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July 9, 2014 8:02 pm
Mario Draghi has called for Brussels to be handed sweeping new powers to enforce eurozone countries’ promises to take tough action to reform their economies.
Reopening a high-level debate about how much more integration is needed to make monetary union more sustainable, the ECB president said on Wednesday: “There is a strong case for us to apply the same principles to the governance of structural reforms as we do to fiscal governance.”
The European Commission was given new powers during the eurozone crisis to enforce fiscal rules that limit member states to budget deficits of 3 per cent of economic output. Violations of those rules can now lead to fines.
Mr Draghi added: “With the benefit of hindsight, it would have been useful to establish, alongside existing convergence criteria, a set of structural criteria that had to be met to enter the euro area and then respected once inside.”
The idea of forcing struggling economies to implement labour market and pension reforms has long been promoted by Berlin. It advocated mandatory “contractual arrangements” that would bind individual eurozone governments to annual reform programmes.
That effort stalled earlier this year when Berlin failed to win the support of other member states at the last summit just before May’s European elections, in which anti-EU parties made unprecedented gains.
Other eurozone leaders have offered variations on the German proposal, with Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup of eurozone finance ministers, suggesting such reforms be required of any country that is given more time to hit EU deficit and debt targets. Both France and Spain last year were given two more years to hit their targets, with no reform prerequisites.
More recently, the government of Matteo Renzi, the new Italian prime minister, has urged the eurozone to offer rewards – rather than punishments – as incentives for enacting such reforms, arguing they impose short-term costs, such as higher unemployment, while gains take longer to materialise.
The ECB has long viewed structural reforms as vital if the eurozone’s economy is to return to full health. Top ECB officials have repeatedly warned governments against abandoning measures that they believe would strengthen longer-term growth prospects by improving productivity. There is rising concern within the ECB and the European Commission that the recent benign financial market conditions in the eurozone has slackened governments’ willingness to implement needed reforms.
In his address, Mr Draghi also cautioned that, without reforms, imbalances between member states risked becoming permanent. “Firms face very different operating environments across the euro area . . . the World Economic Forum ranks Finland third in terms of global competitiveness, whereas Greece ranks 91st.”
While Spain is widely touted as the poster child of economic reforms, introducing sweeping labour market reforms at the height of the eurozone crisis, both Italy and France have encountered criticism over their failure to implement changes to their labour markets and pension systems.
Mr Draghi attacked attempts by European centre-left leaders, led by Mr Renzi, to allow more flexibility the fiscal rules adopted during the crisis.
“It is . . . of considerable relevance and importance that Europe has already made extensive progress in strengthening its rules, for example through the fiscal compact,” the ECB president said, referring to the 2012 treaty that enshrined deficit and debt limits into the constitutions of eurozone countries.
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