Mario Draghi: Hearing before the Plenary of the European Parliament on
the occasion of the adoption of the Resolution on the ECB Annual Report
2011
Introductory statement by Mr Mario Draghi, President of the European Central Bank, at a
hearing before the Plenary of the European Parliament on the occasion of the adoption of the
Resolution on the ECB Annual Report 2011, Strasbourg, 16 April 2013.
* * *
President,
Honourable members of the European Parliament,
I am very pleased to take part in this debate today. It forms a central part of the ECB's
accountability towards the European Parliament to which the ECB attaches utmost
importance.
Since 2011 the ECB has taken a number of important measures to address severe
distortions in the financial markets and to address fragmentation. Although I have had many
occasions to discuss the ECB's policies during my regular hearing before the ECON
Committee, today is an opportunity to take a broad view on recent economic developments
and monetary policy decisions, as well as to discuss the adjustment in the euro area and the
outlook for EMU governance. This will allow me to cover several issues highlighted in the
draft resolution.
1. Economic developments and monetary policy decisions
Following two years of recovery, the euro area moved into recession in 2012. Unemployment
has reached unprecedented levels, especially among young people. This economic
weakness was driven by declining private consumption and faltering investment, in an
environment of weak business and consumer confidence and financial market tensions.
We expect a gradual recovery in euro area economic activity for the second half of this year.
But this scenario is subject to downside risks.
In 2012, headline HICP inflation in the euro area was 2.5%, reflecting elevated energy prices
and increases in indirect taxes and administered prices. Annual inflation rates have since
declined to 1.7% in March this year.
The Governing Council remains firmly committed to its price stability mandate. This is fully
reflected in long-term inflation expectations which have remained firmly anchored in line with
our price stability objective of below but close to 2%.
2011 and 2012 were years in which much of our focus was on the proper transmission of our
monetary policy. When changes in policy rates are not appropriately transmitted to the real
economy, this is a matter of concern.
In a context of large refinancing needs and persisting funding stress for banks, the ECB
launched two long term (i.e three years) refinancing operations in late 2011 and early 2012.
These operations, in combination with our measures to enhance the availability of collateral,
were pivotal in preventing a disorderly process of lenders' deleveraging and a large-scale
credit crunch. This action was instrumental in maintaining price stability.
Later in 2012, a renewed confidence crisis, in part reflecting unwarranted investor fears
about the reversibility of the euro, caused a severe deterioration in financial markets.
Sovereign bond and bank lending rates in some countries increased dramatically, thereby
impairing access to financing of the real economy.
To safeguard the singleness of monetary policy and to ensure an effective transmission of
the ECB's policy intentions to the broad economy, in August, the Governing Council
announced its readiness to undertake Outright Monetary Transactions (OMT). OMTs have
proven to be an effective backstop against unfounded fears of reversibility. Strict
conditionality contains moral hazard on the side of governments. It ensures that they will
adopt the reforms that are necessary to secure their solvency and to foster conditions of
steady growth for their economies. As I said before, the repair of the transmission channel
cannot be done by the central bank alone, governments need to do their part. Let me
therefore turn to the on-going adjustment in Member States, and the euro area more
generally.
2. The adjustment in the euro area
During the past five years, a number of euro area countries have seen a significant
correction of their external and domestic imbalances. In Ireland, Greece and Portugal current
account balances improved by more than 7 per cent of GDP between 2008 and 2012. A
large part of this adjustment has been driven by a contraction in domestic demand, triggered
by the unwinding of long accumulated unsustainable developments and by the cyclical
downturn. At the same time, in Ireland, Spain and Portugal export performance has been
very strong compared with the pre-crisis period. This is a sign that a genuine structural
correction is taking place and resources are being moved from the non-tradable sector to the
production of traded goods.
We have also seen some improvement in cost competitiveness, which has contributed to the
external adjustment. Between 2008 and 2012, in the three programme countries the
cumulated unit labour cost growth was about 10pp below the euro area average. The
adjustment has been mainly driven by an increase in average productivity, largely reflecting
labour shedding, rather than by a reduction in nominal wages. The latter adjustment has
been much more limited so far.
This has contributed to increasing the real cost of adjustment and the burden borne by the
more vulnerable members of society. It calls for greater determination in further addressing
rigidities in wage setting and increasing competition in many segments of the economy.
Reducing rents is not only a matter of efficiency in the adjustment process: it is also a matter
of equity in sharing the burden of adjustment.
3. The outlook for EMU
Prior to the crisis, Member States did not internalise fully what it means to be part of EMU.
Fiscal and economic policies were not sufficiently geared towards the conditions of being a
member of a single currency zone. But the lessons of the crisis have been learnt. EU Heads
of State and Government have taken action and strengthened the governance framework.
The current deepening of EMU is essential, in particular as regards banking union. It is of
utmost importance that the legislation on the Single Supervision Mechanism (SSM) is
finalised before the summer break now that a political agreement has been found. This is an
absolute prerequisite if we want to embark upon our preparatory work in a timely and
effective fashion, so that the SSM is operational by mid-2014. Equally important is the swift
set-up of a Single Resolution Mechanism (SRM): it is a necessary complement to the SSM
and a key element of banking union. The Commission's intention to put forward a legislative
proposal before summer is highly welcome. In the meantime, the Directive on Bank
Recovery and Resolution will hopefully be adopted and provide for a coherent EU-wide set of
rules.
Deeper economic union means more than fixing the financial system. We therefore welcome
the proposal to conduct ex-ante coordination of structural reforms initiatives, which should be
implemented as a best-practice benchmarking exercise. In the same vein, reform contracts,
in which Member States commit to concrete reforms with specific timelines, would also
facilitate the recovery of competitiveness.
But new rules are only as good as the commitment to actually implement them. It is of key
importance that the existing legislation is applied forcefully during the ongoing European
Semester: this represents a true test of the credibility of EMU's governance framework.
I thank you for your attention and stand at your disposal for questions.