Mario Draghi: Euro area economic outlook, the ECB's monetary policy
and current policy challenges
Statement by Mr Mario Draghi, President of the European Central Bank, prepared for the
thirty-first meeting of the International Monetary and Financial Committee, Washington DC,
17 April 2015.
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The economic situation and the short-term outlook for the euro area are currently brighter
than they have been for several years. Various factors are helping to boost confidence that
the weak and uneven recovery experienced up to now will gain strength and breadth. The
ECB has pursued its price stability mandate with determination so that inflation will return to
a level below, but close to, 2% over the medium term. A strengthened financial sector, an
accommodative macroeconomic policy setting, sound fiscal policies and a determination by
euro area governments to pursue structural reforms should allow the euro area to embark on
a sustainable growth path in a context of price stability.
The ongoing recovery, which started almost two years ago, is now more firmly taking hold.
Euro area real GDP rose by 0.3%, quarter-on-quarter, in the last quarter of 2014, driven
mainly by domestic demand and especially private consumption. The latest data and survey
evidence suggest that the euro area economy has gained further momentum since the end
of 2014. Looking ahead, the economic recovery is expected to broaden and strengthen
gradually. Domestic demand should be further supported by the ongoing improvements in
financial conditions resulting from our monetary policy measures, as well as by the progress
made in fiscal consolidation and structural reforms. Moreover, the lower level of the price of
oil should continue to bolster households' real disposable income and corporate profitability.
Euro area labour markets are gradually improving. Employment continued to grow in the
fourth quarter of 2014 and the level of unemployment is continuing to fall gradually from
elevated levels. At the same time, the euro area recovery is likely to continue to be
dampened by necessary balance-sheet adjustments in a number of sectors and the sluggish
pace at which structural reforms are being implemented. While remaining on the downside,
the risks surrounding the euro area growth outlook have become more balanced on account
of the recent monetary policy decisions, the fall in oil prices and the lower euro exchange
rate.
HICP inflation in the euro area turned negative in December 2014 mainly on account of the
sharp drop in oil prices observed last year. Looking ahead, inflation is expected to remain
very low or still negative in the coming months. However, supported by the favourable impact
of the recent monetary policy measures on aggregate demand, and by the impact of the
lower euro exchange rate, the base effects that will materialise later in 2015 and somewhat
higher oil prices in the years ahead, inflation rates are expected to increase consistently over
the short and medium term. The ECB will continue to closely monitor the risks to the inflation
outlook. In this context, the Governing Council will focus in particular on the pass-through of
our monetary policy measures, as well as on geopolitical, exchange rate and energy price
developments.
Our monetary policy continues to aim at safeguarding price stability. Since mid-2014 we
have taken a number of both conventional and unconventional measures. Monetary policy
measures adopted in the second half of 2014, such as the TLTRO, CBPP3 and ABSPP, had
resulted in a material improvement in terms of financial market prices. In January 2015, the
Governing Council launched an expanded asset purchase programme to address the
heightened risks of too prolonged a period of too low inflation, encompassing purchases in
the secondary market of euro-denominated investment-grade securities issued by euro area
governments and agencies and European institutions. We intend to purchase private and
public securities until end-September 2016. In any case, we will continue the purchases until
the Governing Council sees a sustained adjustment in the path of inflation which is
consistent with its aim of achieving inflation rates below, but close to, 2% over the medium
term. In its assessment, the Governing Council will follow its monetary policy strategy and
concentrate on trends in inflation, looking beyond any unexpected movement of inflation in
either direction if it is regarded as transient and deemed to have no implications for the
medium-term outlook for price stability. There is clear evidence that the policy measures are
effective, as financial market conditions and the cost of external finance for the private sector
have eased considerably over the past months and borrowing conditions for firms and
households have improved notably, with a pick-up in the demand for credit.
As regards fiscal policies, we concur with the IMF WEO assessment that the by and large
neutral euro area aggregate fiscal stance in 2015 continues to appear broadly appropriate,
although it masks significant heterogeneity across countries. Many euro area countries still
face significant consolidation challenges in order to reduce high debt ratios and to ensure
fiscal sustainability. The flexibility within the Stability and Growth Pact should be used wisely
and should not lead to increased debt sustainability risks and making countries vulnerable to
economic shocks in the future. Full and consistent implementation of the Stability and Growth
Pact is key for confidence in our fiscal framework. We also acknowledge the findings of the
IMF Fiscal Monitor that good economic times prevailing before the crisis were not sufficiently
used by advanced economies to build sufficient fiscal buffers. It is thus important that euro
area countries now make sufficient progress towards their medium-term budgetary
objectives.
Regarding structural reforms, important steps have been taken in several euro area Member
States, while in others measures still need to be implemented. Product and labour market
reforms addressing supply-side bottlenecks, as well as policies aimed at improving the
business environment for firms, are crucial to the economic recovery. Bold and effective
implementation of reforms is not just in the interest of the individual countries, it is also key
for strengthening the resilience and ensuring the smooth functioning of the Economic and
Monetary Union and for supporting growth at the global level.
The implementation of the banking union has been a pivotal step in the reform of Europe's
financial sector. The new environment for banks, reflected in the better health of the banking
system, supports the transmission of our monetary policy and thereby creates more
favourable conditions for the real economy, which could in turn support the private sector's
efforts to address debt overhangs and impaired corporate and bank balance sheets.
The Single Supervisory Mechanism (SSM) of the ECB has been in operation for just over six
months now as the micro-prudential supervisor of all euro area banks and the direct
supervisor of more than 120 significant institutions. The SSM is committed to establishing
effective and high-quality supervision across its jurisdictions. While respectful of vital
business diversity among SSM banks, an even-handed approach supported by harmonised
supervisory standards will help to halt the fragmentation and underpin the reintegration of the
euro area banking sector. The ECB is looking closely at the scope for rolling back national
options and discretions in order to foster regulatory harmonisation. Within the newly created
banking union, the SSM has launched various initiatives to incentivise banks to reduce NPEs
and to implement viable restructuring practices, as well as to achieve consistency in
provisioning and realistic collateral valuation in line with accounting rules.
The successful completion of the comprehensive assessment improved transparency in an
unprecedented way and boosted the strengthening of banks' balance sheets. It thereby
increased confidence in the European banking sector. Remedial actions for shortfall banks
have to be completed by end-July. Supervisory priorities defined for 2015 aim to scrutinise
the sustainability of banks' business models in a low-profitability environment, the adequacy
of their risk cultures and governance structures, and their resilience to unexpected shocks.
All of this should put the banks in a better position to increase their lending to the real
economy.
The second pillar of the banking union, the recovery and resolution framework
complementing the SSM, has also seen substantial progress since our last IMFC meeting: as
of 1 January 2015, the Single Resolution Mechanism (SRM) has been in place. The Single
Resolution Board will start exercising its full set of responsibilities from next January
onwards. The Single Resolution Fund is set to start operating in January 2016 and ensure
that failing banks are resolved in an orderly fashion so that costs for taxpayers and the real
economy are kept to a minimum.