Euro zone faces long, uphill road to recovery, says Draghi

Oct 10 2012, 04:25 IST
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SummaryThe IMF predicted that the euro zone economy would contract 0.4% this year.

The euro zone economy faces a long, uphill road to recovery and the bloc is still suffering from a crisis of confidence, European Central Bank president Mario Draghi said on Tuesday. But he added that there was no alternative to continued budget cuts.

In testimony to European Parliament, Draghi also said the ECB’s new bond-purchase programme for troubled countries such as Spain would provide a backstop to avoid destructive scenarios in the 17-country euro zone.

The ECB agreed the plan last month and financial markets are now looking for any signs Spain might make a formal aid request that would trigger intervention in bond markets.

“Many hope that could be the beginning of the end of the most acute phase of Europe’s debt problems. But even with the programme,” Draghi said the euro zone faced tough times ahead.

“Some things have improved in the last to two or three months, but I think the road ahead is still long and it’s uphill,” Draghi told European Parliament’s Economic and Monetary Affairs Committee.

“The crisis of confidence that has taken over the euro area in the last few months ... has improved but it’s still there.”

He said the euro zone economy is weak and faces the prospect of only gradual recovery, and that the budget austerity being brought in by euro zone governments was likely to continue depressing growth in the near term.

“But what’s the alternative?” he said. “Let’s not forget that the crisis started from increased risk aversion, which addressed several problems, one of which was the unsustainability of deficits and debt levels.”

The International Monetary Fund predicted on Monday that the euro zone economy would contract 0.4% this year and grow by just 0.2% in 2013. Both figures were downgrades.

Last week, Draghi said everything was in place for the ECB to buy the bonds of troubled euro zone countries and that conditions linked to such purchases need not be punitive.

Euro zone officials meeting in Luxembourg said on Monday that Spain was taking steps to overhaul its economy and was funding itself successfully in financial markets, dashing hopes for a swift move to end the problems of the bloc’s fourth-largest economy.

Draghi told the parliamentary committee the ECB stood ready to act.

“The ECB will conduct OMTs (bond buying) if and as long as countries comply with strict and effective conditions attached to an appropriate programme,” he said.

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