ECB's Constancio warns of need to offset low productivity, weak demographics

The euro area economy is on the mend but the medium-to-long term challenges facing the currency bloc are daunting, the vice president of the European Central Bank said.

Speaking at City Week, in London, Vitor Constancio highlighted it had taken the Eurozone an unusually long-time to recover the level of output seen prior to the Great Financial Crisis and how the ratio of investment to gross domestic product remained three full percentage points below its pre-GFC peak.

In part, that might be the result of two secular trends, a secular decline in the rate of growth of total (labour and capital) productivity and weaker demographics, he explained, citing recent academic research on both topics.

The permanently lower long-term potential rate of growth which could result from such factors might have societal implications, as lower economic growth would not be able to create enough jobs for citizens and may exacerbate income inequality, the policy-maker said.

Against that backdrop, he urged for the adoption of structural reforms to boost the growth potential of the economy.

He specifically mentioned three such types of reforms: measures to improve the business environment and the provision of adequate public infrastructure; growth-friendly fiscal policies (within the limits set out by the EU); and completion of the banking and capital markets union.

During his speech he also placed equal importance on the outlook for the US and Chinese economies in shaping the short-term cyclical outlook, adding that global trade had exhibited resilience early in 2016, althought it was still weak when seen from a historical perspective.

"In sum, while I expect the recovery in the global economy to gather momentum as the headwinds eventually dissipate, there are many factors which could potentially derail it. And from the euro area’s perspective, I expect support from external demand to be considerably lower in the future when compared to the pre-crisis years, even if none of the downside risks materialise."