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01 December 2011

Mario Draghi: Hearing before the Plenary of the European Parliament


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Mr Draghi stressed that governments must individually and collectively restore their credibility vis-à-vis financial markets.


Dysfunctional government bond markets in several euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in the various countries. An impaired transmission mechanism for monetary policy has a damaging impact on the availability and price of credit to firms and households.

This is the very important monetary policy reason for the ECB’s non-standard measures. But of course, such interventions can only be limited. Governments must – individually and collectively – restore their credibility vis-à-vis financial markets.

Tensions in sovereign bond markets have been accompanied by stress in the banking sector given the financial interlinkages between governments and banks. The ECB has taken several measures in 2010 and 2011 to ensure that banks continue to have access to funding sources. This has enabled them to continue lending to firms and households. Most importantly, the ECB has extended its policy of fully allotting liquidity demanded by banks at fixed rates against collateral. The maximum maturity of these liquidity-providing operations was first extended to six months and later to 12 and 13 months. A new Covered Bond Purchase Programme has recently been initiated, with a size of €40 billion.

Looking back at 2010 and 2011, notable progress has been achieved in reinforcing economic governance – though I recognise that this may not be evident in times of crisis. The European Parliament has contributed decisively to that progress, and the ECB commends that work. The “six pack”, the European Semester, the Euro Plus Pact: all these initiatives have set the stage for closer coordination and more intensive scrutiny of economic policies in the EU, particularly in the euro area.

Yet we are at a difficult stage at present. We have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. And the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets.

Fundamental questions are being raised and they call for an answer. At the heart of these questions are not only the credibility of governments’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance. I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations. On the precise legal process that brings about a move towards a genuine economic union, we should keep our options open. Far-reaching Treaty changes should not be discarded, but faster processes are also conceivable.

Full speech



© BIS - Bank for International Settlements


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