Citing Slow Growth, Draghi Urges Reform

May 22, 2015Europe/Middle Eastby EW News Desk Team

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European Central Bank President Mario Draghi believes global growth is too slow, and Europe needs market reforms to stimulate demand.

Draghi’s remarks on Friday were part of a speech given in Portugal, where the bank chief noted economic flexibility and labor market reform were essential to improve Europe’s competitiveness and stimulate demand. "Structural reforms that reverse the downward drift in potential growth are now vital for the euro area, which is why I believe, as the guardian of the currency, we have a legitimate interest in talking about them,” he said in his speech.

The statement comes shortly after France and Germany posted low growth—although French figures were above expectations. However, both are far from the 2% growth rate that the ECB has targeted, despite a quantitative easing program worth over a trillion euros targeted at stimulating growth.

That program, which is set to last until September 2016, has caused European equities to rise and the euro to fall relative to the U.S. dollar, but economists remain mixed on whether it is sufficient to reignite demand in the Eurozone.

“Lasting Stability and Prosperity"

Despite uncertainty about the success of Europe’s QE program, Draghi insisted that monetary policy is a sufficient tool for stimulating European demand, although he also alluded to fiscal reforms that could improve the Eurozone’s growth rate further.

"Monetary policy can steer the economy back to its potential. Structural reform can raise that potential. And it is the combination of these demand and supply policies that will deliver lasting stability and prosperity,” he said.

In his statement, Draghi implied that there is insufficient demand to invest in Europe not because of depressed aggregate demand, but because of barriers to investment that are more complex in nature. "If reforms are targeted specifically at frictions that hold back investment demand, their short-term effects should be largely positive. Similarly, reforms designed to reduce bottlenecks to new investment that come from onerous business conditions should also have mainly benefits in the short-term,” he said.

Low Growth “Everywhere"

While hinting at the need of structural reforms in peripheral European economies, Draghi also admitted that “growth is too low everywhere” and that this is hindering Europe’s own growth rate. Germany’s recent weak GDP growth—with only 0.3% growth in the last quarter, far below expectations—is a large part due to weak exports, since imports have actually improved in the country. The weakness is largely a result of Germany’s reliance on China’s manufacturing sector, where the country exports machinery. With physical and fixed capital investment waning in China, the country’s exports have suffered.

However, in a somewhat mixed message, Draghi also insisted that Europe is stronger than it has been in nearly a decade, and growth is likely to pick up in the near term. "The economic outlook for the euro area is brighter today than it has been for seven long years. Monetary policy is working its way through the economy. Growth is picking up. And inflation expectations have recovered from their trough,” he said.

Eurozone equity markets fell on the news, while the UK saw the FTSE 100 rise by about 0.4% after Draghi’s speech. The euro also gained 76 basis points against the U.S. dollar, at an exchange rate of 1.1188 by early morning trading in New York.