mario draghi : interview with cnn interview by mr mario draghi, governor of the bank of italy, with cnn, at the world economic forum, davos, 2 february 2009. * * * introduction by richard quest : a european country that is struggling in the throes of recession is italy where business sentiment has fallen in january for the eighth month running. it is now at its lowest level on record. mario draghi is the governor of the bank of italy and he is also the chairman of the financial stability forum. last week i spoke to him at the world economic forum in davos. it was clear that we had to understand and i needed to understand from him the situation that we face. a i think it ’ s worthwhile speaking of what ought to be done rather than how the situation stands. i think the first consideration is speed is of the essence. all governments in the world have designed something, have thought about something, but only very few of them have actually done something. so i think the general consensus of …, i mean here, but i should say everywhere, is that fiscal packages that are large, that are lasting, and broad - based are key to the recovery and i think that ’ s … and they should be speedily implemented. q well the problem with what you ’ ve just said is no - one will disagree with you but it ’ s taking a very long time to get that activity under way. i ’ ll give you an example. subprime was august 07. the freezing of markets was july to september 08. we are january 09 and we have had bailouts but not really much stimulus package yet. a unfortunately the same thing happened with the great depression. the first signs of the great depression started a few years, several years before actual fiscal action had been implemented. so we don ’ t want to repeat that mistake. i think we have reached the stage where i would say most governments are ready to act and overall consensus is there. so it ’ s time to move now. on the monetary front however, i don ’ t want to stay only with the fiscal side, on the monetary front i think the response by central banks has been prompt and massive and has certainly been very effective. but it ’ s clear that now there isn ’ t much room left to go to have lower interest rates. and also one should keep in mind that monetary policy takes time to produce its effects and it does produce its effects only through the banking

strict fiscal rules laid down in the stability and growth pact and the “ no bailout ” clause, which, by ensuring that each country ultimately has to bear the consequences of its own fiscal policy, is an indispensable prerequisite for sound public finances within the euro area. the severity of the sovereign debt crisis in some member states and the imminent risks of contagion for other member states, however, have threatened financial stability within the european monetary union as a whole. the european council therefore agreed that financial assistance should be granted to countries with severe refinancing problems, a substantial part of which is provided by germany. this financial support is intended to buy time for the affected countries to conduct necessary structural reforms and implement consolidation measures in order to regain market participants ’ confidence in the soundness of their public finances and their competitiveness. the assistance is therefore bound to adjustment programmes, which each recipient country has to fulfil. however, the reduction of interest payments on the financial aid has weakened the incentives for countries in an adjustment programme to re - establish sound public finances via fiscal and economic reforms and return to the capital market. furthermore, the conditionality of the support measures has been loosened by the recent decisions of july 21st. this weakens the underlying principle of european monetary union that each country has to bear the full consequences of its own fiscal policy. contrary to what is actually needed in order to overcome the sovereign debt crisis, we risk seeing the propensity for excessive deficits rise even further in the future. germany ’ s debate about the way forward in the crisis is therefore motivated by a serious concern for the stability of monetary union. we will not be able to regain stability within emu without re - establishing the credibility of its framework. a fundamental political decision is therefore needed : either the existing policy framework of emu has to be changed fundamentally or the incentives for sound fiscal policy have to be strengthened within the existing framework. the first option would imply emu member states abandoning a substantial part of their national sovereignty over fiscal policy and would therefore require fundamental legal changes on the european and possibly also the national level. the second option requires a return to the fundamental principles of monetary union, with each member state bearing the consequences of its own fiscal policy decisions. either option would be sustainable from an economic point of view. however, combining elements of both options, ie sharing the risks of unsound fiscal policy and retaining national sovereignty over fiscal policy, is condemned to failure. it would undermine