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27th Jan 2023

Draghi: euro countries to lose even more sovereignty

  • Draghi is the father of the 'fiscal compact' but has now the 'growth compact' as well (Photo: The Council of the European Union)

European Central Bank (ECB) chief Mario Draghi has urged eurozone leaders to come up with a 10-year target for the common currency, saying they should accept more transfer of powers if they truly want a fiscal union.

Held exceptionally in Barcelona instead of the ECB headquarters in Frankfurt, the monthly meeting of eurozone's central bank governing council on Thursday (3 May) was an opportunity for Draghi to explain what he meant last week when he said a "growth compact" is needed along with the deficit-cutting measures taken by most governments.

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"There is absolutely no contradiction between a growth compact and a fiscal compact," the Italian banker said in reference to the treaty on fiscal discipline signed in March by 25 EU leaders.

Draghi himself had earlier coined the "fiscal compact" moniker.

He went on to explain that governments have to stick to tighter budgets, while reforming labour markets, increasing competition, re-balancing employment towards young people.

"I can understand the anger of young people, of poor and jobless young people. I can understand it very well. The answer we can give as policy makers is that the policies suggested or implemented are the policies we are convinced to be the right ones."

Also part of his vision of a "growth compact," Draghi backed calls for a boost in the resources of the European Investment Bank and said EU funds needed to be "redirected" to low-income areas - ideas already floated by Francois Hollande, the frontrunner in the Sunday presidential elections in France.

"But the thirdly and most importantly is that we collectively have to specify a path for the euro. How do we see ourselves in 10 years from now ...We want to have a fiscal union? We have to accept the delegation of fiscal sovereignty from national to some form of central [government]," he said.

In getting there, politicians should however refrain from talking about a "transfer union" as a starting point, he said, in reference to richer countries automatically paying for poorer ones, a concept most loathed by Germany and its independence-wary Bundesbank.

"That is why the fiscal compact is so important, that is the starting point," Draghi noted.

For its part, Fitch ratings agency published a report outlining five possible scenarios for the future of the eurozone: a "Greek Exit;" a "Quasi-Fiscal Union;" the "Euro-mark" where Germany and a "core" exit leaving the remaining countries with the euro; the "United States of Europe;" and a "Full Break Up."

A full break-up and the demise of the euro is very unlikely, Fitch said in a press statement, given the huge financial and political costs.

"Even a partial 'break-up' involving the exit of one or more so-called peripheral nations would risk severe systemic damage, although cannot be discounted. The likelihood of a move to full fiscal union in the near term is also very small, as in Fitch's view, the political will for it does not exist."

Instead, the eurozone will continue to "muddle through," the ratings agency predicted, agreeing with Draghi that "some dilution of national fiscal sovereignty" was still to come.

Of the five scenarios, "Fitch believes that a Greek exit is the most likely", it added.

In this case the southern country would have to re-denominate its debt and default again. That would lead Fitch to downgrade Cyprus, Ireland, Italy, Portugal and Spain "owing to the 'exit precedent' of Greece and risk of contagion to banks, bond markets and capital flight," it explained, just three days ahead of general elections in Greece.

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