Eurozone growth was flat in the second quarter and the latest evidence suggests the weakness continued in the third. The ECB is battling to prevent outright deflation in the 18-member region, with inflation perilously low at 0.3% in September - sharply lower than its target of close to but below 2%. Draghi appeared more concerned about low inflation than recent months, but added: “As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim.”
He said France must implement structural reforms and stick to the EU’s deficit rules, a day after Paris announced a budget that would not bring its deficit under the required 3% of GDP until 2017. “Each actor has his role to perform,” Draghi said.
Christian Schulz, senior economist at Berenberg, interpreted Draghi’s comments as “a stark warning to France to live up to the fiscal adjustment commitments it made in previous budget rounds”.
Schulz added: “Since the ECB is involved in reviewing the budgets as part of the European semester which starts in mid-October, France could be headed for stiff headwinds, up to financial penalties being imposed by the EU Commission. Since these could only be averted by a qualified majority of the member states, France faces an uphill battle and will probably have to make significant concessions. If not on fiscal targets, than on structural reforms.”
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