FRANKFURT (MNI) – The following is the verbatim text of European
Central Bank President Mario Draghi’s introductory statement given to
the European Parliament Planery on Thursday at the presentation of the
ECB’s 2010 Annual Report:

President,

Honourable members of the European Parliament,

I am delighted to be making my first appearance here as President
of the European Central Bank (ECB) and I am honoured to present to you
the ECB Annual Report for 2010.

Todays session is an opportunity for us to take a wider
perspective on ECB policies. In that way, I will also touch on a number
of the broader themes of the Resolution of the European Parliament.

Let me begin with a few words on the main monetary policy decisions
we have taken and the challenges we have faced during 2010 and 2011.

As you know, the ECBs monetary policy is constantly guided by the
goal of maintaining price stability in the euro area over the medium
term. And when I say this, I mean price stability in either direction.
This applies to both the setting of official interest rates and the
implementation of non-standard measures.

This autumn, tensions in financial markets have intensified again
with very adverse effects on financing conditions and confidence.
Downside risks to the economic outlook have increased. The weaker degree
of activity is moderating price, cost and wage pressures. It is in this
context that the ECB decided to reduce its key interest rates by 25
basis points in early November 2011.

Dysfunctional government bond markets in several euro area
countries hamper the single monetary policy because the way this policy
is transmitted to the real economy depends also on the conditions of the
bond markets in the various countries. An impaired transmission
mechanism for monetary policy has a damaging impact on the availability
and price of credit to firms and households.

This is the very important monetary policy reason for the ECBs
non-standard measures. But of course, such interventions can only be
limited. Governments must individually and collectively restore
their credibility vis–vis financial markets.

Tensions in sovereign bond markets have been accompanied by stress
in the banking sector given the financial interlinkages between
governments and banks. The ECB has taken several measures in 2010 and
2011 to ensure that banks continue to have access to funding sources.
This has enabled them to continue lending to firms and households.

Most importantly, the ECB has extended its policy of fully
allotting liquidity demanded by banks at fixed rates against collateral.
The maximum maturity of these liquidity-providing operations was first
extended to six months and later to 12 and 13 months. A new Covered Bond
Purchase Programme has recently been initiated, with a size of 40
billion euros.

In addition, liquidity in US dollars has been offered to banks for
three-month periods. Yesterday, in a globally coordinated action with
the Federal Reserve, the Bank of Japan, the Bank of England, the Bank of
Canada and the Swiss National Bank, we have agreed to lower the price on
US dollar provision in other constituencies including the euro area. We
have furthermore agreed, as a contingency measure, to establish
temporary bilateral liquidity swap arrangements so that liquidity can be
provided in each jurisdiction in any of the currencies, should market
conditions so warrant.

As the ECBs Governing Council meets on Thursday next week, we are
now in the pre-decision period, and nothing that I say should in any way
be interpreted in terms of future monetary policy decisions. But as far
as the current situation is concerned, there is not much more to say
beyond what I have said in recent statements.

We are aware of the continuing difficulties for banks due to the
stress on sovereign bonds, the tightness of funding markets and scarcity
of eligible collateral in some financial segments. We are also aware of
the problems of maturity mismatches on balance sheets, the challenges of
raising levels of capital and the cyclical risks related to the
downturn. Challenges for Europes Economic and Monetary Union

Let me now turn to the overall functioning of Europes Economic and
Monetary Union. Looking back at 2010 and 2011, notable progress has been
achieved in reinforcing economic governance though I recognise that
this may not be evident in times of crisis.

The European Parliament has contributed decisively to that
progress, and the ECB commends that work. The “six pack”, the European
Semester, the Euro Plus Pact: all these initiatives have set the stage
for closer coordination and more intensive scrutiny of economic policies
in the EU, particularly in the euro area.

Yet we are at a difficult stage at present. We have set up these
new mechanisms, but their positive effects on the credibility of
government fiscal policies are not yet visible. And the government
changes that have taken place in some of the more exposed countries have
not yet had much of an effect on the continuing fragility of financial
markets.

Fundamental questions are being raised and they call for an answer.
At the heart of these questions are not only the credibility of
governments policies and the actual delivery of the promised reforms,
but also the overall design of our common fiscal governance.

I am confident the new surveillance framework will restore
confidence over time. I am also quite sure that countries overall are on
the right track. But a credible signal is needed to give ultimate
assurance over the short term.

What I believe our economic and monetary union needs is a new
fiscal compact a fundamental restatement of the fiscal rules together
with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of
monetary policy an independent central bank with a single objective of
maintaining price stability so a fiscal compact would enshrine the
essence of fiscal rules and the government commitments taken so far, and
ensure that the latter become fully credible, individually and
collectively.

We might be asked whether a new fiscal compact would be enough to
stabilise markets and how a credible longer-term vision can be helpful
in the short term. Our answer is that it is definitely the most
important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is
first and foremost important to get a commonly shared fiscal compact
right. Confidence works backwards: if there is an anchor in the long
term, it is easier to maintain trust in the short term. After all,
investors are themselves often taking decisions with a long time
horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro
area governments for embarking on a path of comprehensive deepening of
economic integration. It would also present a clear trajectory for the
future evolution of the euro area, thus framing expectations.

On the precise legal process that brings about a move towards a
genuine economic union, we should keep our options open. Far-reaching
Treaty changes should not be discarded, but faster processes are also
conceivable.

Whatever the approach, companies, markets and the citizens of
Europe expect policy-makers to act decisively to resolve the crisis. It
is time to adapt the euro area design with a set of institutions, rules
and processes that is commensurate with the requirements of monetary
union.

Thank you for your attention.

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