Leave "fairy world" behind, Draghi tells euro zone

Fri Nov 30, 2012 8:57am EST
 
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By Daniel Flynn and Leigh Thomas

PARIS (Reuters) - The euro zone's crisis is far from over and its members must tighten budgets and forge a banking union to leave behind the "fairy world" that allowed problems to grow, European Central Bank President Mario Draghi said on Friday.

Draghi's call for reform was echoed by International Monetary Fund chief Christine Lagarde, who said implementing a banking union with powers to supervise all banks in the euro zone should be the currency bloc's top priority.

Speaking in Paris, where the government is trying to dispel concerns raised by the IMF that France could be left behind as Italy and Spain reform at a faster pace, Draghi said the euro zone's debt troubles were likely to stretch deep into next year.

Another 173,000 people joined record jobless queues in the currency bloc in October while German retail sales and French consumer spending both fell more than expected, signs of the scale of the task still ahead for policymakers.

"We have not yet emerged from the crisis," Draghi told Europe 1 radio. "The recovery for most of the euro zone will certainly begin in the second half of 2013."

"The crisis has shown that we were living in a fairy world," the ECB chief later added at a conference with top financial officials, pointing to the unsustainable debts, weak banks and poor policy coordination that gave birth to the crisis three years ago.

ECB policymakers hold their regular monthly policy meeting next week and are widely expected to leave interest rates on hold at a record low of 0.75 percent. Economists are divided on whether the central bank will cut next year and Draghi has said it is now up to governments to act to end the crisis.

He stressed that the ECB's designing of a new bond-purchase program, dubbed Outright Monetary Transactions (OMT), had helped lead to much more benign market conditions in the 17-country euro zone.   Continued...

 
European Central Bank (ECB) President Mario Draghi attends the conference "Growth and integration in solidarity: what strategy for Europe?" with top financial officials at the Economy ministry in Paris November 30, 2012. REUTERS/Charles Platiau