Draghi Elevates Policy Debate as States Seen Falling Short

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European Central Bank policy makers gathered on the western fringes of the euro region today to get away from the Greek crisis and discuss other pressing problems.

In the Portuguese hillside resort of Sintra, ECB President Mario Draghi was joined by global peers, academics and economists to debate euro-area inflation and unemployment. During the course of the three-day gathering, he is expected to warn again that, as the ECB spends 1.1 trillion euros ($1.2 trillion) to revive consumer prices, governments must take on the responsibility of getting people back to work.

The topic of the annual ECB Forum reflects a monetary and political environment that threatens the region’s unity by turning potential workers locked out of the labor market into radicalized protesters. Seven years after the start of the financial crisis, Europe’s inefficient economies are stuck with idle capacity and structural unemployment of around 10 percent - - issues beyond Draghi’s remit of price stability.

“Recently, economic conditions have improved somewhat in Europe,” Draghi said at the Forum’s opening dinner. “But growth is too low everywhere, inflation is low in certain member countries and it’s definitely too low in other member countries.”

Early Success

The ECB president will also give a keynote address at 9 a.m. local time on Friday and participate in a panel discussion on Saturday afternoon.

Bank of England Governor Mark Carney and Bank of Japan Governor Haruhiko Kuroda will address the getaway at Penha Longa, a resort that traces its origins back to a 14th-century monastery. ECB Executive Board members Vitor Constancio and Peter Praet will chair sessions that will include Citigroup Inc. Chief Economist Willem Buiter and outgoing International Monetary Fund Chief Economist Olivier Blanchard.

Federal Reserve Vice Chairman Stanley Fischer is also in attendance. Europe’s Economic and Monetary Union “will survive this crisis,” he said in a keynote speech on Thursday evening.

“The best way to deal with future crises is to strengthen the economic framework in which they will be confronted,” he said. That means, among other things, “the continuation of a courageous and effective monetary policy.”

Early Success

On consumer prices, the ECB is claiming early signs of success after it decided to add large-scale asset purchases to its existing stimulus measures of record-low interest rates and cheap long-term loans. A four-month stint of negative inflation rates ended in April.

“The ECB has been forced to do an awful lot to fulfill its mandate, in part because the politicians haven’t fulfilled theirs,” said Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. “But it won’t overstep its mandate to artificially bring down unemployment. It’s down to the politicians to deal with Europe’s unemployment crisis.”

More than 11 percent of the region’s working population remains without a job, and more than one in five people under the age of 25 are out of work. That’s likely to feed Draghi’s “biggest fear” of the euro area’s economic weaknesses becoming structurally entrenched, a comment he made to reporters in April 2014.

“Long spells of crisis-related unemployment have resulted in so-called ‘hysteresis effects’ in the labor market,” Praet said last month. “Workers are unemployed for so long that they lose their skills and become unemployable.”

The ECB says that since the collapse of Lehman Brothers in 2008, the euro area has lost almost 6 million jobs. The problem is particularly acute in Greece and Spain, where unemployment has topped 20 percent for more than three years, and populist political parties have benefited.

Greek Lifeline

While Greece isn’t on the agenda at the ECB Forum, it’ll likely be a talking point on the sidelines. As the central bankers gather in Sintra, European Union leaders will meet in Riga where Greek Prime Minister Alexis Tsipras will present his government’s plan for a debt restructuring.

Tsipras’s rejection of the previous administration’s reform pledges is blocking international aid payments and driving his nation toward default.

As the political uncertainty prompts depositors to take their money out of Greek banks, the ECB is providing a key lifeline. The Governing Council on Wednesday approved an increase in Emergency Liquidity Assistance by 200 million euros to 80.2 billion euros, though it also kept up the threat of tighter collateral requirements to access the aid.

One challenge the ECB may address at the forum is the accusation that its insistence on countries pursuing reforms contributes to, rather than eases, economic misery. The central bank was at the center of riots in its hometown of Frankfurt in March as it inaugurated its new 1.3 billion-euro headquarters.

Executive Board member Benoit Coeure told French lawmakers this month that if reforms are “ambitious, complementary and credible, they will elicit expectations of a sustained period of higher income, encouraging households to increase consumption and businesses to invest.”

ECB policy makers have repeatedly warned that a sustained pickup in inflation and growth can’t be ensured after QE ends unless governments play their part. Draghi has maintained his stance since appearing at the Fed’s forum last year.

“Unemployment in the euro area is a complex phenomenon, but the solution is not overly complicated to understand,” Draghi said at Jackson Hole, Wyoming, in August. “A coherent strategy to reduce unemployment has to involve both demand and supply-side policies, at both the euro area and the national levels. And only if the strategy is truly coherent can it be successful.”

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