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Can reform be successful without growth? Aspen Dialogue on World Economy, 8-9 July 2005

Can reform be successful without growth? Aspen Dialogue on World Economy, 8-9 July 2005. Lorenzo Bini Smaghi EUROPEAN CENTRAL BANK. Outline. Compared with previous cycles, the euro area is currently experiencing:. A weak recovery In spite of expansionary macro-policies.

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Can reform be successful without growth? Aspen Dialogue on World Economy, 8-9 July 2005

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  1. Can reform be successful without growth?Aspen Dialogue on World Economy, 8-9 July 2005 Lorenzo Bini Smaghi EUROPEAN CENTRAL BANK Aspen Dialogue on World Economy, 8-9 July 2005

  2. Outline Compared with previous cycles, the euro area is currently experiencing: • A weak recovery • In spite of expansionary macro-policies This suggests that we are facing structural changes • There is no alternative to further reforms, even with low growth Aspen Dialogue on World Economy, 8-9 July 2005

  3. 1. A weak recovery The current recovery (started in Q3 2003) is weaker than the previous ones Source: Eurostat. Note: the through for the current recovery is Q2 2003 and for the previous recoveries Q3 1982 and Q3 1993. Aspen Dialogue on World Economy, 8-9 July 2005

  4. 2. A weak recovery Private consumption growth has been the weak factor Source: Eurostat. Aspen Dialogue on World Economy, 8-9 July 2005

  5. 3. A weak recovery Investment has been broadly in line with previous recoveries Source: Eurostat. Aspen Dialogue on World Economy, 8-9 July 2005

  6. 4. A weak recovery Net exports have also been slightly weaker Source: Eurostat. Aspen Dialogue on World Economy, 8-9 July 2005

  7. 1. Policy responses Policies have been accommodative: Real short term interest rates are historically low Source: ECB. Aspen Dialogue on World Economy, 8-9 July 2005

  8. 2. Policy responses Real long term interest rates are also historically low Source: ECB. Aspen Dialogue on World Economy, 8-9 July 2005

  9. 3. Policy responses Fiscal policy has been accommodative Source: European Commission. Aspen Dialogue on World Economy, 8-9 July 2005

  10. 4. Policy responses Government debt has increased Source: European Commission. Aspen Dialogue on World Economy, 8-9 July 2005

  11. 1. Lack of confidence A main factor has been weak confidence Source: European Commission. Aspen Dialogue on World Economy, 8-9 July 2005

  12. 2. Lack of confidence As confirmed by increase in household savings Source: Eurostat. Aspen Dialogue on World Economy, 8-9 July 2005

  13. 3. Why is confidence low? Possibly due to uncertainties about employment prospect Source: European Commission. Note: The figures represent the balance between positive and negative options. A fall indicates a more positive employment prospect. Aspen Dialogue on World Economy, 8-9 July 2005

  14. 4. Why is confidence low? In spite of good employment growth Source: Eurostat. Aspen Dialogue on World Economy, 8-9 July 2005

  15. 5. Why is confidence low? Perceived inflation has been higher Source: European Commission. Note: The figures represent the balance between positive and negative options. A fall indicates a more positive employment prospect. Aspen Dialogue on World Economy, 8-9 July 2005

  16. 6. Why is confidence low? Although actual inflation has been much lower Source: Eurostat. Note: The figures represent the HICP index. Aspen Dialogue on World Economy, 8-9 July 2005

  17. 7. Why is confidence low? Oil price developments might have contributed to low confidence Source: BIS. Aspen Dialogue on World Economy, 8-9 July 2005

  18. 1. Reforms are needed There is no alternative to structural reforms: • Many structural reforms have been implemented so far in the euro area. • But the lag with major competitors (US, UK, SE) is still large or has widened. Aspen Dialogue on World Economy, 8-9 July 2005

  19. 2. Reforms are needed In the labour market, the employment rate significantly rose, but remains below the level observed in the other countries Source: OECD. Note: The employment rate is defined as employment relative to working age population. Aspen Dialogue on World Economy, 8-9 July 2005

  20. 3. Reforms are needed Hourly labour productivity growth has fallen in the euro area Source: Groningen database. Aspen Dialogue on World Economy, 8-9 July 2005

  21. 4. Reforms are needed Potential output growth remains low Source: OECD Aspen Dialogue on World Economy, 8-9 July 2005

  22. 5. Reforms are needed Some key structural indicators (2003/2004) Source: Eurostat and OECD * A low level of PMR and EPL indicators indicates a low regulation. Aspen Dialogue on World Economy, 8-9 July 2005

  23. 6. Reforms are needed In view of ageing, without reforms, debt to GDP could rise above 250% by 2050 (EC estimates) Source: United Nations Aspen Dialogue on World Economy, 8-9 July 2005

  24. Challenges Continue reforms in a view to: • Restore confidence • Enhance potential output Instead of adopting a piece-meal reform process that produces “reform fatigue” and raises uncertainty Aspen Dialogue on World Economy, 8-9 July 2005

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