10 July 2014

Draghi: More control over structural reforms at EU level

In London for the Memorial lecture in honour of Tommaso Padoa-Schioppa, The Governor of the ECB outlined new thinking over reform in Europe. “There is a strong case for us to apply the same principles to the governance of structural reforms as we do to fiscal governance.”

Draghi' speech (July 3 2014) in summary:

"The governance of structural reforms deserves as much attention as enforcing fiscal rules and should be done at the euro area level.

Structural reforms need strong domestic ownership since they reach deeply into societal arrangements. But at the same time, the example of the International Monetary Fund shows that there is a convincing case to be made for a supranational body that makes it easier to frame national debates on reform. This can shift the debate from whether to how to implement reforms, Mr Draghi argues.

The outcome of structural reforms – a higher level of productivity and competitiveness – is not merely in a country’s own interest, but in the interest of the monetary union as a whole.

In the euro area, there is therefore a case for establishing rules on structural reform at the EU-level. While a lack of reform can threaten cohesion of the union, the recovery shows us how decisive reform can strengthen it."

He noted that, "With the benefit of hindsight, it would have been useful to establish, alongside the existing convergence criteria, a set of structural criteria that had to be met to enter the euro area, and then respected once inside. But we have to start from where we are. Thus, I would see merits in initiating, as a one-off, a new convergence process within the euro area – one which ensures that all countries are truly in a position to benefit from membership, and that none cause harm to another.'

His memorial speech also references John Locke, David Ricardo, Vilfredo Pareto and Jean Bodin- covering ideas of sovereignty and economic effectiveness.

The FT commented:

'The idea of forcing struggling economies to implement labour market and pension reforms has long been promoted by Berlin. It advocated mandatory “contractual arrangements” that would bind individual eurozone governments to annual reform programmes.

That effort stalled earlier this year when Berlin failed to win the support of other member states at the last summit just before May’s European elections, in which anti-EU parties made unprecedented gains.

Other eurozone leaders have offered variations on the German proposal, with Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup of eurozone finance ministers, suggesting such reforms be required of any country that is given more time to hit EU deficit and debt targets. Both France and Spain last year were given two more years to hit their targets, with no reform prerequisites.

More recently, the government of Matteo Renzi, the new Italian prime minister, has urged the eurozone to offer rewards – rather than punishments – as incentives for enacting such reforms, arguing they impose short-term costs, such as higher unemployment, while gains take longer to materialise.

The ECB has long viewed structural reforms as vital if the eurozone’s economy is to return to full health. Top ECB officials have repeatedly warned governments against abandoning measures that they believe would strengthen longer-term growth prospects by improving productivity. There is rising concern within the ECB and the European Commission that the recent benign financial market conditions in the eurozone has slackened governments’ willingness to implement needed reforms.' (FT July 9th 2014.)

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Speech

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