“Whatever it takes!” – Mario Draghi’s famous phrase may have saved the common currency in the euro crisis – jointly with extremely low interest rates and the ECB’s bond purchasing programmes. However, in recent years many commentators have criticised that these measures were taken to the detriment of economically strong member states like Germany, as they, amongst others, harm savers. In this view, the “money glut” has also discouraged countries of the eurozone to undertake necessary reforms to make their economies and therefore the Eurozone more competitive.
Our new study finds the opposite: The ECB’s expansive monetary policy may have actually contributed to euro area countries implementing more reforms than would have been the case if monetary policy had been more restrictive. The study shows: For the period between 2006 and 2016, a moderate monetary policy easing of 25 basis points increased the average reform effort by roughly 20 percentage points within two years. Strikingly, the ECB’s positive effect on reforms was strongest in countries like Spain, Portugal, Italy and Greece. Their economies were hit especially hard by the last financial crisis – and they are again under particular pressure in the current corona crisis.
Overall, the results suggest that an expansionary monetary policy has macroeconomic effects that go beyond the direct short-term stabilisation of aggregate demand. The authors of the study conclude that ECB policy creates the necessary fiscal room for manoeuvre for reforms and can help economies to grow faster.