Introductory statement to the press conference (with Q&A)

Mario Draghi, President of the ECB,
Frankfurt am Main, 6 March 2014

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment. At the same time, the latest ECB staff macroeconomic projections, now covering the period up to the end of 2016, support earlier expectations of a prolonged period of low inflation, to be followed by a gradual upward movement in HICP inflation rates towards levels closer to 2%. In keeping with this picture, monetary and credit dynamics remain subdued. Inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.

Regarding the medium-term outlook for prices and growth, the information and analysis now available fully confirm our decision to maintain an accommodative monetary policy stance for as long as necessary. This will assist the gradual economic recovery in the euro area. We firmly reiterate our forward guidance. We continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilised capacity and subdued money and credit creation.

We are monitoring developments on money markets closely and are ready to consider all instruments available to us. Overall, we remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required.

Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.3%, quarter on quarter, in the last quarter of 2013, thereby increasing for three consecutive quarters. Developments in survey-based confidence indicators up to February are consistent with continued moderate growth also in the first quarter of this year. Looking ahead, the ongoing recovery is expected to proceed, albeit at a slow pace. In particular, some further improvement in domestic demand should materialise, supported by the accommodative monetary policy stance, improving financing conditions and the progress made in fiscal consolidation and structural reform. In addition, real incomes are supported by lower energy prices. Economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports. At the same time, although unemployment in the euro area is stabilising, it remains high, and the necessary balance sheet adjustments in the public and private sectors will continue to weigh on the pace of the economic recovery.

This assessment is also broadly reflected in the March 2014 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP increasing by 1.2% in 2014, 1.5% in 2015 and 1.8% in 2016. Compared with the December 2013 Eurosystem staff macroeconomic projections, the projection for real GDP growth for 2014 has been revised slightly upwards.

The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global financial markets and in emerging market economies, as well as geopolitical risks, may have the potential to affect economic conditions negatively. Other downside risks include weaker than expected domestic demand and export growth and insufficient implementation of structural reforms in euro area countries.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 0.8% in February 2014, unchanged from the (upwardly revised) outcome for January. While energy prices fell more strongly in February than in the previous month, increases in industrial goods and services prices were higher than in January. On the basis of current information and prevailing futures prices for energy, annual HICP inflation rates are expected to remain at around current levels in the coming months. Thereafter, inflation rates should gradually increase and reach levels closer to 2%, in line with inflation expectations for the euro area over the medium to long term.

This assessment is also broadly reflected in the March 2014 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.0% in 2014, 1.3% in 2015 and 1.5% in 2016. In the last quarter of 2016, annual HICP inflation is projected to be 1.7%. In comparison with the December 2013 Eurosystem staff macroeconomic projections, the projection for inflation for 2014 has been revised slightly downwards. In view of the first publication of a three-year projection horizon in the March 2014 ECB staff macroeconomic projections, it should be stressed that the projections are conditional on a number of technical assumptions, including unchanged exchange rates and declining oil prices, and that the uncertainty surrounding the projections increases with the length of the projection horizon.

Regarding the Governing Council’s risk assessment, both upside and downside risks to the outlook for price developments are seen as limited and are considered to be broadly balanced over the medium term.

Turning to the monetary analysis, data for January 2014 confirm the assessment of subdued underlying growth in broad money (M3) and credit. Annual growth in M3 increased to 1.2% in January, from 1.0% in December. The monthly inflow to M3 in January was substantial, compensating for the strong outflow in December. The increase in M3 growth reflected a stronger annual growth rate of M1, which rose to 6.2% from 5.7% in December. As in previous months, the main factor supporting annual M3 growth was an increase in the MFI net external asset position, which continued to reflect the increased interest of international investors in euro area assets. The annual rate of change of loans to the private sector continued to contract. The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) was -2.9% in January, unchanged from December. Weak loan dynamics for non-financial corporations continue to reflect their lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) stood at 0.2% in January 2014, broadly unchanged since the beginning of 2013.

Since the summer of 2012 substantial progress has been made in improving the funding situation of banks. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed. This is the objective of the ongoing comprehensive assessment by the ECB, while a timely implementation of additional steps to establish a banking union will further help to restore confidence in the financial system.

