The ECB head also warns of an "ageing crisis" in the region...
Mario Draghi, President of the European Central Bank, has called on governments in the Eurozone once again to aid the ECB in its efforts to revitalise a flagging economy.
Echoing his multiple pleas in recent months for individual states to do their fiscal part, he told the Brussels Economic Forum this morning:
"Fiscal policies should work with and not against monetary policy."
Draghi argued that if structural reforms were not imposed by governments "without undue delay", the Eurozone economy was at risk of suffering lasting economic damage.
He argued that, while inflation is ultimately a monetary phenomenon that could be addressed by a central bank, "monetary policy does not exist in a vacuum" and that the time frame of how effective the ECB can be would be negatively impacted without support:
"Time matters," he said. "A too-slow return of output to potential is far from innocuous. On the contrary, it has lasting economic consequences, since it can ultimately lead to potential being eroded as well.
"It is well-documented for instance that workers who remain unemployed for too long may suffer the effects throughout their life, in the form of reduced employability, reduced productivity and reduced income – so-called hysteresis. That is particularly true for younger workers who are unemployed during the all-important formative years of their careers and may suffer from labour market 'scarring'...
"There is also emerging evidence that growing below potential for too long can erode that potential through its effect on productivity growth.
When uncertainty is high, a 'wait-and-see'attitude can cause the most productive firms not to expand as much as they would otherwise, and the least productive firms not to contract as much as they should.
"In other words – and contrary to what is often claimed – too-weak demand can slow down 'creative destruction', whereas stronger demand can accelerate it. And there are signs of such effects in the euro area, too.
"The cost of delay, then, is that labour and productivity suffer, and the output gap closes in the 'wrong way'– instead of output rising towards potential, it is potential that falls towards current output."
On the subject of Eurozone employment, Draghi warned that productivity would have to increase to offset the effects of Europe's ageing population.
"We cannot avoid the fact that, over time, the inherent speed limits resulting from the euro area’s unfavourable demographics will start to bite. The euro area’s working age population is projected to start gradually decreasing in the next decade.
"In that context, employment growth is likely to start decelerating in the not-too-distant future, even with determined structural reforms, as a higher share of people in work will no longer be able to offset the fall in working age population. Even higher expected migration is unlikely to be able to fully offset this natural population decline.
"Public policy can certainly help temper these effects through its role in receiving and integrating migrants. But since policy cannot do much to alter long run demographic trends, the implication is that raising long-term growth will require a complement – namely, raising productivity."