Draghi: States need growth compact now

Countries must persevere in their structural changes and deficit reduction, but they also need a growth compact now and must plan for economic union in the next 10 or 15 years, ECB president Mario Draghi has said.

In a subdued performance in the European Parliament, Mr Draghi said that inflation risks were broadly balanced and expected to be 2% or below next year, prompting an expectation that the ECB may consider another cut to interest rates shortly.

The governing council would use all instruments to counter upside risks to price stability, he added. He also said it was too early for the ECB to consider an exit strategy from its emergency measures, including liquidity for the banks, which should be good news for Ireland.

Mr Draghi disagreed with claims that the €1trn of three-year money that the ECB made available to banks was creating a kind of protectionism, as banks used it to buy their own governments’ bonds. This was a natural development, he said, and a step towards a return to normal investing.

Risks between banks and sovereigns have been decoupled which was another positive, he said.

He insisted that the money was going into circulation and not just being hoarded by banks, and said that the banks who take up the funds are not the same ones that park it with the ECB. The problem now was demand for money in the real economy was subdued, but it would find its way into the economy to stimulate growth.

“Our LTROs have been quite timely and successful,” he said. “If the only thing we had achieved is to buy time, which by the way is not the only thing we achieved, we would have been successful.”

Reactivation of bond buying was not on the cards, he said, “We want to preserve the credibility of the ECB because it is one of the few things left now. It would not do any good to the union’s credibility or our integration process if we were to step out of the limits of our treaties and mandates.”

A number of times Mr Draghi, who was answering questions from the powerful economy committee of the parliament, said it was time to begin designing for economic union.

“It is time to project what our future design is going to be, to give a long-term objective to our vision and say what has to be implemented to bring this to reality.” He said this was done at the time of the Maastricht treaty for the euro, when a path was established and conditions for achieving it were outlined 20 or 15 years beforehand. “I think we are in a similar position now.”

But what was required now, in conjunction with governments consolidating their debt and deficits, was a growth compact, he said. This was anticipated by the six-pack legislation but now it is necessary to go back and create such a growth agreement, Mr Draghi added.