Draghi in Davos: eurozone will recover in second half


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The eurozone economy will recover in the second half of the year if structural reforms are kept up, ECB President Mario Draghi said

“The perception we have at the ECB is that the level of economic activity is in the process of stabilizing at very low levels and we foresee a recovery in the second part of the year,” Draghi said during a discussion at the World Economic Forum in Davos.

He reiterated his view that the financial markets had improved, saying that they now experience “relative tranquility.”

“It’s a situation where you have what I once called positive contagion on the financial markets and for the financial variables, but we don’t see this being transmitted into the real economy yet,” he said.

This year will be one when governments in the euro area will implement the structural reforms decided last year, which will ultimately lead to jobs and growth and in this context, the European Central Bank’s “accommodative monetary policy stance” will find its way into the real economy, helping the recovery, Draghi predicted.

“We can have a positive development if national governments will persevere in their actions, both in fiscal consolidation but especially now on the front of structural reforms,” he said.

The Outright Monetary Transactions (OMT), the bazooka that the ECB did not even have to fire in order to push down yields on periphery eurozone countries’ bonds, will remain in place until markets return to normal, Draghi pledged.

“The objective of the OMT was to remove tail risks from the euro area. It’s a framework that will stay in place as long as these fears persist.”

He stressed that the OMTs were “highly conditional” as any country that requests their activation has to have a program with the European Stability Mechanism (ESM), the eurozone’s permanent rescue fund, and the involvement of the IMF would be “actively sought”.


“For the euro area, the most important strategic objective today is to overcome the fragmentation that still remains, notwithstanding significant improvements,” Draghi said.

“Of course we have to comply with our basic primary mandate of maintaining price stability, but at the same time, to reach this objective, we have to go back to a fully integrated financial and capital market. That’s the strategic challenge, really.”

European policy makers, German chancellor Angela Merkel among them, have expressed concern about the degree of monetary easing going on in Japan, where the central bank is trying to weaken the yen which is seen as hurting the country’s competitiveness.

Draghi said there would be no change in the ECB’s framework of monetary policy in the light of the efforts by the Bank of Japan and other central banks to weaken their currencies.

“Our mandate is to maintain price stability,” he said.

There have been calls from the IMF and various economic experts on European countries to rethink their austerity policies, which have been blamed for the sharp economic downturn.

But “fiscal consolidation is unavoidable,” Draghi said.

“There can’t be any sustainable growth or for that matter any sustainable equity achieved through an endless creation of debt.”


However, he conceded that over the short term, fiscal consolidation measures trigger contraction and that measures need to be taken to mitigate this effect.

Draghi identified three measures that could offset the negative effects of fiscal consolidation: structural reforms that increase competitiveness as they boost exports and growth; later on in the fiscal consolidation cycle, returning to normal government spending on public investment while cutting current expenditure; and not hesitating in undertaking fiscal consolidation measures, to preserve credibility and thus benefit from lower interest rates on sovereign debt.

He said the way forward for the eurozone was more integration and less national sovereignty on issues regarding financial stability.

“The crisis has taught us something: you want to break the link between the banking systems and the sovereigns. The way to do it is to have a single supervisor which is independent from the vested interests or the political interests of the national authorities and have a common resolution mechanism.”

A European deposit insurance guarantee, which is the subject of hot debate among eurozone member states, is “further out in time” but will eventually be implemented, Draghi believes.

“This is part of a very ambitious, but long-term objective which is the mutualization of risks. We have to have many other things in place before we can actually have the political support … for a system that could mutualize risks in the euro area,” he said.

read more- http://www.emergingmarkets.org/Article/3146584/Draghi-in-Davos-eurozone-will-recover-in-second-half.html

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