ECONOMY

ECB’s Papademos warns that only bold reforms will help eurozone speed up growth

FRANKFURT – The eurozone needs more structural reforms to narrow the differences in inflation and growth among its member states, European Central Bank Vice President Lucas Papademos said Thursday. Speaking during an ECB conference on the impact of monetary union on eurozone economies, Papademos said the general conclusion of papers presented there was that growth and inflation divergences were largely due to structural causes, not the economic environment. «The policy implications of this general diagnosis is that more economic reforms are needed to address the structural impediments to growth and the causes of growth and inflation divergences,» he said. In recent months, divergent growth rates in eurozone economies have led some politicians to question whether a one-size-fits-all monetary policy in the eurozone was appropriate. Some countries in the bloc, including Italy and the Netherlands, have seen their economies shrink in the first quarter of 2005. Germany’s expanded by about 1 percent in January-March from the previous three months and weak domestic demand there has hurt other countries in the bloc. Differences in growth and inflation among members of a monetary union mean that a given interest rate could be wrong for some countries in the bloc. Papademos said that growth and inflation differentials were a natural feature of any monetary union, but that persistent and significant divergences in measures of competitiveness may need closer examination. «The persistence of these developments suggests that adjustment mechanisms are functioning slowly and that self-equilibrating forces are not sufficiently strong. The extent and the cumulative effects of differences in competitiveness between some euro-area countries raises concerns about their impact on growth,» he said. The ECB has been under growing pressure from politicians from several eurozone countries, who have said lower borrowing costs would help the sluggish eurozone economy accelerate. The ECB, which has kept its interest rates on hold at historic lows of 2 percent for the last two years, says cheap credit cannot solve Europe’s economic problems. However, markets are pricing in the chance of a rate cut by the end of the year given the eurozone’s gloomy economic outlook. Growth is to slow to 1.6 percent or less this year.