Draghi: Up to politicians to fight eurozone crisis

[June 15, 2012]  FRANKFURT, Germany (AP) -- European Central Bank head Mario Draghi warned EU leaders that they should not wait for more emergency help from the central bank to solve the debt crisis rattling the region and instead make the political choices needed to strengthen the euro.

Draghi said Friday the ECB has supported banks against the ongoing debt crisis with (EURO)1 trillion ($1.26 trillion) in emergency credit to banks and that now it was the governments' turn to act.

"Political choices have become predominant over monetary policy instruments that we can use in the near future," he said before an audience of economists and analysts at a conference in Frankfurt. The shared currency needs "strengthened foundations" that will "imply greater transfer of powers to a supra-national level," he added.

Draghi said the bank stood ready to keep supporting the banking system by continuing to provide credit to solvent banks. He also said there was "no inflation risk in any eurozone country," a statement which could open the way for an interest rate cut if the bank sees the situation in the eurozone worsening.

Still, his comments seemed aimed at increasing pressure on political leaders to act at the upcoming EU summit in Brussels on June 28-29. German Chancellor Angela Merkel has by contrast sought to lower expectations for decisive new action. The central bank has an incentive to push for stronger action from leaders, since that could lower pressure on the bank to undertake risky measures such as more emergency loans or even direct purchases of government bonds, as some political leaders have called for.

Some ECB officials have said the bank's crisis loans run the risk of easing pressure on politicians to make tough or unpopular decisions on sharing power or cutting deficits. The bank has denied it is engaged in "horse trading" with politicians, however.

Eurozone market tensions are on the rise ahead of Sunday's election in Greece. If a new government rejects the terms of the country's bailout loans, Greece could lose further financing and default on its debt obligations. That could in turn lead it to leave the eurozone, an event that could further shake confidence in the common currency and send shock waves through financial markets, destabilizing Spain and Italy.

Greece has for over two years been dependent on bailout loans from other eurozone countries and the International Monetary Fund after bond investors would not loan it any more money at affordable rates.

Draghi said that he and other top EU officials working on proposals for a revamped euro will have something "very soon" and that "all the work we are doing is in view of the upcoming summit" of EU leaders June 28-29.

The ECB chief, European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy and Jean-Claude Juncker, who chairs eurozone finance minister meetings, have been tasked by the continent's leaders with coming up with new ideas aimed at strengthening the euro.

Those could include more centralized supervision of banks, whose troubles have hurt government finances; more control over individual countries' spending at the EU level; proposals for more growth; and some form of common borrowing that would prevent defaults by one country. All those issues are complex, could take years to fully implement and raise political objections.

The euro was launched in 1999 with one central bank and currency but multiple governments, each with their budgets and economic regulations. Rules against excessive deficits failed to keep some countries from running up too much debt through overspending or expensive bank bailouts. Greece, Ireland and Portugal have needed bailouts to pay their debts.

Draghi added that the goals of the bank's emergency loans to banks in December and February "have been broadly met" and that the step avoided a worse credit crunch. But he conceded that while banks have been supplied with fresh money from the central bank "in some countries very little money reached the real economy." The ECB has said that lending remains subdued because businesses see no reason to ask for credit in a slow economy.

[Associated Press; By DAVID McHUGH]

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.