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Intervention by Peter Praet, Member of the Executive Board of the ECB, on panel “Long-run growth, monetary policy and financing of the economy” at 43rd Economics Conference of Oesterreichische Nationalbank. Vienna, 15 June 2015
Summary
As the ECB’s accommodative monetary policy is playing its part in the euro area recovery, structural reforms are the domain where there is more still to do to create the conditions for sustainable long-run growth, which is critical to the integrity of our monetary union. There is however no “one size fits all” model for how countries should go about tackling structural challenges. While there are principles that apply across countries, each economy is different and reforms have to be tailored to national conditions. As a central bank, our interest is not in how countries implement reforms, but whether they succeed in doing so.
There are two main channels through which structural reforms can support long-run growth in the euro area, namely through increasing the adjustment capacity of the economy and through raising its potential growth rate. Put differently, reforms can raise both the trend of long-run growth and reduce the fluctuations around that trend. Both aspects are particularly important in a monetary union, which makes structural reforms commensurately more pressing. The environment for introducing structural reforms is better today than for several years: all the conditions are in place for governments in the euro area, individually and collectively, to begin addressing their long-term challenges.
Conclusion
What I have argued today is that structural reforms can raise long-run growth in two ways: by raising the trend of long-term growth, and by reducing the fluctuations around that trend. Both these aspects are particularly important for economies in a monetary union. This makes structural reforms commensurately more pressing.
This is not to say that all the euro area’s problems are structural. Demand policies remain crucial to close a still-large output gap and to secure a strong cyclical recovery. And it is possible that some issues that are currently considered to be structural, such a high long-term unemployment, could reverse in a stronger demand environment. That is to say, if hysteresis operates in the downswing, it may also reverse in the upswing.
Yet according to all estimates potential growth in the euro area is weak, and has been on a declining trend for at least 15 years. A strong and sustained recovery cannot therefore come from demand policies alone. It has to entail reforms that improve the allocative efficiency of the economy and unlock its supply capacity.
The environment for introducing structural reforms is better today than for several years. Monetary policy is extremely accommodative. Activity is recovering. And credit supply constraints are falling, allowing finance to flow quickly to the new investment opportunities that reforms create. All the conditions are therefore in place for governments in the euro area, individually and collectively, to begin addressing their long-run challenges.