ECB's Draghi urges Europe to reform to brighten dim prospects

[May 22, 2015]  By John O'Donnell and Axel Bugge

SINTRA, Portugal (Reuters) - The president of the European Central Bank called on euro zone countries to reform their economies, warning that future growth, in the face of entrenched unemployment and low investment, will be modest.

Although not the first time Mario Draghi has made such an appeal, his comprehensive argument in favour of reform underscores concerns that governments may be wasting the time that ECB money-printing has bought them.

"It should ... be clear that the argument that accommodative monetary policy constitutes an excuse for governments and parliaments to postpone their reform efforts is incorrect," Draghi told a gathering of the globe's central banking elite.

His remarks come as the ECB's trillion-euro-plus quantitative easing to buy chiefly government bonds bolsters sluggish lending and injects extra money into the euro currency bloc. That, in turn, eases pressure on governments to change.

In making his argument, Draghi warned countries that Europe's problems were far from over despite an economic outlook that was "brighter today than it has been for seven long years".

This improvement, he said, is marred by heavy debts across parts of the euro zone and entrenched unemployment that "haunts too many countries".
 

PROBLEMS NOT SOLVED

"A cyclical recovery alone does not solve all of Europe’s problems," Draghi told the audience of central bankers and academics at an event organised by the ECB in Portugal.

Euro zone countries are arguing with Greece about sticking to a reform programme that its leftist government claims is strangling the economy but Athens is not alone in resisting painful changes.

European finance ministers were recently told that just a quarter of the reforms recommended by the European Commission, the EU's executive, for the bloc have been carried out and, now that the crisis is easing, the pace of reform is slowing further.

Such reforms would include changes to the tax code to reduce the burden on companies, opening up closed sectors, such as taxi driving, to competition, as well as pension reforms to deal with an ageing population.

Failure to act, said Draghi, would compound the euro bloc's already modest prospects, pointing out how growth in the 19-country euro zone is lagging the United States.

"While some of the effects of the crisis on investment and employment are expected to unwind, potential growth is projected to remain well below pre-crisis growth rates," he said.

He cited Portugal as having set a good example, which embarked on far-reaching reforms under its bailout by Europe and the International Monetary Fund, including in labour markets and in the legal system.

It also cut civil servant wages and pensions and launched the biggest tax hikes in generations.

Still, attempts to cut state salaries were partially challenged by the country's highest court and economists have said that reform efforts have slowed since the creditors left last year and ahead of a general election in the autumn.

(Reporting by John O'Donnell and Axel Bugge; additional reporting by Robin Emmott in Brussels; Editing by Jeremy Gaunt and Toby Chopra)
 

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