Brussels, 03/05/2012 (Agence Europe) - At their meeting in Barcelona on Thursday 3 May, the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively. ECB President Mario Draghi again spoke of the need for a growth pact alongside the fiscal compact, and said that the Governing Council had not discussed changing interest rates.
Draghi said there was no contradiction between a pact for growth and a fiscal compact, arguing that, ultimately, growth was viable if it was built on a number of pillars, one of which had to be budgetary stability. This growth pact refers to a string of ideas expressed from various quarters and contains three component parts, he said: - structural reforms must be pursued in all the economies of the euro area (these reforms will differ from one country to another though certain elements will be common to all); - completion of the single market must be pursued in order to increase competitiveness; - there has to be labour market reform (greater flexibility, increased mobility and more fairness). What is needed at the moment, he said, was discipline across the EU in conducting these reforms (growth pact, EUROPE 2020 strategy, et al). In this way, energy would be released in the private sector which would lead to job creation. There were also a great many proposals on what could be done at EU level to create jobs and increase investment in basic infrastructure (redirecting EU funds), he stated. Public finances had to be improved by reducing expenditure rather than by increasing taxation. He said thought had to be given to where the euro should be in ten years' time: was it a budgetary union that was wanted, should governments devolve a degree of sovereignty to a central body, he asked. More clarity was needed on the joint European future, he said: that is a key factor for growth.
Answering further questions on this issue, he said that structural reforms had to be implemented, but without increasing spending or halting budgetary consolidation. Different stimuli could be brought into the economy (stimulating the private sector, encouraging job creation, and measures to correct the imbalances in public spending). It is better to concentrate on reducing current public spending than reducing investment in infrastructure or increasing taxes, he stated.
To explain the decision to leave rates unchanged, Draghi said that “available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level”. The latest signals from euro area survey data highlight prevailing uncertainty. At the same time, there are indications that the global recovery is proceeding, he said. He said the uncertainty would be taken into account in the forthcoming ECG forecasts, in June. It currently expects a 0.1% contraction in gross domestic product this year followed by growth of 1.1% in 2013. The main risks are now an increase in tension on the euro zone debt market with the potential knock-on effect on the real economy, and further rises in prices of raw materials, the ECB says. “Looking beyond the short term, we continue to expect the euro area economy to recover gradually in the course of the year”, Draghi said.
Inflation is likely to stay above 2% in 2012, mainly because of increases in energy prices, and also rises in indirect taxes. Annual inflation rates should fall below 2% again in early 2013.
Spain has made substantial efforts in terms of reforms, and this has to be acknowledged, Draghi said. The measures taken by the ECB (massive injection of liquidity - LTRO) were successful in avoiding a huge credit squeeze. Time will tell how and when this money will filter through into the real economy to ease credit conditions, he suggested. “We have prevented a further potential massive credit squeeze”, he said.
Italy has made remarkable progress and the Italian government deserves to be encouraged in its efforts, Draghi said. He spoke of the country's “remarkable” budgetary consolidation. Italy is on the right track, he stated. (LC/transl.rt)