World Economy

Draghi Urges European Unity

Draghi says the profitability of European banks remains a challenge to be addressed and called for a faster resolution of non-performing loans
ECB President Mario Draghi addresses the European Parliament in Strasbourg, France, on Nov. 21.ECB President Mario Draghi addresses the European Parliament in Strasbourg, France, on Nov. 21.

ECB President Mario Draghi has urged the European Union to stay united in the face of challenges such as Brexit as he warned that the cohesion of Europe is being tested.

Speaking in the European Parliament in Strasbourg, France, on Monday, Draghi said that Europe needs to respond “cohesively and decisively” to the current challenges facing Europe, news outlets reported.

“During our last plenary exchange in February, I said that the cohesion of Europe was being tested. Since then the challenges have increased. It is now more than ever important and necessary that Europe responds cohesively and decisively to the challenge that we’re facing,” he said.

Quoting a speech by former Italian prime minister Carlo Azeglio Ciampi to the parliament more than a decade ago, he said “If we act alone we will be at the mercy of events bigger than us,” adding: “I am confident that the foundations on which the EU project is built are strong enough to achieve the objectives that have been entrusted by the people of Europe.”

In a regular update to the parliament on the ECB’s annual review, Draghi said the ECB would continue its current monetary policy stance. Noting the “unprecedented level of monetary support” provided by the ECB, Draghi said the bank was “committed to preserving the very substantial degree of monetary accommodation”.

But he said that this must be accompanied by “decisive action” in other policy areas.

Real Economy

On the European banking sector, Draghi said the profitability of European banks remained a challenge to be addressed. While the level of bank equity prices was not a matter per se for policy makers, it could curtail lending to the real economy, he said. “We should therefore consider what factors are behind this and what we can do to resolve them.”

He said legacy and structural challenges were a factor for some banks, and, where over-capacity was an issue, “rationalization and consolidation must form part of the answer”.

Similarly, he called for the faster resolution of non-performing loans.

Addressing the parliament ahead of Draghi’s address, EU commissioner Valdis Dombrovskis said the ECB’s actions had had a “positive impact on overall financing conditions in the eurozone area”. But he noted that monetary policy should not be the only tool to boost the European economy, arguing that member states should also play their part through structural reforms and responsible fiscal policy.

Stable Recovery

The eurozone is in "moderate but stable" recovery thanks largely to ECB monetary stimulus policies, but lawmakers must speed up reform to remove the obstacles still hampering the economy, Draghi said.

The eurozone economy "has shown remarkable resistance to negative developments and the uncertainties deriving from the global environment," he said. "Unemployment is decreasing steadily and nominal inflation has gradually recovered since the beginning of the year, from -0.2% in February to +0.5% in October".

He credited the ECB's monetary stimulus measures—including its massive bond-buying or quantitative easing program and its Targeted Longer-Term Refinancing Operations in which the more banks lend the lower the refinancing rate will be—with sparking growth.

Pledge Support

The European Central Bank needs to continue supporting the eurozone economy with its ultra-loose policy, two of its top officials said on Monday, cementing expectations for an extension of the ECB's bond-buying scheme next month.

The ECB will decide on Dec. 8 on whether and how to extend its €80 billion ($85 billion) monthly bond purchases. Sources have told Reuters the program is all but certain to continue beyond its current March deadline.

Draghi told the European Parliament committee that the ECB needed to maintain its current level of monetary support to bring eurozone inflation back to its target of almost 2%.

"The return of inflation towards our objective still relies on the continuation of the current, unprecedented level of monetary support, in spite of the gradual closing of the output gap," he said.

Eurozone inflation was 0.5% last month and is expected to rise beyond 1% early next year, mainly due to a stabilization in oil prices.


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