Draghi warns on protectionism as a risk for the Eurozone

Mario DRAGHI, President of the European Central Bank, during his intervention in the Economic and Monetary Affairs Committee of the European Parliament. [Pablo Garrigós/European Parliament]

The Eurozone should prepare for US and China protectionist measures if they materialise, president of the European Central Bank Mario Draghi said on Monday (24 September) at the European Parliament.

“For the time being, we don’t know what the final size of all this will be but we know it’s going to be big and we should do our best to be prepared,” Mario Draghi told members of the Committee on Economic and Monetary Affairs.

Draghi identified “the threat of protectionism, vulnerabilities in emerging markets and financial market volatility” among the main risks surrounding the euro area.

The ECB chair praised the accomplishment of the past few years on the tenth anniversary of the financial crisis but, he stressed, “the work is not yet over.” Growth, that has been positive for more than five years, might be in jeopardy due to the disruptions in the global economy derived from protectionist practices in trade.

Draghi admitted that macroeconomic projections for 2018 and 2019 were adjusted with a slight downward for 2018 and 2019, “mainly reflecting weaker global trade.”

The European Commission also reflected in May this year negative spillovers because of trade restrictions in its spring forecast. “The combination of a pro-cyclical fiscal stance in the US and inward-looking trade policies represent a dangerous nexus in our view,” Pierre Moscovici, the Commissioner for Economic and Financial Affairs said back then.

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The risk of financial deregulation

The EU has progressed in the banking sector, Draghi said. However, he warned, this sector “has entities which are very large, very complex, very interconnected and to some extent some of them do some bank-like activities.”

The president of the ECB told the Parliament that there is less visibility in the shade of banking but stresses that while “much has been done in the European Union,” others have not been equally active.

“The exposure of the European Union to other jurisdictions is indeed significant enough not to prevent transmission of crisis from there to here,” ECB chair admitted.

Ten years after the crisis later, the powers of supervisors have been diminished, Draghi warned. Due to deregulation in other areas of the world, the ECB president said with the US in mind, the EU remains clearly exposed.

However, the president of the ECB insisted that the institutions are “monitoring financial stability risks quite intensively” and banks “as far as liquidity, solvency and equity are concerned” are stronger than before.

“Does it mean that we can prevent the next crisis? Of course not but we have the duty to make them stronger,” he defended.

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Brexit muted impact  

The European Central Bank does not expect a major impact of Brexit for the Euro area, Mario Draghi told the parliamentary committee, despite the increased risk of no deal after the confrontation between Theresa May and the 27 during Salzburg summit last week.

“Our estimates show that, on the real side of the negotiation, the impact should be, in the aggregate, quite muted,” Draghi told the Parliamentary Committee.

“On the financial side, the impact we expect should not be significant, with one exception: in some areas of central clearing of derivatives,” he insisted, “if there is a sudden event, an unprepared hard Brexit of the sharpest kind, we have to see how the many contractual positions are going to be regulated after that.”

The European Central Banks does not participate in the article 50 negotiations between the United Kingdom and the European Union. However, the lender monitors them and it is in contact with the Bank of England on that matter.

Asked about the ECB provision to ease the impact of Brexit, Draghi explained the Parliament that it will all depend on the outcome of the negotiation “and we have no say on that”.

Draghi hoped in any case that any solution to close the deal for the withdrawal agreement “will not compromise the integrity of the single market,” in line with member states’ position.

CMU and Banking Union key in Euro internationalization

One of the key proposals the President of the European Commission Jean-Claude Juncker announced in his speech on the State of the Union was his intention to boost the international role of the euro.

Draghi admitted that the euro’s use as a reserve currency has declined but even so, “the euro remains the second most utilised currency in the world.”

The president of the ECB stressed that, in any case, the international role of the euro is primarily determined by market forces. However, Draghi argued that further developing of both the Capital Market Union and the Banking Union would help the internationalisation of the single currency.

“If and as we move forward on the Capital Market Union and the Baking Union the international role of the euro will raise,” the president of the ECB highlighted.

Draghi remained cautious and is waiting to see what the Commission concretely proposes. “Certainly we are there for the Commission to help,” he said.

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A European Anti-Money Laundering authority

“It is not a mystery to say that the current situation is not satisfying,” Mario Draghi admitted to the Economic and Monetary Affairs Committee.

The ECB is part of the working group the Commission set up as to improve communication and exchange of information with national authorities and their supervisors. However, Draghi believes it is not enough.

“Certain information should be shared across supervisors and across anti-money laundering authorities,” he stressed. “With the out exchange of information there is no hope you will be efficient in countering money laundry,” the president of the ECB told the MEPs.

Although the ECB has no competence in this area, Draghi did not hesitate. “There should be a European Anti Money Laundering authority in the EU to give full visibility of what is happening in the Euro Area,” the president of the ECB stressed.

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