Below are highlights of comments made by ECB President Mario Draghi in testimony to the European Parliament on Monday....
ON REMIT OF ECB
"The treaty specifies very closely what our remit is, namely ensure price stability in the medium term. The treaty also forbids monetary financing and ... we want to act within the treaty. I think that to take any other behavior, that would somehow, breach the treaty would also negatively effect the credibility of our institution."
ON BANKS' FUNDING CONSTRAINTS
"We know that banks experience now and will be experiencing, even more so, a very significant funding constraint, especially in the first quarter of 2012.
"Not only then. The whole year is going to be a difficult year for the banks.
"What we certainly want to avoid is that serious severe credit tightening that could induce a further slowdown of growth and a possible recession. We want to avoid that. If we can relieve the funding pressures, that's already a good part of our answer."
ON CREDIT RATING AGENCIES
"The two issues that are of particular importance are, first, the assurance of appropriate underlying methodologies and the transparency of ratings. And second, the reduction of hard-wiring of ratings in legislation and market practices.
"Ratings simplify complex risk assessment. But they should only be one of several inputs for investors as well as regulators. In particular, they should be no substitute for financial institutions and other investors to carry out their own assessment. This is the main step towards avoiding mechanistic reliance on external credit ratings."
"The Eurosystem does not mechanically rely on these assessments as it is aware of the limitations of these methodologies. It reserves the right to reject or limit the use of an asset on the basis of any information on its credit quality that it may consider relevant. The Eurosystem has applied such discretion to temporarily suspend the application of the minimum rating requirement to debt instruments issued or guaranteed by some euro area governments following the EU-IMF adjustment programs."
"We should ask ourselves the most important question. How would we do without ratings? What can we do to replace the ratings of credit rating agencies? Because we want to have a much more complete set of credit assessment than just the one we have today, based exclusively on rating agencies' credit ratings. The question is now concrete steps that we can undertake in order to reduce the reliance on the ratings of credit rating agencies."
"I have no doubt that austerity implies contraction.
"What we want is that this contraction to be short-term and we want to activate all the channels that would enable confidence to return to markets, spreads to go down, costs of credit to go down, ultimately for job-creation to take off.
"You need to have this austerity, you need to have control of your budgets."
ON MONETARY FINANCING
"We want to act within the treaty. The ECB cares about financial stability, a lot, but it has to be done without weakening the credibility of the institutions."
ON THE EURO ZONE'S EFSF TEMPORARY BAILOUT FUND AND PERMANENT
"The EFSF stands ready to act and the fact that the ECB is putting at the disposal of the EFSF its infrastructure, its know-how, should reassure that when the time comes it is ready to supply the necessary resources."
"...There is now greater flexibility in euro area crisis mechanisms to act as backstops thanks to the decision to accelerate the entry into force of the European Stability Mechanism, the ESM, to July 2012, and for the European Financial Stability Facility to remain active in financing programs that have started until mid-2013.
"Second, the clarification that as regards private sector involvement, the euro area will adhere to established IMF practice, is also very helpful in reassuring investors.
"Third, the decision to include an emergency procedure into the voting rule of the ESM, though subject to approval by the Finish parliament, is essential for effective decision making procedure especially in crisis situations."
ON THE EURO
"I have no doubt whatsoever about the strength of the euro, about its permanence, about its irreversibility. Let's not forget, this was a key word at the time of the Maastricht treaty. The one currency is irreversible."
"You have a lot of people, especially outside the euro area, who really spend a lot of time in what I think is morbid speculation, namely, what happens if? What happens if? And they all have catastrophic scenarios for the euro area."
EU SUMMIT DECISIONS
"We welcome the decisions of the heads of state or government of the euro area to strengthen the EFSF and the ESM in a number of areas."
"There is now greater flexibility in the euro area crisis mechanisms to act as backstops."
"The clarification that as regards private sector involvement, the euro area will adhere to established IMF practice is also helpful in reassuring investors."
"The decision to include an emergency procedure into the voting rules of the ESM is essential for effective decision-making procedures, especially in crisis situations."
ECB CRISIS SUPPORT MEASURES
"The ECB has taken a number of steps to ensure that it will continue to deliver price stability in the medium term in an environment that remains challenging."
"These steps relate both to changes in our interest rate and to non-standard measures."
