10 October 2014

Mario Draghi: Recovery and Reform in the euro area

In remarks delivered at the Brookings Institution in Washington, Mario Draghi underlined the urgent need to raise potential output in the euro area through reforms. “Put simply, I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies”, he said, adding that “given demographic trends, raising structural growth will have to take place primarily through productivity”. 

Referring to an open letter written by the economist John Maynard Keynes in 1933 to President Franklin D. Roosevelt on reform and recovery in the US, Mr Draghi argued that in the euro area today “without reform, there can be no recovery”.

The crisis has been tackled on several fronts: actions have been undertaken to “repair money”, that is to keep money fungible across space eliminating redenomination risks; to repair the financial sector and credit allocation;  to repair monetary policy and fiscal policies.

On monetary policy, the ECB President noted that the ECB is now transitioning from a monetary policy framework predominantly founded on passive provision of central bank credit to a more active and controlled management of the balance sheet, in an attempt to lift inflation from its low levels. “We are accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level. And we will do exactly that,” Mr Draghi said. This could include changing the size and/or composition of unconventional policies.

On fiscal policies Mr Draghi emphasised the importance of the governance framework established in order to restore confidence in public finances.

“So to now call into question not just the letter, but also the spirit of the fiscal governance framework would be self-defeating. If this were to again cast doubt over fiscal sustainability, it would create a risk that borrowing costs, and hence fiscal policies, turn procyclical once more”.

At the same time, Mr Draghi reiterated the idea that for governments and European institutions that have fiscal space, it makes sense to use it, so that fiscal policy can work with rather than against monetary policy in supporting aggregate demand.

And for those without fiscal space, fiscal policy can still support demand by altering the composition of the budget – in particular by simultaneously cutting distortionary taxes and unproductive expenditure.

Full speech on European Central Bank's website

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