Mario Draghi: Euro area economic outlook, the ECB’s monetary policy and current policy challenges Statement by Mr Mario Draghi, President of the European Central Bank, prepared for the Twenty-Eighth Meeting of the International Monetary and Financial Committee, Washington DC, 12 October 2013. *  *  *  I would like to focus on the euro area economic outlook, the ECB’s monetary policy and current policy challenges. Economic activity in the euro area bottomed out in the first half of the year and is expected to strengthen gradually in the period ahead. Recent economic indicators, which have been predominantly positive, support expectations of a modest and gradual recovery. Output is expected to recover at a slow pace, driven by a gradual improvement in domestic demand supported by the ECB’s accommodative monetary policy stance and a gradual strengthening of external demand. Furthermore, the improvements in financial markets seen since August 2012 appear to be gradually working their way through to the real economy, as should the progress made in fiscal consolidation. The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect the economic outlook. Other downside risks include higher commodity prices in the context of renewed geopolitical tensions, weaker than expected global demand and slow or insufficient implementation of structural reforms in euro area countries.
With regard to money market conditions, the ECB will remain particularly attentive to developments which may have implications for the stance of monetary policy and is ready to consider all available instruments. Further reducing fragmentation of euro area credit markets and improving confidence in the euro area banking sector are essential to ensure an adequate transmission of monetary policy to the financing conditions in the euro area countries and to further repair the credit channel. Financial stability risks have diminished in the euro area. Measures taken by European and national authorities have helped to ease the severe market stress that earlier weighed on sovereigns and banks. The euro area banking sector has made progress in balance sheet repair by improving its regulatory capital ratios, by reducing its leverage since  BIS central bankers’ speeches  1  the outbreak of the financial crisis and by shifting its funding structure towards more stable funding sources. Net inflows of capital from abroad as well as a reduction in excess liquidity conditions continue to be observed, reflecting an improvement in financial market confidence. Repayments of funds taken up in the context of the ECB’s three-year longerterm refinancing operations conducted in December 2011 and February 2012 have resulted in a decline in the size of the Eurosystem’s balance sheet since end-August 2012. We will remain attentive to all developments that influence an adequate transmission of monetary policy to the financing conditions in euro area countries.