Draghi: Eurozone mustn’t delay structural reforms
Eurozone member states must hasten structural reforms nationally and collectively, European Central Bank (ECB) President Mario Draghi told the Brussels Economic Forum 2016.
Delivering the fifth annual Tommaso Padoa-Schioppa lecture, Draghi said delaying reforms would hurt labour and productivity and lower economic potential in the long run.
He said the interactions between different economic policies meant that it is in everyone’s interest that the various strands of policy buttress each other – if only because that would shorten the time it takes for each to produce its effects.
“There are many understandable political reasons to delay structural reform, but there are few good economic ones. The cost of delay is simply too high,” Draghi said. “I can only underline in this context the costs of postponing the reform of EU and euro area governance that all agree is necessary, and by the same token, the boost to prosperity and stability that would result from removing those uncertainties, without undue delay”
Draghi noted that while each country in the Eurozone has its own challenges, few were boasting high productivity growth, so progress could be made almost everywhere. "The cost of delay...is that labour and productivity suffer, and the output gap closes in the ‘wrong way’ - instead of output rising towards potential, it is potential that falls towards current output," he said. "So it is in fact in everybody's interest to act without undue delay."
Draghi said the three priorities for the euro were to scrap barriers to knowledge diffusion, reform product and labour markets, and invest in human capital.
The most critical policies, he said, are those that increase trade openness and facilitate firms’ participation in value chains, as well as a competitive business environment that favours the adoption of superior managerial practices and organisational structures. Completing the single market would be a "quick win" for structural reforms in Europe, he said. "Structural reforms can help limit the depth and duration of shocks, which in turn supports the anchoring of inflation expectations and keeps real interest rates low.”
He added that such reforms can also reduce, “the transmission lag of our measures, since a more flexible, more responsive economy is likely to transmit monetary policy impulses faster."
Draghi said raising potential is above all about structural reforms, and ultimately came down to two factors: employment and productivity. “And in both areas there is considerable scope for the euro area to raise output with determined reform efforts,” he said, pointing to two examples in recent years where such reforms worked, in Spain and Portugal. In labour markets, he noted that participation rates of older workers grew strongly during the crisis, in part due to pension reforms adopted in many Eurozone countries.
Speaking about the role of central banks, he described them as having “independence in interdependence…They can buttress or dilute the effects of our policy. They can slow down or speed up the return to stability. And they can determine whether stability is accompanied by prosperity, which is directly relevant to the social cohesion of the euro area.”
He said that committed central banks can always fulfil their mandate irrespective of the stance of other macroeconomic policies. “But monetary policy does not exist in a vacuum,” he said, pointing out how other policies can strengthen or dilute the effects of the central bank policy.
Draghi added that while there is a large degree of interaction between monetary policy and other policies, such interactions do not prevent a determined central bank from achieving its objective. “But they do affect the time frame,” he said “What this implies is that, for stabilisation to occur no more slowly than is strictly necessary, all policy areas have a role to play.”