Speech by Peter Praet, Member of the Executive Board of the ECB,
at the Welt-Währungskonferenz,
Berlin, 23 April 2015
Ladies and gentlemen,
It is a pleasure to be here today and to have an opportunity to address this gathering.
As you know, over the last two years the ECB has taken a series of monetary policy measures to ensure that we meet our price stability mandate. In my remarks today I would like to look back on those measures and the effects they have had, but to do so in a broader context - that is, by looking at overall growth trends within the euro area and how monetary policy fits within them.
The main point I would like to make is that the euro area needs a combination of policies for the cyclical recovery we are seeing to become a lasting one: accommodative monetary policy and determined structural reforms need to go hand-in-hand.
Potential growth and monetary policy
The euro area economy seems now to be turning the corner. Both the hard and soft data suggest that the activity is gathering momentum and looks set to strengthen over the course of this year. Consistent with this, all the major forecasting institutions have revised up their expectations for GDP growth in 2015 and the years ahead. We are therefore seeing the beginnings of a cyclical recovery. But it is not yet a structural one.
What I mean by this is that, though the business cycle is improving, the notable decline in euro area's potential growth rate has not been addressed, which can be imagined as the "speed limit" of the economy - the rate at which it can grow while maintaining stable inflation. International institutions currently estimate the potential growth rate to be below 1% in the euro area, compared with above 2% in the United States.
This fall in potential growth is not a new phenomenon. Potential growth in the euro area has been declining since the late 1990s, driven mostly by a prolonged slowdown in total factor productivity growth, a trend decline in hours worked and the labour participation rate growing more hesitantly. Before the crisis, however, it seems that this deceleration went largely unnoticed. And this has in fact contributed both to the type of crisis we have experienced and the situation of weak potential growth that we face now.
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