ECB head warns of increased eurozone risks

Mario Draghi says ‘fundamental restatement’ of the fiscal rules is key to restoring confidence in the markets.

The new president of the European Central Bank has said that it is ready to take fresh steps to tackle the euro zone debt crisis, saying risks to the economy have increased.

Mario Draghi also said on Thursday that temporary measures by the ECB, such as buying up government debt, would be limited.

Highlighting action the ECB and other central banks took on Wednesday to provide dollar liquidity, Draghi – a month into his presidency – said the bank aimed to ensure inflation did not undershoot or exceed its target of just below 2 per cent.

Addressing the European parliament on the eurozone crisis, Draghi said “the ECB’s monetary policy is constantly guided by the goal of maintaining price stability in the euro area over the medium term — and this applies to price stability in both directions.”

Draghi stressed that he was speaking in the ECB’s pre-meeting period and that nothing he said should be interpreted in terms of future policy decisions.

But many investors read the comments as raising the chances for a rate cut next week over which analysts have been divided.

The bank cut the inflation rate last month to 1.25 per cent.

‘Fiscal compact’

Draghi also pressed eurozone governments to adopt a “new fiscal compact” — an agreement on tighter budget rules that he said would help restore financial markets’ confidence in the currency bloc.

“I think the next few days will be very important to tell us whether we make progress on this,” he later added, pressing EU leaders to reach an agreement at a crucial summit they are holding on December 9.

French President Nicolas Sarkozy in a landmark speech on the eurozone crisis in the southern city of Toulon on Thursday said “a new economic cycle of debt reduction was beginning.”

“The cycle will be very different from the preceding one,” said Sarkozy, who will be meeting the German Chancellor, Angela Merkel on Monday to work out a joint proposal for more coercive powers to enforce budget discipline in the eurozone area.

Watch here the financial implications
for the European Central Bank

Al Jazeera’s Tim Friend reporting from London said: “We may see fundamental changes to the way the eurozone will work as a result from the summit”.

“One option is to make the ECB provide funds to the IMF to give to some cash starved eurozone countries”, said our reporter
By saying “other elements might follow”, Draghi appeared to be leaving open the possibility of a bigger ECB role in tackling the crisis, which has seen investors flee the euro zone bond market, fuelling doubts about the survival of the euro currency.

Although it was the first time Draghi addressed a full sitting or so-called plenary session of the European Parliament, only a handful of its 736 legislators turned up to listen or ask him a question.

For those who were present, Draghi delivered a sobering message on the economic outlook: “We have observed serious
credit tightening in the most recent period, which combined with the weakening of the business cycle, doesn’t bode at all well for the months to come,” he said.

Source: Al Jazeera, News Agencies


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