European Central Bank (ECB) President Mario Draghi has urged eurozone governments to agree a growth strategy to go hand in hand with fiscal discipline.
Draghi spoke at a ECB meeting in Barcelona on Thursday, where thousands of people protested against cuts in Spanish government spending, which has eaten into health and education services.
As ECB policy makers gathered in Spain, one of the countries hit hardest by the euro zone debt crisis, Draghi said the bank’s policy was “accommodative” – or designed to support the eurozone economy – after it held interest rates at a record low of 1.0 per cent.
Bank chiefs did not discuss making any changes to rates, said Draghi, adding that the eurozone economy was likely to improve this year but the outlook was uncertain and there were risks of decline.
Such weakness should keep a lid on inflation over time, he said, even though it would remain above 2 per cent this year in the 17-nation currency area.
“The economic outlook continues to be subject to downside risks,” Draghi told a news conference.
Vision for Europe
Draghi outlined his vision for a European “growth compact” he advocated last week, calling on governments to pursue structural reforms. However, he gave no specifics and put the onus on euro states – rather than the ECB – to act.
The Italian said there was “absolutely no contradiction” between pursuing a growth pact and pushing ahead with Europe’s already agreed pact on budget discipline.
“We have to put growth back at the centre of the agenda, without any contradiction with the need to continue, persevere in fiscal consolidation,” Draghi said.
“Now we need a common European discipline for doing reforms.” Asked if he was advocating no near-term economic stimulus, Draghi added: “It seems like that and it is right.”
Voters and investors are becoming increasingly disillusioned with the German-led call for austerity — summed up in the budget-constraining “fiscal compact” – as the currency bloc slides back into recession.
“They are making deep cuts in (money for) hospitals. They are firing nurses’ aides and asking us to do their work,” said Juan Ruiz, 33, a nurse demonstrating in Barcelona, where an extra 2,000 police were drafted in. The protests were peaceful.
Draghi expressed sympathy with young people angry at high unemployment but pressed governments to tackle this with labour market reforms.
“I can understand, I can understand it very well,” he said of the anger.
“But the answer we can give as policymakers is to make sure the policies that are implemented or suggested are the policies we are convinced are going to be the right ones.”
The ECB’s main job was to deliver stable prices, he said.
The euro rallied from two-week lows against the US dollar after Draghi gave a more upbeat assessment of the economy than expected, reducing expectations of further monetary easing.
“There are indications that global recovery is proceeding,” he said. “We continue to expect the euro area economy to recover gradually during the course of the year.”
His comments deflated expectations that the ECB will take further policy action any time soon – either through rate cuts or by reactivating its bond-purchase programme, which the bank has left dormant for the last seven weeks.
“The ECB looks set to keep rates unchanged for a long while,” ING economist Carsten Brzeski said.
“With today’s press conference, Draghi has sent a painful reminder that the ECB cannot solve the current crisis … there does not seem to be any quick fix or alleviation for the economy in the offing,” he added.
The ECB has resisted market pressure to reactivatate its bond-buy programme despite a rise in Spain’s yields to 6 per cent. A break above that, to 7 per cent, is considered an unsustainable price to pay for refinancing.
Draghi said ECB policymakers agreed it would be premature for the bank to pursue an exit from the extraordinary measures taken to help stem the eurozone’s debt crisis.