Cause and Effect in European Politics and Law

Mario Draghi: We Are All in the Same Boat

Ralitsa Kovacheva, March 9, 2012

"I think it’s clear to everybody that if countries don’t release some of their sovereignty about fiscal policy, there is no way they can be together. There’s no way we can have one or two countries that pay for everybody else."

These words belong to Mario Draghi, president of the European Central Bank, on the occasion of the adoption of the fiscal pact. It was namely Mario Draghi who first called on the eurozone countries to make a clear step toward a fiscal union and became the godfather of the ‘fiscal compact’, embodied in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. The treaty was signed by 25 EU countries on 2 March and now it is to be ratified. Mario Draghi expressed confidence that the treaty would be approved at a referendum in Ireland, "because the government’s effort in Ireland has been really very, very serious. Ireland is probably one of the countries that has made the most progress." According to the ECB president the rules laid down in the fiscal pact "are the pillars of trust between countries."

Mario Draghi once again declined to comment on the option a country to leave the euro area. We have no plan B, it would mean to admit defeat, he said, adding: the ECB knows how to manage risk, but this is something we do not foresee. He is also optimistic on the issue of building a firewall of financial resources in the eurozone. Mario Draghi explained that the issues of increasing the European rescue fund`s capacity and the IMF resources are directly linked because the first one was a pre-condition for the second one. Although slowly, progress has been made in terms of the rescue fund, Mario Draghi reminded recalled: the European leaders pledged to review the fund`s capacity in March, to activate the European Stability Mechanism (ESM) in July and to capitalise it faster than envisaged. These efforts will bear fruit and we will have the opportunity to increase the IMF resources, he said.

Mario Draghi defended the two long-term refinancing operations (LTRO) conducted by the ECB and defined them as "unquestionable success." In December 2011, the ECB granted almost 500 billion euro in the form of low-interest loans to 500 banks in the euro area and at the end of February 2012 another 530 billion euro to 800 banks. The loans have 1% interest rate and a three year term. Many fear that banks could become addicted to ECB`s cheap money and will not be able to work in a normal market environment.

But Mario Draghi stressed that there was a need for these operations and if we compared current situation with that from last November, now there were signs of return of confidence in the euro and investors had to some extent come back. This is due not only to ECB`s actions, but also to the "serious reform efforts of several eurozone governments and the fiscal compact", Mr Draghi said. However, he stressed that these measures were temporary and their role was only to create a situation where banks and governments could take the necessary actions. The former to fix their balance sheets, and the latter to implement structural reforms.

"The soundness of banks’ balance sheets will be a key factor in facilitating an appropriate provision of credit to the economy," Mario Draghi underlined. He believes that thanks to ECB`s February refinancing operation, "money is now closer to the small and medium-sized businesses than it was before." As an argument he pointed out, except the larger number of financial institutions, also the fact that most of them were small banks: "I would love to read you the places, the towns, the villages where these banks are, but often they would be the only bank in town so they could be identified." Mario Draghi declined to comment on borrowing per country because there were some large banks that had borrowed through their "avatars" in other member states.

However, the ECB president could not avoid commenting on the criticism, expressed by Bundesbank President Jens Weidmann regarding ECB`s low-cost loans. In a letter to Mario Draghi, that has leaked to media, the president of the Bundesbank warned that ECB's decision to ease its requirements for collateral from borrowing banks would create long-term risks to the financial system. This thesis was supported by the former member of the ECB Executive Board Juergen Stark, who said the ECB's balance sheet was alarming, not only because it was huge, but because it was filled with low-grade securities received as guarantees by banks in the Eurosystem.

Mario Draghi said that his relationship with Jens Weidmann was excellent and denied any tension in the ECB`s Governing Council between Germany and the others. "Nobody – contrary to what some newspapers have said – nobody, especially not the Bundesbank, is isolated," he said, adding that decisions on both refinancing operations have been taken unanimously. He also stressed that he cherished the culture and tradition of the Bundesbank of preserving price stability, but: "We are all in the same boat. There’s nothing to be gained to argue publicly outside the governing council."

At its meeting yesterday the Governing Council of ECB decided to leave the interest rates unchanged at 1%. There are signs of stabilisation in the economic activity, although still at a low level, President Mario Draghi said. However, like the European Commission, the ECB has revised downward its macroeconomic projections for the euro area - annual real GDP growth in a range between -0.5% and 0.3% in 2012 and between 0.0% and 2.2% in 2013. In February 2012 the annual inflation in the eurozone was 2.7%, but by early next year it is expected to fall below 2%.