ECB chief rejects calls to rescue Euro zone

And despite ever louder calls for central bank intervention, Draghi offered no hope he would come to any country’s rescue by pumping money into the financial markets. Draghi, who took office at the beginning of the month, implicitly rejected calls for the central bank to use its enormous resources to stop the upward creep of borrowing costs for Spain and Italy, which threatens their solvency and by extension the European and global economies.

Draghi said the bank would not deviate from its focus on price stability and suggested that other measures could undercut the bank’s credibility. “Gaining credibility is a long and laborious process,” Draghi said at a gathering of bankers here in Frankfurt. “But losing credibility can happen quickly - and history shows that regaining it has huge economic and social costs.”

He criticised leaders for taking too long to act on decisions they had made at numerous summit meetings. “Where is the implementation of these longstanding decisions?” he asked. “We should not be waiting any longer.” If the collapse of the euro seemed imminent, the central bank would become lender of last resort to countries like Italy, many analysts say.

But the bank seems to be far from that point and instead is insisting that countries take steps to cut budget deficits and improve their economic performance. German central bank Bundesbank president Jens Weidmann was more blunt than Draghi in rejecting use of the European Central Bank to bail out troubled governments, reflecting the hard line that German policy makers have taken.

“The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilise the current situation in any sustainable way,” Weidmann said at the same event, the Frankfurt European Banking Congress. He put the onus on governments to address deficiencies in their national economies. “These deficiencies include a lack of competitiveness, rigid labour markets and the failure to seize opportunities for growth,” he said.

One of the countries he was referring to is Greece, whose finance minister, Evangelos Venizelos, said recently that state revenue would exceed spending in 2012 for the first time in years, adding that the deficit was expected to contract to 5.4 per cent of gross domestic product, from 9 per cent this year, as long as a bond swap with private investors goes ahead as planned.

According to a draft budget for 2012 submitted in Parliament by Venizelos, revenue is expected to reach 54.4 billion euros in 2012, compared with 51.3 billion euros this year, while spending will be curbed by 5 billion euros. The blueprint projects an additional 3.6 billion euros in tax collection.

Describing the 2012 budget as “a tool for exiting the crisis”, Venizelos said it would help Greece move from “the current state of pessimism to a new starting point.”
At a news conference he said the budget was “the first major initiative of the new government of Lucas Papademos,” a former vice president of the central bank whose coalition administration won a vote of confidence in the Greek Parliament last week. “This is a budget of consensus and that is significant,” Venizelos said. “It represents four-fifths of the country’s Parliament,” he said, referring to the 300-seat House. A vote on the draft budget is scheduled for December 7.

Venizelos said all projections in Greece’s draft budget for next year were conditional on the adoption of a European Union debt deal, which was negotiated in Brussels last month and earmarked an extra 130 billion euros in loans for Greece. “The responsibility for this is largely ours,” Venizelos said, adding that austerity measures Greece had voted through Parliament must be enforced. But he indicated that the forecasts also depended on the success of a bond swap that forms part of the debt deal and under which holders of Greek debt have been asked to accept a 50 per cent write-down on the value of their bonds.

Venizelos presented two possible outlooks for the budget deficit, one taking into account a bond swap and the other disregarding it. In the first case, the deficit would be reduced to 5.4 per cent of GDP, from the 6.8 per cent originally foreseen in the budget, while in the second, the deficit would drop to 6.7 per cent. He added that no further austerity measures had been included in the blueprint for next year.

“The budget for 2012 will not be accompanied by legislation foreseeing new tax hikes and other revenue-raising measures,” he said. “As long as we implement measures that have already been voted through Parliament we will not need to take any new ones.” If all goes as planned, Greece will report a primary budget surplus of 1.1 per cent of GDP next year, he said. “It will be a small primary surplus but a surplus nonetheless,” he said.

Venizelos and Papademos met visiting members of Greece’s foreign creditors in Athens on Friday afternoon to discuss the release of an 8 billion euro tranche of rescue money, the prime minister’s office said.