SINTRA, Portugal – The eurozone is in better shape than it has been since the beginning of the financial crisis, but political leaders need to overhaul their chronically underachieving economies, the president of the European Central Bank said Friday.
“The economic outlook for the euro area is brighter today than it has been for seven long years,” Mario Draghi said at the institution’s gathering of economists and central bankers at a golf resort in Sintra, Portugal – the European version of the annual conference for Federal Reserve officials in Jackson Hole, Wyo.
But he said governments needed to address impediments to investment and growth like bureaucracy, legal barriers to hiring and firing, and over-regulation.
The economic recovery, attributed partly to central bank stimulus measures, created “near perfect conditions for governments to engage more systematically in the structural reforms that will anchor the return to growth,” Draghi said.
Draghi reiterated that having a flexible, well-performing economy should be a condition for membership in the eurozone, “part of our common DNA.”
It was hardly the first time Draghi has harangued eurozone political leaders to do more to fix their underachieving economies. He noted wryly that he and other members of the European Central Bank’s executive board had pleaded for structural overhauls in one-third of their speeches. Members of the Fed’s board of governors spoke about such overhauls only 2 percent of the time, he said.
Elected officials, however, have often resisted changing laws and regulations that favor certain interest groups, like taxi drivers or accountants, but act as a drag on the economy as a whole.
Political leaders are also reluctant to relax laws that make it hard for companies to dismiss unwanted workers. Such laws are seen as a disincentive for companies to hire new employees. Unemployment in Germany plunged after it loosened labor protections. But changes are unpopular with voters fearful of losing their jobs.
Draghi’s comments drew criticism from some of the high-profile economists taking part in the conference, who said central bankers should not tell political leaders what to do.
“Central banks will get themselves in deep trouble if they try to believe they can be major forces to dismantle what other people consider social protections,” said Lawrence Summers, a former U.S. Treasury secretary who is now a professor at Harvard University. He made the comment during a panel discussion.
Stanley Fischer, the vice chairman of the Fed, also expressed reservations. “In general, the Fed rule is don’t step on anyone else’s toes because they are going to step on yours,” said Fischer, who was otherwise effusive in his praise of the way Draghi has handled the eurozone crisis.
But Lorenzo Bini Smaghi, chairman of the French bank Societe Generale and a former member of the European Central Bank’s executive board, said citizens appreciate it when central bankers act as a restraint on political leaders.
“People like to hear different voices,” Bini Smaghi said from the audience. “In the euro area in particular, when a country has 4 percent unemployment and another one has 13 or 20, maybe the central bank is right in saying that maybe some labor markets are functioning better than others.”
Unemployment in the eurozone is the main topic of discussion at the conference, which is being attended by several hundred economists and central bankers. The jobless rate in the eurozone is 11.3 percent, but there are huge disparities among the 19 countries in the bloc. Germany’s rate is 4.7 percent, while unemployment in Greece is 25.7 percent.
Despite Draghi’s upbeat assessment of the economy, there is also concern at the European Central Bank, as well as among economists and entrepreneurs, that a modest upturn could fizzle if eurozone leaders do not improve conditions for businesses and address the chronically high unemployment. He displayed a slide showing how eurozone countries rank poorly in surveys of how easy it is to do business.
Even as growth picks up, threats remain to the very existence of the 19-nation eurozone. Such concerns were very much on the minds of the economists and central bankers in attendance.
Fischer warned in a speech during dinner Thursday of the continuing risk from the crisis in Greece or the possibility that Britain could choose to leave the European Union.
Fischer said it is “very likely” that the European Monetary Union, the basis of the euro, would survive. “But,” he added, “in the longer run, EMU will not survive unless it also brings prosperity to its members.”