Draghi: Balancing the books is inevitable, but not just through cuts and taxes – growth is essential

Brussels – Spending cuts and tax rises are not enough to balance the public finances. The watchword, rather, is “growth”. So says Mario Draghi, who today (1 October) delivered his lecture – entitled “The Central Bank, Growth and European Integration” – in memory of the economist Karl Brunner at the Swiss National Bank. “If governments were to finance increased spending needs without implementing further consolidation measures or reforms, the average debt-to-GDP ratio in Europe would reach 130 per cent by 2040. Weighted by the size of the economies, the figure rises to 155 per cent,” calculates the former ECB President. “Some fiscal consolidation in the medium term is inevitable. However, if this process were to rely exclusively on spending cuts and tax increases, it would be unlikely to deliver the necessary results,” he emphasises. Draghi points out that, “over the last three decades, typical consolidation measures in Europe have generated an overall recovery of 3–4 per cent of GDP,” and that “those requiring an adjustment would now need to improve their primary balances by around 6–7 per cent of GDP, which is almost double that figure.” Furthermore, “even the smaller effort required in the past was never politically straightforward,” the former prime minister points out. For this reason, “governments’ ability to implement consolidation depends, therefore, on growth.” 

In this context, while “interest rates are increasingly determined outside Europe,” “growth is a variable over which Europe still has some influence.” For example, “an additional half a percentage point of growth per year, sustained until 2040 and accompanied by the setting aside of part of the increased revenue, would enable Europe to cover around a third of the path towards a sustainable debt trajectory,” Draghi explains. And this growth is “achievable” because “the rapid adoption of artificial intelligence could boost total factor productivity growth by up to 0.4 percentage points over the next decade, while domestic reforms and those of the single market could, collectively, a further half a percentage point per annum.” Without this kind of growth, debt would continue “to rise of its own accord, fuelling the temptation to finance it through the central bank.” 

For Draghi, therefore, “growth should become an explicit objective shared by all governments,” while “Europe’s usual response, characterised by individual countries acting independently, will not be sufficient in the current global context.” For this reason, while national reforms “remain important,” it must be recognised that “they cannot guarantee the scale on which technology – and, consequently, growth – now depend,” because “only integration can do so.” Therefore, “supranational reforms have become the key driver of growth,” states Draghi, noting that “a detailed plan to implement these reforms was set out in the report on Europe’s competitiveness, and much of it has now been incorporated into the EU’s common roadmap.” The implementation of this common roadmap is an “absolute priority.” 

According to the former prime minister, therefore, the more European integration “progresses, the more growth can remain consistently above interest rates, and the more the Central Bank will be protected from political pressures.” In this way, “growth and independence end up reinforcing one another,” as demonstrated by the fact that “a generation ago, Europe adopted a monetary constitution that has withstood all subsequent crises.” The foundations consist of an independent central bank, with a clear priority on price stability, and fiscal discipline. “This framework remains the right one. However, for this framework to endure, legislators at the national and European levels must now take full responsibility for growth as an objective of the Union. In doing so, they will set Europe on the path to renewal,” concludes the former Italian Prime Minister.