In his introductory speech Mario Draghi (2015) not only argued forcefully in favour of structural reforms in the euro area. He also explained why he considers it legitimate for the European Central Bank to relentlessly push governments into more and more ambitious reforms.
This is a controversial position, not because reforms are unnecessary – they are indeed indispensable – but for two related reasons: first, because the central bank is a specialised institution with a narrowly defined mandate that does not include structural reforms; and second, because many reforms amount to changing the economic and social institutions underpinning a society and therefore involve choices that only an elected body can make. It is not by accident that reforms of the labour market, of competition laws, of bankruptcy procedures or of pensions, to name just a few, require legislation and therefore decision by parliament.
As argued by Willem Buiter (2015), standard economic and political economy arguments rather suggest that independent central banks would be better off sticking to their mandate and refraining from making statements about policies that do not fall within their remit. This is typically the attitude of the Federal Reserve System or the Bank of England (things are somewhat different in Germany and Italy, but mainly because these central banks enjoy considerable prestige inherited over time). So why should the ECB behave differently? This is a question of major importance for the policy system of the euro area.
Related questions can actually be raised for the other EU institutions. Since 2010 structural reform in the euro area has increasingly been the focus of policy attention. Conditional assistance programmes have involved extensive reform requirements; the macroeconomic imbalances procedure (MIP) has been introduced; annual country-specific recommendations (CSR) are being issued within the framework of the European Semester; in 2011 the heads of state and government of the euro area countries and six other countries agreed on a reform-centred Euro Plus Pact; in 2012-2013 discussions were held on German-inspired “contracts for competitiveness and growth”; in its January 2015 recommendation on the best use of flexibility within the Stability and Growth Pact, the Commission proposed to take reform efforts into account when assessing a country’s public finances; and finally, the Five Presidents’ report of June 2015 emphasises the need to strengthen the coordination of reform policies and the MIP, while streamlining processes to favour better ownership. A consequence of the crisis has unequivocally been increased EU involvement in policy areas that primarily belong to national competence.
Again, this attention is natural in the light of the magnitude of imbalances across countries and of their non-fiscal dimensions; it is also indisputable that the weakness of potential output growth in nearly all countries calls for remedial action. But these are hardly sufficient justifications for EU involvement in policy areas that are deeply national and for EU recommendations that may conflict with domestic social choices. To put it bluntly, why is economic underperformance in a particular country a matter for EU concern? If labour market institutions are organised such that unemployment is structurally higher in that country, what is the justification for requiring a change to these institutions? Why should the corresponding reform choices not be left to the domestic decision-makers?
This short paper includes two sections. In Section 1, I discuss whether the particularities of the euro area provide a rationale for departing from central bank neutrality, or at least prudence as regards national structural reform policies. In Section 2, I examine the structure of reform discussions between EU institutions and national governments and examine how they could be improved.
Forthcoming in European Central Bank (2015), Inflation and Unemployement in Europe, Proceedings pf the ECB Forum on Central Banking, Frankfurt am Main
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