30 May 2015

ECB Vítor Constâncio: Monetary Policy and the European recovery

Speech by Vítor Constâncio, Vice-President of the ECB, at the XXXI Reunión Círculo de Economía, 
Barcelona 30 May 2015

The theme of this year’s conference is on ways to “consolidate the recovery”. The ECB’s monetary policy measures aim at precisely that: supporting the recovery in order to reach our price stability objective. Our policies have however, a broader impact, also being part of the European response to the challenges that the euro area has been confronted with for some time.

The first challenge was precisely the need to overcome the situation of low growth and low inflation then prevailing. The second, referred to the necessity of overcoming the financial and economic fragmentation among the members of the monetary union. The third, corresponded to the goal of repairing and strengthening the banking sector in order to improve the financing of the recovery. The last challenge consisted in increasing the rate of potential growth which is essential.

In different degrees these challenges are still with us but a remarkable set of initiatives started to deal with them in a more forceful way. Besides our own monetary policy decisions, from the Outright Monetary Transactions (OMT) announcement to the recent Asset Purchase Programme (APP), we need to recall the Banking Union project; the operational start of the Single Supervisory Mechanism in the ECB; the Comprehensive Assessment and Stress Tests that preceded it; the creation of a Single Resolution Mechanism; the launch of the European Fund for Strategic Investments aimed at spurring investment and finally, the announcement of the ambitious goal of creating a Capital Markets Union.

In my remarks today, I will explain the rationale for the monetary policy measures taken since mid-2014 and the effects they are having on the on-going recovery. Secondly, I will address some financial stability risks portrayed in our just published Financial Stability Review. Subsequently, I will reflect on the macroprudential policy framework needed to deal with those risks and on the role that the Capital Markets Union may have in improving the efficiency of our financial system and on the creation of private risk sharing mechanism, particularly important for our monetary union.

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The economic recovery in the euro area is now broader and it is firming itself but still in need of achieving higher investment to make it more self- sustained. ECB policies are working and making a significant contribution to the normalisation of economic conditions in the short term. Let me add that they also help the medium-term as, by closing the negative output gap, they reduce the detrimental of effect of hysteresis on the labour supply and the capital stock. A prolonged recession contributes to reduce the qualification and employability of the unemployed, and the capital stock becomes less productive, as replacement investment subsides.

On the back of the fall in capital accumulation and labour utilisation, euro area potential output growth declined from a level close to 2% in the years preceding the crisis to less than 1% on average between 2008 and 2012. Unfortunately, since the start of the crisis, euro area total factor productivity growth has remained subdued, falling behind productivity growth in the U.S., where it rebounded after reaching a trough in 2009. To increase potential output growth against the background of a decreasing working age population, the euro area has to rely on more investment and capital deepening but, crucially, more so on total factor productivity growth which needs to resume growing at least at an annual growth pace around 1%, the rate prevailing at the beginning of the previous decade.

This will not be achieved without a continued effort to implement structural reforms for which monetary policy is not responsible. It is however our task, especially now that the ECB was given supervisory responsibilities, to ensure, besides price stability, proper conditions of financial stability in the euro area by continuing to work as we have been doing, to build up a resilient, robust and efficient financial system that is essential for the long-term prosperity of our monetary union.

Full speech

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