Failure to rein in budget gaps in the euro zone could hurt the euro's credibility and drive up bond yields, European Central Bank (ECB) governing council member Nicholas Garganas said.
"Obviously the budget overruns, particularly in our own country, would weaken the credibility of the euro especially if they are not addressed effectively," Mr Garganas, also head of the Bank of Greece, told reporters in an interview on yesterday on condition it be released today.
"This (budget overruns) does not do anything to enhance the credibility of the Stability and Growth Pact."
The ECB has criticised a recent decision to loosen the European Union's fiscal framework underpinning the euro after EU leaders last month granted governments more time to get their budgets in order.
Their agreement in March let countries run bigger budget shortfalls without automatic sanctions, a relief for euro zone heavyweights France and Germany, which have breached the 3 per cent EU deficit ceiling three years in a row and want more time to boost limp growth.
Greece is also struggling to shore up its public finances and squeeze its budget shortfall to below 3 percent by 2006 from 6.1 per cent of gross domestic product (GDP) last year.
Mr Garganas said fiscal discipline and strict enforcement of the revised pact were therefore necessary to strengthen the fiscal framework's credibility.
"Past compliance with the Stability Pact encountered difficulties. Now that finance ministers have decided to revise it, I think the European Commission and the European Council should enforce the new agreement on implementation of the pact to restore credibility," he said, echoing ECB President Jean-Claude Trichet.