ECB's Draghi says euro not in danger

PARIS Sat Jul 21, 2012 12:26pm EDT

1 of 2. Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in Frankfurt, July 5, 2012.

Credit: Reuters/Alex Domanski

PARIS (Reuters) - The euro zone is not in danger of breaking up despite some analysts' worse case scenarios, European Central Bank President Mario Draghi said, judging that the bloc was inevitably marching towards closer union among its members.

Asked in an interview with French newspaper Le Monde if the euro were in danger, Draghi said: "No, absolutely not. We see analysts imagining the scenario of a euro zone blow-up."

"They don't recognize the political capital that our leaders have invested in this union and Europeans' support. The euro is irreversible," he added.

In the long term, the euro would need to rest on a foundation of greater integration among euro zone countries, Draghi said.

"All movement towards financial, budgetary and political union is for me inevitable and will lead to the creation of new supranational bodies," he said.

European leaders took a step towards greater integration last month at a Brussels summit where they agreed to put the ECB in charge of supervising banks and gave the ESM rescue fund the power to recapitalize troubled banks.

However, the summit provided only brief relief to investors. Concerns about Spain have returned to the fore, driving the country's 10-year bond yields above the 7-percent danger level on Friday.

European and U.S. stocks also fell and the euro hit record lows against the Australian, Canadian and New Zealand currencies in the face of increasing investor fears that the Spanish government may seek a full-blown bailout.

ECB CAN'T FIGHT ALL FIRES

Draghi poured cold water on the prospect that the ECB could take action to calm the situation, saying that its mandate did not allow the central bank to resolve states' financial problems.

The International Monetary Fund has urged the ECB, which is legally forbidden from financing governments, to play a greater role fighting the crisis, suggesting that it could be given lender-of-last-resort functions.

At the summit in June, EU leaders broadened the ECB's role to include supervising banks in hope that the move would cut the risk that troubled lenders' problems could spread to sovereign borrowers.

Draghi said that the ECB's monetary policy and bank supervisory activities would have to be kept separate in order to avoid conflicts of interest and suggested that an "independent structure" could be built.

Weighing in on the LIBOR rate fixing scandal, he warned that it was undermining confidence in a cornerstone of the global financial system.

Turning to the economic outlook in the euro zone, Draghi said he did not see the risk that the bloc as a whole would enter a recession and that the situation would gradually improve towards the end of the year and the beginning of 2013.

The ECB cut its interest rates to a record low earlier this month to breathe life into the ailing euro zone economy amid signs that inflation pressures were subsiding.

Draghi said that the ECB, which strives to keep euro zone inflation at a rate close to but less than 2 percent, was prepared to take action in the case that the risk of deflation emerged.

(Reporting by Leigh Thomas, editing by William Hardy)

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Comments (8)
chrisb1959 wrote:
It is very difficult to predict what is going to happen to the Euro. I suspect it will stay due to political vested interests. However, I think that it is possible for some of the southern European nations to drop out of the Eurozone. If this happens then we would be totally unknown territory economically. The ECB would undoubtedly do a massive QE and recapitalise all the major European banks to prevent a deep and long economic depression.

Jul 21, 2012 7:36am EDT  --  Report as abuse
emu wrote:
“Nobody intends to build a wall.”
Walter Ulbricht
East Berlin
June 15th, 1961

Jul 21, 2012 9:08am EDT  --  Report as abuse
hariknaidu wrote:
The Euro is defintely not in crisis.

What is – is EU-17 governance based on (still) national sovereignty.
Once domestic control of budget and fiscal policy is trasferred to Brussels Commission, it’s inevitable the final success of Euro Zone will ultimately depend on its management from the Centre.

Yes, it will be a suprenational structure and may or may not reflect the USA, but will be endowed with its European historical heritage.

The Euro will survive and gender growth and stability in Europe.

Jul 21, 2012 9:49am EDT  --  Report as abuse
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