Draghi: Central Bankers Are Not Omnipotent

European Union

Mario Draghi is at the limits of his powers.

Speaking on Wednesday in Paris, the president of the European Central Bank emphasized the need for euro zone countries to pursue growth and competitiveness rather than assume that the ECB can drive growth on its own.

“It is important to acknowledge that there are limits to what monetary policy can achieve. Monetary policy cannot create real economic growth,” Draghi said. “If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix.”

He also stressed the need for budget reform in many countries, noting that policies can be carried in a way that facilitates growth — specifically, avoiding revenue through taxes. “Relying less on tax increases would help sustain citizens’ disposable income,” the ECB president said. “Prioritizing capital investment over current spending would do more to lay the foundations for future growth.”

His remarks came in France at a time when taxes have been a contentious and central issue for President Francois Hollande. Speaking earlier this year, Hollande thanked taxpayers for shouldering a massive burden.

“We’ve asked a lot of the French in 2013 and in 2012 — it has been heavy,” he said. “I want to salute their efforts, including the wealthiest, because we’ve asked a lot of them.”

Hollande’s government has relied on tax revenue to shore up its budget. He previously tried to raise the rate on France’s top earners to 75 percent, but his plan was dismissed by courts as unconstitutional.

Draghi noted the need for his organization to help as the recession continues to grip many European economies. The central bank president sees no conflict with his ability to help growth and at the same time maintain price stability.

European inflation has remained low, a feature that will likely spur Draghi to act. Some economists have feared that Europe is bordering on a deflationary crisis because consumer spending is weak. In May, inflation came in at 1.4 percent, substantially below the ECB’s 2 percent target. As unemployment worsens or remains the same in many countries, the 2 percent goal has remained elusive, and consumer power in countries like Greece and Spain can’t prop up or contribute to price growth.

Draghi was vague when discussing future plans, saying, “We have an open mind about all other possible instruments that we may consider proper to adopt.”

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