Draghi: Up to governments to help eurozone economy

Wednesday, June 26th, 2013 | Finance News

PARIS (AP) — European Central Bank head Mario Draghi said Wednesday that the bank "stands ready to act" with measures to boost the struggling European economy but urged national governments to take their own growth-enhancing steps by reforming their economies.

In a speech, Draghi told French lawmakers that governments "need to do all they can" to increase potential growth and make their economies more competitive. One thing he said they could do is to streamline excessive labor market regulations that have contributed to high levels of youth unemployment.

He repeated earlier comments that the bank "stands ready to act again when needed" to support the eurozone economy, which shrank 0.2 percent in the first quarter — its sixth straight quarterly decline.

So far the ECB has cut its key interest rate to a record low of 0.5 percent, offered unlimited cheap loans to banks and outlined a plan to buy government bonds issued by indebted countries. Analysts say the bank could cut rates again sometime this year. The bank has also said it has examined imposing a negative interest rate for money banks deposit with it — the hope behind such a policy, if enacted, would be to get them to lend the money rather than hoard it.

Another measure could be an effort along with the European Investment Bank to encourage more lending to small companies, which are having trouble getting credit from banks. However that could take months to put in place.

Draghi told the legislators that the bank's low rates would remain in place "for as long as needed" and that any withdrawal of its emergency measures was far off. "As I said before, exit is distant," he said.

Draghi's comments provided a contrast with the U.S. Federal Reserve, which is considering when to start reining back on its super-easy monetary policy.

Yet Draghi warned that the central bank alone could not solve Europe's problems of slow growth and too much government debt.

"It is important to acknowledge that there are limits to what monetary policy can achieve," he said.

"The ECB has done as much as it can to stabilize markets and support the economy," he said. "Now governments and parliaments need to do all they can to raise growth potential, strengthen competitiveness and build a stronger, more stable European monetary union."

He said it was "indispensable" for the European Union to strengthen banking regulation by adding an EU-wide agency that could wind down and restructure failed banks. That would be coupled with the ECB's new role as the EU's banking supervisor, expected to begin next year. Banking troubles have been a key driver of Europe's troubles, since bailouts can burden government finances and a functioning banking system is essential so companies can borrow to expand operations.

The ECB's rate-setting council next meets to discuss interest rates and possible other measures July 4.


McHugh contributed from Frankfurt, Germany.