Mon, Sep 08, 2014 - Page 15 News List

ECB rescue plan depends on eurozone members executing reforms: analysts


European Central Bank President Mario Draghi speaks at a press conference in Frankfurt, Germany, on Thursday.

Photo: EPA

The European Central Bank (ECB) has come to the rescue of the eurozone once again, but governments’ foot-dragging on reform could undermine its efforts, analysts said on Friday.

ECB President Mario Draghi said that no deals had been made over radical action announced on Thursday to make money easily available, in exchange for tighter budget discipline by eurozone countries.

However, some observers said that the surprise rate cut and asset-purchase program that Draghi announced to ward off the threat of deflation could be part of a wider game plan to get the eurozone economy back on its feet.

If Germany turns a blind eye to so-called “deficit sinners,” France and Italy would speed up structural reforms of their economies, Brussels would launch new initiatives and the ECB would push down the value of the euro, analysts said.

The ECB moves did indeed send the euro down against the dollar, it fell below US$1.30 on Thursday for the first time since July last year and stock markets rose.

However, the ECB action, which is just what France had wanted, could ultimately take pressure off governments, who have been only too eager in the past to shy away from unpopular reforms.

Draghi, who said on Thursday that monetary policy can do only so much, could find himself fighting a lone battle, analysts said.

France, where there is hostility to the EU’s limits on budget deficits, has already indicated that it is again set to struggle to meet the EU’s strict requirements. Italy has also called for an easing of fiscal austerity, widely seen as being imposed by Germany.

Draghi said that he was not calling for a relaxation of Europe’s budget rules.

“These discussions on flexibility should not be viewed [as if] ... they would undermine the essence of the Stability and Growth Pact,” he said, referring to the budget rules. “One could do things that are growth-friendly and also would contribute to budget consolidation.”

Draghi also denied there was any sort of “grand bargain.”

“There is no ‘bargain,’ no negotiating going on. This would not be institutionally correct. We do monetary policy and others do other policies,” Draghi said.

He said that monetary policy alone cannot steer the 18 countries that share the euro away from deflation — a climate of falling prices which can cause economies to shrink.

“You need growth. You need to lower unemployment. You need fiscal policy. You need structural reforms first and foremost,” he said.

“We can provide as much monetary stimulus as we want, as much availability of credit as we want. But if the person who has planned to use this credit for a new business has to wait eight months before he or she can open this new business, and then once he does it, has to pay lots of taxes, this person will not apply for credit,” Draghi added, explaining why governments had to pursue reforms.

Analysts said that governments would have to play their part if the ECB measures are to be effective.

“The ECB can only play the support act. A lack of dynamism in France and Italy and Russia’s aggression in Ukraine have interrupted the recovery,” Berenberg Bank economist Holger Schmieding said. “These factors are outside the ECB’s control.”

While the ECB’s latest measures would help, they would not solve all problems, Schmieding said.

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