BERLIN (MNI) – Inflation in the euro area will fall back to the
European Central Bank’s price stability threshold by the end of next
year and then slip below it thereafter, ECB President Mario Draghi said
Thursday.

Draghi, taking questions from the audience after making prepared
remarks, attributed currently high inflation of around 3% to “mainly
one-off events.”

However, “we see a profile of inflation which will decline to 2% by
year-end next year, 2012, and then would stay below 2% in 2013 and
onwards,” he said.

As to why people sometimes think the way out of the crisis is to
fire up the printing press and create money, “I don’t know,” Draghi
said.

He pointed out that even if such an approach has its adherents
elsewhere, “each jurisdiction is different” and central banks “have
different mandates.” In particular, he reminded, “the mandate of the ECB
is to ensure price stability in the medium term.”

In any case, he noted again, the EU treaty has a clause clearly
prohibiting monetary financing of governments.

The crisis is not easily dealt with in part because “the wrong
economic models have been in place in some countries for a long time,”
he said.

However, he argued, “it is less difficult to announce a clear path
of decision-making immediately, because this will inject certainty into
people and markets.”

It is clear that if all parties do as they are supposed to do to
deal with the crisis, then in the short run growth will be negative, he
said, referring to the economic dampening impact of deficit cutting
measures.

But there is no alternative, Draghi said, even if “there is a way
to mitigate the short-term contraction.”

“The confidence channel is one way to mitigate the contraction,” he
said. But “much more important is the implementation of structural
reforms.”

Draghi said the ECB is confident that the decisions reached last
week at the summit of EU leaders can be implemented, even if the
“element of exploration” in the pathbreaking accord means implementation
“may not be easy” from a legal standpoint.

The ECB remains convinced nonetheless that “the summit decisions
are the right way to go,” he said.

With regard to the supply of credit for the economy, Draghi said
that an ECB survey showed some 20% of small and medium-sized enterprises
“say funding is their most pressing problem.”

“There is a problem of funding, but there is also a problem of risk
aversion,” about which it is harder for the ECB to do anything, he said.
“We have responded to one part of the problem, we hope. but restoring
confidence requires many other things besides monetary policy.”

Draghi declined to comment on rating agencies’ performance,
“because certainly before the crisis…it could have been much better.”

He repeated his assertion that the ECB’s bond-buying program, SMP,
“is neither eternal nor infinite.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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