"Such measures should prevent adverse effects on the monetary policy transmission mechanism stemming from the ongoing tensions in parts of the euro area financial markets. They should in particular mitigate the effects of strains in financial markets, on the supply of credit to firms and households."
"Overall, all measures aim to ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market, thereby avoiding serious limitations to the real economy from lack of financing possibilities."
"We have decided on three-year refinancing operations to support the supply of credit to the euro area economy. These measures address the risk that persistent financial market tensions could affect the capacity of euro area banks to obtain refinancing over long horizons."
ON EURO ZONE FISCAL COMPACT
"The new fiscal compact is an essential signal, showing a clear trajectory for the future evolution of the euro area. It frames expectations of both citizens and financial markets.
"Enshrining strict rules in primary legislation, making them enforceable by the European Court of Justice: all of this should contribute to making public finances in the euro area credibly robust. The ECB welcomes this outcome."
"The foundations for a fiscal compact have been laid."
EURO ZONE ECONOMIC OUTLOOK
"Euro area economic activity should recover, albeit very gradually, in the course of 2012."
"Inflation is likely to say above 2 percent for several months to come, before declining to below 2 percent."
"Given the environment of weaker growth in the euro area and globally, underlying cost, wage and price pressures in euro area should also remain modest.
"Risks to the medium-term outlook for price developments remain broadly balanced." ....
By Ralph Atkins and Lionel Barber in Frankfurt
Mario Draghi has warned of the costs of a eurozone break-up, breaching a taboo for a president of the European Central Bank, even as he sought to play down market expectations about the ECB’s role in combating the sovereign debt crisis.
Mr Draghi’s willingness to discuss a scenario for Europe’s 13-year-old monetary union that his predecessor, Jean-Claude Trichet, simply described as “absurd,” highlights the high stakes in the eurozone debt crisis, which has rattled global financial markets.
In his first interview since becoming ECB president on November 1, Mr Draghi said that struggling eurozone countries that quit the currency bloc would face still greater economic pain. For remaining members, European Union law would have been broken and “you never know how it ends really”, he said.
Countries that left and devalued their currency would create “a big inflation” and fail to escape from structural reforms that would still have to be implemented “but in a much weaker position”, Mr Draghi told the Financial Times.
To fight the crisis, Mr Draghi stressed the importance of measures taken by the ECB to shore-up eurozone banks - which include its first ever offer of unlimited three-year loans this week. But he emphasised that the region’s politicians had to take the lead in rebuilding investor confidence in eurozone public finances - by ensuring fiscal discipline and making the European Financial Stability Facility, Europe’s rescue fund, fully operational.
The ECB would be able to act as agent to the EFSF in financial market operations from January - speeding its implementation, Mr Draghi said. He expressed hope that the fund’s resources would be enlarged after a review in March.
“If one can show its usefulness in its present size, the argument for its enlargement would be much stronger,” he said. But Mr Draghi was cautious about commenting in detail on the ECB’s own government bond purchasing programme, which has seen it acquire more than 200bn euros of largely southern European debt since May 2010.
Many European politicians and economists argue that the only solution to the crisis is a massive escalation of the programme, but just how controversial that is within the ECB was underlined over the weekend as the bank’s top German executive made clear that it was his objections to the programme that prompted his resignation.
Jürgen Stark, who steps down at the end of the year, in September said that he was quitting owing to “personal reasons”.
Mr Stark has now told a German magazine: “There is one big topic that explains [my resignation] - I am not satisfied with how this currency union has developed.”Mr Draghi said that the programme would remain justified as long as the financial market “channels” by which its interest rate decisions are transmitted to the real economy remained “seriously impaired”.
But he also stressed the EU ban on central bank funding of governments. Asked if that set limits on the ECB’s bond buying, Mr Draghi instead emphasised the need to ensure governments were “trusted on fiscal discipline and structural reforms”.
He hinted that he opposed the ECB setting target limits for eurozone government bond yields or for the spread between the interest rate on German and other eurozone debt. “Monetary policy cannot do everything,” he warned.
Mr Draghi also appeared to rule out US or UK style “quantitative easing” - embarking on large-scale government bond purchases to boost economic growth.
“The important thing is to restore the trust of the people - citizens as well as investors - in our continent. We won’t achieve that by destroying the credibility of the ECB.”