Potential inflationary bubbles still exist in the Euro zone economy and the possible effects of Euro exchange rates on inflation must be monitored, ECB President Mario Draghi warned the Economic and Monetary Affairs Committee on Monday. He also stressed that banks need not only a strong single supervisory system but also common crisis resolution rules. MEPs urged the ECB to improve bank lending to the real economy.
The ECB still sees certain risks to the Euro zone economy, including potential inflationary bubbles. Confidence remains weak but stable, and the ECB expects inflation to fall below 2% in the near term, said Mr Draghi, adding that the possible effects of Euro exchange rates on inflation need to be monitored, even though the ECB has no Euro exchange rate target as such.
Lending to the real economy
Many MEPs urged the ECB to do more to encourage banks to lend to the real economy. Mr Draghi reiterated that this was the ECB's "number one policy priority". However, he also pointed out that the ECB does not control all the factors needed to restore the flow of loans to small firms and households, and warned that if banks were forced to lend, then the ECB would become responsible for their loans.
Some MEPs also pointed out that small and medium-sized enterprises in some EU countries are paying far higher rates of interest than those in others. Mr Draghi forecast that these differences would reduce in the second half of the year.
Left of centre MEPs asked Mr Draghi whether the ECB would advocate "lighter touch" austerity in the countries hardest hit by the crisis, noting that the "Six Pack" economic governance rules do allow for this.
Mr Draghi replied that the solution was not to postpone austerity measures, but to devise them in such a way as to reduce their negative effects. This could be done, for example, by cutting spending further rather than raising taxes, or by implementing structural reforms faster.
Banking supervision and crisis resolution
Various MEPs also asked Mr Draghi for his views on how best to set up a single bank supervisory system that does not weaken the single market and is fair to non-Euro zone banks. Mr Draghi admitted that this was a "complex" task, but felt it was "doable". He also stressed that the system must deliver real change.
He added that common rules for resolving bank crises must be established rapidly. Committee chair Sharon Bowles (ALDE, UK), urged the European Commission to come forward with its proposal before the summer.