1. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 1 Can reform be successful without growth? Aspen Dialogue on World Economy, 8-9 July 2005 Lorenzo Bini Smaghi EUROPEAN CENTRAL BANK

2. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 2 Outline Compared with previous cycles, the euro area is currently experiencing: A weak recovery In spite of expansionary macro-policies This suggests that we are facing structural changes There is no alternative to further reforms, even with low growth

3. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 3 The current recovery (started in Q3 2003) is weaker than the previous ones 1. A weak recovery Source: Eurostat. Note: the through for the current recovery is Q2 2003 and for the previous recoveries Q3 1982 and Q3 1993.

4. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 4 Private consumption growth has been the weak factor 2. A weak recovery Source: Eurostat.

5. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 5 Investment has been broadly in line with previous recoveries 3. A weak recovery Source: Eurostat.

6. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 6 Net exports have also been slightly weaker 4. A weak recovery Source: Eurostat.

7. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 7 Policies have been accommodative: Real short term interest rates are historically low 1. Policy responses Source: ECB.

8. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 8 Real long term interest rates are also historically low 2. Policy responses Source: ECB.

9. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 9 Fiscal policy has been accommodative 3. Policy responses Source: European Commission.

10. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 10 Government debt has increased 4. Policy responses Source: European Commission.

11. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 11 1. Lack of confidence Source: European Commission. A main factor has been weak confidence

12. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 12 As confirmed by increase in household savings 2. Lack of confidence Source: Eurostat.

13. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 13 Possibly due to uncertainties about employment prospect 3. Why is confidence low? Source: European Commission. Note: The figures represent the balance between positive and negative options. A fall indicates a more positive employment prospect.

14. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 14 In spite of good employment growth 4. Why is confidence low? Source: Eurostat.

15. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 15 Perceived inflation has been higher 5. Why is confidence low? Source: European Commission. Note: The figures represent the balance between positive and negative options. A fall indicates a more positive employment prospect.

16. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 16 Although actual inflation has been much lower 6. Why is confidence low? Source: Eurostat. Note: The figures represent the HICP index.

17. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 17 Oil price developments might have contributed to low confidence 7. Why is confidence low? Source: BIS.

18. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 18 Many structural reforms have been implemented so far in the euro area. But the lag with major competitors (US, UK, SE) is still large or has widened. 1. Reforms are needed There is no alternative to structural reforms:

19. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 19 In the labour market, the employment rate significantly rose, but remains below the level observed in the other countries 2. Reforms are needed Source: OECD. Note: The employment rate is defined as employment relative to working age population.

20. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 20 Hourly labour productivity growth has fallen in the euro area 3. Reforms are needed Source: Groningen database.

21. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 21 Potential output growth remains low 4. Reforms are needed Source: OECD

22. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 22 Some key structural indicators (2003/2004) 5. Reforms are needed Source: Eurostat and OECD * A low level of PMR and EPL indicators indicates a low regulation.

23. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 23 In view of ageing, without reforms, debt to GDP could rise above 250% by 2050 (EC estimates) 6. Reforms are needed Source: United Nations

24. L Bini-Smaghi Aspen Dialogue on World Economy, 8-9 July 2005 24 Restore confidence Enhance potential output Challenges Continue reforms in a view to: Instead of adopting a piece-meal reform process that produces “reform fatigue” and raises uncertainty