Draghi Calls For Fiscal Reform Across Euro Area; Quantitative Easing On The Table

draghiThe euro is bouncing off its lowest  level since May 2010 just days after ECB President Mario Draghi held an interview with German newspaper Handelsblatt and spoke about the growing risks of deflation in the 19 member euro currency union and called upon European governments to do more while pledging to keep interest rates low and hinting that a U.S. style quantitative easing program could be launched in early 2015 if inflation remains too low.

After keeping its benchmark interest rate at a record low of 0.05 percent since September 2014 and introducing negative overnight deposit rates of -0.20, the European Central Bank (ECB) has clearly attempted to lay the necessary monetary groundwork to help spur lending across the 19 member euro area.

Draghi said that interest rates will continue to remain low in the future.

“Interest rates have been very very low for a long time- and they will presumably stay like that for a while longer” Draghi told Handelsblat.

From 1998-2014 interest rates in the euro area averaged 2.40 percent.

Economic growth in the euro area has been sluggish throughout 2014 while inflation has managed to move even further away from the ECB’s target of close to but just below 2 percent.

Inflation declined to only 0.3 percent in November.

Draghi told Handelsblatt that it is the ECB ‘s mandate to keep inflation close to its target while acknowledging that the central banks’s monetary policy would be more effective if governments across the euro area would simply begin to adopt fiscal reforms.

“But it is quite clear that our monetary policy would be much more effective if the countries’ governments implement structural reforms” Draghi told Handelsblatt.

Draghi pointed out that Europe has the world’s highest tax rates which gives it a competitive disadvantage on the international stage.

“The triad of weakness in the reform process, bureaucracy and the tax burden hinder Europe’s recovery. If we don’t solve this, our growth will remain weak” Draghi admitted.

Although Draghi expressed confidence that the euro area’s economy will improve in 2015, he told Handelsblatt the risks are higher than they were 6 months ago that the ECB could fail to ensure price stability within its own mandate.

Draghi said that the ECB could add more monetary stimulus in early 2015 to help generate economic growth by launching a € 1 trillion U.S. style quantitative easing program through purchasing  government bonds-sovereign debt from the 19 countries making up the euro area.

The ECB Council will meet again on January 22nd to set monetary policy.

-Johnathan Schweitzer

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