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ECB tells EU to step up reforms

Source: Reuters - Mon 5th Sep 2011

The current and incoming head of the ECB demanded on Monday that European governments quickly implement a strengthening of a regional bailout fund and press ahead with wider reforms.

With some euro zone states dragging their heels in approving the reform of the European Financial Stability Facility agreed in July, ECB President Jean-Claude Trichet and Bank of Italy Governor Mario Draghi warned any delay risked worsening the euro zone's debt crisis.

Draghi, who takes over from Trichet in November, also emphasised that the ECB's sovereign bond buying programme - which has bought breathing space in debt markets for peripheral states such as Italy and Spain in recent weeks - was a temporary measure and no substitute for fiscal reforms.

On Sunday, the head of a junior government party in Slovakia said parliament would not vote until December at the earliest on the strengthening of the 440 billion EFSF euro zone joint rescue fund agreed by EU leaders in July, much later than the early October deadline euro zone officials target.

"It is clear ... that we have an absolute and total need for all of the decisions to be implemented immediately as was decided ... by the different heads of state and government," Trichet said at the conference in Paris.

Draghi, in the text of his speech posted on the Bank of Italy Web site, warned that: "Delays or uncertainty in the process risk reigniting market turbulence."

"The solvency of sovereign states has ceased to be a foregone conclusion," Draghi said, calling for euro zone members to press ahead with austerity measures and warning that ECB bond purchases were a temporary phenomenon.

"The Programme is temporary and fully sterilized; most cannot be used to circumvent the fundamental principle of budgetary discipline," Draghi said.

Italian Prime Minister Silvio Berlusconi's backtracking on key measures in a proposed austerity package - which was seen as a vital condition for the ECB's bond buying - has alarmed his European partners in recent days.


Draghi said it was crucial for the EFSF, whose effective lending capacity was raised to 440 billion euros by the agreement in July, to be perceived by markets as having the financial firepower to respond to the crisis.

Both he and Trichet insisted that far-reaching reforms were needed to create a solid fiscal basis for monetary union: what the Italian central banker called a "quantum leap" in governance.

"We ought to have a change in the (EU) treaty which will imply that it will be broader in scope and should imply changes in governance," he told the conference.

Trichet said there was a consensus the currency zone needed a substantial strengthening of its debt rules. Future reforms could include the possibility of a central override on decision-making by countries who fail to stick to budgetary goals.

"(If) a country doesn't take or is incapable of taking the required decisions, it should be possible to take them ... from the centre of the single currency," Trichet said. "One can imagine a federal government."

Draghi said that higher risk aversion in the wake of the financial crisis was "here to stay", though he suggested that sovereign debt spreads were overstretched.

"We are having a repricing of risk and the sovereign spreads are widening ... We are bound to have some overshooting now," Draghi said, adding that the task of monetary policymakers was to make sure this volatility did not block the ability of monetary policy to stimulate a recovery.

Trichet said governments were only half-way through the reforms needed to strengthen the fragile financial sector.

A raft of structural economic reforms were also needed in the euro zone to improve productivity and increase growth and employment potential, he said.

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