Bloomberg News

Draghi Vows Pragmatism as ECB President, Seeks Gradual Exit

June 08, 2011

(Adds comment on commodity prices in ninth paragraph.)

June 8 (Bloomberg) -- Italy’s Mario Draghi said he will pursue a policy of “gradualism” in lifting European Central Bank interest rates and rolling back emergency liquidity measures as the euro-area economy grapples with a debt crisis.

Draghi, the nominee for ECB president, promised the same “healthy dose of pragmatism” that is the hallmark of the bank’s current leader, Jean-Claude Trichet, who navigated the initial stages of the Greece-led debt shock.

“The continued high degree of uncertainty on the macroeconomic and financial environment together with remaining vulnerabilities requires a careful assessment of the overall situation and outlook,” Draghi said in a written response to European Parliament questions. “This in turn warrants an element of gradualism in changing standard and non-standard monetary policy.”

All 51 economists surveyed by Bloomberg News forecast the ECB will leave its main interest rate at 1.25 percent when policy makers meet in Frankfurt tomorrow. Expectations are mounting that it will nudge rates up in July, trying to cap inflation without further damaging southern Europe’s depressed economies.

“Draghi’s remarks are pretty dovish and much more cautious than recent comments of other ECB council members,” said Juergen Michels, chief euro-region economist at Citigroup in London. “However, ‘gradualism’ may still mean that we can expect more rate hikes after July.”

Full Respect

Draghi, currently head of Italy’s central bank, faces a confirmation hearing in the parliament’s economic and monetary committee on June 14. He is slated to take over from Trichet for an eight-year term on Nov. 1.

Armed with a doctorate in economics from the Massachusetts Institute of Technology, Draghi, 63, has also run Italy’s Treasury and was his country’s chief negotiator of the treaty that established the euro. Stints at the World Bank and Goldman Sachs Group Inc. punctuated his career.

Draghi backed the ECB’s handling of the economy and debt crisis, saying he won’t change the way the bank has conducted monetary policy since the euro’s debut in 1999.

Commodity Prices

Draghi said he is alert to the risk that higher oil and raw material prices may feed through to inflation, which eased to 2.7 percent in May from 2.8 percent in April. It remained above the ECB’s 2 percent limit.

“Monetary policy needs to avoid that temporary increases in inflation lead to the emergence of second-round effects in the wage and price-setting behavior,” Draghi wrote.

While promising to “fully respect” the ECB’s principal goal of stemming inflation, saying that is the best way to promote growth, the 33-page written testimony was tinged with the need to remain flexible amid “the permanently evolving financial and economic environment.”

Draghi’s tone contrasted with that of an earlier German contender for the ECB post, Axel Weber, a self-confessed non- diplomat who opposed the bank’s policy of buying the bonds of fiscally distressed states. Weber dropped out of the running in February.

Draghi said the bank’s purchases of 75 billion euros ($110 billion) of bonds don’t pose an inflation risk, stuck to Trichet’s opposition to a restructuring of Greek debt and echoed ECB calls for more automatic sanctions on high-deficit countries.

No Default

“A restructuring in a euro-area member state poses a significant risk of destabilizing the financial system, with severe consequences for the growth outlook of the euro area,” Draghi wrote. “Significant spillover effects on other euro-area countries cannot be excluded.”

Echoing Trichet’s regular exhortations, Draghi called the debt crisis “a real test for the political will in Europe to do whatever is needed to ensure the achievements of economic and monetary integration.”

Draghi sided with Germany in opposing joint bond issuance in the 17-nation euro area, saying Eurobonds would represent an “implicit subsidy from fiscally sound to fiscally less sound member states.”

--With assistance from Christian Vits in Frankfurt and Gabi Thesing in London. Editors: Andrew Davis, Jeffrey Donovan

To contact the reporter on this story: James G. Neuger in Brussels at

To contact the editor responsible for this story: James Hertling at

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