ECB head Draghi says governments need to act to improve growth, reduce unemployment

  • Article by: DAVID MCHUGH
  • Updated: June 26, 2013 - 6:05 AM

PARIS — European Central Bank head Mario Draghi said Wednesday that the bank "stands ready to act" with measures to boost the struggling European economy while at the same time warning national governments to take their own steps to promote growth by reforming their economies.

Draghi told French lawmakers in a speech that governments "need to do all they can" to make their economies more competitive.

He said they could streamline excessive labor market regulations that have contributed to high levels of youth unemployment.

Along with the appeal to governments, he repeated earlier comments that the bank itself "stands ready to act again when needed" to support the fragile eurozone economy, which shrank 0.2 percent in the first quarter — its sixth straight quarterly decline.

Draghi told the legislators that the bank's low rates would remain in place "for as long as needed" and that any withdrawal of its emergency measures was far off. "As I said before, exit is distant," he said.

Draghi's comments provided a contrast with the U.S. Federal Reserve, which has said it could begin phasing out its extraordinary stimulus measures this year if the stronger U.S. economy grows as it anticipates. The Fed comments have shaken financial markets around the world, including the market for eurozone government bonds. Some indebted governments are seeing higher borrowing costs as a result.

Nomura analyst Nick Matthews said Draghi "is being very careful in trying to emphasize the ECB is in a different place to where the Federal Reserve is."

So far the ECB has cut its key interest rate to a record low of 0.5 percent, offered unlimited cheap loans to banks and outlined a plan to buy government bonds issued by indebted countries. Analysts say the bank could cut rates again sometime this year.

Another measure could be an effort along with the European Investment Bank to encourage more lending to small companies, which are having trouble getting credit from banks. However that could take months to put in place.

Draghi repeated earlier warnings that the central bank alone could not solve Europe's problems with slow growth and too much government debt.

"It is important to acknowledge that there are limits to what monetary policy can achieve," he said.

"The ECB has done as much as it can to stabilize markets and support the economy," he said. "Now governments and parliaments need to do all they can to raise growth potential, strengthen competitiveness and build a stronger, more stable European monetary union."

ING economist Carsten Brzeski said the ECB was juggling two messages at once: "To policymakers, it's clearly, 'don't always rely on the ECB.' And when they talk to the markets, they shift their stance and say, 'trust us, we're going to take care of it.' This is the balancing act they have to do."

Draghi also said it was "indispensable" for the European Union to strengthen banking regulation by adding an EU-wide agency that could wind down and restructure failed banks. That would be coupled with the ECB's new role as the EU's banking supervisor, expected to begin next year. Banking troubles have been a key driver of Europe's troubles, since bailouts can burden government finances and a functioning banking system is essential so companies can borrow to expand operations.

The ECB's rate-setting council next meets to discuss interest rates and possible other measures July 4.

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