Coalition ‘on right track’ for growth

The Government has introduced the right kind of policies to create sustained economic growth that is not dependent on the financial sector, according to ECB executive board member Yves Hersch.

“However, I trust that this good news will not give rise to complacency, as Ireland continues to face considerable challenges on several fronts. These include further repair of both public and private sector balance sheets.

“They include reducing the still high rates of unemployment for the long-term unemployed and the young. And they include restoring the functionality of the banking sector, so that it supports rather than hinders the domestic economy as it emerges from the crisis,” he said, speaking at a seminar in Dublin organised by the Institute of International and European Affairs.

Mr Hersch warned that unless eurozone countries raised their growth potential, the region risked turning a cyclical downturn into a long-term structural decline.

Policy initiatives in three areas: monetary policy; financial sector repair; and, structural reforms were all needed to stoke growth.

“There has been some discussion recently among central bankers as to whether monetary policy can have more lasting effects. For example, if an extended period of low demand is creating hysteresis effects (a lag in response), a more accommodative monetary policy that boosts the economy may prevent a permanent downward shift in productivity.”

There are signs that financial market fragmentation is improving. However, an unfettered flow of credit to the most dynamic parts of the economy is needed for the recovery, Mr Hersch said. The comprehensive review of the banking system as part of EU banking union has to be credible. Investors have to feel confident that banks are dealing with their toxic assets, Mr Hersch said.

And the eurozone has to embrace alternative funding models, including an asset- backed securities market for SMEs, he said.

Most importantly, every country has to commit to wide-ranging structural reforms that will boost the supply side of the economy.

“When I think of the euro area today, I am reminded of Winston Churchill’s line about ‘always doing the right thing… after exhausting all the alternatives’ . We have spent two decades exhausting all the alternatives in Europe – and so now I trust that the only path left to us is the right one.”


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