To sum up, the economic analysis confirms our expectation of a prolonged period of low inflation, to be followed by a gradual upward movement towards levels of inflation closer to 2%. A cross-check with the signals from the monetary analysis confirms the picture of subdued underlying price pressures in the euro area over the medium term.

As regards fiscal policies, the ECB staff macroeconomic projections indicate continued progress in reducing fiscal imbalances in the euro area. The aggregate euro area general government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced further to 2.7% of GDP this year. General government debt is projected to peak at 93.5% of GDP in 2014, before declining slightly in 2015. Looking ahead, euro area countries should not unravel past consolidation efforts and should put high government debt ratios on a downward trajectory over the medium term. Fiscal strategies should be in line with the Stability and Growth Pact and should ensure a growth-friendly composition of consolidation which combines improving the quality and efficiency of public services with minimising distortionary effects of taxation. National authorities should also continue with the decisive implementation of structural reforms in all euro area countries. These reforms should aim, in particular, to make it easier to do business and to boost employment, thus enhancing the euro area’s growth potential and reducing unemployment in the euro area countries. To this end, the Governing Council welcomes the European Commission’s communication of yesterday on the prevention and correction of macroeconomic imbalances and on the Excessive Deficit Procedure. Looking ahead, it is key that the macroeconomic surveillance framework in the euro area, which was significantly strengthened in the wake of the sovereign debt crisis, is implemented fully and in a consistent manner.

We are now at your disposal for questions.

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Question: You placed a lot of emphasis on this meeting. You said you’d have the information that you needed on a variety of factors affecting your reaction function today, and you’ve done nothing. You’ve said that you stand ready to take decisive action if needed, but presumably all central banks are willing to take decisive action if needed. Isn’t it reasonable, given that you’ve done nothing today, for investors and the public to assume that you’re just done, barring some big outside shock? And my second question is on the euro. You mentioned that your inflation forecast assumes an unchanged euro. To what extent is the strength of the euro affecting your inflation outlook, and are you surprised at its strength given the comparative weakness of the Eurozone recovery and the fact that you’ve got this easing bias and you’ve got this forward guidance?

Draghi: The reasons for today’s Governing Council decisions are the following. First of all, we saw our baseline scenario by and large confirmed. There is a continuation of a modest recovery. In the last quarter of last year we had an increase in GDP of 0.3%, after two consecutive quarters of positive growth. The news that has come out since the last monetary policy meeting is also, I would say, by and large on the positive side. Just let me give you a few data, not all of them. The composite PMI data that have just come out are the strongest in two and a half years. The PMI for services also was quite good. That’s quite important because job creation takes place mostly in the services sector.

When we look at consumer confidence, we see that the gap between Germany and the stressed countries, especially Spain and Italy, is actually narrowing. And so is the data on economic sentiment produced by the European Commission. It is true unemployment is still high, but it’s stabilised. It’s now been a few months since unemployment stopped going up. We actually have some data – local data, like the fall of 2 percentage points in unemployment in Portugal – which are quite striking. We also saw that the employment data are timidly going up.

Having said that, the risks are on the downside. But basically, when we looked at all the amount of information we had in front of us since the last monetary policy meeting, we thought that our monetary policy stance would remain accommodative. Our forward guidance is confirmed in saying that interest rates will stay at the present or lower level for an extended period of time. And we asked ourselves whether the contingencies I hinted at last time that would actually elicit monetary policy decisions, had taken place. You may remember one of these contingencies was an unwanted tightening of monetary policy on the short-term end of the market. In fact, if anything, we had a further normalisation of conditions on that front. The other was a consistent and significant worsening of the medium-term outlook for price stability – for our inflation outlook – and that, too, isn’t there. So, all in all, I think that, based on the current set of data, the Governing Council decided not to act today.

Now, on the second question, let me start first with the standard statement. The exchange rate is not a policy target for us. But the exchange rate is very important for growth and price stability. If we look back to the trough in the exchange rate in 2012 and then we look at the exchange rate today and we ask ourselves how much this has counted for the low inflation that we see today, we come up with a figure which is roughly 0.4 percentage points. I think I will come back to this if I have questions on inflation, but that’s a significant statement on how the exchange rate might influence our price stability objective.

