LONDON (Reuters) - European Central Bank President Mario Draghi urged euro zone states to respect their joint fiscal rules and extend their cooperation to economic reforms, telling governments they must “learn to govern together”.
While reiterating his message that the ECB is ready to use “unconventional instruments” - code for large-scale asset buying - if needed, he devoted most of a speech in London to pressing for closer European integration to deliver growth and jobs.
Draghi, who brought the euro zone back from the brink of break-up in 2012 with his pledge to do “whatever it takes” to save the euro, called on countries to respect the EU’s Fiscal Compact on reducing public debt.
“What is essential now is that these rules are enforced,” he said in the text of his speech, a memorial lecture on Wednesday in honour of the late Italian minister and ECB policymaker Tommaso Padoa-Schioppa.
“To unwind the consolidation that has been achieved, and in doing so to divest the rules of credibility, would be self-defeating for all countries,” Draghi said.
His comments come as euro zone policymakers debate the flexibility of their fiscal rules, with Italian Prime Minister Matteo Renzi leading calls to move from austerity to expansion.
Draghi appeared to push back: “Fiscal rules should be viewed in the national debate as promoting growth-friendly fiscal consolidation and not simply as a painful accounting exercise.”
The ECB president added that high debt made countries more vulnerable in the event of financial shocks.
Furthermore, only by showing a willingness to respect common fiscal rules could euro zone states achieve the mutual trust that is a pre-requisite for integration in other areas, he said.
Pressing for closer integration, Draghi urged euro zone states to align their approach to structural reforms - efforts to shape up economies by, for example, liberalizing labor markets - using the template of the common fiscal rules.
“There is a strong case for us to apply the same principles to the governance of structural reforms as we do to fiscal governance,” he said. “The essential cohesion of the union depends on it.”
Draghi said structural reforms were fundamental to reaping the benefits of the ECB’s recent monetary policy decisions to expand bank credit.
“But for firms, companies to access this credit they must be in a condition to work. If it takes nine months to open a new business and then once it’s opened, it’s overwhelmed by taxation, it’s very hard for this business to ask for credit,” Draghi added in a departure from his speech.
The return of market confidence in the euro area stemmed in good part from the efforts made by some countries to shape up their economies after the euro zone crisis took hold, he said.
Establishing rules on structural reforms at a European level could also help governments implement them, he said.
The experience of the International Monetary Fund had shown that, with discipline imposed by supranational bodies, “the debate can be framed not in terms of whether, but in terms of how reform needs to take place.”
European governments are not powerful enough individually to be able to fully exercise their sovereignty alone, Draghi said.
“To serve their purpose, they have to learn to govern together; they have to learn to be sovereign together so as respond to their citizens’ needs,” he added. “Those needs today are growth and job creation.”
Turning to ECB monetary policy, Draghi said threats to price stability in the euro zone stemmed from changes in energy and food prices, relative price adjustment in stressed countries, exchange rate behavior, weak demand and high unemployment.
He added that “those threats are real and to cope with them the Governing Council is determined to keep the monetary policy stance accommodative for an extended period of time.”
To breathe life into a sluggish euro zone, the ECB cut interest rates to record lows in June and introduced a series of measures to pump money into the economy.
Euro zone inflation is running at 0.5 percent, far below the ECB’s target of just under 2 percent. The ECB expects the new measures to help get inflation closer to the target.
Draghi reiterated that the ECB Governing Council was united in its willingness to begin quantitative easing - essentially creating money to buy government or private debt from banks to keep borrowing costs low and boost spending - if inflation headed lower still.
Writing by Paul Carrel; Editing by Larry King and Hugh Lawson