Wednesday

31st Aug 2016

Draghi urges eurozone not to give up on austerity

  • 'We are just in the middle of the river we are crossing,' says Draghi. (Photo: World Economic Forum)

Budget cuts may be deepening the recession, but governments should not give up now, European Central Bank (ECB) chief Mario Draghi said on Wednesday (25 April) at a hearing in the European Parliament.

"We are just in the middle of the river we are crossing, the only way out is to persevere," the Italian economist in charge of the eurozone's central bank said.

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He admitted that "fiscal adjustment" - a euphemism for budget cuts - is contributing to recession, which in some countries may last longer than a year or even two.

"In certain cases the contractionary effects could be medium or even long term, for instance where youth unemployment has been there for a long time," Draghi noted, in reference to Spain, where over half of people under 25 are out of a job.

He said the only way out is to stick to labour market reforms that "free some energies in the economy," given that countries like Spain were prosperous and competitive in the past.

But he also referred to measures to stimulate growth, although not via budgetary expenditure: "What is most present in my mind is to have a 'growth compact'," he said.

In this context, the only thing the ECB can do is to keep interest rates low and make sure banks are lending to each other. "We cannot supplement the absence of governments taking structural reforms," he underlined.

The ECB has already engaged in several "non-standard" programs such as bond-buying and more recently, a €1 trillion cash injection in the eurozone banking system in the form of cheap three-year loans.

Any other interventions are being fiercely fought by the German central bank, which has openly disagreed with the cheap loan program.

For his part, Draghi also pointed out the "limitations" of the bank's legal mandate.

"It is a delicate balance where we want to preserve the credibility of the ECB - one of the few things left now. We wouldn't do any good were we to step out of the limits of our treaty," he said, when pressed by MEPs to step up the bond-purchasing program.

As for putting more pressure on banks who have taken up the ECB loans without giving cheaper loans to households and small enterprises in return, Draghi said the eurozone was based on "free market" rules and banks could not be told what to do with the money.

"We cannot direct credit like in a planned economy. National central banks are in a better position there, they are closer to the banks," he said.

Asked by MEPs about the potential impact of a left-wing president in France unpicking the EU25 fiscal discipline treaty or of the Duthch political crisis, Draghi said these are "outcomes very difficult to anticipate."

The bottom line - in his view - is that the euro area has to convince investors that it pursues "credible" policies to preserve "price stability, fiscal stability and growth."

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