Draghi Touts Austerity Message as ECB Cuts Borrowing Costs

ECB chief Mario Draghi on Thursday said it is crucial that eurozone governments do not “unravel” the progress made in reducing their borrowing cost, arguing that EU leaders must focus on structural reforms to ensure long-term growth, as the central bank cut its key interest rates for the first time in 10 months in a move aimed at boosting the ailing eurozone economy.

ECB chief Mario Draghi on Thursday said it is crucial that eurozone governments do not “unravel” the progress made in reducing their borrowing cost, arguing that EU leaders must focus on structural reforms to ensure long-term growth, as the central bank cut its key interest rates for the first time in 10 months in a move aimed at boosting the ailing eurozone economy.

With the eurozone economy shrinking, inflation at a three-year low and unemployment at record highs, the European Central Bank on Thursday lowered its benchmark interest rate from 0.75 percent to 0.5 percent.

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The cut was widely expected after ECB president Mario Draghi said last month that the ECB stood ready to act, a phrase he repeated on Thursday, though few economists expect it to make a decisive difference to the economy.

Anticipating scepticism, Draghi urged reporters “not to underestimate the impact” of the rate cut, which takes effect May 8, and insisted the move would stimulate growth now that the economic slump has spread north to countries like Germany, Austria and Finland.

Speaking at a press conference, Draghi added that the central bank would prime banks with as much liquidity as they need until at least July 2014 and look at ways to boost lending to smaller companies, which are the lifeblood of Europe’s economies but which in many countries have been starved of credit.

“Weak economic sentiment has extended into the spring of this year,” he said. “Our monetary policy stance will remain accommodative for as long as needed.”

However, Draghi said it is crucial that eurozone governments do not “unravel” the progress made in reducing their borrowing needs.

Euro area countries had succeeded in cutting deficits in the past two years but average government debt had risen to 90.6 percent in 2012, from 87.3 percent a year earlier.

Responding to comments that he is the “last man standing” when it comes to austerity advocacy, Draghi said he had always conceded that such fiscal consolidation was contractionary in the short term but said it had been a mistake, borne out of the need to act urgently, to raise taxes rather than cut expenditure in many countries.

“You are talking about raising taxes in an area of the world where taxes are already very high so no wonder this had a contractionary effect,” he said.

The ECB’s renewed call for fiscal rigour, alongside structural reforms to free up labour markets and boost growth in the longer term, is part of a drive to mark out the limits of its ability to act.

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On Thursday, European Council President Herman Van Rompuy said governments must take immediate action to promote growth and the creation of jobs because patience with austerity measures is wearing thin in some countries.

“Taking these measures is more urgent than anything,” he told a separate conference in Portugal. “After three years of firefights, patience with austerity is wearing understandably thin.”