20th Sep 2019

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

  • Banks first, then growth, says Draghi (Photo: EPP Group)

The euro is "irreversible" and will overcome the crisis, European Central Bank chief Mario Draghi said in his first appearance in front of the European Parliament's economics committee on Monday (19 December), while making the case for austerity and fiscal discipline.

In line with Berlin and the ECB's own stance so far, Draghi rejected calls for his institution to step in majorly to alleviate the borrowing costs of Italy and Spain, which in turn would help them restore economic growth and jobs.

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Pressed by MEPs to explain why the ECB puts its "credibility" higher than actually boosting economic growth and jobs in troubled eurozone countries, similar to what the US Federal Reserve or the British central bank are doing, Draghi insisted that his institution does not have "the mandate" for such intervention.

"The Fed's mandate is different, it is also geared on growth and jobs. We are much more restricted to monetary stability," he explained.

As for the current crisis, the ECB chief said he has "no doubt in the strength, permanence and irreversibility of the euro," dismissing as "morbid speculation" any eurozone break-up scenarios.

Austerity, however, cannot be avoided, Draghi said, welcoming the fact that EU leaders earlier this month pledged more fiscal discipline measures, dubbed a "fiscal compact".

"To restore trust, we need the elements contained in the compact. On top of this we then need structural reforms to ensure growth", he added.

His most pressing concern was linked to a potential credit crunch in 2012, with banks wary of lending to each other, to households and to small enterprises, which in turn could trigger a deeper recession than expected.

"Banks will face a significant funding constraint especially in the first quarter, but the whole year is going to be difficult for banks. We want to avoid the possible recession and if we can relieve funding pressure, it is already a good part of the answer," he said, in reference to the eurozone's temporary bail-out fund (EFSF) which from 1 January will be able to help out struggling banks with the technical assistance of the ECB.

Meanwhile, warnings by big rating agencies that France and other eurozone countries may have their top rating downgraded in the coming months should not be given too much importance, he said.

Ratings agencies were underestimating the weaknesses of some eurozone countries before the 2009 financial crisis, whereas "now they are overshooting the actual risk" and forcing the borrowing costs up.

However, the days of one-size-fits-all premium ratings for all euro-countries are over and will never return, Draghi said.

"We have to get used to spreads, to riskiness. In a way it is healthy, as it sends a message to national and EU politicians they have to speed up processes," he said in reference to record-high borrowing costs for Italy and Spain compared to Germany.

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