Tuesday

18th May 2021

ECB chief hints at more robust action

  • Draghi: The ECB is looking for a 'fiscal compact' (Photo: European Parliament)

European Central Bank president Mario Draghi offered hints on Thursday that the Frankfurt institution is ready to expand its efforts to staunch the eurozone crisis, but only if eurozone economies commit to deeper integration rapidly under what he called a “fiscal compact”.

Parsing the wording of central bankers is never an exact science and indeed the newly minted central bank chief in his first speech to the European Parliament was far from explicit.

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"It is first and foremost important to get a commonly shared fiscal compact right," he said to a chamber nearly empty of MEPs despite the gravity of the situation.

"I think the next few days will be very important to tell us whether we make progress on this."

The European Commission last week unveiled proposals that would radically centralise fiscal-policy-making, giving the EU executive the right to in effect direct national budget-making before the documents have been presented to national parliaments.

Draghi appeared to endorse this strategy, suggesting that once such a fiscal union was in place, “other elements” could occur, wording that could be taken to mean the ECB is now opening the door slightly to a more robust purchase of Spanish and Italian government bonds.

Until now, the ECB and Germany have firmly resisted now EU-wide and even global pressure to open the taps and become the lender of last resort to the currency area.

Such a fiscal compact is “the most important element to start restoring credibility” he added.

“Other elements might follow, but the sequencing matters,” he said, hinting that a pact for fiscal union must come first. European leaders are expected to consider the commission’s plans at a crunch Brussels summit on 9 December.

Olli Rehn, the EU’s economy chief, has said that the eurozone has just days to save the euro, billing this summit as the make-or-break meeting for the single currency area and perhaps the Union itself.

Draghi also said that the bank did not want to see inflation “undershoot” the ECB’s target of below but close to two percent.

The wording is being read by markets as telegraphing a rate cut, perhaps to one percent, down from the current 1.25 percent.

He conceded that Europe had entered a credit crunch. The situation was the most important issue to resolve, he said.

"We have observed serious credit tightening in the most recent period, which combined with the weakening of the business cycle, doesn't bode at all well for the months to come."

"In our view now the most important thing for the ECB to do is to repair the credit channel," he said.

ECB will not become bank of last resort, Draghi says

In his first appearance as head of the ECB, Mario Draghi has said the Frankfurt-based bank will not become the lender of last resort for the eurozone. The bank lowered its interest rate by 25 basis points to 1.25 percent.

ECB returns to markets to help Italy and Spain

The European Central Bank has decided buy bonds from troubled eurozone countries after a five-month pause in a bid to stem the crisis from spilling to Italy and Spain.

Agenda

This WEEK in the European Union

With lending between banks freezing up, contagion spreading to Germany, and EU economy chief Rehn fretting the euro has days to prevent collapse - the coming week is the mother of all crunch weeks for the European Union.

Euro is 'irreversible' and 'permanent', says ECB chief

The euro is "irreversible" and will overcome the crisis, European Central Bank chief Mario Draghi said Monday, while making the case for austerity and fiscal discipline. But he also warned of prolonged recession due to a credit crunch in 2012.

EU leaders embrace 'fiscal compact' demanded by central bank

EU leaders have endorsed a series of rules tightening budget surveillance and institutionalising limits on public spending - the ‘fiscal compact’ that the ECB has demanded before it can more aggressively purchase Italian and Spanish debt.

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