While many countries have made “substantial progress” recently, “we can’t exclude that at some point in time this progress can easily stop because of adjustment fatigue,” Draghi said. “So that’s why we are asking for conditionality combined with these interventions by the ECB. I think this could stand against the charges that we are doing monetary financing, because we are not doing it.”
Draghi started his testimony yesterday with an overview of the economic outlook.
He said financial-market sentiment “has somewhat calmed down over the past few weeks.” Still, the situation “remains fragile and it’s surrounded by heightened uncertainty,” he said. “Looking ahead we continue to expect only a gradual recovery with subdued momentum and risks on the downside.”
Draghi said risks to the inflation outlook “are still broadly balanced, but certainly further intensification of financial-market tensions has the potential to affect the balance of risks for both growth and inflation towards the downside.”
Lending to households and private sector companies is “still very, very sluggish,” he said.
Draghi said the debt crisis has distorted yields across a range of asset classes.
“Markets have perceptions of a certain country in a crisis,” he said. “Therefore they ask for higher interest rates in order to buy the bonds issued by the country. And when I say bonds I don’t only mean government bonds. Bank bonds, corporate bonds. Markets are asking for higher and higher interest rates, which in return reinforce the situation of the perception of the crisis. That’s where the main justification to step in is for the ECB and start buying bonds.”
The fact that the ECB’s monetary policy is only being transmitted in one or two euro nations compels the ECB to intervene, Draghi said.
“We have to rebuild the euro area,” he said. “We have to overcome this fragmentation exactly for pursuing price stability through changes in interest rates.”
For a “genuine” monetary union to be achieved, policy makers must make progress in four areas, Draghi said -- financial, fiscal, political and economic.
It is “high time to take a comprehensive approach,” he said. “I’m convinced that we need a robust and shared vision for the duration of the European monetary union over the next decade. A solid long-term anchor is essential to put the euro area back on the path of stability. This long-term vision is an indispensible complement to the short-term management of the crisis.”
Draghi began the session by thanking committee members for their warm wishes.
“We collectively are going to need all of them in the coming weeks and coming months,” he said.