Draghi Calls 2014 &15 As Year Of Recovery, Calls For Schumpeter Creative Destruction In Banking Sector (14 Mar 2014) The ECB President Mario Draghi on accepting the Schumpeter Award in Vienna said that, the year of 2014 and 2015 were set to be a period of recovery after two years of stabilization and a return of confidence in the euro area. But the recovery “remains conditional on our pursuing the very policies that have brought about the return of confidence,” including growth-friendly fiscal consolidation, structural reforms and a committed monetary policy. In his speech, Mr Draghi drew a parallel between the policies applied in the euro area with the ideas of economist Joseph Schumpeter, who spoke of “creative destruction” driving innovation and productivity growth. By cleaning up and repairing banks balance sheets, the ECBs comprehensive assessment helps create the necessary conditions for resources again to flow to the productive economy. “By encouraging creative destruction in the banking sector, we can facilitate creative destruction in the wider economy and support the recovery.” Deleveraging in the financial system was necessary, since too much debt has been built up in the run up to the crisis, but the question is what form this deleveraging should take, and at what speed it should be allowed, or encouraged, to take place. What we want to achieve, Mr Draghi said, is a good form of bank deleveraging, where equity is built up, where deposits rise and where balance sheet reduction takes the form of swift asset clean-up, rather than a slow scaling back of the loan book while rolling over bad loans. The ECBs monetary policy is helping this process. As the recovery proceeds and inflation gradually increases towards levels closer to 2%, the ECBs forward guidance, firmly reiterated by the Governing Council in its last meeting, creates a de facto loosening of policy stance, and real interest rates are set to fall over the projection horizon. At the same time, the real interest rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal. The strengthening of the effective euro exchange over the past one and a half years has certainly had a significant impact on our low rate of inflation, and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability. The risk of deflation, which would make deleveraging harder, is quite limited. But the longer inflation remains low, the higher the probability of such risks emerging. That is why the ECB has been preparing additional non-standard monetary policy measures to guard against such a contingency and why it stands ready to take further decisive action if needed, Mr Draghi said. Powered by Commodity Insights
Posted on: Fri, 14 Mar 2014 05:32:20 +0000
Trending Topics
Recently Viewed Topics
© 2015