Please ensure Javascript is enabled for purposes of website accessibility

Draghi Urges Leaders to Solve Euro's Core Problems

By Associated Press - Apr 15, 2013 at 11:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The head of Europe's monetary authority said in a speech delivered in Amsterdam that the central bank had already warded off "fire sales" by investors through emergency measures.

AMSTERDAM (AP) -- European Central Bank head Mario Draghi said Monday that while the bank had averted financial "panic" in the euro union, it was still up to politicians to solve the region's core problems of strengthening the banking system and improving long-term growth.

The head of Europe's monetary authority said in a speech delivered in Amsterdam that the central bank had already warded off "fire sales" by investors through emergency measures. Those included launching €1 trillion ($1.3 trillion) in cheap, three-year loans to banks to steady their finances and helping lower the borrowing costs of indebted countries by offering to buy government bonds on the open market.

Nonetheless, the economy of the 17 European Union countries that use the euro is mired in recession and is suffering from record unemployment. Meanwhile, borrowing conditions across the eurozone are fragmented: Companies in the indebted countries are paying more to borrow due to troubled government and bank finances than their more financially stable neighbors.

Draghi hasn't ruled out further stimulus from the central bank -- including interest rate cuts or new measures to get credit flowing to the small and midsize companies.

However, he said Monday, those steps only buy time. Governments must pass structural reforms to make their economies more competitive and business-friendly, such as easing rules on hiring and firing people. The aim would be to improve growth that would, in turn, improve tax revenues and help governments shrink debt long-term.

"To conclusively address the root causes of the crisis these efforts need to be maintained and, in some countries, stepped up," he said.

"Let me be clear: undertaking structural reforms, budget consolidation and restoring bank balance sheet health is neither the responsibility nor the mandate of monetary policy."

Draghi did not appear to rule out further emergency actions by the central bank but gave little hint what those could be. He did mention so-called quantitative easing efforts by other central banks such as the U.S. Federal Reserve and Bank of Japan to purchase of securities from banks. This adds new money to the economy and can drive down longer term interest rates.

However, he said, those policies were "tailor made" for those large single economies. Introducing such a scheme across the 17 countries of the eurozone would be complicated and Draghi warned there was "no uncontroversial way" to determine what the target interest rate would be. It's also unclear how the bank would decide which countries' bonds to buy.

Draghi in particular urged quick action to set up a single European authority that can wind down busted banks and protect euro member governments from heavy losses.

Troubled banks have contributed to the bloc's three-year debt crisis. Most recently, they helped pull down the public finances of Cyprus, which became the latest eurozone country to need a bailout.

Draghi said such an authority would wind up banks "without reinforcing the vicious link between banks" and government finances.

European leaders have said they intend to set up such a resolution authority but action on the proposal has lagged.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.