Draghi Urges New Euro-Zone Fiscal Tool to Keep Economy Stable

(Bloomberg) -- European Central Bank President Mario Draghi called for a euro-area fund to complement monetary policy, renewing his plea to governments to strengthen the currency bloc before another crisis strikes.

The ECB chief said that while nations should pursue sound domestic fiscal policies, that’s not not always enough to withstand erratic financial-market reactions, and that there’s a case for public sharing of risk.

“We need an additional fiscal instrument to provide stabilization,”’ he said in a speech in Berlin. “There ought to be an instrument that complements monetary policy in delivering macroeconomic stability both at the euro-area level and, crucially, in each of its member states.”

The fact that Draghi stepped up his rhetoric in Germany’s capital is significant, as the country has been a key driver behind the focus on reducing euro-area risks -- for example cutting bad loans -- before introducing risk-sharing projects such as common deposit insurance and a joint fund. The ECB and many European leaders have long acknowledged the need for some kind of fiscal capacity to bolster the economic union, but without much progress.

December Goal

Heads of state are due to meet in Brussels for a summit next month, though their focus will be on more pressing issues such as U.S. trade threats and Brexit. While they aim to strike a deal on key elements for deepening the economic and monetary union in December, talks on a fiscal tool remain far from a consensus.

Draghi said the precise design of any such instrument is still up for discussion, but it should fulfill two conditions -- it should be “adequate to its task” and it should be designed so as to contain moral hazard.

“Today’s debate is often cast in terms of dichotomies: private risk-sharing versus public risk-sharing, and risk sharing versus risk reduction,” he said, echoing comments he made in May. “But I believe that, to a great extent, these different goals are complements, not substitutes.”

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