(By Cam Hui) Angela Merkel has said in the past that there is not magic bullet that can save the eurozone, but that it's a process which takes time. The "process" that she refers to is the Grand Plan
, which I wrote about before, as outlined by Mario Draghi. It consists of:
- "Good austerity" in the form of lower taxes and lower government spending. But the Grand Plan isn't all austerity, all the time. The second component addresses the problem of the competitiveness gap between northern and southern Europe, which means:
- Structural reform, which is the European version of the step China took to "smash the iron rice bowl" in order to create labor flexibility for all, not just the young but all of the current employees in their cushy jobs and gold-plated pension plans. Draghi went on to characterize structural reform as the old days of the European social model being all gone.
Now that austerity is starting to bite in many European countries, Draghi went before the European Parliament's Economic and Monetary Affairs Committee in Brussels and defended the Grand Plan
. He went on to call structural reform a "growth compact".
Restoring fiscal health is "an unavoidable policy measure to regain market confidence" Draghi said, stressing that governments need to "persevere."
However, "to deny that fiscal consolidation has some short-term contractionary effects would not be correct," the ECB chief said, conceding later that these effects are now starting to "reverberate."
Structural reforms are essential to restoring competitiveness but will also cause pain in the short term, the ECB president said.
"Structural reforms hit vested interests," he said, adding that they "change profoundly the society." These changes are themselves "a source of pain," he added.
"We are just in the middle of the river that we are crossing. The only answer to this is to persevere and for the ECB to create an environment that is as favourable for this as possible," Draghi said.