BRUSSELS (MNI) – The following is the second part of a verbatim
text of the introductory statement by European Central Bank Governing
Council member Mario Draghi in his testimony to European Parliament
regarding his candidacy for the ECB presidency.

The text was provided by the Bank of Italy, which Draghi heads.

“The continued high degree of uncertainty about the macroeconomic
and financial environment requires a careful assessment of the overall
situation and outlook. Non-standard measures need to be phased out to
the extent that they are no longer needed to support the functioning of
the transmission of monetary policy to the economy; we must make sure
that liquidity support to the economy is maintained as long as
appropriate; but also that we do not sow the seeds of future imbalances
and create addiction to our liquidity.

At the same time, the setting of our policy rates must be adjusted
with the aim of delivering on the ECB’s mandate — to maintain price
stability for the euro area in the medium term — in a pre-emptive
manner, in order to avoid any deterioration of inflation expectations.

It must be fully clear that neither the sovereign debt crisis nor
the abnormal dependence of some banks on central bank liquidity can
divert the ECB from pursuing its primary objective.

Secondly, challenges to monetary policy come from the area of
financial stability.

The financial crisis and the heightened emphasis on financial
stability have raised a number of questions on the relationship with
monetary policy. It has shown that a closer interaction is needed
between macroeconomic and macroprudential analyses, although it has also
brought out that there is no real trade-off between the objective of
price stability and the support that the ECB can lend to other areas.

In this respect, I believe that while synergies must be exploited
to the full, the respective roles and responsibilities must remain
clearly distinct.

Monetary policy must keep its focus on preserving price stability
over the medium term. As I just mentioned, the benefits of a sound
monetary framework have been made more — not less — evident by the
crisis.

At the same time, monitoring the emergence of monetary and credit
imbalances and asset price developments is one important element in a
robust monetary policy strategy; a medium-term orientation is also
crucial. The ECB’s monetary policy strategy already goes a long way
towards taking these concerns into account.

However, monetary policy is not necessarily the most appropriate
instrument to deal with credit or asset price imbalances. The use of
macroprudential instruments targeted on the sources of financial
exuberance may be more appropriate. The new European supervisory
authorities can make an important contribution in this respect. Let me
just remark here that the ECB plays an important role in the European
Systemic Risk Board (ESRB), to which it provides logistical, analytical
and administrative support.

An appropriate management of the interaction between
macroprudential and monetary policy authorities will be crucial to
success. The institutional arrangement adopted in Europe appears
well-suited to address any problem that may arise from the management of
monetary policy and new macroprudential tools. It will certainly be
important for there to be dialogue between the two bodies on policy
issues that can affect systemic risk.

Finally, let me mention the challenges to the construction of
Europe itself. The sovereign debt crisis is a real test of the solidity
of European institutions and of the political will in Europe to do
whatever is needed to ensure the achievement of economic and monetary
integration.

The European surveillance of national budgetary policies proved to
be inadequate. For a long time exceptionally favourable financing
conditions have concealed the differences between member countries’
underlying conditions and economic policies and the absence of really
binding common rules. The global crisis has accentuated investors’
perception of risk and revealed weaknesses in the architecture of the
Union.

The exceptional response of national governments and European
authorities limited the risk of contagion and safeguarded the area’s
financial stability. The financial support granted to the countries in
greatest difficulty allows them to proceed with adjustment sheltered
from market volatility. It is not a fiscal transfer between countries
and it is subject to stringent conditions.

There are no shortcuts available: the response to the debt crisis
lies first and foremost in national policies, in the complete
implementation of the adjustment plans that have been agreed. Solidarity
among the member countries in the Union must be matched by a sense of
responsibility and compliance with the rules.

Looking ahead, I believe that the steps that have already been
taken to tackle the weaknesses of the European architecture are
important. The proposals of the EU Commission and the Council reinforce
surveillance over budgetary policies. They can be made more ambitious by
making procedures more automatic so as to shield them from the arbitrary
nature of political negotiations. The European Parliament is having an
important influence in this regard.

The extension of rules similar to those governing national budgets
to the surveillance of macroeconomic imbalances, with special
consideration for the state of member countries’ external accounts, is
also a very welcome development.

Above all, structural reforms aimed at boosting economies’
competitiveness and growth potential must be a top priority on the
policy agenda, not only in those countries hit by the debt crisis. In
the end, the ultimate objective of EMU, and the measure of its success,
is its ability to promote growth and economic and social welfare.

Many of these matters are not the direct responsibility of the ECB,
but the ECB can – and I believe must continue to – offer objective and
independent advice, based on rigorous and credible analysis. I hope we
will continue exchanging our views on these issues in the future.”

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