Draghi to urge European leaders to reform to back ECB stimulus

Fri Dec 12, 2014 6:17am EST
 
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By John O'Donnell

FRANKFURT (Reuters) - The head of the European Central Bank is set to tell European leaders in stark terms at a summit next week that they need to reform straggling economies or risk blunting an ambitious monetary offensive to help revive the stagnant euro zone.

As the central bank inches closer to printing money to buy government bonds, Mario Draghi has become increasingly worried about slack reform in countries such as France and Italy, which he fears will undermine the long-term boost from so-called quantitative easing (QE).

On Dec. 18, Draghi will urge leaders including French President Francois Hollande and Italian Prime Minister Matteo Renzi to step up reforms and hold down spending, people familiar with ECB thinking say.

He wants German Chancellor Angela Merkel, by contrast, to invest more in infrastructure and boost domestic demand.

Yet French caution, Italian fragility and electoral uncertainty in Greece mean Draghi is likely to come away without a political "game changer", forcing him to press ahead with QE regardless to avert a deflationary economic spiral.

ECB bond buying may give a temporary boost to confidence, but Draghi is convinced his efforts will be in vain in the longer run unless countries make a more binding commitment to shake up rules such as those for employees or taxation.

"The agendas of the French and Italian governments are the right ones but the implementation is not complete," one person familiar with ECB thinking told Reuters. "Europe can help through peer pressure."

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European Central Bank (ECB) President Mario Draghi addresses an ECB news conference December 4, 2014, for the first time in the ECB's new 1.3 billion euro headquarters in Frankfurt. REUTERS/Kai Pfaffenbach