24th Oct 2016

Draghi urges new stimulus to stave off stagnation

  • Draghi: The risks of 'doing too little' to stimulate the eurozone economy outweigh those of 'doing too much' (Photo: Valentina Pop)

The European Central Bank (ECB) is preparing to step up its attempts to breathe life into the eurozone’s stagnant economy.

During a speech in the US on Friday (22 August), ECB chief Mario Draghi called on eurozone treasuries to take fresh steps to stimulate demand amid signs that the bloc’s tepid recovery is stalling.

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"It may be useful to have a discussion on the overall fiscal stance of the euro area," Draghi told delegates at a meeting of financiers in Jackson Hole, Wyoming, adding that governments should shift towards "a more growth-friendly overall fiscal stance."

"The risks of 'doing too little’...outweigh those of 'doing too much’”, he added.

The Frankfurt-based bank is preparing to belatedly follow the lead of the US Federal Reserve and the Bank of England by launching its own programme of quantitative easing (QE) - creating money to buy financial assets.

In June the ECB cut its main interest rate to a record low of 0.15 percent and announced plans to introduce a new four year programme of cheap loans to banks, starting in September, if they promise to increase lending to businesses.

Draghi’s remarks come as policy makers are once again under intense pressure to stave off a vicious spiral of economic stagnation, high unemployment and very low inflation across the eurozone.

They also mark a departure from the austerity-heavy rhetoric in many EU governments that has prioritised deficit reduction and structural reforms ahead of stimulus measures.

Figures released by Eurostat earlier this month revealed that the eurozone economy flat-lined between April and June. The German economy contracted on fears about the EU’s sanctions battle with Russia, while Italy fell back into recession.

This Friday Eurostat will release the currency bloc’s inflation rate in August. Analysts fear that annual inflation will have slowed to 0.3 percent this month from 0.4 percent in July, well below the ECB’s 2 percent target.

Draghi also hinted that the bank was prepared to use “all available tools” at its disposal to prevent the eurozone falling into negative inflation. "We stand ready to adjust our policy stance further," he added.

Meanwhile, the euro opened trading on Monday (25 August) at its weakest level against the US dollar for nearly a year.

Draghi’s remarks could offer further encouragement to Italian prime minister Matteo Renzi, who has led a campaign to loosen the application of the EU’s rules on budget deficit limits to enable more spending on public infrastructure projects.

On Saturday (August 23), the Italian daily Corriere della Sera quoted transport minister Maurizio Lupi calling for Brussels to exclude spending on infrastructure projects from the calculation of national budget deficits.

Spain's Socialists ease Rajoy's path to power

The Socialists agree to abstain in a confidence vote later this week, meaning conservative leader Mariano Rajoy should be able to form a minority government after 10 months of deadlock.

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