Europe’s handling of the financial crisis made the recession worse and longer, Mario Draghi has admitted.
Prompt action by the US to sort out its banks meant the economy there recovered years before Europe, and European leaders actually hurt the economy by leaving banks and states to cope without financial support and by cutting investment in the downturn, the ECB president said in a speech in Paris.
In diplomatic but clear language, Mr Draghi said that “policy choices made under the pressure of events and that were commendable by themselves, but that were sequenced in the wrong order, made dealing with the consequences of the debt overhang more difficult.”
Since June 2012, the euro area has taken “the right sequence of steps”, he added. But he highlighted decisions taken before as being in the wrong order.
That included the statement in the French resort of Deauville by German Chancellor Angela Merkel and then French President Nicolas Sarkozy that “private sector involvement” or losses, were on the table for bond investors holding euro area government bonds.
That 2010 statement is now widely believed to have exacerbated the crisis by driving investors to sell bonds of weaker euro area members.
Mr Draghi also cited bank stress tests in 2011 that were undertaken before a financial system was put in place to cope with the losses uncovered by those tests.
Here the stress tests revealed a further €24bn hole in the Irish banks that had to be plugged, in large part by taxpayers, just months after the bailout.
Mr Draghi said the purpose of his comments was not to criticise policymakers in power at the time, but he said policy- makers dealt with the “immediate situation without simultaneously addressing its consequences.”
The euro area only returned to a path of recovery in mid-2012, when that changed, he said.
Mr Draghi took over as head of the ECB at the end of 2011.
Up to June 2012, the “seq- uencing” of policy responses “aggravated concerns about bank and sovereign debt sustainability,” Mr Draghi said.