European Central Bank President Mario Draghi on Wednesday called for a new set of rules for euro-zone members that would apply to economic reforms and be analogous to the standards that govern borrowing by governments.
In outlining a new proposal from the ECB that would further deepen the economic integration of the euro zone, Mr. Draghi said differences in the competitiveness of its 18 member economies are as much a threat to its survival as differences in their debt loads.
The ECB has long called for greater structural reform of euro-zone economies to narrow the differences between their economic performance, but in a speech in London, Mr. Draghi gave the clearest outline yet of a governance structure that would help bring that about.
While the euro zone’s crisis was triggered by the inability of some of its member governments to borrow on international bond markets because their debts had grown too large, many economists and policy makers believe that reflected more deep-rooted economic differences.
Specifically, they said businesses and workers in those countries most affected by the crisis had lost their ability to compete with their counterparts elsewhere in the currency area, leading to large current-account deficits that were financed through foreign borrowing.
Mr. Draghi noted that while the World Economic Forum ranks euro-zone member Finland third in the world in terms of competitiveness, Greece ranks No. 91.
Similarly, he noted that the World Bank ranked Ireland 15th in the world for ease of doing business, while it ranks Malta at No. 103.
“No firm or individual should be penalized by its country of residence,” he said. “The persistence of such differences creates the risk of permanent imbalances. With this in mind, I believe that structural reforms in each country are enough of a common interest to justify that they are made subject to discipline at the community level.”
Mr. Draghi said establishing new rules that would require member governments to take “corrective action” to improve the competitiveness of their economies would strengthen the cohesion of the currency area and help boost growth and create jobs.
He said the existence of euro-zone rules would also help governments implement needed reforms, which would “require substantial political capital.”
“Historical experience, for example of the IMF (International Monetary Fund), makes a convincing case that the discipline imposed by supranational bodies can make it easier to frame the debate on reforms at the national level,” he said.
“In particular, the debate can be framed not in terms of whether, but in terms of how reform needs to take place.”
Speaking earlier Wednesday, ECB Executive Board member Benoît Curé made a similar case for “a convergence of economic policies and structures” that would be “embedded in a binding European effort, based on benchmarks to be met by all euro-area member states.”
The ECB’s proposals for greater integration in economic policy-making comes at a time when some leading members of the currency area are arguing for greater flexibility in applying the existing fiscal rules so that they reflect the particular circumstances of individual countries, and give them more freedom to pursue economic reforms.
Italian Prime Minister Matteo Renzi has been leading efforts to shift the main focus of the euro zone’s response to the crisis to growth from stability and fiscal rigor. His government has called for more flexibility in the application of fiscal rules and policies aimed at boosting investment.
Mr. Renzi was alone among euro-zone political leaders in picking up significant support during May elections for the European Parliament.
Across the EU, support rose for parties that are avowedly skeptical of the benefits of further integration and argue for the transfer back to national parliaments of powers now exercised by the EU.
In his speech, Mr. Draghi also said the rules that govern government borrowing in the euro zone must be strictly observed. “To unwind the consolidation that has been achieved, and in doing so to divest the rules of credibility, would be self-defeating for all countries,” Mr. Draghi said.
Mr. Draghi also repeated his concern about too-low inflation in the euro zone, and the ECB’s readiness to use “unconventional instruments within its mandate” should that problem persist.
marketwatch.com
In outlining a new proposal from the ECB that would further deepen the economic integration of the euro zone, Mr. Draghi said differences in the competitiveness of its 18 member economies are as much a threat to its survival as differences in their debt loads.
The ECB has long called for greater structural reform of euro-zone economies to narrow the differences between their economic performance, but in a speech in London, Mr. Draghi gave the clearest outline yet of a governance structure that would help bring that about.
While the euro zone’s crisis was triggered by the inability of some of its member governments to borrow on international bond markets because their debts had grown too large, many economists and policy makers believe that reflected more deep-rooted economic differences.
Specifically, they said businesses and workers in those countries most affected by the crisis had lost their ability to compete with their counterparts elsewhere in the currency area, leading to large current-account deficits that were financed through foreign borrowing.
Mr. Draghi noted that while the World Economic Forum ranks euro-zone member Finland third in the world in terms of competitiveness, Greece ranks No. 91.
Similarly, he noted that the World Bank ranked Ireland 15th in the world for ease of doing business, while it ranks Malta at No. 103.
“No firm or individual should be penalized by its country of residence,” he said. “The persistence of such differences creates the risk of permanent imbalances. With this in mind, I believe that structural reforms in each country are enough of a common interest to justify that they are made subject to discipline at the community level.”
Mr. Draghi said establishing new rules that would require member governments to take “corrective action” to improve the competitiveness of their economies would strengthen the cohesion of the currency area and help boost growth and create jobs.
He said the existence of euro-zone rules would also help governments implement needed reforms, which would “require substantial political capital.”
“Historical experience, for example of the IMF (International Monetary Fund), makes a convincing case that the discipline imposed by supranational bodies can make it easier to frame the debate on reforms at the national level,” he said.
“In particular, the debate can be framed not in terms of whether, but in terms of how reform needs to take place.”
Speaking earlier Wednesday, ECB Executive Board member Benoît Curé made a similar case for “a convergence of economic policies and structures” that would be “embedded in a binding European effort, based on benchmarks to be met by all euro-area member states.”
The ECB’s proposals for greater integration in economic policy-making comes at a time when some leading members of the currency area are arguing for greater flexibility in applying the existing fiscal rules so that they reflect the particular circumstances of individual countries, and give them more freedom to pursue economic reforms.
Italian Prime Minister Matteo Renzi has been leading efforts to shift the main focus of the euro zone’s response to the crisis to growth from stability and fiscal rigor. His government has called for more flexibility in the application of fiscal rules and policies aimed at boosting investment.
Mr. Renzi was alone among euro-zone political leaders in picking up significant support during May elections for the European Parliament.
Across the EU, support rose for parties that are avowedly skeptical of the benefits of further integration and argue for the transfer back to national parliaments of powers now exercised by the EU.
In his speech, Mr. Draghi also said the rules that govern government borrowing in the euro zone must be strictly observed. “To unwind the consolidation that has been achieved, and in doing so to divest the rules of credibility, would be self-defeating for all countries,” Mr. Draghi said.
Mr. Draghi also repeated his concern about too-low inflation in the euro zone, and the ECB’s readiness to use “unconventional instruments within its mandate” should that problem persist.
marketwatch.com
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