ECB Measures 'to Buy Time' Says Bank's Chief Economist

5/9/2014

Measures No Substitute for Reform But to Buy Time for Reform to Work

The vast array of measures agreed by the European Central Bank Thursday can only buy time and isn't a substitute for countries to enact needed reforms, ECB Executive Board member Peter Praet said Friday.

Speaking to journalists on the sidelines of a conference in Italy, Mr. Praet reiterated remarks made the previous day by ECB head Mario Draghi that countries shouldn't feel that the ECB is letting them off the hook with respect to structural reforms.

"We made very clear that monetary policy can only buy time and not solve the structural problems of our society," said Mr. Praet, who serves as the chief economist for the Frankfurt-based central bank.

The remarks come one day after the ECB surprised markets with a 0.1 percentage point cut to all of its interest rates, plus announcing that it would start buying a broad array of private sector assets, including asset-backed securities and covered bonds.

But in response to questions about a speech last month in the U.S., Mr. Draghi made it clear that countries needed to make reforms to increase the flexibility and dynamism of their economies if they wanted any impulse from monetary or fiscal authorities to have an impact.

Mr. Draghi said that even with an extremely generous monetary policy and bank lending, "if the person who has planned to use this credit for a new business has to wait eight months before he or she can open this new business, and then, once he does it, he has to pay lots of taxes, this person won't apply for credit."

Mr. Praet said the ECB's message wasn't "very different from the one we've been giving for a long time of a moderate fragile recovery with downside risks, weak price pressures extending into the medium term." Nevertheless, "recent data show there is some increase in downside risks."

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