L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 1
Can reform be successful without growth?
Aspen Dialogue on World Economy, 8-9 July 2005
Lorenzo Bini SmaghiEUROPEAN CENTRAL BANK
L Bini-Smaghi 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
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 3
The current recovery (started in Q3 2003) is weaker than the previous ones
1. A weak recovery
Source: Eurostat.Note: the through for the current recovery is Q2 2003 and for the previous recoveries Q3 1982 and Q3 1993.
Real GDP
99
100
101
102
103
104
105
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
99
100
101
102
103
104
105
currentrecovery
averagerecoveries
Quarters from trough(index = 100 at through)
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 4
Private consumption growth has been the weak factor
2. A weak recovery
Source: Eurostat.
98
99
100
101
102
103
104
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
98
99
100
101
102
103
104
currentrecovery
averagerecoveries
Quarters from trough(index = 100 at trough)
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 5
Investment has been broadly in line with previous recoveries
3. A weak recovery
Source: Eurostat.
99
100
101
102
103
104
105
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
99
100
101
102
103
104
105
currentrecovery
averagerecoveries
Quarters from trough(index = 100 at trough)
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 6
Net exports have also been slightly weaker
4. A weak recovery
Source: Eurostat.
Net export contribution to growth(percentage points)
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
current recovery
average recoveries
Quarters from trough
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 7
Policies have been accommodative: Real short term interest rates are historically low
1. Policy responses
Source: ECB.
-1
0
1
2
3
4
5
6
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
-1
0
1
2
3
4
5
6
current recovery
average recoveries
Quarters from trough
% %
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 8
Real long term interest rates are also historically low
2. Policy responses
Source: ECB.
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
current recovery
average recoveries
Quarters from trough
% %
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 9
Fiscal policy has been accommodative
3. Policy responses
Source: European Commission.
Primary balance (% of GDP)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-3 -2 -1 0 1 2 3
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5current recovery
average recoveries
Years from trough
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 10
Government debt has increased
4. Policy responses
Source: European Commission.
% of GDP
45
50
55
60
65
70
75
-2 -1 0 1 2 3
45
50
55
60
65
70
75
current recovery
average recoveries
Years from trough
% of GDP
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 11
1. Lack of confidence
Source: European Commission.
Consumer confidence indicator (Balance between positive and negative options)
-30
-25
-20
-15
-10
-5
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
-30
-25
-20
-15
-10
-5
current recovery
average recoveries
Quarters from trough
A main factor has been weak confidence
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 12
As confirmed by increase in household savings
2. Lack of confidence
Source: Eurostat.
85
90
95
100
105
110
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
85
90
95
100
105
110
current recovery
average recoveries
Quarters from trough(index = 100 at trough)
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 13
Possibly due to uncertainties about employment prospect
3. Why is confidence low?
Source: European Commission.Note: The figures represent the balance between positive and negative options. A fall indicates a more positive employment prospect.
15
20
25
30
35
40
45
50
55
60
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
15
20
25
30
35
40
45
50
55
60
current recovery
average recoveries
Quarters from trough
Households' view on future unemployment
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 14
In spite of good employment growth
4. Why is confidence low?
Source: Eurostat.
99
100
101
102
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
99
100
101
102
current recovery
average recoveries
Quarters from trough(index = 100 at trough)
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 15
Perceived inflation has been higher
5. Why is confidence low?
10
20
30
40
50
60
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
10
20
30
40
50
60
current recovery
average recoveries
Quarters from trough
Source: European Commission.Note: The figures represent the balance between positive and negative options. A fall indicates a more positive employment prospect.
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 16
Although actual inflation has been much lower
6. Why is confidence low?
94
96
98
100
102
104
106
108
110
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
94
96
98
100
102
104
106
108
110
current recovery
average recoveries
Quarters from trough(index = 100 at trough)
Source: Eurostat.Note: The figures represent the HICP index.
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 17
Oil price developments might have contributed to low confidence
7. Why is confidence low?
Source: BIS.
20
22
24
26
28
30
32
34
36
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
20
22
24
26
28
30
32
34
36current recovery
average recoveries
Quarters from trough
euro euro
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 18
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.
1. Reforms are needed
There is no alternative to structural reforms:
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 19
In the labour market, the employment rate significantly rose, but remains below the level observed in the other countries
2. Reforms are needed
Source: OECD.Note: The employment rate is defined as employment relative to working age population.
60
65
70
75
80
85
60
65
70
75
80
85
EA SE UK US% %
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 20
Hourly labour productivity growth has fallen in the euro area
3. Reforms are needed
Source: Groningen database.
(5 years moving average)
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.5
1.0
1.5
2.0
2.5
3.0
3.5EA SE UK US
% %
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 21
Potential output growth remains low
4. Reforms are needed
Source: OECD
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
EA SE UK US% %
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 22
Some key structural indicators (2003/2004)
5. Reforms are needed
Source: Eurostat and OECD
* A low level of PMR and EPL indicators indicates a low regulation.
EA US UK SE
GDP per capita in PPS ( relative to the euro area) 100 145 111 109
Labour MarketParticipation rate 69 76 76 77Older workers employment rate 38 58 56 69
Unemployment rate 8.9 5.5 4.7 6.3
Tax rate on low wage earners 39.0 27.3 26.4 46.2
InnovationR&D expenditure as % of GDP in Private sector 1.2 1.9 1.3 3.3Youth education attainment level 73.0 87.6 76.4 86.3ICT expenditure (% of GDP) 2.7 4.6 4.2 4.4
Regulation*Product Market Regulation 1.4 1.0 0.9 1.1Employment Protection Legislation on regular contracts 2.5 0.3 1.1 2.9Employment Protection Legislation on temporary contracts 2.1 0.2 0.4 1.6
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 23
In view of ageing, without reforms, debt to GDP could rise above 250% by 2050 (EC estimates)
6. Reforms are needed
Source: United Nations
Euro ara old age dependency ratio (population aged over 64 years relative to the working age population)
20
25
30
35
40
45
50
55
20
25
30
35
40
45
50
55
%%
L Bini-Smaghi Aspen Dialogue on World Economy,8-9 July 2005 24
Restore confidence Enhance potential output
Challenges
Continue reforms in a view to:
Instead of adopting a piece-meal reform process that produces “reform fatigue” and raises uncertainty
