Draghi: This Union Will Save the Euro Zone

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Giving a harsh assessment of the euro zone’s past, European Central Bank President Mario Draghi told financial leaders at a conference in Paris that the “crisis has shown that we were living in a fairy world.” That fairy world was one in which unsustainable debts, weak banks, and poor policy coordination created a disaster.

But Draghi has a new solution to leave that world behind. As Reuters reported on Friday, the bank’s president has urged euro-zone governments to implement a banking union that would have the authority to oversee all banks in the bloc, leaving the ECB to act as a pan-European banking supervisor. International Monetary Fund Managing Director Christine Lagarde agreed. “Banking union seems to us to be the first priority,” she said at the conference. However, German financial leaders were opposed; in their opinion, banking supervision should be applicable only to the region’s largest banks.

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Draghi has made it clear that the euro zone has not yet emerged from from the crisis, and he has predicted that the bloc’s problems will continue into next year. “The recovery for most of the euro zone will certainly begin in the second half of 2013,” he told Europe 1 radio. As for now, unemployment in the region is up, German retail sales are down, and French consumer spending is decreasing.

For its part, the ECB has designed a new bond-purchase program, known as Outright Monetary Transactions. According to Reuters, it has “helped lead to much more benign market conditions in the 17-country euro zone.” ECB policymakers are also expected to leave interest rates at a record low of 0.75 percent at the institution’s monthly policy meeting next week.

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