ECB head said euro needs strengthened foundations, says proposals coming soon

FRANKFURT – European Central Bank head Mario Draghi warned EU leaders that they should not wait for more emergency help from the central bank to solve the debt crisis rattling the region and instead make the political choices needed to strengthen the euro.

Draghi said Friday the ECB has supported banks against the ongoing debt crisis with €1 trillion ($1.26 trillion) in emergency credit to banks and that now it was the governments’ turn to act.

“Political choices have become predominant over monetary policy instruments that we can use in the near future,” he said before an audience of economists and analysts at a conference in Frankfurt. The shared currency needs “strengthened foundations” that will “imply greater transfer of powers to a supra-national level,” he added.

Draghi said the bank stood ready to keep supporting the banking system by continuing to provide credit to solvent banks. He also said there was no inflation risk in the eurozone, a statement which leaves open the chance of an interest rate cut if the bank sees the situation in the eurozone worsening.

Still, his comments seemed aimed at discouraging reliance on the ECB’s monetary powers and increasing pressure on political leaders to act at the upcoming EU summit in Brussels on June 28-29. German Chancellor Angela Merkel has by contrast sought to lower expectations for decisive steps at the meeting.

The central bank wants stronger action from leaders so it does not have to undertake risky emergency measures such as more cheap loans to banks or direct purchases of government bonds, as some political leaders have called for.

The ECB has cut its key rate to a record low 1 per cent and while there is some room to cut more, some analysts wonder whether the bank is running out of weapons to steady markets. The ECB has already opened its credit taps wide for banks, while massive bond purchases to support weak government’s ability to borrow could collide with the EU treaty’s legal prohibition on financing governments.

Some ECB officials have said its crisis loans — though they calmed markets tempoarily — risked easing the pressure on politicians to make tough decisions like reducing deficits or cutting bureaucracy. The bank, which is legally independent and can’t take advice from politicians, has denied it is engaged in “horse trading” with elected officials.

Eurozone market tensions are on the rise ahead of Sunday’s election in Greece. If a new government rejects the terms of the country’s bailout loans, Greece could lose further financing and default on its debt obligations. That could in turn lead it to leave the eurozone, an event that could further shake confidence in the common currency and send shock waves through financial markets, destabilizing Spain and Italy.

Greece has for over two years been dependent on bailout loans from other eurozone countries and the International Monetary Fund after bond investors would not loan it any more money at affordable rates.

Draghi also called on governments to take steps to boost growth by dismantling regulations. “Strengthening the growth potential of our economies is crucial,” he said. These measures could include making it easier for companies to hire and fire people and cutting through the bureaucracy that makes it hard to start up a company.

Draghi said that he and other top EU officials working on proposals for a revamped euro will have something “very soon” and that “all the work we are doing is in view of the upcoming summit” of EU leaders June 28-29.

The ECB chief, European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy and Jean-Claude Juncker, who chairs eurozone finance minister meetings, have been tasked by the continent’s leaders with coming up with new ideas aimed at strengthening the euro.

Those could include more centralized supervision of banks, whose troubles have hurt government finances; more control over individual countries’ spending at the EU level; proposals for more growth; and some form of common borrowing that would prevent defaults by one country. All those issues are complex, could take years to fully implement and raise political objections.

The euro was launched in 1999 with one central bank and currency but multiple governments, each with their budgets and economic regulations. Rules against excessive deficits failed to keep some countries from running up too much debt through overspending or expensive bank bailouts. Greece, Ireland and Portugal have needed bailouts to pay their debts.

Draghi added that the goals of the bank’s emergency loans to banks in December and February “have been broadly met” and that the step avoided a worse credit crunch. But he conceded that while banks have been supplied with fresh money from the central bank “in some countries very little money reached the real economy.” The ECB has said that lending remains subdued because businesses see no reason to ask for credit in a slow economy.