Mario Draghi: Reception for the opening of the European Cultural Days
Welcome address by Mr Mario Draghi, President of the European Central Bank, at the
reception for the opening of the European Cultural Days, Frankfurt am Main, 3 November
2015.
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Ladies and gentlemen,
I am very pleased to welcome you to this reception for the opening of the ECB's Cultural
Days. As you know, each year we dedicate this series to one of the 28 EU members as a
way to underscore Europe's diversity and richness. This time the focus is on Malta. At the
formal opening I will speak more about Maltese culture and the programme of upcoming
events. Here, however, I would like to tell you something about your hosts - what the ECB is
currently doing, and most importantly, why.
Since last year, when we welcomed the panoply of Bulgarian culture to Frankfurt, the ECB
has been through a major transformation. Tomorrow, we will celebrate our first full year as
the supervisor of Europe's significant banks - a project which has involved us hiring over
1000 new staff and setting up a new European institution from scratch. We also this year
officially inaugurated our new building, which has now become a symbol of the Frankfurt
skyline.
What has not changed, however, is the ECB's mandate to deliver price stability for the euro
area, which we define as an inflation rate of "below but close to 2 percent" over the
mediumterm. During the first 17 years of our history, inflation has averaged just over 1.8 percent - so
pretty close to our objective.
But note that this definition of price stability is symmetric: inflation should be neither too high
nor too low. This is a legacy of our colleague Otmar Issing, who appreciated the risks of too
low inflation at a time when most people only had the risk of too high inflation in mind.
Indeed, history shows that deflation can be just as damaging to the prosperity and stability of
our economies as high inflation.
To mention just some of the negative impacts, in a low inflation environment firms' revenues
fall but the wages they pay their employees are typically more "sticky", so the real wages
they have to pay rise. That can lead to higher unemployment. Monetary policy can also
become less effective at supporting the economy, as lower inflation leads to higher real
interest rates, which cannot be offset by conventional policy when interest rates reach zero.
And in a situation of high indebtedness, too low inflation increases the burden of servicing
that debt.
In the aftermath of the crisis it has become, at times, more difficult for central banks to
achieve the slow increase of price levels that they aim for. This is also true in the euro area
where, thanks mainly to falling oil prices, inflation is currently around zero. That would not be
a serious problem if we saw low inflation only for one or two months, but it becomes
worrisome if there is a risk of too low inflation for too long. In that scenario, it can start to
affect people's expectations of future inflation, which then makes low inflation self-fulfilling.
In line with our mandate, the ECB has therefore made full use of its conventional tools
- interest rate cuts - to ward off these risks to price stability and keep inflation expectations
anchored to our objective. And since rates reached zero, we have switched to
unconventional measures - namely large-scale asset purchases - as the main means to
expand our stance and ensure that inflation returns gradually back to 2%.
Those asset purchases are proceeding smoothly and continue to have a favourable impact
on the cost and availability of credit for firms and households. But even though domestic
demand remains resilient, concerns over growth prospects in emerging markets and other
external factors are creating downside risks to the outlook for growth and inflation. In this
context, the degree of monetary policy accommodation will need to be re-examined at the
Governing Council's December meeting. The Governing Council is willing and able to act by
using all the instruments available within its mandate if warranted in order to maintain an
appropriate degree of monetary accommodation.
Such decisions by the ECB often trigger a lively discussion in the public debate - and often
with a quite different flavour depending on the country concerned. While in some countries
the main theme is typically that the ECB should "do more", in Germany, as you know, the
opposite is the case. The low interest rate environment is often seen as a cause for concern.
I would not be surprised if that is the case for many of you here.
One concern is low interest rates unfairly punish savers. I fully understand this - low interest
rates of course lead to low nominal returns on certain types of assets. But I think the extent
of disquiet with the ECB about this issue also reflects some misunderstandings. There are
two points in particular I would like to underline.
First, what matters for savers is not nominal returns on liquid assets such as deposits, but
real returns - i.e. what those returns actually buy - on the portfolios of assets that most
households hold, which include for example shares. An interesting piece of research last
month by our colleagues at the Bundesbank1 showed that the real return since 2008 for
German households on a typical private portfolio lay at 1.5%. This was lower than the
precrisis average, to be sure, but better than in several repeated periods since the early 1990s.
Second, we need to keep in mind why interest rates are so low today. It is not an arbitrary
decision of the central bank; it is because the euro area has been in a long and deep crisis
where the economy needed low interest rates to recover. And what would happen if we were
to raise rates in that environment? The answer is that it would only push us back into
recession, which would mean lower incomes and more job insecurity for everyone. And then,
the ECB would have to keep interest rates lower for longer to get the economy back on track.
None of this would be in the interests of savers in any country.
Moreover, if one takes a longer-term perspective, it is clear that low interest rates are also
being driven by forces outside the ECB's control. It is the productive capacity of the real
economy that ultimately produces real returns on savings - and in the euro area, due to our
ageing societies and low productivity, that is currently very weak. This is not an issue
monetary policy can solve; it depends on reforms that will make our economies more
inclusive, flexible and innovative. The long-term interests of savers, in other words, depend
on governments implementing the structural reforms that will transform our economies in
Europe.
This brings me to another concern about our policies: that the implementation of our
monetary policy in fact creates the opposite effect - that it decreases the willingness of
governments to undertake structural reforms because they pay little interest on their debts.
Again, while I can understand this concern, I think it needs to be looked at in context. First of
all, the argument does not fit with the facts we have seen in the euro area. Spain, for
example, started its labour market reforms when interest rates had already gone down. Italy
undertook labour market reform at the beginning of this year of its own volition. France
pursued the Macron Reforms this year as well, and they are not yet finished. So I do not see
convincing evidence that structural reforms are impossible without strong market pressure.
Moreover, where very strong market pressure does lead to reforms, are we sure that they
are the right ones? Often we have seen in recent years that, when countries face severe
sovereign debt tensions, they prioritise raising taxes rather than cutting unproductive
expenditure and delay structural reforms. Those reforms that countries really need to boost
their long-term growth - such as improving education or judiciary - do not come about in a
crisis environment. They have to come about through societies recognising their deep-rooted
challenges and collectively fixing them.
But let's imagine for a moment that all this were not the case - that market pressure was
essential for structural reforms to happen - should that really be a factor in how the ECB
makes its policy?
Remember that we have been given a narrow mandate in the Treaty to deliver euro area
price stability, and that narrow mandate is what justifies our independence. Nowhere in the
Treaty does it say that the ECB should set interest rates in such a way as to force policy
changes on unwilling governments. For us to do that would be undemocratic and a misuse of
the independence we have been given. If anybody is to put pressure on governments to
enact structural reforms, it has to be other governments within a democratically-agreed
framework. Indeed, this is why the ECB has frequently called for stronger European
institutions for economic policymaking.
The point here is that one cannot expect the ECB to deliver the objectives that rightfully
belong to other policymakers. We will meet our price stability mandate, as we are obliged to
do in the Treaty. But it is up to individual countries to build on that foundation and make their
economies work better; and it is up to the euro area as a whole to strengthen the institutional
architecture of our union.
Only with such a common, comprehensive response can we durably leave this crisis behind,
and re-focus on the purpose for which the euro was launched: the unity and prosperity of the
peoples of Europe. That is no doubt a challenging task. But the Cultural Days are a reminder
what Europe is all about and why it is worth standing up for.