Question: I usually cover the Bank of Japan. I have two questions: First, there were market expectations that the ECB might decide today to stop sterilising the Securities Markets Programme (SMP). Is there any reason why this was not decided today? Second, I have been covering the Bank of Japan for 15 years and so I saw Japan slipping into deflation, staying there and suffering from it. I know it is not good to draw a direct link between Japan and the euro area, which is very different for the reasons you set out at your press conference last month, but what are the key lessons you think the euro area could learn from Japan’s experience? I am asking because you say that long-term inflation expectations are well anchored. However, inflation expectations are very hard to measure, and even in Japan, long-term inflation expectations have been very stable, even when the country was suffering from deflation. Furthermore, the Bank of Japan introduced zero interest rates and flooded markets with liquidity to beat deflation, but this did not really push up prices. Therefore, I am wondering why cutting rates or introducing any stimulus measures in the euro area would prevent it from slipping into deflation. I would just like to know how the transmission mechanism is different from that in Japan.

Draghi: In answer to your first question, the suspension of the sterilisation of the SMP is one of the instruments on our list. However, we have not seen any developments in the money markets that would lead to an unwanted tightening of the monetary conditions that would justify the use of this instrument. Furthermore, the benefits of sterilisation are relatively limited, given, for example, the short maturity of the bonds currently in the SMP portfolio. The net injection of the liquidity may really only last for a relatively short time, less than a year. Nevertheless, we will continue to monitor the situation and look at this, as well as other instruments, in our catalogue.

With regard to comparisons with Japan, I have discussed this before. The situation in the euro area is different because inflation expectations are firmly anchored, whereas they were not in Japan. They de-anchored at some point. You are right, medium to long-term inflation expectations are hard to measure, but this is the measure that the ECB used when inflation was high and is using now that it is low. On both occasions, there have been discussions about the validity of these expectations. They could de-anchor themselves both upwards and downwards, but by and large, they have helped us to deliver, since the establishment of the ECB, our objective of an inflation rate that is below, but close to, 2%. Therefore, the definition of these inflation expectations that we have been using has contributed to our credibility in delivering the inflation target. There are also other reasons why the situation in the euro area is different to that in Japan. First, we have taken early decisive action on the monetary policy front for several years now and are, in fact, still doing so. It has been for several years now that we have continued to take action. You come here every time expecting us to take action and are slightly disappointed when we don’t. However, we are anything but inactive. Second, the condition of the balance sheets of both companies and banks in the euro area today is not what it was in Japan at the end of the 1990s and in the early 2000s. We also monitor other statistical measures, for example, the percentage of commodities or services, of which the prices are falling, i.e. of which price inflation is negative or less than 1%. And the percentages that we are watching are much lower than they were in Japan when the country was suffering from deflation. All in all, we believe that the situation in the euro area is different and that there are other reasons that explain our low level of inflation. I hinted before that global factors are at play, for example low energy prices. The average historical contribution to inflation from energy prices is 0.5 percentage points. More specifically, in early 2012 this contribution was 1 percentage point, while in February 2014, it was -0.3 percentage point. This means that of the 1.9 percentage point fall in annual HICP inflation since the first quarter of 2012, two-thirds can be attributed to lower energy prices. I also mentioned the exchange rate as having an effect. In the case of Japan global factors played much less of a role. There is also another dimension, namely that part of this low inflation is due to relative price adjustments in the stressed countries, which, prior to the crisis, were experiencing serious imbalances that needed to be corrected.

Question: Mr Draghi, earlier you spelled out quite clearly the arguments why you decided not to cut interest rates today. I am wondering whether all your colleagues subscribe to these arguments, or whether you had some Governing Council members push for an interest rate cut today, and – if so – how close the decision might have been. My second question is on credit developments in the euro area: during the last press conference, you expressed hopes that, in the coming weeks, we might actually see positive signals from credit. In light of that, I wonder whether you might have been somewhat disappointed by what we saw on the M3 data and what you might be expecting in the weeks ahead.

