Euro zone risks 'relapse into recession' without structural reforms: Draghi

By Francesco Guarascio and Robin Emmott BRUSSELS (Reuters) - The ECB's president warned divided euro zone leaders on Friday they risked "a relapse into recession" if they failed to press ahead with structural economic reforms, a message welcomed by German Chancellor Angela Merkel. With a recovery coming to a halt in the second quarter and depressed prices reflecting near record unemployment, France and Italy want to shift away from the spending cuts that marked the bloc's response to the 2009-2012 crisis. But Germany says debt discipline must continue and the European Commission, which acts as a budget policeman, has until next Wednesday to reject 2015 budgets that fail to comply with EU fiscal rules. France and Italy are pushing for more spending room in their budgets in return for new commitments on structural reforms, and officials say that any changes Paris and Rome make to their budgets are likely to be small. Many economists say nothing short of a large scale U.S.-style bond-buying program will revive the economy that is still suffering a hangover from the debt and banking crisis. But European Central Bank President Mario Draghi told euro zone leaders seated around a large oval table in the EU summit's red marble building that they could not just rely on the ECB. "We avoided the collapse of the euro with a joint effort. Now our focus should be to act jointly again to avoid a relapse into a recession," Draghi said, according to his spokesman, who quoted from his speech. "Hope is not a strategy." He said a coherent plan for economic growth had to involve "concrete and credible" structural reforms. Laying out a four-pronged strategy, Draghi emphasized that monetary policy was only one part of an economic revival plan, the others being reforms, sound public finances and healing the bloc's sick banks. DRAGHI'S MIRROR Draghi said he wanted to see governments draw up a reform program by the next EU summit in December. That appeared to be welcomed by Merkel, who has faced sustained pressure from France and Italy and to some extent the United States and the International Monetary Fund, to agree to more government spending to help the economy. Merkel told a news conference following the summit that she thanked Draghi "for holding up a mirror for us once again." "Monetary policy can do some things, that is the job of the independent European Central Bank," Merkel said. "But 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," Merkel said. The summit underscored how the euro zone has few quick fixes. According to people in the room at the summit, Merkel said that a mix of private investment, fiscal discipline and openness to fast-growing Asian economies was the way forward. Incoming European Commission President Jean-Claude Juncker has promised to unveil a 300-billion euro investment plan by Christmas, which is likely to focus on transport and energy. But such measures could take years to bear fruit, and the United States and the IMF worry that the bloc, which makes up a fifth of the world economy, is a drag on global prosperity. The debate is complicated by EU rules that seek to keep country's public finances in order and Germany's promise to balance its books next year for the first time since 1969. GROWTH POTENTIAL The EU's top economic official renewed calls on Berlin to act, saying that without investment the future was bleak for Europe's biggest economy, even if it is stronger than most. "All euro area countries have shortages in potential growth, including Germany," said Jyrki Katainen, the European Commissioner who will become the bloc's growth tsar from November, tasked with bringing down near record unemployment and raising investment. "Germany's potential growth is currently 1.5 (percent). This is far too low," he told reporters. France, the euro zone's second biggest economy, is particularly in the spotlight after conceding it would fail to meet EU debt limits until 2017, later than initially promised. French President Francois Hollande told the summit that Europe should not give the impression that there were "good and bad students" and promised in principle to meet EU budget rules, diplomats said. Italian Prime Minister Matteo Renzi is proposing tax cuts to get households spending again, as his country is suffering its third recession since 2008. However, Dutch Premier Mark Rutte, a Merkel ally, said no investors would put their money into the euro zone if public finances were out of control, and said there was a risk of "rapid death" of the currency area if action were not taken. Outgoing Commission President Jose Manuel Barroso sounded a conciliatory note at the end of the summit, saying budget discussions with France and Italy were to see if there was a "serious deviation" from EU rules, not whether they had simply been met. (Additional reporting by Paul Taylor, Alastair Macdonald, Jean-Baptiste Vey and Philip Blenkinsop in Brussels and Noah Barkin and Michelle Martin in Berlin; Editing by Jon Boyle)