but questions and his answers regularly centered on the role of the ECB.
Madrid has called on the central bank to revive its bond-buying program to help buy some time but that call has fallen on deaf ears so far, although the ECB has fed banks more than 1 trillion euros of cheap three-year money since December to avert a credit crunch.
The long-running debate about closer economic union in the euro zone has been reignited by mounting concerns that Spain, weighed down by its creaking banking system and heavily indebted regions, may need an international bailout. Elections next month could also see Greeks vote in anti-bailout parties, potentially leading to the country's departure from the euro.
Such a move by Athens could cause bank customers in other countries to fear that their money could one day be redenominated in a much weaker currency.
Asked about a potential bank run, Draghi said: "We will avoid bank runs from solvent banks. Depositors money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected."
The ECB's push for a more centralized approach to the financial sector appears to be gaining some traction.
EU leaders will discuss a closer economic union at their end-June summit, EU Commission President Jose Manuel Barroso said on Wednesday. He too said its elements should include a banking union, joint financial supervision and bank deposit guarantees.
The Commission also floated the idea of giving Spain longer to make the deficit cuts demanded of it.
(Reporting by Marc Jones, John O'Donnell and Gavin Jones,; Writing by Mike Peacock; Editing by Catherine Evans)