European Central Bank: 'No Escape from Tough Austerity Measures'

European Central Bank: 'No Escape from Tough Austerity Measures'

From the Wall Street Journal:

FRANKFURT–European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent’s traditional social contract is obsolete, as he waded into an increasingly divisive debate over how to tackle the region’s fiscal and economic troubles.

In a wide-ranging interview with The Wall Street Journal at his downtown office here, Mr. Draghi reflected on how the region’s travails were pushing Europe toward a closer union. He said Europe’s vaunted social model–which places a premium on job security and generous safety nets–is “already gone,” citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people.

There are no quick fixes to Europe’s problems, he said, adding that expectations that cash-rich China will ride to the rescue were unrealistic. He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity.

“You know there was a time when [economist] Rudi Dornbusch used to say that the Europeans are so rich they can afford to pay everybody for not working. That’s gone,” Mr. Draghi said.

“There is no feasible trade-off” between economic overhauls and fiscal belt-tightening, Mr. Draghi said in the interview, his first since Greece sealed its second bailout.


“Backtracking on fiscal targets would elicit an immediate reaction by the market,” pushing interest-rate spreads higher, he said.

Mr. Draghi’s comments come amid an intensifying debate in Europe over whether deeper austerity is the best prescription for countries facing substantial economic contraction and place him squarely in the hard-line camp, alongside Angela Merkel and other German officials.

They also come against a backdrop of a gloomier European Union economic forecast that shows the euro zone at risk of recession. Some governments, meanwhile, have resisted emphasizing spending cuts in favor of tax increases, though those can stifle enterprise. Boosting consumption taxes can also increase inflation, which makes it harder for the ECB to keep interest rates low and spur growth.

Though Mr. Draghi welcomed the relative calm that has descended on European debt markets in recent months, he said credit remained scarce, especially in Europe’s struggling southern fringe.

Though Mr. Draghi welcomed the relative calm that has descended on European debt markets in recent months, he said credit remained scarce, especially in Europe’s struggling southern fringe.

Despite Europe’s vast wealth, it has gone to the International Monetary Fund three times for aid–for Greece, Portugal and Ireland–and is going back again for additional assistance for Greece. Euro-zone officials have pressed emerging markets such as China for help by having these countries purchase euro-zone debt or bonds issued by the bailout fund.

“There have been lots of talks and conversations. I hear about them but I haven’t seen any official investment [from China] in European financial markets,” Mr. Draghi said.

Greece, despite its latest, €130 billion ($172.24 billion) bailout, remains a major risk, he said. While Athens has agreed to rein in its debt and overhaul its economy, the country’s leaders now need to show that they will follow through and implement the measures.

“It’s hard to say if the crisis is over,” he said.

Read the rest of the story here.


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