The euro zone needs to boost investment and draw up a common budget if it is to increase growth and strengthen its economy, the governor of the Bank of Italy said on Wednesday.

"The idea that economic and monetary union can work without a centralised fiscal capacity is simply an illusion," Fabio Panetta said at a conference in the Adriatic coastal town of Rimini.

Italy, which has the euro zone's second-largest debt as a proportion of output and high borrowing costs, would have much to gain by a more common approach to budget policy and debt issuance.

Without a "common fiscal capacity", economic governance in the 20-nation bloc will remain unbalanced, Panetta said in his speech, calling for large-scale strategic investments.

The central banker said austerity policies adopted by many European Union countries in response to the 2010-2012 debt crisis had been a mistake, accentuating recessions and causing "economic and political fractures between member states."

Panetta, who sits on the European Central Bank's Governing Council, said it was now time for the EU to build on its common response to the COVID-19 pandemic, after which the European Commission issued billions of euros to member states in the forms of grants and cheap loans.

Panetta said it was "indispensable" to boost growth in the EU, noting that in the last 20 years its productivity and share of global output had diminished considerably compared with the United States.

Italy has a "crucial" need to reduce its debt, Panetta said, and it should do so through both fiscal consolidation and growth-enhancing structural reforms.

(Reporting By Gavin Jones; Editing by Hugh Lawson)