FRANKFURT – A sustained economic recovery is finally arriving in the 19-country eurozone, European Central Bank head Mario Draghi said Monday – a recovery he says must be used to complete the euro currency union and fix its problems for good.
Draghi said in a speech at a financial forum in Frankfurt that “most indicators suggest a sustained recovery is taking hold” as consumers and businesses grow more confident and banks become more willing to lend.
The head of the chief monetary authority for the shared currency said the upturn was helped by cheaper oil prices and by the central bank’s stimulus policies.
The ECB has cut its benchmark interest rate to near zero at 0.05 per cent and launched large-scale purchases of government and corporate bonds with newly printed money to lower longer-term borrowing costs and raise inflation from worrisome low levels. It says it will purchase 60 billion euros a month through September 2016 for a total of at least 1.1 trillion euros ($1.2 trillion) in added monetary stimulus.
Draghi said Monday that member countries should use the breathing space given them by the central bank’s stimulus efforts. He said they need to pass tough structural reforms that would make their economies more business-friendly so they can grow and prosper – and to enshrine supervision of such policies at the EU level. The 16-year-old currency union is still struggling to overcome troubles with too much government and bank debt that led to Greece, Portugal, Ireland, Cyprus and Spain needing bailout loans from the other countries. Despite two bailouts, Greece is trying to avoid a debt default that could see it leave the euro. Eurozone unemployment remains high at 11.2 per cent and prices are falling at a 0.3 per cent annual rate.
Draghi said that “a nascent recovery provides us with a window of opportunity, with the conditions to press ahead with reforms that will make the euro area less fragile and vulnerable to shocks.”
Eurozone countries must make their economies more productive and “stand on their own two feet” because the eurozone doesn’t provide for budget transfers from richer countries – the way U.S. states that suffer recessions can depend on tax transfers through the federal government.
The way to do that was to create new EU institutions in which countries would share sovereignty over their economic policies instead of leaving the responsibility at the national level. Draghi said any such institution would need strengthened democratic oversight and accountability to voters.
He didn’t give a detailed picture of what such an institution would look like. The current EU-level reviews of national economic imbalances such as excessive labour costs and trade surpluses “has so far not gained much traction in national decision-making processes.”
Draghi praised recent efforts by Spain and Portugal to lower labour costs to businesses – for instance by decentralizing wage negotiations in Spain – had helped those countries begin to recover.