Lecture by Mario Draghi, President of the ECB,
at Sciences Po,
Paris, 25 March 2014
The euro area has been through a crisis of almost unprecedented drama and severity. Like the Great Depression of the 1930s, this will most likely provide rich material for economic historians for decades to come. It will be studied and analysed, its causes and consequences debated and revised. So it is interesting for us to imagine, when the dust has settled, where the various accounts of the euro area debt crisis will locate its turning point.
Some historians may locate it in individual policy measures taken during the crisis; others may place it in a future that we have not yet reached. In my view, the turning point has passed, and it came in the summer of 2012. What changed at that point was that crisis management shifted towards the development and execution of a consistent recovery strategy. It is this strategy that I am going to outline in my remarks today.
I will organise my remarks as follows. First, I will describe the initial development of the crisis, illustrating how policy choices made under the pressure of events and that were commendable by themselves, but that were sequenced in the wrong order, made dealing with the consequences of the debt overhang more difficult. This interacted with features of the euro area’s institutional structure to postpone the recovery.
Thereafter, I will describe how the right sequence of steps after June 2012, when the banking union project was first agreed, has put the euro area back on a trajectory towards recovery. The first step was ‘rebooting’ the financial system, which is a necessary condition of a sustained recovery, not least because it helps monetary policy to manage aggregate demand. But it is not a sufficient condition: policies of structural reform that lift the level of potential growth are an equally important part of the recovery strategy.
In describing this strategy, I am not only talking about the past, but also about the present and the future. The crisis is not over. To be successful, the recovery strategy is being, and must continue to be, executed with commitment and perseverance.