Business World

Friday 23 March 2018

'Weak productivity, lack of innovation and low growth threaten Eurozone'

ECB president Mario Draghi delivers his hard-hitting speech to the Brussels Economic Forum
ECB president Mario Draghi delivers his hard-hitting speech to the Brussels Economic Forum

Balazs Koranyi

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

The ECB has been using radical tactics to ease 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," Mario Draghi told the Brussels Economic Forum.

"For others, it means devoting every effort to ensuring that output is returned to potential before sub-par 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 added.

The Eurozone grew by just 1.6pc 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 2pc.

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

"Given the harm that has already occurred to potential growth during the crisis, it also means acting decisively to raise potential," Mr Draghi said.

Singling out areas for improvement, Mr Draghi 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 labour force, which can be unleashed with appropriate labour market and activation policies.

The ECB this week extended its €80bn a month bond-buying programme to include lower risk forms of company debt, a move expected to drive down borrowing costs for businesses in the euro area.

Borrowing costs for states, including Ireland, have already plunged to historic lows in large measure a result of the ECB's action.

Earlier this week the ECB came in for a storm of criticism from the chief economist of German financial giant Deutsche Bank, David Folkerts-Landau.

He said it was the ultra loose monetary policies - such as negative interest rates and quantitative easing - that have allowed politicians to delay badly-needed structural reforms, and hurt savers.

"ECB policy is threatening the European project as a whole for the sake of short-term financial stability," Mr Folkerts-Landau said in a note titled 'The ECB must change course'.

ECB policies have contributed to the growth of populist or extremist politics, he said. (Reuters)

Irish Independent

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