Draghi Says Euro Area Is in ‘Most Difficult’ Austerity Phase

European Central Bank President Mario Draghi comments on fiscal austerity in the euro area, Spain’s budget plans, special ECB measures to tackle the financial crisis and the outlook for prices in Europe.

Draghi spoke to a European Parliament committee today in Brussels.

On the impact of fiscal austerity and structural changes:

“We are probably in the most difficult phases of a process where austerity, where fiscal consolidation, has been, or is being, undertaken and is now starting to, in a sense, reverberate its contractionary effects.”

“We haven’t seen yet the benefits of this. At the same time, we are convinced that we have to persevere, to continue on that path.”

“Structural reforms hit vested interests.”

“We are just in the middle of the river that we are crossing. The only answer to this is to persevere and for the ECB to create an environment which would be as forthcoming, as favorable, to this process as possible.”

“Now the ball is entirely, squarely, in the court of governments and banks.”

“They have to give evidence. And they are -- governments and banks -- are giving some evidence that they are actually using this time in a productive way.”

On the Spanish government’s fiscal-austerity plans:

“Remarkable progress has been achieved and is being achieved.”

“We have no reason to doubt about the absolute commitment of the Spanish government to undertake the necessary reforms.”

“From this viewpoint, I think, the whole union is close to Spain and certainly the ECB.”

On the ECB’s Securities Markets Program:

“The SMP is neither eternal nor infinite.”

“It’s been there. But we should not forget that the primary mandate, that basically the ECB has to act within the limits of its primary mandate and of the treaty.”

“The limits of the treaty prohibit monetary financing. The primary mandate of the ECB is ensuring price stability in the medium term for the whole of the euro area.”

“We have to, in a sense, walk this, in a sense, thin but delicate balance where we want to preserve the credibility of the ECB because it’s one of the few things left.”

“To do so means that we have to act within the limits of our treaties.”

“We don’t want to pre-commit. And frankly there is also another reason why we abstain from making announcements in either direction now. The reason is that the uncertainty about the present situation is very, very high.”

“Any exit strategy is premature given the current economic situation.”

On the ECB’s Long-Term Refinancing Operations:

“We are confident that central bank liquidity has come very close to the real economy.”

“Let me emphasize that our non-standard measures are not a constraint on setting interest rates in line with what is required to ensure price stability in the medium term.”

“The Governing Council will use all the instruments at its disposal to counter possible upside risks to price stability should they materialize.”

“We also hear concerns that the Eurosystem is exposing itself to excessive risks. I would like to underscore that the expansion of our balance sheet is being managed with extreme prudence.”

“All non-standard measures are temporary in nature. Moreover, liquidity support cannot substitute for capital or for sound fiscal and structural policies that bring about sustainable growth and stability in the European economy.”

On the outlook for prices:

“The Governing Council continues to expect annual inflation rates to fall below 2 percent in early 2013.”

“Underlying price pressures should remain modest.”

“Risks to the outlook for price developments are broadly balanced.”

“Upside risks could stem from higher-than-expected oil prices and further indirect tax increases; downside risks could arise from weaker-than-expected economic activity.”

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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