By Laura Noonan
LONDON (Reuters) - Dramatically reduced borrowing costs for Europe's weakest economies risk making governments complacent about structural reforms needed for growth, the European Commission's most senior economics official said on Friday.
Yields on bonds issued by countries like Greece, Spain, Italy and Ireland have fallen to pre-crisis lows in recent months as fears for the fate of the euro zone recede and investors embrace the one-time pariahs of the periphery.
"It is a dangerous thing if it leads to complacency and the declaration of 'mission accomplished'," Marco Buti, the long-serving head of the Commission's directorate for economic and financial affairs, told Reuters in an interview.
"It is not the case, there is still a lot to do at the national level and at the European level. The tendency always is to make mistakes when times are good or when times are getting better, and this is the same risk now."
Buti said the Commission was determined that countries across the EU's 28 member states should run their finances responsibly and would monitor countries that have exited bailout programmes, as Ireland and Portugal have, particularly closely.
"It's not (a) free-for-all," he said. "They have quite robust post-programme surveillance."
Another danger cited by Buti, who is waiting to find out who his next boss at the Commission will be, is that the new, more Eurosceptic parliament elected last month will water down plans to tighten banking ties within the bloc.
"There will certainly be some temptation of that, but I think this would be a mistake," said Buti.
Work still to do includes setting up the single resolution mechanism that will deal with failing banks and agreeing details of how to fund a 55 billion euros (44.5 billion pound) backstop.
Europe is also still debating how to balance austerity aimed at fixing public finances with measures to boost growth, mirrored in the banking sphere by the dilemma over how to get loans flowing to companies while making banks less risky.
Delegates at the International Institute of Finance conference in London, which Buti was speaking at, said the Commission wanted to promote lending and growth, but that its policies display a suspicion of capital markets and especially the shadow banking sector.
"We have to move into a more adult approach," said Buti, pointing to European regulators' initial preference for placing the complex securitisation products that hobbled America's banking system into a box marked 'toxic'.
"I think now it is time to fish back some of the good elements from that basket," he added. "For instance, due to the crisis, the securitisation market has virtually stopped."
Buti believes "good" kinds of securitisation, such as the packaging and reselling of small business loans, as advocated by the European Central Bank, can and should play a role in Europe's recovery.
"If we want to have a sound recovery, but also if we want to boost investment and potential growth, we have to deepen European capital markets."
He pointed to low levels of venture capital and private equity activity compared with the United States and the fact that banks are likely to remain "relatively prudent" even after they complete a landmark EU-wide health check in October.
"The kind of projects that we want to finance to boost productivity and potential growth are products that are inherently riskier than others, and one cannot expect banks to finance a lot of this," Buti said.
The ECB unveiled a suite of measures to kick start bank lending on Thursday, including long-term loans to banks that are conditional on their providing funding for the small and medium-sized firms that are Europe's economic backbone.
"It is certainly a very ambitious package," Buti said, adding that it would he particularly helpful to countries in Southern Europe which are struggling with very low inflation.
"What is important, clearly, is that there is a recognition that action was needed, it has been taken. Also (there is) an acknowledgement that even though the risks of outright deflation may not be large, the implications of the euro area getting stuck in a very protracted low inflation is a worrying phenomenon."
Buti's department, whose staff has swollen by more than 25 percent to 800 over the last four years as it grappled with the financial and sovereign debt crises, is also involved in the EU-wide stress tests to find whether banks have enough capital to withstand future turmoil.
The Italian, who hails from the same village as his country's new prime minister, Matteo Renzi, said the exercise should instill confidence in Europe's banks as 2009 tests did for their U.S. peers, even if the results aren't dramatic.
"We are in a different phase, the parameters for judging the success of the exercise should not be how many banks fail and how big the capital hole is," he said.
"We are certainly going to find pockets of weakness, but the idea that there is a widespread capital holes is unwarranted."
(Editing by Catherine Evans)