17 September 2014

ECB: Draghi's 3 Pillars approach (Eurofi Speech)

Draghi's speech in summary:

'We are facing a set of conditions – low growth and low inflation, high debt and high unemployment – that can only be addressed by concerted action on both the demand and supply sides of the economy. This requires that all actors – both at national and European levels – play their parts in line with their respective mandate as laid down in the EU Treaties.

No monetary or fiscal stimulus can be successful if not accompanied by the right structural policies -- policies that foster potential growth and instil confidence.

Investment has been one of the great casualties of the crisis. From peak to trough business investment in the euro area decreased by around 20% since 2008, against 15% in the 1992 recession. We will not see a sustainable recovery unless this changes.

A decisive rise in investment is essential to bring inflation where we would want to see it, to kick-start the economy and to bring down unemployment.

There are two key areas where national and European level government action can help revive investment. First, the regulatory environment should be made more favourable to economic growth. Second, companies need to have access to more diversified sources of financing: the launch of a capital markets union could contribute to achieving this. It is an idea that the ECB fully supports.

The development of the market for simple and transparent Asset Backed Securities deserves particular support. Member States should consider the provision of public guarantees to support lending to small and medium sized enterprises.

There also needs to be a consistent and credible application of the Stability and Growth Pact across time and across countries. Within the existing framework, countries should explore how to support productive investment.

In monetary policy, we have deployed a number of non-standard tools to ensure our very accommodative monetary policy stance is transmitted to the real economy. Last week, the Governing Council decided to start the purchase of certain high-quality asset-backed securities and covered bonds in October. Senior tranches of such ABS have proven to be high quality assets.

Alongside our Targeted Longer Term Refinancing Operations, we expect these measures will enhance the functioning of monetary policy transmission, provide further accommodation now that we are at the lower bound, and have a sizeable impact on our balance sheet.'

AFP commented:

'European Central Bank head Mario Draghi made the first move in his grand plan to rescue the economic recovery. Now it's over to the governments of the 18 countries that use the euro.

Eurozone finance ministers gather Friday and Saturday for the first time since the ECB president sketched out what has been dubbed "Draghinomics:" a three-pillared strategy including more stimulus from the central bank, added government spending and pro-business reforms to cut bureaucracy and make economies more productive.

Problem is, Draghi as an unelected central banker only controls the monetary pillar, while governments hold sway over the other two. The finance officials meeting in Milan, Italy, now have a chance to show Europe's politicians are ready to help, too.

On the eve of the meeting, Draghi made a blunt appeal for action, saying Europe's trouble "can only be addressed by concerted action" by "all actors, both at the national and European level." '

AFP Article

Draghi Eurofi Speech 11 Sept. 2014

© ECB - European Central Bank