A paper authored by German and French economists and entitled “Reconciling risk sharing with market discipline: A constructive approach to euro area reform” suggests European leaders including Angela Merkel and Emmanuel Macron face a race against time if they are to rectify the situation.

The paper, published yesterday by the Centre for Economic Policy Research, states: "The European Monetary Union still has significant weaknesses, its institutional and financial architecture is unstable.”

It suggests the debt rules set out in the Maastricht Treaty need to be changed and that a European savings system be set up. 

They go on to say that while the economic outlook in the 19 Common Currency Area countries and the EU as a whole was improving after years of crisis, with all countries recording growth, the persistently high level of public debt and the large volume of bad loans in bank balance sheets were a source of concern, especially in Italy.

Marcel Fratzscher, the paper’s co-author and president of the German Institute for Economic Research, said: “Europe needs to be reformed, and Germany and France must first come to an agreement in order to succeed.

“Just as the eurozone is currently positioned, the euro is not sustainable.

“The concern is that politics is not taking action but waiting, but now is the time to start reforming, there is a window of opportunity, next year are European elections.”

In addition to Fratzscher, Clemens Fuest, President of the Munich Ifo Institute, and Isabel Schnabel, a member of economic think tank the German Council of Economic Experts for the Review of Macroeconomic Development, or Wirtschaftweise, have been involved in writing the paper.

It comes as the EU Commission and French President Emmanuel Macron recently submitted proposals for reforming the EU and the Eurozone.

Portuguese Minister of Finance Mario Centeno, chairman of the Eurogroup, a collective of finance ministers across the bloc from those countries which have adopted the currency, warned his German counterpart Peter Altmaier that time was of the essence.

The currently good economic situation would not last forever, Mr Centeno said, adding: "It's about making sure that the euro becomes more robust."

Among the reforms proposed within the paper is a rainy day fund to cushion against future major emergency crisis situations to be payed for by contributions from the Member States.

It states: "To ensure that the fund does not result in permanent transfers, contributions to the common fund should be higher for countries that have made greater use of the fund."

The economists also suggested that complicated rules on debt set down within the Maastricht Treaty should be simplified and the monitoring of national economic policies should be improved. 

As far as public spending is concerned, the authors propose that it should not grow faster than nominal gross domestic product in the long run, and more slowly in countries which need to reduce their debt ratio. "Independent national fiscal councils" should also monitor the rules.

The authors also call for breaking the "vicious cycle" of financial dependency between states and their banks.

(Additional reporting by Monika Pallenbeg.)