Central bank will do ‘whatever it takes’ to preserve euro

27 Jul 12
The euro is irreversible and the European Central Bank will do whatever it takes to preserve it, the bank’s president, Mario Draghi, said yesterday.

By Nick Mann | 27 July 2012

The euro is irreversible and the European Central Bank will do whatever it takes to preserve it, the bank’s president, Mario Draghi, said yesterday.

Speaking in London, Draghi said the single currency bloc was ‘much, much stronger’ than people acknowledge. It had performed as well as, if not better than, the US or Japan over the past ten years in terms of inflation, employment and productivity.

‘The comparison becomes even more dramatic when we come to deficit and debt,’ he continued. ‘The euro area has much lower deficit, much lower debt than these two countries.’ He added that it also had a balanced current account and ‘a degree of social cohesion that you wouldn’t find either in the other two countries’.

Draghi hailed the ‘extraordinary’ progress made by eurozone countries in the past six months. ‘The progress in undertaking deficit control [and] structural reforms has been remarkable,’ he said. ‘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.’

But he acknowledged that there were short-term challenges, mostly relating to the ‘financial fragmentation’ that has taken place within the eurozone. In particular, investors and banks had retreated within their national boundaries.

To address this, regulation must be ‘recalibrated completely’ and national banking supervisors must take collective action to ensure assets can be converted into cash across state boundaries.

Draghi also raised the potential for the ECB to intervene to address rising government borrowing costs. ‘To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate,’ he said.

He added: ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’ 

Draghi’s comments provided a boost to the major European stock markets both yesterday and this morning and also reduced the yield on Spanish bonds.

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