Mario Draghi warns euro leaders of ‘relapse into recession’

European Central Bank chief Mario Draghi has warned euro zone leaders to step up political action to prevent “a relapse into recession”.

Mr Draghi’s intervention, at the end of a summit in Brussels, comes ahead of bank stress test results tomorrow which are designed to root out remaining problems in the financial system and underpin the position of strong lenders.

While Bank of Ireland and Allied Irish Banks will pass the test, Permanent TSB will be told to raise more than €800 million in new capital.

In the wake of the test, the Government will signal it is prepared to sell part of Permanent TSB to private investors. The net amount of capital the institution must raise will come in at about €200 million when account is taken of a special €400 million State investment.

Taoiseach Enda Kenny declined to comment on the stress test, which leaves the Government on course to begin selling down its stake in AIB next year.

Weakness

However, Mr Kenny was quick to acknowledge weakness in the euro zone economy and said EU leaders will seek to settle a new growth plan at their next gathering in December.

“Obviously, the situation is fragile in many countries. There was a lot of comment about unemployment, about structural change, about structural reforms,” Mr Kenny said.

“The point was made by one speaker that there are 19 different kinds of insolvency legislation in the euro area, and this makes us less competitive in the sense of being cost-effective for business.”

Mr Draghi’s plea for a “coherent and comprehensive strategy” from European leaders follows growing concern about the lack of economic growth, even in euro zone powerhouse Germany. Although chancellor Angela Merkel has pledged to balance the German budget instead of boosting investment, she thanked Mr Draghi for “holding up a mirror for us once again”.

Dr Merkel said central bank policies could achieve something, but she accepted government had responsibility to act as well.

“If fiscal policy doesn’t react simultaneously, if we don’t improve our economic policies, our competitiveness and our investment climate, then we won’t come out of this unsatisfactory situation,” Dr Merkel said.

Fiscal leniency

The gathering came amid French and Italian demands for fiscal leniency under newly reinforced budget rules.

However, Mr Kenny rejected the notion that big countries should receive leeway while smaller states such as Ireland followed the rules to the letter.

“I think you have a set of rules here that are applicable in the growth and stability pact. Clearly we have to abide by those rules, it’s on those rules that trust is built . . . Ireland abides by these rules and so should everybody else,” the Taoiseach said.

Regular summit proceedings were overshadowed by a row over a European Commission demand for a €2.1 billion budget repayment from Britain after a recalculation of the size of European economies.

British prime minister David Cameron vowed he would not make the payment to Brussels, further deepening antagonism between London and the EU powers.