The entire eurozone watches you: what Draghi said to Spain’s MPs

“I hope that we will have reached a good mutual understanding–one that will allow us, within our respective institutional mandates, to make further progress on the twin challenges of strengthening our union and returning to sound and stable growth.”

“As the democratically elected representatives of the Spanish people, you are responsible for domestic economic policy. Yet in the exercise of those duties, just like all national parliaments in the euro area, you influence the functioning of our economic and monetary union as a whole.”

“As you know, the euro area economy is undergoing an important adjustment. This process is necessary, but it is particularly painful and protracted in those areas where past misalignments of policies created vulnerabilities.”

“But we are seeing the first positive results of the adjustment. For example, euro area countries have almost halved their fiscal deficits from 6.2% of GDP in 2010 to an estimated 3.3% in 2012. Excluding interest payments, the primary deficit of the euro area as a whole is virtually zero. This contrasts with the United States and Japan, which recorded primary deficits of around 6% of GDP in 2012.

“Several euro area countries are addressing their external imbalances, among them Spain, whose current account deficit fell substantially–from almost 10% in 2008 to about 1% in 2012. According to the latest data, your country’s exports have increased notably–by about 20% in volume between 2009 and last year. There has been a similar increase in Portugal and, to a somewhat lesser extent, in Ireland.”

“Over the same period, the share of exports in GDP increased by around 10 percentage points in Spain, Ireland and Portugal. Exports are providing a strong positive contribution to real economic growth. These economies are also seeing a fall in unit labour costs, which will improve their competitiveness and provide a platform for sustainable growth.”

“Notwithstanding these signs of improvement, the adjustment has not yet had a visible impact on people’s daily lives […] The top priorities on the reform agenda remain correcting misalignments and restoring the capacity of the economy to create value, incomes and jobs.”

“Countries undertaking painful but necessary reforms should not feel that they have been left to fend for themselves. Creating a more stable and prosperous future for Europe is the goal that unites all euro area countries […] The sense of solidarity within societies should be expressed by ensuring that the burden is not borne disproportionately by certain sectors or groups of people.”

“Let me now turn to the specific policy actions that the ECB has taken […] The first has been to reduce our key interest rate to 0.75%, a level previously unseen in virtually all euro area countries. The interest rate in the overnight interbank market is now even lower, close to zero.”

“The second element has been to give banks unrestricted access to central bank funding through both our short- and long-term operations. This policy meant that banks did not have to shrink their balance sheets unnecessarily at a time when market funding became unavailable or excessively costly. It prevented a potential deflationary scenario.”

“The overall size of our refinancing operations increased from less than €450 billion before the crisis to more than €1.2 trillion at its peak. We have also provided banks with assurance that they can rely on our refinancing operations for extended periods. The maximum maturity of these operations increased from three months to three years. Without the two three-year refinancing operations launched in late 2011 and early 2012, there could have been a major credit crunch.”

“Through these measures, the ECB has decisively addressed the liquidity pressures faced by euro area banks. Here in Spain, for example, the liquidity support extended to the banking system currently corresponds to a quarter of the country’s GDP, about eight times what it was before the crisis.”

“Provision of capital is not among the tasks of a central bank. It is the task of shareholders to ensure that banks are solvent and able to sustain their core business. When the private sector is unable or unwilling to provide capital, it is for the fiscal authorities–governments and parliaments–to decide whether and how to act.”

“Here in Spain, the authorities have been proactive, even in strained conditions, embarking on an ambitious financial adjustment programme with the assistance of their European partners […] But our interventions are conceivable only if the risk of fiscal dominance is firmly excluded. This requires certainty that governments will maintain fiscal discipline and that continuous reforms will correct underlying weaknesses. Only strict and effective conditionality can generate that kind of assurance.”

“Let me turn briefly to the longer-term vision for Europe […] The most urgent project–financial union–is taking tangible shape. The ECB is expected to become the single supervisor for a large part of the euro area’s banking sector […] The proposal for a single resolution framework is also in the pipeline. Taken together, these two reforms will re-establish confidence in the euro area’s banking sector.”

“Let me conclude. We have begun this year with a more stable financial environment. This has been achieved through concerted reform efforts by governments and parliaments and decisive actions by European institutions.”

Be the first to comment on "The entire eurozone watches you: what Draghi said to Spain’s MPs"

Leave a comment