Draghi: On the first question. Yes, indeed, we had a broad discussion on changes in interest rates, as well as on other monetary policy instruments. If I have to flag a key point of the discussion, I would point to the attention that the presence of slack in the economy received during the discussion. With slack, we mean a low capacity utilisation rate, an output gap, which is indeed hard to measure. But according to any measure you want to take, it is fairly wide and is estimated, at the present juncture, to be closing itself very slowly. So, our monetary policy stance that says basically what I have said before, namely that interest rates will stay at the present level, or lower, will remain as it is even though we will be seeing improvements in the economy precisely because of the existing slack in the economy. I think this was really the point of major consensus, if not unanimity, in the discussion we had. Our monetary policy stance will stay in place even after we see improvements in the economy, in the flow of data in the economy, because we have a stock of slack that is weighing on the economy.

On the second point: well, you know it is always a matter of how you see the glass – you asked me if I was disappointed by the credit developments: this is like the glass that could be seen as half empty or half full. We have seen a stabilisation of credit flows and we have seen an increase in M3. By the way, in December, M1 was low because of special seasonal factors.

I have also explained several times how we should look at fragmentation. We continue to see some improvement on that front as well. In particular, even though lending rates remain higher in the stressed countries than in core countries, and higher for small and medium-sized enterprises (SMEs) than for corporates, we saw some convergence in lending rates, some timid, I would say, mild convergence. We also saw another factor, namely that issuance of corporate bonds completely offset the decline in bank credit, which is – to some extent – positive news, but we should not make too much out of that for two reasons. One is that we know only too well that SMEs do not usually access capital markets, cannot issue bonds on capital markets – if you exclude those “mini-bonds” that I hear are being issued in Italy but it is still a very experimental project – and the second is that much of this corporate bond issuance is concentrated in core countries, in France. It is not concentrated in stressed countries, basically.

Question: You’ve mentioned geo-political factors. To what extent were they important in your decision today? How much did these geo-political factors, such as Ukraine, impact your decision today? And I would also like to ask you about the developments in emerging markets. You have commented on that before, but the situation seems to be one of prolonged unease there. The other question is about credit again: recovery can hardly happen without credit. In the past you have alluded to several possible measures, like revitalising ABS, or targeted or conditional liquidity provisions. Are they still on the table? You have been talking about this for quite a long time now. Are they still on the table or have you shelved them?

Draghi: On the first question: as you have seen, the impact of the situation of emerging market economies upon the euro area has so far been muted. In fact, if anything, there have been flows into the euro area, which have narrowed the spreads of some of the stressed countries. It is more and more clear that the situation of the emerging countries depends, to a great extent, on the economic policies that have not been undertaken, or that have been undertaken in a wrong way, in the most vulnerable of these emerging market economies. And, as I think I said last time, we certainly cannot ignore this fact. We certainly cannot ignore that our monetary policy decisions have spillovers, and so better communication is certainly there and we ought to pursue that. But it is also true that the best insurance against foreign spillovers is good economic policies. And third, international financial institutions like the IMF should, and could, create safety nets that could help some of these countries to cope with these spillovers. So there are three sets of actors: domestic governments and the IMF are the major actors, because central banks act within their national mandates and have to act in full independence.

When we look at the specific situation in Ukraine, and if we look at it from a purely technocratic viewpoint, and we look at the amount of trade in goods, services and financial services and capital flows, we have to say that the interconnections are not as important as to suggest a strong contagion from that region. However, let me also add that this would be a limited way to look at the situation, because the geopolitical risks in the area could quickly become substantial and generate developments that are unforeseeable and, potentially, of great consequence.

On the credit recovery, you are absolutely right: we have hinted on several occasions at various measures. One was the revitalisation of the ABS market, and another one was funding for lending. And a third could be QE. We have not shelved these projects: we are continuing to reflect on this and we will continue to work. I think time is necessary, because they are not easy issues. If we consider just the revitalisation of the ABS market, there are many things that need to change in regulation and in legislation. Today, the capital charges for ABS discriminate ABS unfavourably with respect to other instruments with similar degrees of riskiness. The current capital regulation of ABS was calibrated on a reality which is not the European one. To give you an idea, I can’t remember exactly the period of reference, but let’s say over five or ten years, the default rate of ABS in the United States was 17.4%; in Europe, it was 1.4%. So you see that the capital charges are certainly not being calibrated on European ABS, which are traditionally of a much simpler, transparent and unstructured form. These things have to be changed, and it will be up to the Basel Committee and the European Commission, as far as legislation within the EU is concerned, to change some of these regulations. Also there are issues like the sovereign cap: ABS are rated according to their sovereign – perhaps with a few points difference, but this often does not make much sense. So there are several issues and, in the end, it may well be the case that, to launch this market, one may need third party guarantees. So, it is a complex thing on which the ECB’s staff is working.

