ECB sees 'newfound confidence' in EU, but urges prudence

President Mario Draghi is scheduled to give a speech to the ECB's annual forum in Sintra, Portugal. (Photo: AFP/Raigo Pajula)

Speaking at a central bank forum in the Portuguese resort town of Sintra, Draghi said that for years uncertainty over whether the eurozone would seriously reform labour markets had acted as a brake on investments and confidence.

Britain's decision to quit the EU also shook the bloc, which came under assault from anti-European sentiment.

"Today, things have changed. Political winds are becoming tailwinds. There is newfound confidence in the reform process, and newfound support for European cohesion, which could help unleash pent-up demand and investment," he told the annual forum organised by the ECB.

Despite the optimism, Draghi cautioned against a change in the eurozone's expansionary monetary policy stance.

While the risk of deflation has disappeared, "inflation dynamics are not yet durable and self-sustaining. So our monetary policy needs to be persistent," he said.

The ECB's €60-billion (US$67-billion) a month bond-buying stimulus along with record low interest rates have helped ward off the threat of deflation - which could spark a spiral of low wages and low consumption, he said.

"As the economy picks up, we will need to be gradual when adjusting our policy parameters, so as to ensure that our stimulus accompanies the recovery amid the lingering uncertainties," he added.

'SILENT MAJORITY GETS VOICE'

Although the Brexit vote last June had emboldened populist anti-U voices, the convincing win secured by Emmanuel Macron against far-right candidate Marine Le Pen in France's presidential election in May had lent a strong boost to pro-European voices.

Macron campaigned on greater European integration, and called for reforms in the bloc.

Although Germany heads into general elections in September, both parties leading in the polls - Chancellor Angela Merkel's centre-right alliance and the centre-left Social Democratic Party - are both firm proponents of a strong European Union.

Draghi said he detected a "big difference" in sentiment compared with a year ago.

Recalling his feeling of "sadness" immediately after the shock Brexit vote last year, the ECB chief said at the time, economic growth in Europe "was still weak and political uncertainty high ... (People) who were always against the euro, the European project, a minority of European citizens, were more vocal than ever."

But since then, "the silent majority of Europe was given a new voice," the ECB chief said. "The outlook for economic recovery improved, and the vocal cries for the demise of the European Union and the euro (have) become just barely heard whispers," he continued.

With both the bloc's biggest and second biggest economies firmly committed to the EU, the problems still facing the single currency area stem from the financial crisis.

Productivity was not increasing, particularly against the backdrop of the ageing population.

The key question now, given the relatively favourable economic situation, was "how to make this growth sustainable and less reliant on monetary stimulus," Draghi, at the forum which gathers central bankers, academics, analysts and banking experts.