May 3, 2012
European Central Bank Opposes Higher Taxes
By RAPHAEL MINDER and JACK EWING
BARCELONA, Spain — Ahead of crucial elections this weekend in France and Greece, Mario Draghi, the president of the European Central Bank, warned governments on Thursday against the “easier road” of raising taxes to fill public coffers, saying it would not solve Europe’s economic problems.
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He spoke from the current ground zero of the European debt crisis, Spain, where the central bank’s governing council happened to be holding one of two meetings each year it schedules outside the bank’s headquarters in Frankfurt.
.The central bank officials met under heavy police protection intended to shield them from any possible street protests over European austerity measures or Spain’s own high employment. No big demonstrations materialized. But the bunker atmosphere might have in some ways symbolized the distance between the central bank’s policy-making and the anxious mood of much of the European public.
.“Is having helicopters and snipers on the roofs the way the E.C.B. wanted to show its face and meet the Spanish people?” asked Edward Hugh, an economist in Barcelona.
.The central bank left its benchmark interest rate unchanged, at 1 percent, choosing not to react immediately to signs that the euro zone economy was continuing to deteriorate. Analysts had expected no action on rates.
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But in light of increasing negative economic data — including figures on Wednesday showing joblessness in the euro zone was up again in March, to 10.9 percent — analysts have been expecting the central bank to consider reducing interest rates later this year. Mr. Draghi, though, sought to dispel that notion Thursday, saying the central bank governing council had spoken generally about monetary policy but had not discussed a cut.
.The euro zone economy “continues to be subject to downside risks,” Mr. Draghi said at a news conference, but the bank still expects it to “recover gradually in the course of the year.”
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Asked whether he understood the frustration of ordinary people suffering from the crisis, Mr. Draghi insisted that he did. All that the central bank can do is pursue what it thinks is the best policy, he said. “We will try to do our job the best we can.”
.Mr. Draghi said it was understandable that governments struggling with debt and budget deficits would be tempted to raise taxes “under extreme urgency,” but he emphasized that “past the urgency, this should be corrected,” especially in a European environment with “a high level of taxation.”
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Mr. Draghi would not discuss the politics of any specific European country, but his comments came before the second round of the French presidential election. On Sunday, French voters could bring to power François Hollande, the Socialist candidate, who has promised to raise taxes on the rich. Mr. Hollande finished slightly ahead of President Nicolas Sarkozy in the first round of voting last month and has remained ahead in opinion polls since then.
But right now, Spain is a bigger concern for the rest of the euro zone. Unemployment in Spain, at more than 24 percent, is the highest in the euro zone, while mounting bad loans are raising questions about the solvency of Spain’s banking sector.
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Opening Mr. Draghi’s news conference in a convention center on the outskirts of Barcelona, Miguel Ángel Fernández Ordóñez, the governor of the Bank of Spain, said that it was “a meeting that allows the bank to get closer to its citizens.”
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And yet Spain avoided giving citizens much opportunity to make their views known to the central bankers. The government temporarily suspended the Schengen agreement, the European treaty that allows free cross-border travel, over concerns that violent protesters might travel to Barcelona.
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About 8,000 police officers were deployed around the city, with helicopters hovering above, while only a few hundreds of students gathered in central Barcelona to protest spending cuts, particularly in education.
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Mr. Draghi said “several governments need to be more ambitious” in addressing fiscal, financial and structural imbalances. But he then went on to heap praise on the governments of Spain and Italy — the other big euro economy now in investors’ line of fire.
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“The fiscal progress, not only referring to Spain and Italy, is generally substantial and insufficiently acknowledged,” Mr. Draghi said.
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Besides talking down expectations of an interest rate cut, Mr. Draghi also damped hopes that the central bank would dispense another round of the inexpensive, three-year loans to commercial banks that had seemed to greatly ease financial anxieties in Europe earlier this year.
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It is too early to judge the effect of the most recent loans, which banks received on March 1, Mr. Draghi said. “We will need some more time.”
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He expanded on his call last week for a “growth compact” among euro zone nations, but made it clear that the central bank did not want countries to weaken efforts to cut deficit spending.
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“We have to put growth back at the center of agenda, without any contradiction with the need to persevere, to continue in fiscal consolidation,” Mr. Draghi said.
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Growth must come from encouraging entrepreneurship, removing barriers to competition within the European Union, and creating more flexible labor markets, he said.
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Speaking in a country where half of its young people are now unemployed, Mr. Draghi also assailed labor rules that he said required young people to bear most of the pain of layoffs, because they were less likely to hold protected jobs.
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“This has very long term social consequences and is something that should be addressed,” Mr. Draghi said.
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Jack Ewing reported from Frankfurt.
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