around the world have been under pressure to cover shortfalls in fiscal
policy. At his monthly press conference, European Central Bank (ECB)
President Mario Draghi stuck to his guns, telling
politicians to focus on structural reforms to stimulate growth, rather than
raising hopes for more easy money from the ECB. Interest rates remain at 1%;
the euro reacted positively to Draghi's comments.
the experience of how stagflation in the 1970s was overcome, Draghi points out structural reform, not increased
spending, is the the proper course of action.
Specifically, Draghi calls for: fiscal balances,
fiscal stability and competitiveness. Having said that, the prepared
introductory statement of the press conference mentions "growth" 13
times, stressing that "growth and growth potential in the euro area
need to be enhanced by decisive structural reforms. In this context,
facilitating entrepreneurial activities, the start-up of new firms and job
creation is crucial. Policies aimed at enhancing competition in product
markets and increasing the wage and employment adjustment capacity of firms
will foster innovation, promote job creation and boost longer-term growth
prospects. Reforms in these areas are particularly important for countries
which have suffered significant losses in cost competitiveness and need to
stimulate productivity and improve trade performance."
Draghi also calls for a vision of how the Eurozone ought to
look in a decade, so that such vision can be implemented. A fiscal compact,
not a "transfer union" is the appropriate starting point of how
fiscal sovereignty can be delegated over time to a central Eurozone
authority. The press conference was ahead of this weekend's national
elections in France and Greece, as well as regional elections in Germany.
assessment, austerity is the easy part, structural
reform is the tough part. With regard to monetary policy, Draghi
was notably light. He shed cold water on the notion of re-activating the
peripheral bond purchase program (Securities Markets Program, SMP). He also
dampened expectations of a rate cut by emphasizing balanced inflation risks,
as well as a gradual economic recovery, albeit with downside risks. He
suggested the European banking sector is improving, not only visible in
reduced intra-bank refinancing (repo) rates, but also apparent in an increase
of the deposit base in peripheral Eurozone countries.
just about all actions suggested by Draghi are
really outside of the purview of the ECB. We may want to add a comment
recently made by Bundesbank President Jens Weidmann: the higher cost of borrowing can also been seen
as an encouragement to engage in reform. It appears that the ECB is in line
with our view that the one language policy makers listen to is that of the