Sep 11, 2014 3:58 PM

European states struggle with Draghi's challenge

The Associated Press

FRANKFURT, Germany (AP) European Central Bank head Mario Draghi made the first move in his grand plan to rescue the economic recovery. Now it's over to the governments of the 18 countries that use the euro.

Eurozone finance ministers gather Friday and Saturday for the first time since the ECB president sketched out what has been dubbed "Draghinomics:" a three-pillared strategy including more stimulus from the central bank, added government spending and pro-business reforms to cut bureaucracy and make economies more productive.

Problem is, Draghi as an unelected central banker only controls the monetary pillar, while governments hold sway over the other two. The finance officials meeting in Milan, Italy, now have a chance to show Europe's politicians are ready to help, too.

On the eve of the meeting, Draghi made a blunt appeal for action, saying Europe's trouble "can only be addressed by concerted action" by "all actors, both at the national and European level."

Business investment had grown only slightly since 2008, he said. "We will not see a sustainable recovery unless this changes," he said in the text of a speech for delivery at the Eurofi Financial Forum in Milan.

The case for action is pressing: Europe's economy showed no growth in the second quarter. That followed four quarters of unsatisfying recovery from a crisis over high government debt. Unemployment remains at a painful 11.5 percent.

The ECB on Sept. 4 did its part by cutting its benchmark interest rate to a record low 0.05 percent. It also said it would buy bonds backed by bank loans a step aimed at increasing bank lending to companies. And it held out the possibility of broader bond purchases, a move that would aim to make credit cheaper still.

But Draghi's challenge to governments remains a tough sell. Some of the key reasons:

With tight EU rules on public deficits, there's little room for more government spending on projects that would help economic growth.

The push for pro-business reforms in two of the more troubled countries, France and Italy, faces political headwinds.

Germany, the dominant eurozone country, has backed calls for more investment spending, but excluded borrowing money to do it, at least at the national level.

There is talk of an EU-level investment fund to pay for infrastructure such as roads and bridges, but the details are far from filled in.

Guntram Wolff, director of the Bruegel think tank in Brussels, said Draghi "doesn't have any direct handle on the member states and on their structural and fiscal policies. All he can do is push them. That's the problem we are having a real coordination problem."

And even if financially stronger countries are willing to spend more, it might not give the economy the push it needs: "They need a fiscal plan at the EU level," Wolff said. "I don't think fiscal loosening at the national level will do the trick. "

European Union rules restrain countries from borrowing excessive amounts of money to boost spending. That is a key condition to ensure stability of the shared currency. And Germany and the EU's executive commission have pressed for countries that needed bailouts Greece, Portugal, Ireland, Spain, Cyprus to keep spending down in return for rescue loans. Yet those policies can choke off growth that is needed both to shrink debt and reduce unemployment.

A senior EU official said the finance ministers will on Friday discuss the bloc's fiscal policies in the wake of Draghi's call in a speech Aug. 22 to loosen the belts in some eurozone economies to boost growth. The official spoke on customary condition of anonymity.

Italy and others want to change how the EU calculates member states' deficits so that governments are allowed to keep some spending as long it helps economic growth, the EU official added. That idea has been opposed, however, by Jyrki Katainen, the new vice president of the European Union's executive commission, and by German Chancellor Angela Merkel.

More growth could come from shrinking the bureaucracy and paperwork that make it hard to start a business, and more flexibility in hiring and firing. Yet Italian Prime Minister Matteo Renzi has slowed his reform efforts.

There's not much cash to spare from government budgets for Draghi's plan, said Raoul Ruparel, head of economic research at the Open Europe think tank in London. "I'm skeptical about how much he'll really get," he said. "This is all enshrined in law and there is very little appetite to change that law."

Still, "there is widening acceptance that the ECB is reaching the end of its tether, and an acceptance that the pressure is shifting to member states."


Baetz reported from Brussels.


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