— ECB Will Act To Avert Risks Of Deflation

PARIS (MNI) – Inflation in the Eurozone should slow sooner that
previously expected, ECB President Mario Draghi said in an interview
released over the weekend, hinting this might give the central bank more
leeway in its monetary policy.

Asked by the French daily Le Monde whether the ECB should heed
the IMF’s call to do more to bolster the Eurozone economy, Draghi
replied, “We are very open and have no taboos. We decided to lower
interest rates below 1% because we expected that inflation would be
close to or below 2% at the start of 2013. Now it is probable that it
will come down by the end of 2012.”

However, Draghi did not say this would allow the ECB to cut rates
further. Instead, he reiterated his message from last month’s press
conference that the ECB’s price stability mandate also means preventing
“a generalized and global decline in prices.”

“If we observe such risks of deflation, we will act,” he said.

Draghi returned to the idea later in the interview: “We must
maintain price stability in both directions, deal with problems as they
arise and act without prejudice.”

At the same time, he ruled out the risk of recession in the
Eurozone: “We still expect a very gradual improvement in the situation
at the end of this year or the beginning of next year.”

The survival of monetary union is not at risk, Draghi asserted,
arguing that those who predict its demise underestimate “the
political capital our leaders have invested in this union and the
support of the Europeans. The euro is irreversible!”

As for Greece’s membership, he reiterated the ECB “unequivocal
preference” that the country remain in EMU. “But that’s up to the Greek
government.”

Draghi stressed that Athens “must now produce results” and said he
would wait for the joint report of the ECB, the European Commission and
the IMF before taking a stand on any flexibility on reform commitments.

Regarding the loans Eurozone governments have agreed to allow
Spain to recapitalize its banks, Draghi said the implication of senior
creditors was an “important” issue. “The ECB considers that this should
be possible if a bank is liquidated. One must protect savers, but
creditors should be involved in the resolution of the crisis in order to
limit the contribution of taxpayers. They have already paid a lot.”

Eurozone governments must go beyond the measures decided to bolster
economic growth and take “difficult decisions” for structural reform –
not only for labor markets but also for goods and services markets –
preferably with more joint decision-making at the European level, he
said.

“The movement toward financial, budgetary and political union is
inevitable in my view and will lead to the creation of new supranational
bodies,” he declared. “With globalization, it is precisely by sharing
sovereignty that countries can best preserve it.”

The central banker justified the ECB’s demands on governments for
fiscal consolidation, greater competitiveness and the correction of
unsustainable economic imbalances in the name of “financial stability”.

“The preservation of the euro is part of our mandate,” he said.

–Paris newsroom +331 4271 5540; email: ssandelius@marketnews.com

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