Draghi to warn EU leaders reform needed

The head of the European Central Bank is set to tell European leaders in stark terms at a summit next week that they need to reform straggling economies or risk blunting an ambitious monetary offensive to help revive the stagnant eurozone.

As the ECB inches closer to printing money to buy government bonds, Mario Draghi has become increasingly worried about slack reform in France and Italy, which he fears will undermine the long-term boost from so-called quantitative easing (QE).

Next Thursday, Draghi will urge leaders, including French President François Hollande and Italian Prime Minister Matteo Renzi to step up reforms and hold down spending, people familiar with ECB thinking say.

He wants German chancellor Angela Merkel, by contrast, to invest more in infrastructure and boost domestic demand. Yet French caution, Italian fragility and electoral uncertainty in Greece mean Draghi is likely to come away without a political “game changer”, forcing him to press ahead with QE regardless to avert a deflationary economic spiral.

ECB bond buying may give a temporary boost to confidence, but Draghi is convinced his efforts will be in vain in the longer run unless countries make a more binding commitment to shake up rules such as those for employees or taxation.

European leaders, grappling with eurosceptics who want to scrap the euro currency and with vested interests clinging to acquired rights, have little room to respond for now.

ECB officials have discussed with the European Commission, the EU’s executive, the idea of a “structural reform pact”, a commitment signed by all 18 eurozone countries with benchmarks and peer pressure to encourage laggards.

An informal EU summit in February is due to discuss these ideas, but such a pact, if it ever comes, is a long way off.

While unveiling timid steps to loosen a highly regulated economy, France has been defiant in overshooting EU budget deficit rules that limit the shortfall to 3% of output. It faces the threat of a fine in March unless it takes some corrective measures.

Parliament in Italy, which has a public debt that outstrips the size of its economy, has given Renzi a green light to reform labour market rules, but his much-trumpeted Jobs Act has yet to be implemented.

Draghi also has Germany in his sights. The ECB would like the eurozone’s largest economy to invest more to modernise its transport, energy and digital networks.

Draghi, who will lend support on Thursday to the European Commission’s plan to bolster investment, cannot wait for Europe’s leaders before launching QE because the economic slowdown is so acute.

But he will tread carefully in giving advice and avoid any appearance of a trade-off for bond-buying.