European Central Bank president Mario Draghi has defended euro zone austerity in an interview and urged countries to press on with reforms despite a gloomy economic forecast.
"There is no feasible trade-off" between economic reforms and fiscal belt-tightening, Draghi told The Wall Street Journal in his first interview since Greece sealed a second bail-out from euro zone partners.
"Backtracking on fiscal targets would elicit an immediate reaction by the market," and push interest-rates higher, he said.
The ECB chief spoke after euro zone finance ministers had agreed to fresh loans worth €130 billion to Greece, part of a deal that should also see Athens benefit from a cut in its privately-held debt of €107 billion.
The European Commission yesterday warned that the euro zone would likely see economic activity contract by 0.3% this year, instead of expanding by 0.5% as previously forecast. The slowdown, which is particularly strong in countries along the bloc's southern rim, has led to calls for less austerity and a greater focus on boosting economic growth.
But Draghi, a former Italian central bank head, came down on the side of northern countries such as Finland, Germany and the Netherlands, which are doing fairly well and urge others to stay the course until their fiscal houses are in order.
He warned that there was no guick fix for Europe's debt crisis, and downplayed hopes that China would come to the rescue with its massive foreign currency reserves and trade surplus.
"There have been lots of talks and conversations. I hear about them but I haven't seen any official investment [from China] in European financial markets," Mr. Draghi said.
He felt the present situation would force governments towards a closer fiscal union and oblige them to reform labour markets and make structural changes to their economies to ensure prosperity over the long term.
"It's hard to say if the crisis is over," the ECB chief added, with Greece in particular remaining a major risk. EU leaders want to see if Greek politicians will follow through on pledges made to secure the second bail-out, after failing to keep their promises once an initial €110 billion rescue was secured in 2010.
Draghi defended an ECB refusal to take losses on its Greek bond portfolio, now worth about €50 billion, as private creditors are being pressed to write down the value of their holdings by more than half. The ECB "is committed to protect the taxpayers' money," Draghi explained.
Less than four months after taking over as head of the central bank, he had a moderately positive view of the euro zone's economic prospects, which he said were stabilising following a weak 2011 fourth quarter.
Governments have reduced their deficits, banks have stabilised and bond markets were reopening, Draghi noted. Portugal, which many observers believe is the next country in trouble, will not need to be rescued again, he added.
