ECB-chief Draghi at the Ludwig Erhard Lecture “The decisions are a breakthrough”

At the Ludwig Erhard Lecture of the Initiative for a New Social Market Economy (INSM) Draghi stressed the importance of price stability as a goal of the ECB and also referred to Ludwig Erhard as a role model for this principle. In the Atrium of the Frankfurter Allgemeinen Zeitung in Berlin Draghi said that according to Erhard “the social market economy is unthinkable without a consistent policy of price stability”. “It is not possible to phrase this idea in any better way”, Draghi went on to say.

In previous weeks the ECB has reacted to the tensions between merchant banks and, among other things, reduced the base rate from 1,25 percent to 1,0 percent. Furthermore, the “extraordinary” crisis measures were extended: with three years, the ECB now offers banks an even longer timeframe to refinance.

Beyond that, the central bank has loosened its catalogue of securities which banks can submit to the ECB when they refinance. Also, the ECB lowered the reserve ratio from two to one percent. The rate determines which ratio of other funds the banks have to keep at the ECB. A low ratio facilitates the credit business for the banks. “This reduction alone adds 100 billion euro to the market”, said Draghi in front of more than 300 guests.

In spite of this, the ECB is in control of the inflation rate, says Draghi. The ECB-chief expects an easing at the price front soon. Although the annual steering currently revolves around the three-percent level, the reasons for this are to be found in one-time items such as the oil price or heightened commodity prices. Already at the end of 2012 the inflationary rate is expected to drop to two percent and will hence approach the ECB target rate of just under two percent. “And in 2013 and after that it will stay below two percent”, said Draghi.

Draghi justified the expansive monetary policy with the current crisis. In Europe, enterprises as well as private households are particularly dependent on a functional banking system, said Draghi. In Europe, 80 percent of credits are granted to companies and private households, whereas the rate in the USA is only 35 percent, Draghi said.

The ECB-president stressed the importance of small and medium-sized businesses (SME) in Europe which, unlike big companies, cannot refinance themselves with their own bonds and are hence particularly dependent on banks. After all, the SME employ 70 percent of all employees which create 60 percent of economic performance, said Draghi.

Next to the justification of the ECB monetary policy Draghi focused on the latest European political decisions in his speech. “The Stability and Growth Pact has not been good enough so far”, said Draghi and also quoted Federal Chancellor Angela Merkel when he said that the pact has been breached over 60 times in the previous 12 months. “We have to work on it in order to prevent this from happening .”

In the previous weeks, the EU-heads of state and government had agreed to a further intensification of the budget control in the euro zone. Because the necessary unanimity for an alteration of the EU-contract could not be reached, the 17 euro states want to conclude their own contract before March 2012.

However, there is legal uncertainty over how stable such a contract could be designed. In Berlin, Draghi was optimistic: “I am convinced that there is a statutory basis. Even if this is not an easy way to go about it.”

At the Ludwig Erhard Lecture Draghi explicitly stressed that he believed the path taken at the most recent EU-summit to be the right one. “The summit decisions on top of the six-pack-decision of the European Parliament are a breakthrough for clear fiscal rules”, said Draghi. Six-pack is the name of the first intensification of the stability pact that entered into force two days ago. Based on the most recent summit decisions, a further intensification is yet to come.
 

Before, the former president of the German Central Bank and chairman of the board of trustees of the INSM Prof. Dr. Hans Tietmeyer had mentioned Ludwig Erhard. According to Tietmeyer, Ludwig Erhard had always emphasized the independence of the central bank. “Monetary policy cannot be a replacement for other politics”, said Tietmeyer. He asked the politicians of the euro states to guarantee the “long-term strength and stability” of the euro.

At the beginning of the event, Martin Kannegiesser, 1. deputy chairman of the board of trustees of the INSM and president of Gesammtmetall, had confessed himself to more Europe and the common currency euro. “The modern social state belongs to the social market economy. It is two sides of the same medal. The stable currency is a basic prerequisite for such a liberal system. It is the core for peace in any society and builds on the unconditional trust of men.” Now, there is a need for a new culture of stability in Europe in order to regain the trust of the financial markets, said Kannegiesser.

Martin Kannegiesser: “We entrepreneurs have reacted to the political decisions of the past years with rather reserved applause. However, the most recent decision in Brussels, which means a fiscal union with automatic sanctions towards the same stability-political orientation, has our unconditional support.”

Mr. Kannegiesser congratulated Prof. Dr. Tietmeyer belatedly to his 80th birthday and emphasized again his outstanding contribution to D-Mark stability and during the construction of the euro zone. As a sign of appreciation and gratitude for his support as chairman of the board of trustees, the INSM dedicated an essay-competition to Prof. Dr. Tietmeyer. Together with the Zeitverlag, students are asked to write down their thoughts on the social market economy.