The European Central Bank said European authorities should be cautious in granting member states budget leeway in exchange for structural reforms.
Starting this year, the European Commission has extended governments’ scope to delay budgetary belt-tightening when they’re engaged in long-term changes to their economy, citing a trade-off between short-term costs and the long-term benefits of structural overhauls. In an article released on Monday to be published in its Economic Bulletin on Thursday, the Frankfurt-based ECB said this clause should be “carefully applied” as the cost of reforms is in most cases difficult to estimate and sometimes even nonexistent.
“Reforms with direct short-term costs are systemic pension reforms. In other cases, the net effect is difficult to pin down,” the article states. “Moreover, there are many examples where the short-term effects of structural reforms are actually positive. Therefore, it is important that the assumptions underlying the decision to apply such a clause are spelled out in a clear and transparent way.”
With interest rates near zero and a 1.1 trillion-euro ($1.2 trillion) quantitative-easing program under way, the ECB has repeatedly called on governments to deliver on their commitments to structural reforms and to play their part in reviving stagnating prices and supporting the region’s recovery.
“Structural reforms and low interest rates complement each other,” ECB President Mario Draghi said in an interview with Italy’s Il Sole 24 Ore newspaper published on Saturday. “Carrying out structural reforms means paying a price now in order to obtain a benefit tomorrow; low interest rates substantially reduce the price that has to be paid today.”