Friday

19th Aug 2022

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.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

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."

Conditions met for German nuclear extension, officials say

Conditions have been met for the German government to allow a temporary lifetime extension of three remaining nuclear reactors, according to the Wall Street Journal, as the country is facing a likely shortage of gas this winter.

News in Brief

  1. UN chief meets Zelensky and Erdogan over grain exports
  2. Fighting stalls ahead of UN visit, Ukraine says
  3. German chancellor to face MPs over tax-fraud probe
  4. Norway wealth fund makes record €171bn loss
  5. German utility firm Uniper on 'brink of insolvency'
  6. ECB mulls big interest rate hike amid recession risk
  7. Germany unlikely to hit November gas-storage target
  8. Mali accuses France of arming Islamist fighters

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic prime ministers: “We will deepen co-operation on defence”
  2. EFBWW – EFBH – FETBBConstruction workers can check wages and working conditions in 36 countries
  3. Nordic Council of MinistersNordic and Canadian ministers join forces to combat harmful content online
  4. European Centre for Press and Media FreedomEuropean Anti-SLAPP Conference 2022
  5. Nordic Council of MinistersNordic ministers write to EU about new food labelling
  6. Nordic Council of MinistersEmerging journalists from the Nordics and Canada report the facts of the climate crisis

Latest News

  1. Serbia expects difficult talks with Kosovo at EU meeting
  2. How scary is threat to Ukraine's Zaporizhzhia nuclear plant?
  3. Slovakia's government stares into the abyss
  4. Finland restricts Russian tourist visas
  5. Conditions met for German nuclear extension, officials say
  6. A year of Taliban — only aid is keeping Afghan kids alive
  7. Is this strange summer a moment of change?
  8. Germany rejects visa ban for Russian tourists

Join EUobserver

Support quality EU news

Join us