Draghi says eurozone must stick with budget reforms

Jan. 25, 2014 at 1:17 PM
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DAVOS, Switzerland, Jan. 25 (UPI) -- European Central Bank President Mario Draghi said steps would be taken to fight deflation, if needed, but the economic recovery, for now, was moving forward.

Speaking at the World Economic Forum in Davos, Switzerland, Draghi said "The recovery is gradually taking place, but the risks are on the downside."

He also said that government should stick with budget reforms, "since all over now there is widely diffuse awareness of the need for reforms."

He said Italy, Spain, Portugal and Greece, which he blamed for slowing down inflation, had made progress on structural reforms, but they must stick with the strategy of reigning in debt.

"Fiscal consolidation must not be unraveled. ... it must be made more pro-growth by cutting taxes, cutting most government spending, and increasing spending on infrastructure," Draghi said in a paraphrased statement provided by the World Economic Forum.

The Wall Street Journal reported Saturday that Draghi also stressed the need for Europe to put all of its banks under the jurisdiction of one regulatory authority.

"Many things have happened to the banking system all over the world and to the European banking system as well," he said.

The goal is to have "one supervisor and one regulator for all banks in Europe," he said calling for "an accelerated time line for breaking the link between banks and sovereigns" by setting up an international bailout fund that would operate separate from national governments.

He said the economic recovery was "fragile," but low inflation should trend back toward the 2 percent central bank target rate.

If need be, he said, the central bank would move to prevent deflation.

"When you ask me what instruments would you use for coping with deflation, if deflation were to happen, the answer is with all the instruments that are allowed by our mandate," he said.

In a debate session at the forum, International Monetary Fund Director Christine Lagarde sounded a more alarming note about the chance for the region to fall into deflation, the BBC reported.

She said inflation in the eurozone at 0.8 percent was "way below" where it should be, stressing it would be risky to ignore the possibility that prices could stagnate or fall.

Deflation is seen as a damaging dynamic for an economy, as people hesitate to make purchase when they sense that prices are falling, because they can get a better price if they wait.

Deflation can lead to job cuts and that slows consumption and accelerates the risk of prices falling further.

Lagarde said there were "old risks" and "new risks."

She said the old risks included bank reforms that still needed to be done and the continued imbalance between prosperous and floundering countries in Europe.

New risks, she said, included low inflation and the reaction of emerging economies to the U.S. Federal Reserve's slowdown in purchases of mortgage-backed securities and Treasury notes.

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