Mario Draghi: Euro area economic outlook, the ECB's monetary policy
and current policy challenges
Statement by Mr Mario Draghi, President of the European Central Bank, prepared for the
Twenty-Eighth Meeting of the International Monetary and Financial Committee, Washington
DC, 12 October 2013.
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I would like to focus on the euro area economic outlook, the ECB's monetary policy and
current policy challenges.
Economic activity in the euro area bottomed out in the first half of the year and is expected to
strengthen gradually in the period ahead. Recent economic indicators, which have been
predominantly positive, support expectations of a modest and gradual recovery. Output is
expected to recover at a slow pace, driven by a gradual improvement in domestic demand
supported by the ECB's accommodative monetary policy stance and a gradual strengthening
of external demand. Furthermore, the improvements in financial markets seen since August
2012 appear to be gradually working their way through to the real economy, as should the
progress made in fiscal consolidation. The risks surrounding the economic outlook for the
euro area continue to be on the downside. Developments in global money and financial
market conditions and related uncertainties may have the potential to negatively affect the
economic outlook. Other downside risks include higher commodity prices in the context of
renewed geopolitical tensions, weaker than expected global demand and slow or insufficient
implementation of structural reforms in euro area countries.
Underlying price pressures in the euro area are expected to remain subdued, reflecting the
broad-based weakness in aggregate demand and the modest pace of the recovery, as well
as subdued monetary and credit dynamics. Medium to long-term inflation expectations
continue to be firmly anchored in line with price stability. The risks to the outlook for price
developments are expected to be still broadly balanced over the medium term, with upside
risks relating in particular to higher commodity prices as well as stronger than expected
increases in administered prices and indirect taxes, and downside risks stemming from
weaker than expected economic activity.
The ECB's monetary policy stance continues to be geared towards maintaining the degree of
monetary accommodation warranted by the outlook for price stability. It thereby provides
support to a gradual recovery in economic activity. Looking ahead, our monetary policy
stance will remain accommodative for as long as necessary. In line with the guidance
provided in July, the Governing Council expects the key ECB interest rates to remain at
present or lower levels for an extended period of time. This expectation is based on an
overall subdued outlook for inflation extending into the medium term, given the broad-based
weakness in the economy and subdued monetary dynamics. In the period ahead, the ECB
will monitor all incoming information on economic and monetary developments and assess
any impact on the medium-term outlook for price stability.
With regard to money market conditions, the ECB will remain particularly attentive to
developments which may have implications for the stance of monetary policy and is ready to
consider all available instruments.
Further reducing fragmentation of euro area credit markets and improving confidence in the
euro area banking sector are essential to ensure an adequate transmission of monetary
policy to the financing conditions in the euro area countries and to further repair the credit
channel. Financial stability risks have diminished in the euro area. Measures taken by
European and national authorities have helped to ease the severe market stress that earlier
weighed on sovereigns and banks. The euro area banking sector has made progress in
balance sheet repair by improving its regulatory capital ratios, by reducing its leverage since
the outbreak of the financial crisis and by shifting its funding structure towards more stable
funding sources. Net inflows of capital from abroad as well as a reduction in excess liquidity
conditions continue to be observed, reflecting an improvement in financial market
confidence. Repayments of funds taken up in the context of the ECB's three-year
longerterm refinancing operations conducted in December 2011 and February 2012 have resulted
in a decline in the size of the Eurosystem's balance sheet since end-August 2012. We will
remain attentive to all developments that influence an adequate transmission of monetary
policy to the financing conditions in euro area countries.
Further decisive steps towards establishing a genuine banking union are needed so as to
further reduce financial fragmentation, enhance the resilience of the banking sector and
strengthen the institutional framework of the euro area. The ECB welcomes the approval of
the legal framework of the single supervisory mechanism (SSM) by the European Parliament
on 12 September and we look forward to its urgent adoption by the EU Council in the course
of October. The entry into force of the SSM legal framework will allow us to further speed up
the preparation process, which is well under way. We are committed to delivering on our new
supervisory responsibilities by November 2014.
We also strongly support the envisaged timeline for the establishment by the end of 2014 of
the single resolution mechanism (SRM), which is a necessary complement to the SSM. The
Commission's proposal for the SRM contains three essential elements for the effective
resolution of banks, namely: a single system, a single authority and a single fund.
The ECB's forthcoming comprehensive assessment of banks' balance sheets, which will take
place before the ECB assumes its supervisory responsibilities, will be an important
confidence-building tool, and we are committed to ensuring its consistency and transparency.
The effectiveness of this exercise will also depend on the availability of necessary
arrangements for recapitalising banks, if and when needed, including through the provision of
a public backstop, if private funds cannot be acquired. These arrangements must be in place
before we conclude our assessment, in line with the declaration of the European Council of
June 2013. It is also noteworthy that strong efforts to repair bank balance sheets and
enhance transparency have already been undertaken in all euro area countries, especially in
those that have experienced severe stress.
As regards fiscal policies, substantial fiscal adjustment has been undertaken by the euro
area countries over the last few years. The average fiscal position of the euro area countries
is much stronger than that of global peers. The authorities should not unravel their multi-year
efforts to cut deficits but should reduce the debt ratios without delay, in line with the EU's
fiscal framework, which has been considerably reinforced over the past few years. As part of
this enhanced framework, the draft budgetary plans that countries will now deliver for the first
time under the "two-pack" regulations need to provide for sufficiently far-reaching measures
to achieve the fiscal targets in 2014.
Euro area governments must also decisively strengthen their efforts to implement the needed
structural reforms in product and labour markets. These reforms are required not only to help
the respective countries to regain competitiveness and to rebalance within the euro area, but
also to create more flexible and dynamic economies that will generate sustainable growth
and employment. As regards intra-euro area imbalances, there has been a major external
adjustment in euro area countries with previously high current account deficits. Improved
competitiveness indicators, in particular declining unit labour costs and the relatively robust
export performance, point to a more lasting effect of the structural reforms undertaken so far.
The framework of the European Semester and the macroeconomic imbalance procedure
have provided additional tools to secure further progress in terms of structural adjustments in
the euro area that will put the euro area in a position to make a positive contribution to global
growth and employment creation.