Draghi Says Crisis Lull Must Spur Governments, Banks to Act

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi. Photographer: Hannelore Foerster/Bloomberg

European Central Bank President Mario Draghi called on banks and governments to make the most of a lull in the sovereign debt crisis as he seeks to get the ECB back to its main job of ensuring price stability.

Policy makers “see continued signs of stabilization” in the economy and banks “should use this currently more benign environment to strengthen their resilience further, including by retaining earnings, cutting dividends and bonuses,” Draghi said in a speech in Paris today. “The financial system should serve the economy, not the other way round.”

The ECB has shouldered the main burden of fighting the three-year-old crisis by keeping banks afloat, cutting interest rates to a record low and buying distressed governments’ bonds. The unprecedented measures have swelled its balance sheet to more than 3 trillion euros ($3.9 trillion), prompting Bundesbank President Jens Weidmann to write a letter to Draghi warning that the central bank may be taking on too much risk.

Draghi appealed to the governments, saying that the ECB’s contribution “needs to be complemented by the work of national policy makers” and that “countries should use this phase of financial stabilization to make further progress on their program of economic reform.”

The ECB’s two three-year loans, which totaled a record 1 trillion euros, have been “central in banks returning to play their vital role in the real economy,” he said. The diversity of the 800 institutions bidding for the second tranche of funds at the end of February bring the money “closer to households and the small and medium-sized enterprises” than before.

Inflation Outlook

While “inflation risks are not materializing at the present time” from a 40 percent jump in oil prices since October, the ECB is “continuously alert to the risks of inflation” and “all the necessary tools to address potential upside risks to medium-term price stability are fully available,” Draghi said.

Inflation in Germany, Europe’s largest economy, already accelerated in February, quickening to 2.5 percent from 2.3 percent, well above the ECB’s 2 percent limit.

Draghi forecast on March 8 that that euro-region inflation will average 2.4 percent this year and 1.6 percent in 2013, up from previous estimates of 2 percent and 1.5 percent.

“We at the ECB have a steadfast commitment to price stability,” he said.

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