In March 7 Press Conference, Confident Draghi Shows Euro Crisis Is Abating

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by: Martin Lowy

I have been listening to ECB President Mario Draghi's monthly press conferences and reporting on them on SA since Mr. Draghi took over in November 2011. There is now a marked difference in the tone of the events from the early ones. Whereas in the early conferences, the press challenged Draghi on every conceivable issue, and the tone reflected extreme crisis conditions, the March 7, 2013, conference reflected a settled set of policies that are working, albeit more slowly than one might like. When challenged on a variety of issues, Mr. Draghi relied on policies and initiatives in progress rather than announcing anything new.

Although he made no new announcements of policy, Mr. Draghi reiterated the needs for the policies that he has been advocating for many months. Asked about the uncertain consequences of the recent Italian election, he indicated that this sort of thing happens in democracies and that no new policy objectives are expected at this time. He noted that whereas a year or more ago, contagion might have been expected due to the Italian election, there had been no contagion, which he thought was a very good development.

The European financial press had a hard time coming up with blockbuster questions, instead focusing on policy details.

President Draghi also sounded further optimistic notes on the future of the Euro area economy. He forecasted that the euro area economy would grow in the second half of 2013 and in 2014 and that inflation would remain under 2%. In addition, Target 2 balances are improving, Over 200 billion of the LTRO has been repaid, and the ECB balance sheet has shrunk markedly. These developments point to improving cross-boarder financial activity and greater health of the banking system.

Overall government deficits in the euro area declined from 4.2% in 2011 to 3.5% in 2012, and are projected to be 2.8% in 2013. This is still high in relation to targets, the trend shows that policies are working.

Mr. Draghi was pressed on how the ECB would act to restore credit to small and medium sized businesses. Large businesses, he said, have not had trouble financing themselves. Small and medium-sized businesses have had greater problems, largely because of the uncertain state of the European economies. The ECB will keep monetary policy accommodative as long as necessary to help the banking system to be in a position to lend. This was the one area in which he still seemed to me not to be satisfied that his policies were working as well as they could. But he blamed that on a weak economy and expected the situation to improve gradually as the economy improves as he had forecasted.

Mr. Draghi reiterated the need for labor market reforms as the way to lower unemployment among the young. The young have borne the brunt of illiberal labor market policies. Structural reform remains essential.

I can see that on the policy front, Mr. Draghi remains concerned about the progress toward a "single resolution mechanism" for all banks in the area, regardless of nationality. He reiterated that such a resolution mechanism is necessary as a part of the establishment of a single banking supervisor. I share Mr. Draghi's concern and fear that the single resolution mechanism is going to be very difficult to implement politically.

He dismissed a number of issues as the "angst of the week," which he said was constantly changing.

I come away feeling that the corner that seemed to have been turned in July and August when Mr. Draghi said the ECB will do "whatever it takes" really has been turned. I have been skeptical about the European stock markets' euphoric reaction. But perhaps the market has been right to forecast better economies, even in the face of so much uncertainty.

Does this mean that the doomsayers are wrong? I do not know. But I would suggest that the chance that they are correct is significantly lower today than it was in November 2011 when Mr. Draghi took office.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.