Youth unemployment would also remain elevated, with devastating effects for individuals in terms of labour market “scarring”. 8 And this would ultimately affect society as a whole as, given our demographics, realising the potential of the young and their capacity for innovation is essential for long-term sustainability. Second, a situation of persistently low potential growth would make it even harder to work through the debt overhang that still exists in parts of the euro area. For firms that took on debt based on pre-crisis growth expectations, low potential growth acts as a major barrier to new investment, as any profits generated will likely be absorbed by servicing existing debt. And we do see signs that this effect has been operative in euro area: there is a clear negative correlation between corporate debt-to-GDP levels in different countries at the beginning of the crisis and the evolution of business investment since. Third, low potential growth can have a direct impact on the tools available to monetary policy to deliver its mandate. The reason is that low potential growth implies a lower equilibrium real interest rate, which in turn means that, faced with a negative output gap, nominal policy rates need to go lower still to steer output back to potential. This materially increases the likelihood that central bank policy runs into the constraint set by the effective lower bound for interest rates, which is not far below zero. It therefore also increases the likelihood that we have to resort recurrently to unconventional policies to meet our mandate.

24 In this context, the combination of our interest rate and credit easing policy, together with the recently completed Comprehensive Assessment of bank balance sheets, can be seen as creating the ideal conditions for reforms to succeed. By bringing real interest rates well below the medium-term growth rate, this policy package is creating strong price incentives to invest. And by improving the transmission of those low real rates into actual borrowing conditions, it ensures that the financial sector can quickly reallocate finance to firms that capitalise on those incentives. In this way, accommodative monetary policy supports structural reform by ensuring that the investment and employment benefits materialise faster. And structural reform, by reducing  23  Draghi, M. “The ECB’s recent monetary policy measures: Effectiveness and challenges.” Camdessus Lecture at the International Monetary Fund, 14 May 2015. 24  Bouis, R., O. Causa, L. Demmou, R. Duval, and A. Zdzienicka (2012), “The Short-Term Effects of Structural Reforms: An Empirical Analysis.” OECD Working Papers, no. 949. 8  BIS central bankers’ speeches  uncertainty about the future macro- and microeconomic outlook, supports monetary policy by releasing the pent-up investment demand that accommodative policy creates. It should therefore be clear that the argument that accommodative monetary policy constitutes an excuse for governments and parliaments to postpone their reform efforts is incorrect. In fact, I would submit it actually makes reforms less socially and politically costly, as it reduces the time it takes for reforms to produce positive effects.