ECB Chief Sides with Austerians

Mario Draghi, president of the European Central Bank, told an interviewer from The Wall Street Journal that Greece must live up to its promises to cut its fiscal deficit targets, saying, “It’s hard to say if the crisis is over.” Draghi’s other comments in the interview place him firmlyin the camp of the fiscal conservatives like German Chancellor Angela Merkel.

Draghi also referred to a possible widening of the interest-rate spread:

There is no feasible trade-off between economic reforms and fiscal belt-tightening. Backtracking on fiscal targets would elicit an immediate reaction by the market.

The argument for austerity is that when combined with structural reforms, including lower wages and reduced pensions, the two approaches will lead to long-term growth. But Greece’s problems could also be considered to be short-term ones, that would respond better to an immediate plan for expanding the country’s GDP rather than forcing it to contract further.