ECB chief sees slow recovery, offers no new help

Associated Press + More

By DAVID McHUGH and JOSEPH WILSON, Associated Press

BARCELONA, Spain (AP) — European Central Bank President Mario Draghi offered little prospect that the bank would deliver more support for the struggling economies of the 17-country eurozone, instead urging governments to agree a growth strategy that would work alongside tough spending cuts.

Speaking after ECB policymakers met under tight security in hard-hit Spain, Draghi said Thursday that the best way to lasting recovery would be a long-term, Europe-wide push on deep economic reforms.

"We have to put growth back at the center of the agenda," he said at a news conference after the bank's governing council left its key interest rate unchanged at a record low of 1 percent.

However, Draghi went on to stress that he saw "absolutely no contradiction" between a broader agreement on longer-term pro-growth reforms and the austerity cuts that are now weighing on growth as governments try to bring down their borrowing costs on the world's debt markets.

He urged governments to engage in "decisive structural reforms" and to "give the sense that there is a joint effort, an overall effort."

Budget cuts and tax hikes have been introduced by eurozone governments to reduce debt are now seen as hurting growth and some European governments are calling for policies to focus more on stimulating economic activity.

These measures could include cutting red tape for businesses and reforming unbalanced labor market practices that make it hard to fire established employees.

Draghi made his comments after an ECB meeting in Barcelona — one of two the bank holds each year away from its Frankfurt headquarters to underline its status as a pan-European institution. They follow similar remarks made last week when he acknowledged the need for a "growth compact" to go alongside the fiscal treaty signed earlier this year tightening limits on government spending and deficits.

Unemployment across the eurozone rose to a new record of 10.9 percent, official figures showed Wednesday. Meanwhile eight of the 17 eurozone countries are in recession — characterized as two quarters of negative growth.

The eurozone economy will shrink 0.3 percent this year, the European Union's executive commission estimates, while Spain is currently dealing with a recession and a 24 percent unemployment rate as the government of new Prime Minister Mariano Rajoy introduces its own raft of tough austerity measures.

Fearing violent anti-austerity protests timed to coincide with the bank's Barcelona meeting, Spain deployed an extra 2,000 police and tightened border controls for the event.

Several thousand students protesting increases in college costs marched from the University of Barcelona to a part of the city near the heavily guarded hotel where the ECB met. There were no immediate reports of unrest.

Spain and Italy are trying to avoid the fate of Greece, Ireland and Portugal, which turned to bailout loans after skeptical bond markets wouldn't loan them money at affordable rates. The size of Spain and Italy's economies, the No. 4 and No. 3 in the 17-country eurozone, means they could be too expensive to rescue for the other euro countries.

Draghi conceded that structural reforms to labor laws and business regulation would take time but pointed to the broad push for basic changes that got Europe ready to launch the euro in 1999 could serve as an example.

He also suggested there could be more use made of European Union funds to support infrastructure spending, particularly in poorer areas of the union.

The proposals for structural reforms covered familiar ground, but the key aspect was Draghi urging a some kind of pan-European way of pushing governments to enact them, said HSBC economic Janet Henry.

"Probably the newest part was the need for some kind of roadmap on the future of the eurozone," she said.

Draghi signaled no immediate fresh help from the ECB for the shaky economy or indebted governments in terms of interest rate cuts, purchases of government bonds or cheap loans to banks, three chief tools it has used during the crisis.

He indicated the ECB expects the eurozone economy to "recover gradually" over the rest of this year, although growth was subject to "downside risks" from Europe's debt crisis.

Meanwhile, he said the risks to inflation were broadly balanced, meaning it could be higher than expected or lower. That stance led several analysts to think the bank had left the door open to a rate cut down the road — but they saw little signal one is imminent.

The ECB, is tasked by treaty with controlling inflation first, and therefor has a narrower mandate than the U.S. Federal Reserve or Bank of England. They are freer to take steps promoting employment and growth.

Draghi also said it would be "premature" to talk about an exit from earlier bank measures. The ECB handed out €1 trillion in cheap loans to banks in December and February, a move that is credited with easing pressure on banks and on indebted governments.

"The impression we get is that there is still a marked reluctance within the ECB to take interest rates below 1 percent and it will probably need sustained weakened eurozone economic news to result in it happening," said Howard Archer of IHS Global Insight. "Unfortunately that could very well happen."

___

McHugh reported from Frankfurt, Germany.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.