NEWS Release - The productivity challenge for Europe - Lectio magistralis by Mario Draghi, President of the ECB, marking the 100th anniversary of the Deusto Business School, - Madrid, 30 November 2016
The euro area economy continues to expand at a moderate, but steady, pace and labour markets are gradually improving, including notably here in Spain. This gradual upward trend is expected to continue, not least owing to our monetary policy measures.
But productivity growth has remained very subdued. In 1995, productivity growth in the euro area was on a par with the rest of the world at about 2%. But now, at below 0.5%, it lags behind the growth rates of the United States, other advanced economies and emerging markets.
If it persists, this slowdown in productivity growth will matter greatly for our future prosperity, and will have direct consequences for the conduct of monetary and fiscal policy and the cohesion of the euro area.
Consider first the challenge caused by ageing populations, which many economies will face in the coming decades. The share of working-age persons in the total population is projected to decline across Europe, and this is particularly marked in some economies.
In the absence of change – if output per worker, structural unemployment, and labour participation remain at current levels – population ageing will result in a stark fall of output per capita. Using the OECD’s population projections, the decline in output per head by 2050 would be 14% in Germany, 16% in Italy and 22% in Spain. While this scenario is very unlikely to materialise, it shows that current rates of productivity growth are barely sufficient to offset the demographic drag on per capita income.
Structural reforms are therefore urgently needed to raise productivity growth and unlock unused labour potential and thereby avoid stagnation in per capita income.
But the benefits of structural reforms to the welfare of people in the euro area extend beyond increasing aggregate incomes and offsetting the demographic drag. They also empower other policies.
Stronger potential output growth aids monetary policy by increasing the equilibrium real interest rate. Higher equilibrium rates provide more room for monetary policy to operate without being constrained by the effective lower bound. This in turn reduces the likelihood that unconventional measures will be required to counteract future downturns.
And higher future growth helps monetary policy today. It encourages households to spend more and firms to invest, reducing the need for monetary policy to support current economic activity and bring inflation back towards 2%, and speeding up the return to more conventional monetary policy settings.
There are benefits for fiscal policy too. By lifting output and employment and lowering unemployment, reforms improve governments’ structural balances. Moreover, higher levels of potential output reduce the current overhang of public sector debt that is impinging on some countries’ ability to carry out stabilisation policies. The greater fiscal space also enables governments to redistribute the benefits of reforms across the whole population. Some reforms can have upfront negative distributional effects, which governments may want to offset.
Structural reforms also help fully unlock the benefits of the Single Market and thereby improve the cohesiveness of the monetary union.[1] Increased convergence not only reinforces the integrity of the union. It also builds up the trust among Member States that is necessary to take further integration steps.
And finally, structural reforms make the euro area economy more resilient in the face of the disruptive influence of globalisation and digitalisation.
All these reasons highlight the vital importance of structural reforms for the welfare and well-functioning of our union. Let me now briefly consider the factors behind the euro area’s recent lacklustre productivity performance, before setting out some necessary steps for improvement.
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