European Central Bank President Mario Draghi said there are limits to what monetary policy can do and urged governments to implement structural reforms and build a sound political and economic union in the euro region.
“It is important to stress that the ECB’s mandate only extends so far,” Draghi said in a speech in Munich today. “There are clear limits to what monetary policy can and should aim to achieve. We cannot repair unsound budgets. We cannot clean up struggling banks. We cannot solve deep-rooted problems in the structure of Europe’s economies.”
Progress in implementing economic reforms has been “extraordinary” and the scale of adjustment in countries under European Union-led bailouts has been “particularly impressive,” Draghi said. “Deficits are being reduced. Current account imbalances are being unwound. Wide-ranging structural reforms are under way.”
Eventually, “we should aim to build a strong and deep economic and political union in Europe, which would be to the benefit of all members of the single currency,” Draghi said.
Draghi also said that the ECB takes “very seriously” people’s concerns about potential inflationary threats.
“But it is a fallacy to make a mechanical connection between the creation of central bank liquidity and a rise in the money supply,” he said. The liquidity provided by the ECB “does not automatically increase credit or money in the economy, and so does not automatically lead to price pressure in the economy.”
Money and credit growth remains weak and inflation expectations are “firmly anchored,” he said. “So risks of inflation down the road are firmly in check.”
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