Europe is at risk of suffering lasting economic damage from weak productivity and low growth, the European Central Bank’s president warned on Thursday, sending the euro exchange rate lower. As of 07:30 GMT this morning, one UK pound exchanged 1.2794 euros, or 0.18% higher (GBP/EUR). The current 14 day average GBP/EUR exchange rate adjusts to 1.29.
The ECB has been easing policy aggressively to boost growth and inflation in recent years with little to show for its efforts, fuelling arguments that monetary policy was at its limits and local European governments needed to help out.
The euro-zone grew by just 1.6% last year with much of the expansion coming from the ECB’s stimulus and growth is expected to flat-line over the next several years with inflation also holding below the ECB’s target of close to 2%.
ECB president Draghi said growing below potential for too long actually reduced the economy’s potency because instead of output rising towards capacity, potential would fall towards the actual output, permanently embedding low growth. “Given the harm that has already occurred to potential growth during the crisis, it also means a need for acting decisively to raise potential.” Draghi said.
Singling out areas for improvement, Draghi said the euro-zone was lagging behind in innovative capacity, particularly in the services sector, and needed to utilise the latent potential in the euro-zone labour force, which can be unleashed with appropriate labour market and activation policies.
ECB Debt & Bond Buying Program
The ECB is buying 80 billion euros a month in public and private debt, and extended the program to corporate bonds this week. Its deposit rate was cut to minus 0.4% and the main refinancing rate to zero in March, and a program starts this month that could see lenders paid to take long term loans from the central bank.
Draghi has underlined the importance of the euro-zone government’s involvement to boost growth and inflation in the region. He further warned that the euro-zone could not rely solely on the central bank’s efforts and that the lack of economic reforms is making the ECB’s job harder.