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Euro Central Bank head urges nations to take corrective action
FRANKFURT, Germany — European Central Bank President Mario Draghi warned Thursday that the economy of the 17 countries that use the euro currency remains weak and will struggle to grow, even with “visibly improved” confidence among the currency union’s financial markets.
After the bank’s governing council left its key interest rate unchanged at the record low of 0.75 percent, Mr. Draghi insisted the bank has done its part to haul the eurozone out of its financial crisis. Markets have rallied since the bank offered in September to buy the bonds of countries such as Spain and Italy, which are struggling with borrowing costs on their debt.
Mr. Draghi said it is up to governments to improve investor confidence in the currency bloc by fixing their shaky public finances and cutting the bureaucracy and regulations that block stronger growth.
“Economic activity in the euro area is expected to remain weak; although it continues to be supported by our monetary policy stance, and financial market confidence has visibly improved on the back of our decisions,” he said at a news conference in Frankfurt.
The slack economy poses a serious risk for the eurozone because only a broad rebound will help shrink the levels of government debt that have already pushed Cyprus, Ireland, Greece and Portugal into asking for bailouts. Government debt across the eurozone now averages 90 percent of annual economic output — well above the 60 percent limit under the region’s fiscal rules.
Mr. Draghi said current evidence “does not signal improvements toward the end of the year” and that growth is suffering from “heightened risk aversion,” as consumers and companies seek to cut their debt and improve their finances.
As part of its efforts to calm the financial crisis, the bank in September said it was willing to buy bonds issued by heavily indebted countries with the aim of lowering their borrowing costs as long as they are willing to ask for the help and take steps to cut their deficits.
Since then, stocks have risen and borrowing costs fallen without the bank spending a cent to intervene. The proposal alone appears to have helped instill greater confidence in the countries’ ability to pay down their debts.
On Thursday, the interest rate for Spain’s benchmark 10-year bond on the secondary market — an indicator of investor wariness of a country’s economy — was at 5.8 percent, up marginally on recent days but still way down from the unsustainable highs of 7 percent it reached in July. Meanwhile the Stoxx 50 index of leading European shares was up 148 points to 2,527.
While markets are feeling better, the outlook for the wider economy remains glum.
Budget cuts and tax increases imposed as part of austerity programs are weighing heavily on economies. The region’s gross domestic product shrank 0.3 percent in the second quarter.
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