European bank chief predicts ‘stability’

While some experts see a bleak future for the euro zone, the head of Europe’s Central Bank paints an optimistic picture.

Mario Draghi, President of the European Central Bank
Mario Draghi forecast that the euro area economy would "stabilise" at a "very low level of activity" this year [AFP]

The head of the European Central Bank has said that the embattled euro had been relaunched but that more had to be done to boost the eurozone’s recession-wracked economy.

Speaking to the world’s top business and political leaders at the World Economic Forum in Davos, Mario Draghi also said on Friday that austerity measures being taken in crisis-hit countries were “unavoidable” despite the impact on growth.

“If one has to find a common denominator … for defining why 2012 is going to be remembered, I think one would say it’s the year of the relaunching of the euro,” Draghi said in his well-attended and hotly anticipated speech.


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Draghi outlined three “extraordinary” steps taken by European leaders and institutions to battle the three-year sovereign debt crisis that has pitched the 17-nation bloc into recession.

Governments have pushed through structural reforms with “urgency” and these are “now bearing fruit,” said the ECB boss.

European leaders had recognised structural flaws inherent in the single currency and were now pushing for greater integration.

And finally, his own institution had undertaken actions that broke the monetary policy mould, including providing one trillion euros ($1.33 trillion) in liquidity for banks.

The ECB also announced a programme to buy the bonds of debt-wracked countries which had proved “very helpful” in reducing the perception that the euro was on the point of collapse, Draghi said.

However, he said it was too early to declare the battle over.

“Are we satisfied for that? I think to say the least, the jury is still out. Because all in all, we haven’t seen an equal momentum on the real side of  the economy and that’s where we will have to do much more,” he said.

Nevertheless, Draghi hailed what he called a period of “relative tranquillity” on the financial markets and said: “All the indices point to a substantial improvement of financial conditions.”

The European Central Bank has forecast the eurozone economy will contract by 0.3 percent this year but rebound to register GDP growth of 1.2 percent in 2014.

Draghi urged governments not to let up on the momentum of reforms just because the pressure from the markets had been reduced.

Eurozone crisis to ‘heat up’ in 2013

But even as Draghi spoke of “positive contagion” in the markets, leading US economist Barry Eichengreen warned that the debt crisis that has shaken Europe to its core could easily erupt again this year unless European leaders move faster to solve their problems.

“None of the underlying problems have been solved. There is no economic growth in Europe. Germany itself is on the verge of recession. The banking union doesn’t exist. There’s less consensus on completing it than we thought last year, so the markets are going to lose patience at some point and the crisis will be back,” said Eichengreen, a professor at the University of California, Berkeley.

While European governments and markets have been breathing easier in recent months after years of turmoil, it’s no time for complacency, said Eichengreen, who has chronicled the Great Depression and explored the consequences of a breakup of the euro currency used by 17 nations.

“Nothing has been resolved in the eurozone, where markets have swung from undue pessimism to undue optimism,” said Eichengreen.

“They said all the right things last year … and they’ve been backtracking ever since.”

He warns that the crisis over too much debt burdening governments and banks in the 17-country currency group “is going to heat up again in 2013.”

Source: Al Jazeera, News Agencies