Mario Draghi on why reform is necessary for recovery


Nov. 26 2019, Updated 1:18 p.m. ET

Mario Draghi says “without reform, there can be no recovery”

In a recent speech at the Brookings Institution in Washington on October 9, 2014, The ECB (European Central Bank) chief, Mario Draghi, argued that in the Eurozone today, “without reform, there can be no recovery.”

Draghi referred to an open letter published in the New York Times in 1933, by John Maynard Keynes to President Franklin D. Roosevelt, which in essence talked about the risk that over-hasty reform could impede recovery. Draghi, on the other hand, believes that the solution to the current problems Europe faces lies in the implementation of reforms along with recovery.

Euro area real GDP growth rate

Without reform, there can be no recovery

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While stressing the urgency of much-needed reforms in the Eurozone, Draghi supported his views about reforms being important to recovery. He argued that reforms are often postponed in bad times on the belief that they work better in good times. However, when good times arrive, people don’t remember the good ideas.

In Europe the problems tend to be more structural than cyclical, relating to the particular structure of that economy as opposed to business cycles. Therefore, reforms are the only way to lift growth rates.

The current growth is too low to lift unemployment levels or to overcome the surmounting debt burdens in many of the European economies. U.S. exchange-traded funds like the iShares MSCI EAFE (EFA), the iShares MSCI EMU (EZU), and the Vanguard FTSE Europe ETF (VGK) that track European equities have largely underperformed U.S. equity funds like the SPDR S&P 500 (SPY) and the Core S&P 500 ETF (IVV) over the last 5 years.

The EFA, EZU, and VGK have gained (or lost), 7.47%, -8.76%, and 0.80%, respectively, from October 12, 2009 to October 13, 2014. At the same time, SPY and IVV have gained 72.11% and 72.59%, respectively.

Stabilizing policies not enough

Draghi puts forth a very relevant point. Stabilizing policies are effective in increasing an economy’s output towards its potential. However, what the Eurozone needs to come out of its economic abyss is a rise in its potential. This can only be achieved through appropriate policy reforms.

Draghi goes on to explain how structural reform and policy initiatives can fit together to form a coherent strategy for overall growth, especially relevant in Europe’s case.


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