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Draghi buys time, but clock ticking on need for Eurozone structural reform

04 Dec 2015

Extension of quantitative easing in the Eurozone could hit UK economy, but Carney must not get caught in the middle of the Great Divergence

The Institute of Directors has said that the Eurozone must use the window of opportunity that an extension of the €60 billion-a-month stimulus package has created to embed ongoing structural reforms, particularly market flexibility, boost competitiveness and deliver a longer-term solution to create more sustainable growth. James Sproule, Chief Economist at the IoD, also warned that while UK exporters may feel the pinch of a depreciating euro, Mark Carney must still act to start normalising monetary policy here.

James Sproule, Chief Economist at the Institute of Directors, said:

“Mario Draghi has bought the Eurozone precious time by extending the ECB’s €60 billion-a-month bond-buying programme until March 2017. This is a stimulus package which the block clearly needs. On its own, however, money from the central bank will do little to address the Eurozone’s underlying rigidity which has led to its chronic growth problems. The Eurozone clearly needs broad and deep structural reform of both labour and product markets, but this takes time. An extra dose of quantitative easing must be used to embed ongoing structural reforms, not put off hard decisions.

“Today’s decision could have implications for businesses in Britain. It’s likely the euro will gradually weaken through 2016, while the pound will strengthen, leading to a potential squeeze on British exporters. Goods and services will become more expensive for European customers, while most businesses will face fresh competition from firms on the continent that will undoubtedly benefit from a weak euro. Businesses in the UK are not going to become uncompetitive overnight, though they will need to pay even more attention to raising productivity and watching their margins for the foreseeable future.

“With the US Federal Reserve poised to raise interest rates on their side of the Atlantic, it is important Britain does not get caught in the middle of the ‘Great Divergence’. The UK economy is healthy. Inflation will return next year, wages are rising at a decent pace, and unemployment is coming down across the board. The Bank of England must see through today’s decision and start the process of normalising our own monetary policy while the conditions are right.”

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