Central Banks

Wednesday, April 25, 2012 - 05:55

Draghi Calls For 'Growth Compact', Reassures On Target 2


BRUSSELS (MNI) - European Central Bank President Mario Draghi called on Wednesday for a European "Growth Compact" to complement the Eurozone's recently negotiated "Fiscal Compact."

"What is most present in my mind is to have a 'Growth Compact'," Draghi told the European Parliament's Economic and Monetary Affairs Committee in Brussels. "This was anticipated by the 'six pack'. We now need to go back and have a 'Growth Compact'," he said.

The ECB president's call for Europe to turn its focus to boosting economic growth, comes as voters and politicians in a growing number of Eurozone countries have begun to balk at the higher taxes and spending cuts being pursued by governments trying to bring their fiscal deficits down to below the EU's 3% ceiling and eventually into balance.

Greece, Italy and Spain have seen huge protests against government austerity drives. The coalition government of Dutch Prime Minister Mark Rutte fell this week due to a split over fiscal consolidation policies.

Leading French Presidential candidate Francois Hollande has called for a reopening of the Eurozone's Fiscal Compact to include growth measures. And economic populism, with a strong anti-euro tinge, has played extremely well in France's presidential campaign.

Restoring fiscal health is "an unavoidable policy measure to regain market confidence" Draghi said, stressing that governments need to "persevere."

However, "to deny that fiscal consolidation has some short-term contractionary effects would not be correct," the ECB chief said, conceding later that these effects are now starting to "reverberate."

Structural reforms are essential to restoring competitiveness but will also cause pain in the short term, the ECB president said.

"Structural reforms hit vested interests," he said, adding that they "change profoundly the society." These changes are themselves "a source of pain," he added.

"We are just in the middle of the river that we are crossing. The only answer to this is to persevere and for the ECB to create an environment that is as favourable for this as possible," Draghi said.

He said competitiveness disparities within the Eurozone are a key underlying cause of the crisis and that "the way out is to implement structural reforms that free some of the energies."

Different levels of economic competitiveness are also the "underlying illness" behind the huge disparities in the Eurozone's 'Target 2' payment system, which has caused unease in Germany because of its more than half a trillion euros in claims on other Eurozone countries.

"'Target 2' balances are an ordinary feature of a payment system," he said. "Under normal conditions we would not see such high balances in favour of one country and most other countries as debtors to this country."

"The target 2 balances are the symptoms of an underlying condition," Draghi said. "This underlying illness has to do with different degrees of competitiveness across different countries."

As debtor countries improve their government finances and restore economic competitiveness and start growing again "we will see these 'Target 2' imbalances disappear," he said.

The ECB President said the imbalances in the euro area's 'Target 2' payment system are not a risk as long as the currency bloc remains in one piece.

"In a payment system, the creditor parties are not at risk if the system stays together," he said.

--Brussels Newsroom, +324-952-28374; pkoh@marketnews.com

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