–Adds Comments on Rescue Fund, Germany, Italy to Story sent 17:07 GMT

FRANKFURT (MNI) – Introducing common eurobonds does not make sense
before the Eurozone has a shared tax and budgetary policy, European
Central Bank Governing Council member Mario Draghi said in an interview
released Monday.

There is some overshooting taking place in sovereign bond markets,
the head of Italy’s central bank, considered a top possibility to take
over the helm of the ECB at the end of October, told Germany’s
Frankfurter Allgemeine Zeitung.

“Eurobonds could make sense, if Europe were not only a currency
union, but also a union with a shared tax and budget policy,” he
reasoned.

“We are, however, not a tax and budget union. Because at the moment
it is not so that citizens of a country are ready to pay taxes to
finance another state.”

Asked if there was a crisis of trust in the euro, Draghi replied,
“Not at all. The euro is a success story,” which has brought stability
to countries such as his own.

Queried if markets were now displaying exaggerated risk aversion in
the sovereign bond market, Draghi affirmed that indeed there “now is an
effect of overshooting, just as before there was undershooting. The
difference is that the low risk premia do not disturb anyone until it is
too late. With exaggerations on the upside, everyone is immediately
concerned.”

Draghi rejected the notion that a larger rescue fund would be a
panacea for future crises. “It is wrong if the expectation is aroused
that the fund definitely will have a gigantic size and that, thanks to
this fund, there will never again be crises in Europe.”

“If we arouse these expectations, then there will be
disappointments and, thus, instability. The fund must have a clearly
outlined purpose and cannot simply finance just any crisis or behavior,”
he reasoned.

Moreover, he warned that it did “not make sense to toughen rules
for budgetary policy yet on the other hand create incentives to break
those very rules,” since “that generates ‘moral hazard.'”

Draghi warned against relying too much on the rescue fund; rather
responsibility for fiscal rectitude rests with individual states, he
declared.

“The answer to the crisis of trust of an individual state must
above all be sought at the national level. If the national government
cannot generate a credible answer, then the condition is hopeless,” he
said.

A “really convincing plan” can, on the contrary, overcome
difficulties, he argued.

One must, however, “banish the illusion that the [debt] problems
can be solved in one year. If budget policy has been out of control for
years, then the reform also takes years,” he pointed out.

The Eurozone cannot be simply a common currency area, rather it
“can only survive if the currency union guaranties stability — that
especially means price stability — and prosperity. All need to make
their contribution for that,” he urged.

In addition to budgetary discipline, all countries need to
“implement structural reforms to accelerate economic growth,” Draghi
argued. “Growth is the second pillar upon which financial stability is
built. We would need a second system of rules, similar to the Maastricht
criteria and the Stability Pact for the budget, from now on, to create
the preconditions for growth.”

Pressed as to whether Germany might lose a competitive advantage if
Europe were to converge into more “economic governance,” Draghi quickly
retorted, “We would need to follow Germany as an example and I have said
that also many times openly.”

“Germany has improved its competitiveness by implementing
structural reforms. That must be the role model.”

Draghi also rejected the classification of Italy being a risk
country: “The debt of families and businesses is one of the lowest in
Europe. The industrial structure is very diversified and, as a result,
resistant.”

“The culture of stability is today an integral part of Italy’s
economic life and in all of the Eurozone. It must be preserved because
there can only be sustainable growth on the basis of stability,” he
argued.

–Frankfurt bureau, +49-69-720142, frankfurt@marketnews.com

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