On track

In his first keynote address as president of the European Central Bank, Mario Draghi spoke in Berlin on Thursday about the initial idea of forming an independent central bank and the role it plays today.

The Italian banker and economist emphasized his affinity with Ludwig Erhard, the "Father of the Economic Miracle," who in 1950 laid the foundation for an independent central bank. In the same breadth, the ECB head also spoke of the need for price stability, which is essential for a positive investment climate.

Draghi expects the eurozone to recover soon. The inflation rate, he also believes, will drop to two percent by the end of 2012 and below that in 2013.

Massive risks

Those, however, were the only positive forecasts Draghi had to offer. He painted an otherwise dismal picture of the current situation in Europe and spoke of "massive downward risks."

Draghi warned of a credit crunch as banks shy away from risks. Europe, he said, could be the big loser because there up to 80 percent of loans to companies and consumers flow through banks, compared to up 35 percent in the United States.

Consequently, the ECB has taken measures to restore trust. In the past week, for instance, the central bank lowered its prime rate to an historic low of one percent. In addition, it decided for the first time to lend money to banks at this favorable interest rate for three years.

Draghi stressed the need to improve borrowing conditions, in particular, for small and medium-sized business, which account for about 70 percent of the economy in the eurozone and generate around 60 percent of sales.

Fiscal discipline: A weak point

The ECB chief also mentioned the progress made at the recent summit of eurozone leaders in Brussels and their agreement to create a fiscal union.

He referred to this agreement as a "breakthrough," adding that fiscal discipline had been weak point in the eurozone from the very beginning. Control mechanisms, he said, are necessary: "We have to help ourselves."

All EU member states need to consolidate their budgets, according to Draghi.

"There is no alternative," he said. This action, he conceded, could lead to a short-term drop in economic growth, and that would need to be absorbed.

The only path ahead is to achieve sustainable growth through comprehensive structural reforms, according to Draghi.

As for allowing inflation to rise, the ECB head said he sees no justification in a strategy "to print money." Europe, he summarized, has taken an important step forward and can't afford to lose any momentum.

Author: Kay-Alexander Scholz / jrb
Editor: Cyrus Farivar