The European Central Bank’s ultra-easy monetary policy is working and the euro zone’s economic recovery has taken hold even if more time is needed to lift inflation to the bank’s 2 percent target, ECB President Mario Draghi said on Friday.
Speaking at the U.S. Federal Reserve’s annual conference in Jackson Hole, Wyoming, Draghi said he was confident inflation would eventually reach the target as output rises and the labor market tightens, though he urged patience on that front.
While ECB stimulus has pushed euro zone growth to over 2 percent, the fastest since 2011, inflation is expected to undershoot the bank’s target at least through 2019, a dilemma for its policymakers who, unlike those at the Fed, only have an inflation mandate.
“On one hand we are confident that as the output gap closes inflation will continue converging to its objective over the medium term,” Draghi said in response to a question after his speech. “On the other hand, we have to be very patient because the labor market factors and the low productivity are not factors that are going to disappear anytime soon.”
ECB policymakers are running out of time to resolve this dilemma as they have agreed to decide this autumn whether to extend or wind down the bank’s 2.3 trillion euro ($2.7 billion) asset purchase program, which is due to expire in December.
“We have not seen yet the self-sustained convergence of inflation to the medium-term objective,” Draghi said. “Therefore a significant degree of monetary accommodation is still warranted,” he added, repeating the bank’s longstanding line on stimulus.
The euro soared to its highest level in more than two years against the dollar on Friday on Draghi’s initial comments, which did not mention monetary policy but eased slightly after his more dovish comments.
But Draghi warned that while stimulus has boosted economies around the world, the growing tide of protectionism threatened to thwart trade, cap productivity and ultimately hold back growth.
He acknowledged that globalization has left pockets of society on the fringes, fostering distrust to threatening long-held trust in openness and international cooperation.
Draghi’s comments came as the Trump administration advocates a more protectionist approach, threatening to renegotiate or pull out of trade deals including the North American Free Trade Agreement with Canada and Mexico.
“A turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy,” Draghi said in his speech. “To foster a dynamic global economy we need to resist protectionist urges.”
Although the euro zone economy is growing for the 17th straight quarter, big gaps have opened between the bloc’s core and peripheral members, and between the top and bottom tiers of society, fueling social tension and discontent with the European project.
While German’s unemployment rate is now under 4 percent, the jobless rate in Spain is still over 17 percent, more than twice the level before the 2007-2009 global financial crisis. Youth unemployment is even more alarming: 45 percent of young Greeks and 38 percent of Spanish youth are out of work.
And in Italy, where anti-euro, populist parties are making headway ahead of an election next year, economic output is still well below its pre-crisis peak, fueling arguments that the constraints of the euro keep the country in a vicious austerity spiral with little hope of a sustained rebound.
“Without stronger potential growth, the cyclical recovery we are now seeing globally will ultimately converge downwards to those slower growth rates,” Draghi said.
Draghi defended global financial regulation, which was bolstered after the crisis, picking up on the theme raised by Fed Chair Janet Yellen in a speech to the Jackson Hole conference earlier on Friday.
“Given the large collective costs that we have observed, there is never a good time for lax regulation,” Draghi said. “But there are times when it is especially inopportune.”
“Specifically, when monetary policy is accommodative, lax regulation runs the risk of stoking financial imbalances,” he added.