ECB president stung by austerity critics as Naples hit by protests

http://www.theguardian.com/business/2014/oct/02/ecb-criticism-mario-draghi-naples

Version 0 of 1.

Mario Draghi gave an impassioned defence of the European Central Bank’s role in the eurozone crisis as anti-austerity protestors took to the streets of Naples blaming the central bank for economic misery.

The ECB’s president rejected the suggestion that the bank had been an agent of doom for the people of Italy and the wider economic bloc because of its role in pushing spending cuts and tax rises in some of the worst hit countries in the region.

Speaking after the October meeting of the ECB’s governing council in Naples, he insisted the it had instead taken radical steps in recent months to breathe some life into the eurozone’s flagging economy.

“I think the description of the ECB here as the guilty actor needs to be corrected. Go back and ask yourself how you were two and a half, three years ago. The financial system seemed on the verge of collapsing.”

Draghi appeared to be stung as the bank became the subject of protests in his home country. Protestors held banners declaring “block the ECB” and “job insecurity, poverty, unemployment, speculation. Free us from the ECB.”

Reeling out a list of measures introduced by the ECB over recent months to combat weak growth and low inflation, Draghi said they were expected to have a “sizeable impact” on the eurozone economy. He added: “We have done a lot since June, quite unprecedented. We have decided a massive amount of measures now and we haven’t yet seen the impact on the economy.”

Last month the ECB took markets by surprise, further cutting the main interest rate from 0.15% to 0.05%. Policymakers also made it more expensive for banks to park money with the ECB – cutting the deposit rate, which was already negative, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers.

The ECB announced no new measures on Thursday, and failed to reveal the scale of an asset purchasing scheme announced last month. Investors were left disappointed, contributing to a large scale selloff of equities across Europe. The FTSE 100 fell to a near eight month low, down 111 points or 1.7% at 6,446. The Italian MIB was the biggest faller of all major European markets, shedding almost 4%. The euro rose half a cent against the dollar to $1.2667.

The ECB has stopped short of announcing full-blown quantitative easing, but Draghi reiterated that it was still a possibility. “The governing council stands unanimous in its commitment to use other unconventional instruments if needed,” he says.

Marc Ostwald, strategist at ADM investor services international said Draghi gave “an air of extreme irritation”.

Ostwald added: “While [Draghi] continued to loosely suggest that the ECB has more policy ammunition if needed, the actual impression that he made was not only that the ECB has run out of road, but also that if the eurozone does not recover, the blame will have to be parked at the door of politicians and their failure to act. He appeared desperate to point to all the measures that the ECB has put in place, and the actions that it has taken.”

Eurozone growth was flat in the second quarter and the latest evidence suggests the weakness continued in the third. The ECB is battling to prevent outright deflation in the 18-member region, with inflation perilously low at 0.3% in September - sharply lower than its target of close to but below 2%. Draghi appeared more concerned about low inflation than recent months, but added: “As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim.”

He said France must implement structural reforms and stick to the EU’s deficit rules, a day after Paris announced a budget that would not bring its deficit under the required 3% of GDP until 2017. “Each actor has his role to perform,” Draghi said.

Christian Schulz, senior economist at Berenberg, interpreted Draghi’s comments as “a stark warning to France to live up to the fiscal adjustment commitments it made in previous budget rounds”.

Schulz added: “Since the ECB is involved in reviewing the budgets as part of the European semester which starts in mid-October, France could be headed for stiff headwinds, up to financial penalties being imposed by the EU Commission. Since these could only be averted by a qualified majority of the member states, France faces an uphill battle and will probably have to make significant concessions. If not on fiscal targets, than on structural reforms.”