Public 'understands' need for economic reform - ECB's Yves Mersch

Friday 07 February 2014 18.21
Yves Mersch said the need for reform has been known since the 1990s but action was now urgently required
Yves Mersch said the need for reform has been known since the 1990s but action was now urgently required

The general public understands the need for reform to help create economic growth, according to ECB executive board member Yves Mersch.

Speaking in Dublin at the Institute of International and European Affairs, Mr Mersch said that the only way out of the current economic malaise was growth, which could only happen if economic structures were reformed.

This public awareness meant that it was no longer impossible for politicians to undertake reforms and get re-elected afterwards, he said.

Mr Mersch said the public is, in fact, now demanding reform which will lead to economic growth, jobs and "the welfare premium they demand".

Mr Mersch made reference to the so called "Curse of Juncker", - named after a quote by former head of the Eurogroup Jean Claude Juncker, who famously remarked near the start of the crisis "we all know what needs to be done, we just don’t know how to get re-elected after we have done it".

Mr Mersch, who is himself from Luxembourg, criticised the failure of politicians across the EU to introduce wide-ranging reforms over the past 20 years.

"Since the 1990s we have known that supply conditions in the euro area needed to be reformed,” he said.

“What is new today, however, is the urgency for action. We are facing the risk of a structural set back in growth. We can therefore no longer afford to delay, nor should we over-burden monetary policy. Structural reforms are a must.”

He said that, for this reason, the “apparent contradiction between reforms and re-election may now be moot” as there is “no country in the euro area that has delayed reforms and achieved economic outcomes with which their citizens are content.”

He said monetary policy - the interest rates set by the ECB and any form of quantitative easing it may engage in - had only a very limited ability to help growth. In effect it only buys time for politicians to act.

He said repair of the banking system was essential, as there was considerable evidence that big banks have become risk averse and are not lending much to start up businesses. 

On the other hand, smaller and weaker banks are "ever-greening" loans to failing companies to make their own balance sheet look good, rather than pulling the plug on such businesses. 

Together these trends have halted the "churn" in company formations and dissolutions that are seen  as an essential driver of growth.  As such the banking system was not fulfilling its key mission of allocating capital efficiently in the economy of the Euro Area, he said.

Mr Mersch said the ECB's Asset Quality Review and Stress Tests which are underway will encourage banks to clean up their balance sheets because of the level of transparency they will induce. 

This should increase confidence in European banks and help a return to normal lending conditions.

But he said the key to returning growth to the European economy lay in structural reforms dealing with capital, labour markets and technology. 

He said a number of European countries have made a start on some aspects of these reforms - some have started with capital, some with labour, and he said there was evidence that Ireland’s flexible labour market was facilitating a faster return to growth than some other countries. 

But he said there were still some countries he described as "laggards" on reform, adding the longer reforms are delayed, the worse it will be.