Draghi Sees Progress in Euro Zone, but Puts Banks on Notice

By JACK EWING

The New York Times

DAVOS, SWITZERLAND — Some banks in the euro zone could go out of business as a result of intense official scrutiny they will face this year, Mario Draghi, the president of the European Central Bank, said Friday as he presented a generally upbeat view of the European economy that was, however, laced with warnings.

The E.C.B. is scouring the books of euro zone banks this year in an effort to expose hidden problems and restore trust in the integrity of European lenders. Mr. Draghi said he did not know whether any banks would need to be shut down following an honest appraisal of their financial health. But if so the E.C.B. and euro zone governments are prepared to deal with the consequences, he told an audience at the World Economic Forum in Davos.

“The banks that should go, should go,” Mr. Draghi said.

During a half-hour appearance, Mr. Draghi was cautiously optimistic about the state of the euro zone after five years of crisis. Echoing comments by Wolfgang Schäuble, the finance minister of Germany, earlier in the day, Mr. Draghi said that some countries had made substantial progress in fixing the problems that provoked the crisis in the first place. But, in an apparent reference to France, he said that some countries have not yet begun taking steps to restore economic competitiveness.

“Even Greece has actually made very, very meaningful progress,” Mr. Draghi said. He added that other countries, including some large ones, “haven’t done anything.”

Mr. Draghi said the E.C.B. does not expect deflation, a broad decline in prices that can destroy corporate profits and jobs and is associated with economic depression. He said that low inflation in the euro zone, which is well below the E.C.B. target of about 2 percent, is due to price declines in stricken countries like Greece. The lower prices help them regain competitiveness and are a good thing, he said.

But Mr. Draghi acknowledged that low inflation could become a concern if it goes on for a long time. The longer it lasts, “the higher will be the risks, and we are aware of that,” Mr. Draghi said, in response to questions posed on stage by Philipp Hildebrand, former head of the Swiss National Bank, who is now a top executive at the investment manager BlackRock.

Mr. Draghi did not specify how the E.C.B. might respond to heightened danger of deflation, except to express its resolve to keep interest rates low for an extended period of time. But with the Federal Reserve poised to begin withdrawing its stimulus to the United States economy, the E.C.B. is under pressure to find ways to restore the flow of credit in the euro zone, which has only barely emerged from recession.

Analysts at Barclays this week forecast that the E.C.B. would cut its benchmark interest rate, which is already at a record low of 0.25 percent, to 0.10 percent in February or March. At the same time, analysts at the British bank said, the E.C.B. will for the first time begin effectively charging banks interest to keep money at the central bank with a so-called negative deposit rate of 0.10 percent.

Such a move would be designed to pressure banks to lend money to businesses and consumers rather than hoarding it. But a negative deposit rate would be controversial, in part because it would undercut the profits of commercial banks that the E.C.B. has been trying to help.

Maximilian Zimmerer, the chief investment officer of the German insurer Allianz, expressed skepticism that a negative rate would encourage banks to lend.

“It would have no impact at all,” he said in an interview in Davos. “I don’t know why they would even think about doing that.”

In another sign that tensions in financial markets have eased, the E.C.B. said Friday it would phase out a program designed to make sure that banks could get access to dollars.

Along with the Bank of England, the Bank of Japan and the Swiss National Bank, the E.C.B. had, since the first stirrings of the financial crisis in 2007, allowed banks in the euro zone to borrow dollars from central banks if they had trouble doing so on open markets. During the financial crisis, fear and mistrust among commercial banks about each other’s health made it difficult for some banks to get dollars they needed to do business.

“In view of the considerable improvement in U.S. dollar funding conditions,” the E.C.B. said in a statement, it would end the dollar program on July 31, though it left open the option to continue if needed.

In response to a question from Mr. Hildrebrand, Mr. Draghi declined to declare the euro zone crisis over. But he noted that there were signs that borrowing costs in troubled euro zone countries were starting to come down, freeing up credit that is essential to economic growth.

“If other things don’t happen,” Mr. Draghi said, “it’s actually better than last year.”