ECB's Draghi, seeking growth, throws crisis ball to governments

BRUSSELS Wed Apr 25, 2012 2:10pm EDT

European Central Bank (ECB) President Mario Draghi addresses the European Parliament economic and monetary affairs committee in Brussels April 25, 2012. REUTERS/Yves Herman

European Central Bank (ECB) President Mario Draghi addresses the European Parliament economic and monetary affairs committee in Brussels April 25, 2012.

Credit: Reuters/Yves Herman

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BRUSSELS (Reuters) - European Central Bank President Mario Draghi called on Wednesday for a "growth compact" but put the onus on euro zone governments to shape-up their economies.

He gave no indication the ECB was poised to provide more support to countries or banks.

There are growing expectations in financial markets that the ECB will have to ride to the rescue again with Spain under intense pressure, the Dutch government having collapsed over budget plans and latest data showing the euro zone is being driven back into recession.

The word from the currency bloc's central bankers is very different - having created more than a trillion euros of low-cast, three-year money via so-called LTROs to avert a credit crunch, governments and banks have been given space to cut debt and clean up balance sheets.

Draghi called for euro zone states to pursue growth-enhancing structural reforms.

"We've had a fiscal compact. Right now what is most present in my mind is to have a growth compact," he told the European Parliament, calling for this to be founded on Europe's 'six pack' of tighter budgetary rules.

He pressed euro zone states to pursue structural reforms to help generate this growth, saying the ECB's contribution was to deliver stable prices.

"Are we doing all we can for growth? Our task is not that. Our task is to ensure price stability and through this contribute to growth. That's what I think we are delivering."

Joerg Asmussen, a member of the ECB's Executive Board, said one possibility would be to channel some of the available EU structural funds towards countries in crisis, "with the goal of promoting employment".

Asmussen was also quoted by Financial Times Deutschland as saying European countries could also carry out labor market reforms like Germany had.

Socialist Francois Hollande, favorite to take the French presidency next month, has called for the ECB's mandate to be revised to add a responsibility for promoting growth.

Draghi insisted the ECB's primary mandate was to ensure price stability and had to remain so. He made clear that after the central bank's LTRO operations in December and February it was now up to governments to act.

"Now, the ball is entirely, squarely in the court of governments and banks," he told the European Parliament's economic committee.

However, he added that any "exit strategy" from the ECB's emergency measures, something Bundesbank chief Jens Weidmann and others have said should be discussed, was premature given weak economic conditions.

Draghi said banks must strengthen their finances further, including by retaining earning and bonus payments, while governments must stick with fiscal austerity drives which in some cases are driving countries deep into recession.

"We are just in the middle of the river that we are crossing," he said. "The only answer is to persevere."

The ECB had played its part in buying governments time.

"Our LTROs have been quite timely and successful. If the only thing we had achieved is to buy time, which by the way is not the only thing we achieved, we would have been successful. I think buying time is not a minor achievement," Draghi said.

SHAKY ECONOMY

The euro zone's business slump deepened at a far faster pace than expected in April, data showed on Monday, suggesting the economy will stay in recession at least until the second half of the year.

Draghi conceded recent data had been mixed though he expected overseas demand and the ECB's still very low interest rates to support growth.

"At the same time, downside risks relate in particular to a renewed intensification of tensions in euro area sovereign debt markets and their potential spillover to the real economy," he said.

Despite the political stand-off in the Netherlands, the immediate pressure is off. Spanish and Italian 10-year government bond yields fell on Wednesday and are both comfortably below the 6 percent mark which starts to flash danger signals.

ECB Executive Board Member Jose Manuel Gonzalez-Paramo said Spain would not find it hard to meet its financing needs for the rest of the year despite rising borrowing costs.

Madrid has already met 50 percent of its planned issuance in medium and long-term bonds for the year, and the ECB policymaker said in an interview published in Expansion newspaper on Wednesday it would complete its plans well before year-end.

Other euro zone central bankers added to the drumbeat of comments suggesting the ECB is in no mood yet to create more long-term money for banks, let alone resume its government bond-buying program, which has essentially been inactive for the past 10 weeks.

Draghi said the bond-buying scheme was "neither eternal nor infinite" while Bundesbank board member Andreas Dombret said banks should not rely on the ECB providing unlimited liquidity as an alternative to adjusting their business practices as the policy will be removed before it creates risks to financial stability.

(Writing by Mike Peacock. Editing by Jeremy Gaunt.)

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Comments (1)
breezinthru wrote:
“Our LTROs have been quite timely and successful. If the only thing we had achieved is to buy time, which by the way is not the only thing we achieved, we would have been successful. I think buying time is not a minor achievement,” Draghi said.

If the Eurozone finds a way to become solvent and achieve growth, then buying time was a monumental achievement.

“Now, the ball is entirely, squarely in the court of governments and banks,” he told the European Parliament’s economic committee.

Both the governments and the banks are incapacitated due to the constraints imposed by massive debts, thus they cannot produce a solution. That means that buying so little time at such great expense and sacrifice was not just a minor achievement, it was a terrible mistake.

Apr 27, 2012 7:27am EDT  --  Report as abuse
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