Stressing that his assessment is not a typical German view, Peter Bofinger, a member of the German Council of Economic Experts, described a “vicious triangle” of three interconnected, mutually-reinforcing crises: first, the banking crisis, as seen for example in Ireland, Spain and Cyprus. This banking crisis became a public debt crisis, which forced countries to take tough austerity measures and led to a macroeconomic crisis, he argued.

Draghi’s intervention created more confidence in the stability of the euro, but it did not really have any impact on the vicious triangle, said Bofinger, pointing out that the recession is intensifying and affecting an increasing number of EU member states. He warned that the public debt crisis is showing no sign of abating either, and debt-to-GDP ratios are worsening despite austerity, public spending cuts and higher taxes – because austerity is also hitting GDP growth.

None of the three interconnected crises are improving and they are unlikely to in the near future, said Bofinger. He argued that the fiscal consolidation programmes had been overly ambitious.

Bofinger argued that there was too much fiscal consolidation, too quickly: “the doctors weren’t fully aware of the consequences of their medicine” and severely underestimated the multipliers of fiscal consolidation. In line with the IMF’s philosophy, savings were made by cutting public expenditure rather than by increasing taxes – this had the effect of depressing the economy, he said.

In the euro zone, the general fiscal policy stance for this year is clearly still restrictive, said Bofinger, predicting that pro-cyclical fiscal policies will continue in 2013 and 2014. To emerge from a recession, any textbook will tell you that you need deficit spending and anti-cyclical fiscal policies, he argued. Bar a miracle, “I don’t see how with pro-cyclical policies we’ll ever get out of this,” he said.

He argued that responsiveness to structural reform in the countries that needed it most had actually been high: the problem is that the impact of structural reform has been overestimated.

Bofinger warned that the euro will not survive without a paradigm change. He argued that there is no substitute for measures that enhance growth in the short term, and claimed that the current debate centred on bailing-in depositors with deposits above 100,000 euros and a restructuring of public debt is a recipe for disaster.

He argued that in the short term, the euro zone needs a classical demand stimulus programme worth 1-2% of euro-area GDP. This should be used to boost public investment, particularly in European transport and energy networks, as well as to subsidise renewable energies, energy-efficient cars, and energy conservation in private buildings, he said.

In Bofinger’s view, there must be more fiscal integration and enhanced political integration. Eurozone finance ministers should be granted direct surveillance powers over national budgets, which implies some transfer of national fiscal sovereignty, he argued, declaring that “fiscal sovereignty is already a myth anyway”.

It would therefore be feasible to transfer some fiscal sovereignty to the European level in return for joint debt and mutual liability, with the possibility to throw countries out of the euro if necessary, the economist argued. A banking union will also be an important element of this Euro 2.0, he added.