Eurozone must leave its ‘fairy world’: Draghi

The eurozone’s crisis is far from over and member states must tighten budgets and forge a banking union to leave behind the “fairy world” that allowed problems to grow, said ECB president Mario Draghi.

Draghi’s call for reform was echoed by IMF chief Christine Lagarde, who said implementing a banking union with powers to supervise all banks in the eurozone should be the currency bloc’s top priority.

Speaking in Paris, where the government is trying to dispel concerns raised by the IMF that France could be left behind as Italy and Spain reform at a faster pace, Draghi said the eurozone’s debt troubles were likely to stretch deep into next year.

Another 173,000 people joined record jobless queues in the eurozone in October, and German retail sales and French consumer spending both fell more than expected, signs of the scale of the task ahead for policymakers.

“We have not yet emerged from the crisis,” said Draghi. “The recovery for most of the eurozone will begin in the second half of 2013.

“The crisis has shown that we were living in a fairy world,” he added, pointing to the unsustainable debts, weak banks, and poor policy co-ordination that led to the crisis three years ago.

ECB policymakers hold their regular monthly policy meeting next week, and are expected to leave interest rates on hold at a record low of 0.75%. Economists are divided on whether the ECB will cut next year.

He stressed that the ECB’s designing of a bond purchase programme, dubbed Outright Monetary Transactions, had helped lead to much more benign market conditions in the eurozone.

Under the programme, the ECB is ready to buy potentially unlimited amounts of sovereign debt but until Spain — the prime candidate for help — applies for aid, it cannot use the tool.

Simply announcing the plan, however, has eased the pressure on Spain and Italy, cutting around 2 percentage points since July off the interest they pay bond market investors to borrow over 10 years.

Data yesterday showed that Spain registered a capital inflow of €31bn in September, the first time in 14 months that international investors had put more money into the country than they took out.

Resisting fresh ECB action, Bundesbank chief Jens Weidmann said on Thursday that central bankers had done more than enough to fight the crisis and it was up to governments to reform their economies and make the banking sector solid.

— Reuters