Eurozone must hasten with structural reforms in order to avoid the lasting economic damage that weak growth and productivity entail, European Central Bank President Mario Draghi said Thursday.
"There are many understandable political reasons to delay structural reform, but there are few good economic ones," Draghi said in a speech at the Brussels Economic Forum. "The cost of delay is simply too high."
A committed central bank can always fulfill its mandate irrespective of the stance of other macroeconomic policies, Draghi said. However, monetary policy does not exist in vacuum as other policies can strengthen or dilute the effects of the central bank policy, he added.
The ECB aims to keep inflation near 2 percent over the medium term, which Draghi said "is not a fixed period of time".
"When faced with adverse shocks, the pace at which monetary policy can bring inflation back to the objective depends on two factors: the nature of the shock itself, and the conditions in which monetary policy operates," the ECB Chief said.
"The job of monetary policy is not to fight short-term shocks to prices, but to prevent them from feeding into longer-term inflation dynamics – or put another way, it is to make sure that the effect of shocks on inflation is no more persistent than it needs to be."
Inflation risks returning to the ECB target at a slower pace if other policies are not aligned with monetary policy, he warned.
A too-slow return of output to potential is far from innocuous, but has lasting economic consequences, since it can ultimately lead to potential being eroded as well, Draghi pointed out.
"The cost of delay…is that labor and productivity suffer, and the output gap closes in the "wrong way" – instead of output rising towards potential, it is potential that falls towards current output," he said.
"So it is in fact in everybody's interest to act without undue delay."
The ECB will not let inflation undershoot its objective for longer than is avoidable, Draghi said. Others must take decisive action to return output to potential before subpar growth causes lasting damage, he added.
This month, the ECB raised its inflation projection for this year to 0.2 percent from 0.1 percent. The growth forecast was also lifted to 1.6 percent from 1.4 percent. However, the bank warned that there were downside risks to the outlook such as the "Brexit" referendum.
Completing the single market would be a "quick win" for structural reforms in Europe, Draghi said.
"Structural reforms can help limit the depth and duration of shocks, which in turn supports the anchoring of inflation expectations and keeps real interest rates low," Draghi said.
"Such reforms can also reduce the transmission lag of our measures, since a more flexible, more responsive economy is likely to transmit monetary policy impulses faster."
Elsewhere today, ECB Governing Council member Erkki Liikanen said policy measures undertaken by the ECB to boost the euro area growth and inflation are likely to feed through into the economy only gradually and recovery momentum will gather pace once all the announced measures are implemented.
by RTT Staff Writer
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