ECB head urges reforms to European economy

FRANKFURT, Germany — European Central Bank head Mario Draghi gave a muted outlook for the European economy and called for a “growth compact” to restore lost competitiveness across Europe.

FRANKFURT, Germany — European Central Bank head Mario Draghi gave a muted outlook for the European economy and called for a “growth compact” to restore lost competitiveness across Europe.

Draghi’s remarks Wednesday follow a backlash in Europe against austerity and deficit measures that were introduced to help the 17 countries that use the euro deal with the debt crisis that is hitting the region.

“We have a fiscal compact,” Draghi said, referring to the treaty signed in March by European governments tightening rules on government spending. “Right now, what is most present in my mind is that we have a growth compact.”

The ECB president’s comments — which weren’t accompanied by extensive explanation or details — alluded to efforts to introduce long-term structural reforms to make countries more business-friendly. Those measures include making it easier to fire longtime workers and to start a business.

Draghi, however, did not take a stance against governments working to cut the size of their deficits, describing that step as “unavoidable.”

Speaking to the economic and monetary affairs committee of the European Parliament, Draghi said the package of fiscal and economic measures recently agreed by the European Commission, the EU’s executive, and the European parliament could pave the way for a formal eurozone agreement on growth.

“That’s why we have to go back and make it a compact,” he said. “That’s very very important.”

Draghi’s push for a growth agreement has caused some interest among analysts and politicians because it was his earlier call for a “fiscal compact” that eventually led to the European governments’ current fiscal treaty.

Draghi added that economic indicators confirm “a stabilization in economic activity at a low level” and referred to “an environment of modest growth” in the euro area. But he indicated demand for credit — a key sign of economic activity — remained weak.

The EU’s executive commission predicts the 17-country eurozone will see their economy shrink by 0.3 per cent this year, and recent surveys of purchasing managers in industry and service suggest that the economy might even fall short of that.

The fiscal treaty — and the Europe-wide effort by governments to cut spending and debt — has provoked fierce debate in France, where Socialist Francoise Hollande led the first round of presidential voting on Sunday. In the May 6 runoff, he faces incumbent Nicolas Sarkozy, a key partner with Germany’s Chancellor Angela Merkel in steering the eurozone through its debt crisis and in pushing through the fiscal treaty.

Hollande has called for renegotiating the fiscal compact to add provisions that stimulate growth. Speaking on the campaign trail Wednesday, Hollande used the ECB president’s remarks to back up his policy. “And now the president of the European Central Bank, Mr. Draghi, has just himself said … that the budget pact should be completed by a growth pact.”

He added that Draghi’s comments “add a voice to others that confirm that the announcement I made, that the commitment I made, will turn the French election into an election that is also decisive for Europe.”

Analyst Carsten Brzeski at ING in Brussels said that “for the ECB, a growth compact does not mean more fiscal stimulus. It means structural reforms with a vision. Have a plan, but it’s structural reforms.”

That’s a far cry from agreeing with Hollande: “From Mr. Hollande, it’s good old fashioned Keynesian stimulus of the economy,” Brzeski said, referring to John Maynard Keynes, the 20th Century British economist who advocated government spending as a way to make up for lagging demand in a down economy.

Draghi also said the ECB’s survey of bank lending showing that banks were not tightening credit as much as in the first quarter compared to the last quarter of 2011, but that consumers and businesses were not borrowing because of the slack economy.

The ECB’s closely watched survey of lending practices released Wednesday indicated that fewer banks were tightening credit since it gave them C1 trillion ($1.3 trillion) in cheap loans.

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