Question: I want to come back to two particular questions. First, coming back to the foreign exchange argument, it is not your mandate and you have made that absolutely clear, but you have gone to the extent of working out the impact of the 2012 trough in the euro on inflation, and inflation is your mandate. Should we, therefore, in some way be viewing the exchange rate as part of the reaction function? I want to know exactly how we should be looking at the exchange rate. Second, let me ask a broader question on the Ukraine, which may be a little offbeat, but the governor of Narodowy Bank Polski has been suggesting that Poland should rethink whether it should be a part of the euro area or not. All of this is in the long term, but given the instability we are seeing at the moment around the Ukraine, does that strengthen the case for the euro? Is it an advantage?

Draghi: In answer to the first question, I can only reiterate that the exchange rate is not a policy target, but certainly I have here another number. The cumulative appreciation of the exchange rate between the euro and the dollar since the trough of 2012 has been around 9%. In effective terms the euro has strengthened by 8% since then. Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points. So we can say that between 2012 and today about 0.4 or 0.5 percentage points of inflation was taken out of current inflation because of the exchange rate appreciation. Having said that, we have to be cautious, because there was a previous depreciation of the euro. That is why it is hard to take the exchange rate as a policy target and even harder to take it as a policy instrument. But it is certainly a factor that is affecting in a significant way – together with the price of energy and of food for that matter – our low rate of inflation.

Your second question is indeed a very difficult one. The euro is an island of stability. It will also have to go back to being an island of prosperity and job creation, but certainly it is an area of stability. To the extent that countries feel threatened, this area certainly looks attractive. However, I should stop here, because you are aware that the foreign policy and geopolitical dimensions of these choices go well beyond the mind of a humble central banker.

Question: Mr Draghi, in the statement you underscored a high degree of unutilised capacity; this is the first time I have seen this. Is this a signal that it is a primary concern of the ECB that unutilised capacity has reached this level in the euro area? And if it is not a signal, then companies will invest in new capacities. And if they do not invest, then they will not require credit: so no credit, no creation of money and then no inflation. Do you follow my line of thinking? My second question is why do you mention specifically the fourth quarter of 2016 as regards inflation? You gave a rate of 1.7%, which is above the 1.5% forecasted for 2016. Is this just to say, “hey guys, 1.7%, we are right on the finish line: below, but close to, 2% – goal achieved”? And maybe could you tell us if there are some extreme values in these forecasts for inflation and GDP. I mean values which are below 1.5% or above 1.8%.

Draghi: On your first question, to say that the monetary policy stance that keeps interest rates at the present or lower level will stay in place even after improvements are seen in the economy means the following. It means that monetary policy, even if we do not do anything in the presence of an improvement in the economy, will become more and more accommodative because real interest rates will go down. That is the message that this consensus produces. And in this sense it links with what you said before. One of the reasons, perhaps the most important reason, for credit flows being low is the lack of demand. And a lack of demand also means a lack of investment. So, the present monetary policy stance, which is producing lower real rates, should help in this sense to increase demand for investment and therefore demand for credit.

As regards the 1.7%, this is simply stating that there is a dynamic, which for the first time the ECB’s staff can measure quantitatively, whereby even though inflation is currently low, it will gradually move towards a level which is closer to 2%. The data include both the yearly average and figures for the last quarter to show the momentum towards 2%. But bear in mind, as I said in the introductory statement, the uncertainty of these projections increases with the length of the horizon. And the assumptions, such as the decline in oil prices and unchanged exchange rates and many other assumptions, become more and more fragile as the horizon lengthens. So, a certain degree of wisdom should be employed when viewing these projections.

