Draghi wants shared sovereignty over structural reforms

Mario Draghi called for a "quantum leap in institutional convergence" at a conference yesterday (March 16), as he fleshed out his vision for common governance of structural reforms in the eurozone.

The European Central Bank (ECB) president first introduced the idea of common governance when he spoke at a memorial lecture for Tommaso Padoa-Schioppa in London in July 2014.

He highlighted the importance of reforms again yesterday, at the SZ Finance Day in Frankfurt, before arguing in favour of an "institutional-based approach" to making them happen.

Earlier in the day the ECB also published an article chronicling the progress of reforms in the eurozone, lamenting the loss of momentum since 2013, while arguing for further efforts.

Integration to convergence

The purpose of the reforms, at least to Draghi, is to achieve greater "economic convergence" in the eurozone, which he defines as "the gradual alignment of productivity levels".

This, he explained, is a necessary condition for the monetary union to prosper in the absence of fiscal transfer between member states, as "cohesion depends on every state producing enough growth to support its citizens' welfare".

"Every economy needs to be able to meet the highest standards in terms of competitiveness, employment and growth," Draghi added, an ongoing challenge in the region.

Turning his attention to how greater convergence can be achieved, Draghi pointed to the fact reforms remain "almost entirely a national responsibility", something he believes must change.

Rules to institutions

This raises the question of how, in practice, European governance would work. "I think few would deny that where European institutions have been invested with executive power, they have used it well," Draghi said.

"If we look at the rules-based approach, however, it is difficult to reach such a positive conclusion." He argued fiscal rules are repeatedly broken in the eurozone and, as a result, trust between countries has become "strained" at times.

Draghi does not attribute this to any "inherent difference" between policy-makers at the European and national levels, but the greater trade-off between credibility and flexibility associated with rules when compared with institutions.

"Rules can only really be credible if they are applied with very little discretion," he noted, while institutions have greater flexibility in how they meet the mandate handed down to them, as the ECB demonstrates.

"I recognise that for structural reforms the analogy with monetary policy is not perfect," Draghi said.

"But I am confident that a European institution could help on two fronts, [by] making it easier to agree on the aims of structural reforms by aligning best practice and making it easier to implement them by using European law to bypass vested interests."

Ample space

The separate ECB report identified "ample space" in the eurozone for further reforms, though this differs greatly from one country to the next. Indeed, Draghi has not been shy in praising countries such as Ireland and Spain for their progress, which only serves to highlight those who have not.

It singles out the need for reforms that "directly address bottlenecks and barriers to entry to increase the ease of doing business", describing the business environment as "unfriendly" in most eurozone countries.

"Indeed, several euro area countries remain far from the frontier and well below the top ranking countries in the world, with only one euro area country among the top ten," the report added – Finland receives the highest score of the member states, Malta the lowest.

Additional measures highlighted by the report include reforms that "allow workers to redeploy quickly to new sectors and job opportunities and which reduce unemployment duration and structural unemployment."