Draghi warns of delayed euro zone recovery

Fri, Dec 7, 2012, 00:00

European Central Bank chief Mario Draghi has warned there will be no economic recovery in the euro zone until the second half of next year.

As the bank held its main interest rate steady at a record low of 0.75 per cent, he said economic weakness would spill over into next year.

“In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity,” he told reporters.

“In order to sustain confidence it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.”

Mr Draghi said downside risk prevailed.

“These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States, possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”

Mr Draghi’s remarks came after a new economic forecast by ECB staff which said gross domestic product in the euro zone would come between a 0.9 per cent drop or a 0.3 per cent expansion next year.

This suggests the economy is more likely to shrink than expand. “Later in 2013 economic activity should gradually recover as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through the economy.”

Mr Draghi said the decision to hold rates steady was taken by consensus, indicating it was not unanimous. “There was a wide discussion ... but the consensus was to leave the rates unchanged.”

Asked why rates were not cut, he said the bank had already done “much” but declined to say whether it had done all in its power.

“If you think from July to today some countries’ spreads or some countries’ sovereign bonds went down by 200, 250 basis points; that is much more than anything you can achieve by a reduction in the short-term policy rate.

“So to some extent we will continue looking at the situation, of course, but to some extent we have already done much that is needed.”

The ECB forecasts inflation will come between 1.1 per cent and 2.1 per cent next year, compared with the ECB’s own target of just below 2 per cent.

Mr Draghi also said the bank discussed introducing negative interest rates for bank deposits, something that would be applied to encourage banks to stop hoarding cash with the ECB. “We are operationally ready, but the discussion didn’t go into any depth with respect to this point.”