European Central Bank (ECB) president Mario Draghi has said the Eurozone should make it easier for companies to fail in order to allow stuttering productivity in the region to accelerate, while his criticised the deregulatory impulses of Donald Trump in a thinly veiled attack.
He said: “Ensuring that failed firms are able to smoothly exit the market is key to enabling capital and labour to be allocated to where it can be more productively used.”
The ECB has continually pushed for structural reforms amongst EU countries, with Greece in particular forced to implement changes in exchange for financial assistance.
In a speech in Frankfurt Draghi pointed to the falling rate of “business churn”, the rate of businesses forming and closing since before the crisis as evidence of the decline in competitiveness in Eurozone industry.
The lack of competition means “capital misallocation has been rising”, Draghi said, with company insolvencies taking two years in the Eurozone – three times longer than the best performing nations.
He also pointed to failing firms which do not take up new technologies as a key inhibitor of productivity in the bloc.
Weak productivity growth since the global financial crisis has held back growth in the Eurozone as well as in other nations such as the UK.
Lagging productivity has become an increasingly prominent source of concern for economists, including central bankers, as the divide between firms on the frontier of technological progress and less efficient firms accelerates.
Draghi reiterated his call for “government support” of productivity-boosting innovations, including greater spending on research and development, which would “improve the ability of euro area firms to absorb more innovation.”
Meanwhile, Draghi’s colleague Sabine Lautenschlaeger hit out at people pushing for deregulation of the banking sector, with a thinly veiled dig at the administration of US President Donald Trump.
In a separate speech in Dublin Lautenschlaeger, an influential member of the ECB’s executive board, said bank regulators should learn from the financial crisis and avoid the temptation to relax rules in the rush to chase growth.
She said: “There are more and more voices calling for an easing of the rules – not just banks, of course, but also some politicians. My advice to them is: don’t weaken regulation just for a short-lived increase in growth prospects.”
During the US election campaign Trump repeatedly vowed to dismantle the Dodd Frank banking regulation. He blames the act, which was introduced following the financial crisis and subsequent bank bailouts, for slowing the pace of growth in the US economy.
Lautenschlaeger called for further efforts to consolidate global banking regulation, warning “against leaving the global regulatory wall unfinished or even tearing it down.”