Brussels, 10/01/2013 (Agence Europe) - This year, 2013, will not be easy economically because the stabilisation and improvements seen in the financial sector have not yet found their way to the economic sector, said the president of the European Central Bank, Mario Draghi, on Thursday 10 January 2013. He hailed progress in the eurozone in terms of the budget and structural reforms, calling for work to continue to ensure gains in competitiveness.
The ECB Governing Council decided on Thursday to keep euro interest rates unchanged. Draghi said it had been a “unanimous decision. It implies that there was no request for rate cuts”.
Draghi, the former head of the Bank of Italy, listed a number of positive factors on the financial markets, where “fragmentation is gradually being repaired”, with “bond yields and country CDS significantly lower; stock markets going up; volatility going down; loan redemption much lower at 1/5; strong capital inflows; deposits in periphery banks have gone up; target imbalances down; ECB balance size, something reporters identified as a weakness, is continuing to shrink”.
This improvement, however, “has not found its way to the real economy. So the real economy is still weak. No reason to change outlook of monetary policy”, said Draghi. This year will be difficult due to a fall in eurozone GDP in the third and fourth quarters of 2012, to 0.2% and 0.1% respectively. Along with the slowing of growth globally, domestic demand will remain low due to cuts in private and public spending, such that Draghi expects the return to growth to occur later in 2013. This, along with the significant signs of fragmentation that still remain, suggests that the eurozone is not yet at an economic turning point such that the special liquidity measures taken by the ECB to deal with the crisis can yet be withdrawn.
Top priority - structural adjustment. The ECB president constantly repeats the ECB's message that the return of investor confidence in the ECB depends above all on crucial budget consolidation action by governments: “Right now the main risk is lack of action of governments on the fiscal side. Not only fiscal consolidation, but also to implement it in a balanced way, proper combination of government spending reduction and taxation. Structural adjustment is the only thing that matters to regain competitiveness”. He believes that without this painful structural adjustment, struggling countries will not become more competitive. He welcomed recent progress vis-a-vis eurozone governance.
When will the record levels of unemployment in Europe (see EUROPE 10759) become an issue for monetary policy? Unlike the Fed in the US, explained Draghi, “Our mandate is not 100% employment. Our mission is to maintain price stability. Dual labour markets, unemployment concentrated on the younger part of population. Monetary policy cannot do much about that. Ensuring price stability gives a long-term foundation for growth and long-term job creation”. (MB/transl.fl)