European Central Bank President Mario Draghi said there is no alternative to austerity as Italian and Spanish officials balk at asking for bailouts that may impose more budget cuts.
“It’s without doubt that the process of fiscal consolidation has depressed output in parts of the euro area,” Draghi told lawmakers in testimony to the European Parliament in Brussels today. “But what’s the alternative? We need to do that, we need to do that in the best possible way, as effective and as short as possible, complying with basic grounds of social justice.”
European officials are pushing debt-strapped nations across southern Europe for more cuts despite the risk that they will worsen recessions gripping the region. Draghi last month said that the ECB is prepared to take the unprecedented step of buying unlimited quantities of Spanish and Italian bonds if they sign up to certain conditions.
Italian Prime Minister Mario Monti said in an interview on Sept. 27 that uncertainty about what those terms will look like is making him and his Spanish counterpart reluctant to apply for help.
International Monetary Fund Chief Economist Olivier Blanchard today suggested bond yields in Spain and Italy may resume rising if the countries don’t meet investor expectations and seek aid.
With German Chancellor Angela Merkel visiting Athens today, Draghi said the progress made by the Greek government on implementing sufficient reforms to qualify for further European aid had been “perceptible.”
A mission led by the so-called troika, consisting of the ECB, the European Commission and the IMF, has been negotiating with the Greek government for more than two months over the implementation of austerity measures.
“It is also clear more has to be done,” Draghi said. “We have to wait for the troika report in order to see how the situation stands.”
Draghi praised on economic adjustment in Portugal, saying the pace of reforms is “faster than expected.” Portugal “is well poised to regain market access within the horizon forecasted,” he said.
The ECB’s bond-buying program, known as Outright Monetary Transactions, is theoretically “unlimited, but not unconditional,” Draghi added, reminding governments that the central bank could end purchases if the agreed conditions are not kept to.
“The ECB will conduct OMTs if and as long as countries comply with a strict economic adjustment program,” he said. “OMTs will not compensate for a lack of fiscal action.”
Draghi also responded to a question over whether the ECB would allow Ireland to restructure part of its legacy banking-sector debt by saying the institution couldn’t engage in the monetary financing of states.
“It’s too easy to think that the ECB can replace governments’ action, or lack of it, by printing money,” Draghi said. “That’s not going to happen.”