By Paul Day and Marc Jones
BARCELONA, Spain (Reuters) – European Central Bank President Mario Draghi urged euro zone governments to agree a growth strategy to go hand in hand with fiscal discipline, but as thousands of Spaniards protested in the streets he gave no sign the bank would do more to address people’s fears about the economy.
As ECB policy makers gathered in Spain, one of the countries hit hardest by the euro zone debt crisis, Draghi said the bank’s policy was "accommodative" — or designed to support the euro zone economy — after it held interest rates at a record low of 1.0 percent.
Bank chiefs did not discuss making any changes to rates, said Draghi, adding that the euro zone economy was likely to improve this year but the outlook was uncertain and there were risks of decline.
Such weakness should keep a lid on inflation over time, he said, even though it would remain above 2 percent this year in the 17-nation currency area.
"The economic outlook continues to be subject to downside risks," Draghi told a news conference in Barcelona, where thousands of people protested against cuts in Spanish government spending, which has eaten into health and education services.
Draghi outlined his vision for a European "growth compact" he advocated last week, calling on governments to pursue structural reforms. However, he gave no specifics and put the onus on euro states – rather than the ECB – to act.
The Italian said there was "absolutely no contradiction" between pursuing a growth pact and pushing ahead with Europe’s already agreed pact on budget discipline.
"We have to put growth back at the centre of the agenda, without any contradiction with the need to continue, persevere in fiscal consolidation," Draghi said. "Now we need a common European discipline for doing reforms."
Asked if he was advocating no near-term economic stimulus, Draghi added: "It seems like that and it is right."
Voters and investors are becoming increasingly disillusioned with the German-led call for austerity — summed up in the budget-constraining "fiscal compact" — as the currency bloc slides back into recession.
"They are making deep cuts in (money for) hospitals. They are firing nurses’ aides and asking us to do their work," said Juan Ruiz, 33, a nurse demonstrating in Barcelona, where an extra 2,000 police were drafted in. The protests were peaceful.
Protesters planned another march later in the evening, when Spanish Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos were due to dine with the visiting central bankers.
Draghi expressed sympathy with young people angry at high unemployment but pressed governments to tackle this with labor market reforms.
"I can understand, I can understand it very well," he said of the anger. "But the answer we can give as policymakers is to make sure the policies that are implemented or suggested are the policies we are convinced are going to be the right ones."
The ECB’s main job was to deliver stable prices, he said.
The euro rallied from two-week lows against the U.S. dollar after Draghi gave a more upbeat assessment of the economy than expected, reducing expectations of further monetary easing.
"There are indications that global recovery is proceeding," he said. "We continue to expect the euro area economy to recover gradually during the course of the year."
His comments deflated expectations that the ECB will take further policy action any time soon – either through rate cuts or by reactivating its bond-purchase program, which the bank has left dormant for the last seven weeks.
"The ECB looks set to keep rates unchanged for a long while," said ING economist Carsten Brzeski.
"With today’s press conference, Draghi has sent a painful reminder that the ECB cannot solve the current crisis … there does not seem to be any quick fix or alleviation for the economy in the offing," he added.
The ECB has resisted market pressure to reactivate its bond-buy program despite a rise in Spain’s yields to 6 percent. A break above that, to 7 percent, is considered an unsustainable price to pay for refinancing.
Draghi said ECB policymakers agreed it would be premature for the bank to pursue an exit from the extraordinary measures taken to help stem the euro zone’s debt crisis.
In addition to the now dormant bond-buying plan, which Draghi said "is still there", the ECB’s crisis measures have included twin three-year funding operations with which it has pumped over 1 trillion euros into the financial system in recent months, smoothing debt issuance for euro zone members.
Spanish bond yields nonetheless jumped at a debt auction held as the 23-member ECB Council met, though demand was solid.
Draghi is under pressure to limit the ECB’s role from Bundesbank chief Jens Weidmann, who wants countries to put their finances in order rather than looking to the central bank.
Draghi also faces resistance from the powerful Bundesbank to any potential rate cut or a reactivation of the bond-buying plan launched to help keep borrowing costs in Spain and Italy lower.
A Reuters poll taken last week showed three-quarters of economists saw the ECB restarting its bond purchases within the next three months. However, most money market traders said in a separate poll the bank would not buy more bonds.
Weidmann told Reuters last month Spain should take the rise in its bond yields as a spur to tackle the causes of its debt woes and not look to the ECB for help.
Draghi praised the reform efforts of Italy and Spain, which has slipped into its second recession in three years. In a sign the Bundesbank argument is winning through at the ECB, he said the austerity would help reduce borrowing costs in time.
"While the necessary fiscal adjustment is weighing on near-term growth, it will contribute to the sustainability of public finances and thereby to the lowering of risk premiums," Draghi said.
(Additional reporting by Eva Kuehnen and Sakari Suoninen in Frankfurt; Writing by Paul Carrel; Editing by Jeremy Gaunt and Giles Elgood)