ECB eurozone on track for recovery

CNC reporting from Shanghai
Added On June 4, 2013

The European Central Bank's President Mario Draghi says the eurozone economy is on track for a recovery later this year.

He says it will be driven by the bank's loose monetary policy and demand from abroad.

The European Central Bank or ECB cut interest rates to a new record low in May.

And the bank says that it will act again if necessary.

But its hand may in part be tied this month as inflation rose back to 1.4 percent in May from 1.2 percent in April.

That is still below the bank's roughly 2 percent target.

While unemployment in the eurozone reached a fresh high in April at 12.2 percent.

The high rate is pressuring policymakers to do more to help the economy.

Draghi says the economic situation in the euro area remains challenging.

But there are a few signs of a possible stabilization.
After the ECB's last policy meeting a month ago, the bank said economic activity should stabilize and recover gradually.

The bank meets again on rates next Thursday.

Draghi also focused on defending the ECB's new government bond purchase program, dubbed Outright Monetary Transactions (OMT) in his speech.

A court hearing will be held in Germany later this month over complaints about the program.

Draghi says the threat of the ECB buying bonds has played a key role in calming financial markets.

"Virtually all economic agents, including corporations, banks and households" he says have benefited from the program.

Calmer markets have given governments more breathing space to adjust their economic structures and policies.

And last week, the European Commission announced that several countries would have more time to meet deficit targets.

Meanwhile, Draghi urges governments to stick to their reform paths.

He says in order to inspire confidence, policymakers must follow through with their fiscal reform agenda.

And little would be gained from a loosening of fiscal adjustment today if it creates market expectations that additional tightening will become necessary tomorrow.

He also adds that the adjustment should be based on increasing productivity.    

And only through steadfast pursuit of such structural reforms can the competitiveness of euro area economies in the global marketplace be restored. 

The ECB can only start buying a government's bonds once the country has signed up to strict reforms under a bailout program.

Draghi says even then, the OMT was designed to keep government bond yields just below 'panic' levels.

He says the need for governments to reform did not stem so much from the bond market but from the dramatic conditions in the labor market.