Question: In justifying your decision not to act today, a lot of emphasis seems to be placed on recent data points, but if we look at the economics text book, it teaches us that monetary policy acts with a lag. Now, if we look at the lag with which it is supposed to act – two years – we see inflation still below target then. We have also heard you say that there is a significant degree of slack. Both pieces of evidence point to taking action today. Now, cynics might say that the decision not to act owes more to the political economy of the institution, rather than the economics of the euro area. How would you respond to such criticisms? As a second point, you noted in your last answer that this is based on the idea that monetary policy will become more and more accommodative as time goes on. Now, you have also mentioned that where credit conditions are working better – not just in bank lending, but also in capital markets – it is the core, so there is not any evidence that you are really seeing much of an improvement in credit conditions in the periphery, so is it not a little bit complacent to assume that credit conditions are just going to become more accommodative and think that this warrants not taking more action today?

Draghi: On this last point, I did say that credit conditions remain weak. But we also say that credit conditions are a lagged indicator of future growth, and all in all, we are seeing some stabilisation of credit flows – not only for core countries, but for everybody. In fact, if anything, lending standards have become looser in countries like Italy and, to some extent, Spain, for certain categories of borrower. So, we are seeing some improvement there. Even though, as I have said, credit flows remain weak, we are seeing some convergence – admittedly, mild convergence – in lending rates between stressed countries and core countries. I will not repeat what I have been saying for months now, but we continue to see improvements on the funding side for banks – both in the core countries and especially on the periphery, where in terms of the dispersion of the growth rate of bank deposits, we are at the same level as we were in 2007. So, if we consider funding only from the perspective of bank deposits, we can safely say that the fragmentation is over from that perspective. But of course, there are other aspects of fragmentation that are also very important, and we focus on what does not work, not on what works.

Now, you are absolutely right: monetary policy exerts its effect with a lag. And one way to look at the recent improvements is to say that our accommodative monetary policy, which has been in place for years now, is finally finding its way through the economy. Now, the lag of two years is actually questionable, because unfortunately the lag depends on how well the transmission channels of our monetary policy work. And the key actor in Europe for the transmission of monetary policy is the banks. And so, one of the greatest contributions that a credible comprehensive assessment can make is actually to repair the bank lending channel and therefore speed up the transmission of monetary policy relative to how it is today.

Question: Let me come back to the situation in the Ukraine. How could the Ukrainian crisis impact the euro, the euro area, non-euro area countries and the European financial markets? And the second question is: Have you discussed any scenarios and, if yes, which?

Draghi: No, we have not discussed scenarios of different impacts that the crisis could have. So far, we have seen a major impact on the Russian economy and on the Ukrainian economy, and some financial impact on some countries that are bordering that area. The impact on the Russian economy is severe. However, it is very, very difficult to foresee what is going to be the impact over a horizon of two or three years, because that is what we have to look at if the crisis were to continue. For example, the impact on the energy market, what could this be for Europe? If we look at the next six months, the answer is: It is going to be very mild. If we look at a year and a half, it could be very serious. But it depends on so many things. It depends on alternative sources of energy, it depends on how this crisis will evolve, and frankly, as I have said, we poor central bankers do not have enough information to give a reliable assessment of the economic impact at such an early stage in the crisis.

Question: Problem number one, and maybe number two for European banks is the high level of non-performing loans. Do you think that the creation of a bad bank or other mechanisms to split the non-performing loans is the right solution, and if not what would you suggest? The second question: you welcomed the European Commission’s communication. But yesterday’s communication was very tough, very strict with Italy, but not so with France or Germany. Do you really think that more sacrifices can improve the recovery or growth?

