Mario Draghi Made A Case For The Euro To A Group Of German Industrialists

Mario Draghi

Photo: World Economic Forum, Flickr

Mario Draghi is giving a speech at The Federation of German Industries in Berlin.Draghi says governance of fiscal policies is now being given proper attention.

Draghi says clear progress is being made toward addressing fundamental challenges.

Draghi says the ECB has improved confidence with its bond-buying plan.

Draghi: “The euro area has faced a very severe fragmentation in its financial markets.”

Draghi is discussing the divergence in borrowing costs between the core and the periphery in addressing the topic of fragmentation.

Draghi: “A key channel through which the ECB ensures price stability is through the cost of credit.”

Draghi says if the ECB is unable to influence borrowing costs across the euro area, then the monetary policy transmission mechanism is undermined.

Draghi says the ECB faced a choice: either do nothing (say ‘Nein zu allem’), accepting the situation and allowing the singleness of the monetary policy to be undermined, or you take action.

The ECB decided in favour of the latter.

Draghi says the ECB’s actions are meant to fix the monetary policy transmission by backstopping government bond markets.

Draghi: “This is what we look at: we look at the credit flows.”

Draghi says it’s too early to tell the impact of the ECB’s measures on credit flows.

Draghi says the market reaction to the bond-buying plan means investors are ready to reinvest in Europe at the first signs of stabilisation.

Draghi: “The stability of the euro is key for [the euro area’s] sustained prosperity.”

Draghi says German firms can compete with their innovativeness without “unfair distortions” caused by divergent interest rates.

Draghi highlights the profound effects the euro has had on German exports.

Draghi: “1.5 million jobs [in Germany] depend on that investment.”

Draghi says TARGET2 data suggests balances have fallen slightly since their peak in August. Therefore, banks will be more prepared to make cross-border loans.

Draghi says if the ECB is successful, TARGET2 balances and thus idiosyncratic risk will go down.

Draghi says the measures announced by the ECB fully support its mandate to ensure price stability.

Draghi says the OMT bond-buying plan is solely to support the monetary policy transmission mechanism.

Draghi says the OMT does not amount to financing governments and the OMT will only be accompanied by strong conditionality.

German crowd applauds.

Draghi says indicators of inflation expectations show the credibility of the ECB is clear.

Draghi: “The ECB’s actions can only build a bridge to the future.”

In other words, governments must do more.

Draghi says you need both legs – intervention, but also conditionality.

Draghi: “Without reforms and without conditionality, the intervention would not be effective, and it would not be credible.”

German crowd applauds.

Draghi says there is no need for a “United States of Europe.”

Draghi says the euro area must be built on four pillars:

  1. Financial union with a unified regulatory system. Draghi: “For our part, we guarantee the firm separation of monetary policy from supervisory tasks.”
  2. Fiscal union that can effectively prevent and correct excessive budgetary policies. Draghi: “A stable monetary union would ultimately require the establishment of true budgetary oversight at the European level.”
  3. Economic union with incentives for continued structural reform.
  4. Political union that can make the previous three pillars democratically legitimate.

Draghi says exceptional times require exceptional measures and “we can’t always look to the past for answers.”

Draghi says the new OMT bond-buying program is necessary in order for the ECB fulfil its mandate.

Draghi closes by saying the euro is irreversible.

Draghi is honored with a lengthy applause from the German audience.

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