Eurozone leaders urged to push ahead with fiscal reforms

European Central Bank (ECB) president, Mario Draghi has urged eurozone leaders to continue implementing the necessary fiscal reforms in order to protect the economy, as he warned of difficult times ahead. Gerald Callaghan reports

By Gerald Callaghan

09 Oct 2012

Speaking before the European parliament's economic and monetary affairs committee on Tuesday, the Italian banker said, "Provided that policymakers continue to implement agreed measures with determination", there remain "reasons to be confident".

Also chair of the European systemic risk board (ESRB) - a set of quantitative and qualitative indicators to identify and measure systemic risk in the EU financial system - Draghi warned the committee that it is vital to "always to be mindful of systemic risks" in the financial sector.

He went on to say that economic recovery was best served through the revitalisation of supply of credit, adding, "Notwithstanding some reductions in market tensions, financial activity remains impaired in various parts of the system. At this time, the role of macro-prudential policy is primarily to restore trust in the financial sector."

Draghi, on behalf of the ESRB board members, welcomed the commission's proposal to create a European banking union. The board considers that the macro-prudential benefits of a single supervisory mechanism (SSM) would be enhanced under the formation of a banking union, and plans should be "implemented without substantial delay", the official said.

Furthermore, he called for the creation of a common bank bailout fund to prevent bank failures from disrupting the financial system and costing European taxpayers money.

The ESRB considers a bank resolution fund as a way to avoid the same type of disruption that occurred directly after the failure of US investment bank Lehman Brothers in 2008.

The measure would put Europe in a position "where we can afford to let fail an important institution", said Draghi. The ESRB is working on a general framework for the coordination of macro-prudential policies in the EU with the first results being expected next year.

Meanwhile, finance ministers from all 27 EU member states are meeting this week in Luxembourg to discuss steps towards the European banking union, as well as plans for a financial transaction tax.

The eurozone has been slowly moving towards closer harmonisation on several fronts, as a means to ending the EU debt crisis and yesterday formally launched its permanent bailout programme, the €700bn European stability mechanism.

Elsewhere, on Monday night, eurozone finance ministers approved the next tranche of Portugal's bailout, but at a late night news conference head of the International Monetary Fund (IMF), Christine Lagarde said Greece still had to do more in order to secure the next instalment of its rescue package, with the IMF's report showing that the Greek economy will contract by a further six per cent next year.

"Some things have improved in the last to two or three months, but I think the road ahead is still long and it's uphill" - Mario Draghi

It also warned that there is a risk the global economy will fall back into recession which could be more complex than the last one endured three years ago.

However, in his testimony to the parliament, Draghi said the ECB's new bond purchase programme for troubled countries, such as Spain, would provide a backstop to avoid "destructive scenarios" in the 17-member eurozone.

The ECB agreed the plan last month and financial markets are now looking for any signs that Spain might make a formal aid request that would trigger an intervention in bond markets.

Although there is hope that the bond buying programme could be the beginning of the end of the most troublesome phase of Europe's debt problems, Draghi said the eurozone still faced tough times ahead. "Some things have improved in the last to two or three months, but I think the road ahead is still long and it's uphill," he said.

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