Former ECB President Mario Draghi Talks Growth in Europe

Mario Draghi

Europe is rich, old and not growing; slightly better forecasts don't change that structural problem.

Draghi says all of Europe has had a growth problem. Europe is doing slightly better now, with growth forecasts revised up by a few notches. But the underlying situation is a society that is rich, old and not growing. When there is no growth, incumbents and older people control decisions, which explains why young people feel disenfranchised. He presents this structural stagnation as the most natural explanation for the unrest.

“Europe is doing slightly better now. Growth forecasts have been revised upward by a few notches, but the underlying situation is one of a society that is rich, certainly, old, and not growing.”at 4:03

Mario Draghi

France's fiscal problem is real, but its long-duration debt cushions it against higher borrowing costs.

France has run budget deficits for many years, and its debt-to-GDP ratio has risen gradually for around 10 to 15 years. With interest rates rising fast around the world, that deficit is becoming hard to manage. Draghi also sees some less negative features. Little debt is left to issue this year, and the debt has a very long duration. That means France can pay quite high spreads without the debt dynamics being affected immediately.

“France has a specific fiscal problem. ... this budget deficit seems to be difficult to manage. ... The debt has a very long duration, which is quite important because it means that France can afford paying spreads that are pretty high without this affecting the debt dynamics immediately.”at 4:50

Mario Draghi

Youth unrest in France, Italy and Germany reflects blocked expectations and a lack of growth, not just violence.

Draghi argues the riots in three countries have different motivations, but they share one circumstance: all three hold elections next year. The deeper explanation is blocked expectations. Young people feel nobody is listening to them, and most people want growth with social justice. Where there is no growth, intergenerational justice becomes hard to deliver. Young people feel they can't easily find jobs and are unequipped for a fast technological transformation. Violence should be condemned, but he says these factors are amplifiers rather than explanations.

“it's a case of blocked expectations. ... has a feeling that nobody's listening to them.”at 2:07

Mario Draghi

The ECB will stay on the sidelines; the bar to intervene on French spreads is high.

Draghi says the widening spreads are a repricing of fiscal and political risk, so nothing so far would prompt an ECB intervention. The bar is high for three reasons. Inflation is high and has just risen, and price stability is the ECB's mandate. The tools require contagion across Europe, which he says is not substantial, and an impairment in the transmission mechanism, which he says is not visible, since bank lending has increased. Rules also bar TPI intervention for countries under an excessive deficit procedure. He expects the ECB to watch markets and the speed of rising spreads, but to stay on the sidelines for now.

“look at these spreads. The spreads are basically a repricing of fiscal and political risk. So to that extent, there is nothing that would elicit an ECB intervention.”at 6:03