Draghi: euro zone won't be fixed by weakening strong members

Reuters

By Michelle Martin

HAMBURG (Reuters) - Economic imbalances in the euro zone must be overcome but without weakening the bloc's strongest economies, European Central Bank President Mario Draghi said on Thursday.

Draghi said policymakers should not harm Germany's competitiveness but rather other countries should pursue policies to make their economies as competitive as Germany's.

"One of the greatest problems that the euro area has today is great imbalances ... and these imbalances have to be overcome," Draghi told an economics forum in the German port city of Hamburg.

"The best way to do it from our viewpoint is do it without weakening the strongest - weakening the strongest doesn't make the weaker stronger," he said, mentioning Italy as a country that needs stability and reforms.

He called Germany, which implemented labor market reforms a decade ago, a model for other countries.

Draghi said while the German current account surplus was "very high", its surplus with the euro zone had declined, and an increase in German imports showed that a rebalancing of the single currency bloc was taking place.

Last week the U.S. Treasury reprimanded Germany, saying its exporting prowess was hampering economic stability in Europe and hurting the global economy.

FAST DECLINE IN INFLATION

Earlier in the day the ECB cut its main interest rate to a new record low of 0.25 percent, responding to a surprise drop in inflation by easing policy to support the euro zone's weak economic recovery.

Inflation in the euro zone approached a new four-year low in October. This week the EU Commission forecast that inflation will stay subdued for at least two years.

"We had a figure in October which was lower than we had expected," Draghi said.

"But even without that, if one looks at the figures that are analyzed over the last two quarters, you see that actual inflation is declining fast so we had to act to bring it back."

Draghi said the central bank saw no deflation in the euro zone by and large. The ECB targets inflation of close to but just below 2 percent for the single currency bloc.

"We see a period of protracted low inflation and at this point in time we had to act to bring it back to 2 percent."

Draghi said he could understand fears among Germans about low interest rates in their country and said these were "serious concerns" but added that the ECB had to set monetary policy for the whole of the euro zone.

Germany's status as a safe haven in the euro zone crisis has driven interest rates down in Europe's largest economy.

But Draghi said a lot of progress had been made in returning confidence to the euro zone in the last 1-1/2 years, which meant that capital was gradually leaving Germany and returning to southern Europe.

"The more we go back to a situation where people trust each other and trust these countries, the sooner Germany will be out of these artificially low interest rates," he said.

(Writing by Paul Carrel and Michelle Martin; Editing by Robin Pomeroy)

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