Draghi: Eurozone at risk of lasting economic damage

Europe is at risk of suffering lasting economic damage from weak productivity and low growth, European Central Bank president Mario Draghi warned yesterday, underscoring his argument that monetary policy alone cannot end the bloc’s economic malady.

The ECB has been easing policy aggressively to boost growth and inflation in recent years with little to show for its efforts, fuelling arguments that monetary policy was at its limits and governments needed to help out.

“We do not let inflation undershoot our objective for longer than is avoidable given the nature of the shocks we face,” Mr Draghi told the Brussels Economic Forum.

“For others, it means devoting every effort to ensuring that output is returned to potential before subpar growth causes lasting damage.”

“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,” he said.

The eurozone grew by just 1.6% last year with much of the expansion coming from the ECB’s stimulus and growth is expected to flatline over the next several years with inflation also holding below the ECB’s target of close to 2%.

Mr Draghi said growing below potential for too long actually reduced the economy’s potency because instead of output rising towards capacity potential would fall toward the actual output, permanently embedding low growth.

Singling out areas for improvement, he said the eurozone was lagging behind in innovative capacity, particularly in the services sector, and needed to utilise the latent potential in the euro area workforce, which can be unleashed with appropriate labour market and activation policies.

Mr Draghi also called on politicians to help the ECB to restore economic health to the region by accelerating reforms. His comments reflect increasing concern that governments are undermining the central bank’s policies by holding back on reforms, and hurting its credibility.

Mr Draghi said fiscal policy should not work against monetary policy by curbing aggregate demand, and should be seen as a microeconomic tool to enhance growth. n Reuters and Bloomberg