MNI POLICY: Draghi Says Economy On Track, Downside Risks Grow

By Luke Heighton

     FRANKFURT (MNI) - The eurozone remains on track to meet the ECB's growth

and inflation targets, President Mario Draghi said Thursday, but maintaining and

deepening the EU is necessary to support the financial stability of its member

states.

     Draghi said he expected broad-based growth to continue, and euro area

inflation to continue to converge towards the ECB's objective of below, but

close to, 2% over the medium term.

     He reminded listeners that support for the euro among euro area citizens

remains strong, and -- in an apparent reference to both Brexit and the ongoing

crisis between Brussels and Rome -- said shared institutions made all member

states stronger.

     Here are the key points from his speech in Dublin:

     --The financial stability environment in the euro area overall "remains

favorable", but has become "somewhat more challenging in recent months." Sources

of risk from outside the EU have grown since May. A stronger U.S. dollar and

heightened trade tensions triggered renewed stress in a number of emerging

market economies.

     --Stress test results published last Friday showed euro area banks are

increasingly resilient to financial shocks, though there is still a need to

guard against liquidity risks in the non-bank financial sector that could be

transmitted to the broader financial system.

     --While there is currently no compelling evidence of overstretched asset

valuations at the euro area level, there are localized risks. However, euro area

monetary policy is not the appropriate tool with which to address them.

     -- On Brexit, it is essential to prepare for all possible outcomes,

including a no-deal scenario, the direct trade effects of which for the euro

area as whole would be limited. Overall risks to euro area financial stability

are limited, although a cliff-edge Brexit could have an adverse impact in

certain areas of centrally-cleared derivatives markets.

     -- The eurozone's continued economic strength and financial stability

depends on the completion of the banking union and the creation of a single

capital market.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

[TOPICS: M$E$$$,M$X$$$,M$$EC$]