|Mario Draghi, president of the European Central Bank |
The European Central Bank (ECB) at a meeting of
its Governing Council in Frankfurt today, kept its benchmark rate at 0.75% - -
a record low since the launch of the euro in 1999. In London, the Bank of
England's policy committee kept its rate at 0.5% -- the lowest since the bank
was founded in 1694.
Mario Draghi, ECB president, will address a
press conference at 1:30 Irish time - - Webcast
The president is pressure both from investors and
the Bundesbank, the German central bank, in respect of his pledge last week to
do whatever it takes to save the euro.
On Wednesday, the Bundesbank chief warned the
ECB against straying beyond its mandate. Jens Weidmann, Bundesbank president,
said the ECB’s independence “requires it to respect and not overstep its own
mandate” to guard against inflation.
He said policy makers “overestimate the central bank’s possibilities” when
calling on the ECB to support economic growth, create jobs and stabilise the
The Bundesbank had a greater say than many of
the central banks of the single currency area because Germany’s monetary
authority was “the largest and most important central bank in the euro system,”
Dr Weidmann pointedly warned.
The Bank of England’s Monetary Policy Committee today voted to maintain the
official benchmark rate at 0.5%. The
Committee also voted to continue with its programme of asset purchases
totalling £375bn - - purchase of bonds in the market, commonly known
as money printing.
The Committee expects the announced programme of asset purchases to take
another three months to complete. The
scale of the programme will be kept under review.
The Committee’s latest inflation and output projections will appear in the
Inflation Report to be published Wednesday 8 August and the minutes of the meeting will be published at 9.30am on Wednesday 15
Speech by Mario Draghi, President of the European Central Bank at the Global
Investment Conference in London 26 July 2012
I asked myself what sort of message I want to
give to you; I wouldn’t use the word “sell”, but actually I think the best thing
I could do, is to give you a candid assessment of how we view the euro situation
And the first thing that came to mind was
something that people said many years ago and then stopped saying it: The euro
is like a bumblebee. This is a mystery of nature because it shouldn’t fly but
instead it does. So the euro was a bumblebee that flew very well for several
years. And now – and I think people ask “how come?” – probably there was
something in the atmosphere, in the air, that made the bumblebee fly. Now
something must have changed in the air, and we know what after the financial
crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s
The first message I would like to send, is that
the euro is much, much stronger, the euro area is much, much stronger than
people acknowledge today. Not only if you look over the last 10 years but also
if you look at it now, you see that as far as inflation, employment,
productivity, the euro area has done either like or better than US or Japan.
Then the comparison becomes even more dramatic
when we come to deficit and debt. The euro area has much lower deficit, much
lower debt than these two countries. And also not less important, it has a
balanced current account, no deficits, but it also has a degree of social
cohesion that you wouldn’t find either in the other two countries.
That is a very important ingredient for
undertaking all the structural reforms that will actually graduate the bumblebee
into a real bee.
The second point, the second message I would like
to send today, is that progress has been extraordinary in the last six months.
If you compare today the euro area member states with six months ago, you will
see that the world is entirely different today, and for the better.
And this progress has taken different shapes. At
national level, because of course, while I was saying, while I was glorifying
the merits of the euro, you were thinking “but that’s an average!”, and “in fact
countries diverge so much within the euro area, that averages are not
representative any longer, when the variance is so big”.
But I would say that over the last six months,
this average, well the variances tend to decrease and countries tend to converge
much more than they have done in many years - both at national level, in
countries like Portugal, Ireland and countries that are not in the programme,
like Spain and Italy.
The progress in undertaking deficit control,
structural reforms has been remarkable. And they will have to continue to do so.
But the pace has been set and all the signals that we get is that they don’t
relent, stop reforming themselves. It’s a complex process because for many
years, very little was done – I will come to this in a moment.
But a lot of progress has been done at
supranational level. That’s why I always say that the last summit was a real
success. The last summit was a real success because for the first time in many
years, all the leaders of the 27 countries of Europe, including UK etc., said
that the only way out of this present crisis is to have more Europe, not less
A Europe that is founded on four building blocks:
a fiscal union, a financial union, an economic union and a political union.
These blocks, in two words – we can continue discussing this later – mean that
much more of what is national sovereignty is going to be exercised at
supranational level, that common fiscal rules will bind government actions on
the fiscal side.
Then in the banking union or financial markets
union, we will have one supervisor for the whole euro area. And to show that
there is full determination to move ahead and these are not just empty words,
the European Commission will present a proposal for the supervisor in early
September. So in a month. And I think I can say that works are quite advanced in
So more Europe, but also the various firewalls
have been given attention and now they are ready to work much better than in the
The second message is that there is more progress
than it has been acknowledged.
But the third point I want to make is in a sense
When people talk about the fragility of the euro
and the increasing fragility of the euro, and perhaps the crisis of the euro,
very often non-euro area member states or leaders, underestimate the amount of
political capital that is being invested in the euro.
And so we view this, and I do not think we are
unbiased observers, we think the euro is irreversible. And it’s not an empty
word now, because I preceded saying exactly what actions have been made, are
being made to make it irreversible.
But there is another message I want to tell you.
Within our mandate, the ECB is ready to
do whatever it takes to preserve the euro. And believe me, it will be enough.
There are some short-term challenges, to say the
least. The short-term challenges in our view relate mostly to the financial
fragmentation that has taken place in the euro area. Investors retreated within
their national boundaries. The interbank market is not functioning. It is only
functioning very little within each country by the way, but it is certainly not
functioning across countries.
And I think the key strategy point here is that
if we want to get out of this crisis, we have to repair this financial
There are at least two dimensions to this. The
interbank market is not functioning, because for any bank in the world the
current liquidity regulations make - to lend to other banks or borrow from other
banks - a money losing proposition. So the first reason is that regulation has
to be recalibrated completely.
The second point is in a sense a collective
action problem: because national supervisors, looking at the crisis, have asked
their banks, the banks under their supervision, to withdraw their activities
within national boundaries. And they ring fenced liquidity positions so
liquidity can’t flow, even across the same holding group because the financial
sector supervisors are saying “no”.
So even though each one of them may be right,
collectively they have been wrong. And this situation will have to be overcome
And then there is a risk aversion factor. Risk
aversion has to do with counterparty risk. Now to the extent that I think my
counterparty is going to default, I am not going to lend to this counterparty.
But it can be because it is short of funding. And I think we took care of that
with the two big LTROs where we injected half a trillion of net liquidity into
the euro area banks. We took care of that.
Then you have the counterparty recess related to
the perception that my counterparty can fail because of lack of capital. We can
do little about that.
Then there’s another dimension to this that has
to do with the premia that are being charged on sovereign states borrowings.
These premia have to do, as I said, with default, with liquidity, but they also
have to do more and more with convertibility, with the risk of convertibility.
Now to the extent that these premia do not have to do with factors inherent to
my counterparty - they come into our mandate. They come within our remit.
To the extent that the size of these sovereign
premia hampers the functioning of the monetary policy transmission channel, they
come within our mandate.
So we have to cope with this financial
fragmentation addressing these issues.
I think I will stop here; I think my assessment
was candid and frank enough.
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