Draghi: On the bad bank, I don’t want to enter into a discussion about the specific instruments. But certainly what countries should do, what supervisors should do, and what we will certainly do with the comprehensive assessment will be to cope with non-performing loans and other factors or weaknesses in the banks’ balance sheets squarely. The worst thing one can do is to pretend the problems don’t exist. If anything, evidence from Japan from the 1990s and 2000s is that zombie banks don’t lend. So the idea that people are afraid of the AQR because they think that banks will then deleverage and will not lend – well, they don’t lend anyway if they are zombie banks. And so the only possible path is to cure and proceed and carry out surgery if needed. That is the purpose of the AQR; that is the purpose of the comprehensive assessment. But I also think fair credit should be given to national supervisors who, in view of the AQR, are already taking prompt, corrective action with respect to their own banking systems by increasing provisions, demanding capital increases so that banks can be repaired. Whether the bad bank is the right instrument or not really depends on the specific circumstances. The important thing, as I said before, is to restore trust in the European banks’ balance sheets, and that is the ultimate objective of the exercise and that is the necessary and sufficient condition for the private sector to return to invest in the European banking industry.

As for the second question, while we certainly welcome the European Commission’s communication, let me read what we said in the introductory statement. We said “euro area countries should not unravel past consolidation efforts”. It would be a disaster. If you think, as you said, that there are so many sacrifices and so much pain because of the efforts that have been undertaken now, would it make any sense to go back and squander all the political and human capital that has been invested in these efforts? The introductory statement does say not to unravel past consolidation efforts and that high government ratios should be put on a downward path over the medium term. Fiscal strategies should be in line with the Stability and Growth Pact but should also be growth-friendly, so it is time to think or re-think about the composition of the budget consolidation efforts. I will not dwell on this because you have heard me saying too many times, really, what I mean by re-thinking the composition. And then it says “national authorities should also continue with the decisive implementation of structural reforms in all euro area countries.” That is essential. There are several markets that, without structural reforms, will not function again. One of them is the labour market, where structural unemployment is high. One copes with structural unemployment through structural reforms.

Question: My first question is on OMT because, just one day after your last press conference, the German Constitutional Court came out with a “non-ruling”.

Draghi: They would disagree with that definition, but those are your words.

Question: That’s true, but there are opinions in the market that, for now, the OMT programme is on hold because the Bundesbank might not participate. What is your opinion on that? I would also like to know your opinion about the IMF calling on the ECB for more stimulus in recent articles. How do you feel about that?

Draghi: Let me say that the OMT programme is ready, it is there and it is ready to be activated if and when needed. In this sense, we welcome the referral of the OMT case to the European Court of Justice. OMT, in our view, falls within our mandate of pursuing price stability over the medium term.

The IMF statement asking for more stimulus is one of the many voices asking us to move in one direction, just as many others are asking us to move in another direction or to do nothing. So I think the analysis that we are carrying out at the present time, at least with respect to this monetary policy meeting, diverges from what the IMF is saying. One should also ask the question of what kind of stimulus here because, as I have said over and over again, many of the problems that we face today are structural. Fragmentation is a structural problem and one way to cope with it is precisely the comprehensive assessment and asset quality review that we will be carrying out.

However, let me just say one last thing with respect to that. The ECB – Vítor Constâncio and Danièle Nouy – are working on several issues: undertaking the asset quality review and later the stress test, as well as working on building up a totally new institution, the SSM, which we foresee some 1,000 people working for. And then the question is what about the SRM? Will the SSM start to take charge at the same time as the SRM will take charge? This is an important point because to have a single resolution mechanism working together jointly with the supervisory mechanism would align responsibilities between the one European supervisor and the one resolution authority. So there would be no misalignment of responsibilities. By contrast, if we do not have one SRM, the responsibilities for resolution will remain national, and so we will have a misalignment of responsibilities. We are following with great attention the current discussion between the Council and the European Parliament. The ECB view is that the mutualisation process should be sped up and the governance of this new institution should be effective so that the new institution, the resolution authority, could actually take the swift decisions that are in its very nature because, as we all know, to resolve a bank is a decision that is often taken in hours. So the governance of this new institution should be such that it could decide in a matter of hours. And the third point is that, of course, in order to have this gradual but not too slow mutualisation, one has to have a backstop. And on the backstop, we have always been very open: It could be a credit line from the ESM or it could be borrowing from the markets with joint government guarantees.

Finally, and we have insisted on this a lot, including with you, I think, we have to have a strict separation between the supervisor’s assessment and the resolution assessment. I just wanted to make this point because these are examples of structural reforms that would address a structural problem, namely fragmentation.

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