European leaders must act swiftly and decisively to avoid the disintegration of the euro zone, which European Central Bank chief Mario Draghi said is "unsustainable" in its current form.
Spain is facing imminent financial danger and Greece is already tipped to possibly exit the single currency.
Europe must set out a clear vision of how the single currency area will be run over the next decade, Draghi said.
He made his comments at the European Parliament in Brussels today.
A vital start, he told the Parliament, would be to complete the "banking union" it urgently needs if a four and a half year old financial and economic crisis is not to tear down more lenders and countries.
At the base of a solution European Union leaders need to flesh out at a June 28-29 summit is more austerity, EU economy commissioner Olli Rehn said separately at a conference of economists in the Belgian capital.
Rehn said re-written labour laws and other reforms were required in a host of European nations, many of which have suffered economic recessions during the two-year sovereign and banking debt crisis. There was only minimal scope for public investment to boost growth, he added.
"The next step is basically for our leaders to clarify what is the vision for a certain number of years from now. How is the euro going to look," said Draghi, speaking in his capacity as head of the European Systemic Risk Board.
Warning that the ECB cannot "fill the vacuum" as a lack of capital and risk aversion hampered the markets, Draghi said greater centralisation of oversight was essential, beginning with euro zone banks.
European Commission head Jose Manuel Barroso yesterday said the "building blocks" of a full-fledged euro zone would now include "a banking union with integrated financial supervision and single deposit guarantee scheme."
Draghi compared the troubled euro zone to a swimmer struggling to cross a river in fog. "He or she continues fighting against the current but doesn't see the other side," he said. "We need to dispel this fog."
Defining this clear, long-term vision is the single most important contribution that today's leaders can make to lowering skyrocketing borrowing costs and bolstering growth, Draghi said.
He said the configuration of the euro zone "has been shown to be unsustainable unless further steps are being undertaken."
The financial crisis has changed our perception of risk and heightened our aversion to it "in a dramatic way," Draghi said.
The Frankfurt-based Italian is a firm advocate of what he calls releasing sovereignty upwards - but he said the pooling of national debts, as pursued by French President Francois Hollande, was not a priority.
IMF adds weight to euro zone banking union push
The IMF added its voice today to calls led by ECB head Mario Draghi to set up a centralised euro zone "banking union" complete with common backstops and guarantees.
"Decisive steps toward more complete financial integration would complement the growth agenda and weaken the adverse bank and sovereign feedback loop," International Monetary Fund deputy managing director Nemat Shafik told a conference of economists in Brussels.
Fallout from the European debt crisis has thrust problems in the banking system back at the top of the agenda, with the problem at its most acute in Spain.
There, analysts say that the bursting of property and credit bubbles in a country struggling under recession and massive unemployment has brought the government to the verge of calling for bailout aid from euro zone partners, which usually also involves the IMF.
Shafik said that the building blocks for a genuine single market for finance on a continent where countries have different languages as well as traditions "would involve providing banking support from a common resource pool independent from national sources."
This should happen "sooner rather than later," she said, four weeks from a summit of European Union leaders originally called to decide on measures to boost anaemic growth after two years of harsh austerity.
"To ensure that banks which receive pan-European support are properly restructured and supervised, these banks could over time be made subject to centralised regulation and supervision, through a joint bank resolution authority with a common backstop and a single deposit insurance fund," Shafik spelled out.
A pan-European financial system "would entail some fiscal risk-sharing" and "restoring stability and confidence will require additional pooling of sovereignty," she added.
Like Draghi and EU economy commissioner Olli Rehn, Shafik said that greater fiscal integration more than any pooling of future debt via common issuance of eurobonds "would contribute to lowering sovereign yields" and improve access to money markets.
She said that this approach "would decouple banks from sovereigns and reduce deleveraging pressures," in turn easing the supply of credit and so boosting investment.
