FRANKFURT, Germany — European Central Bank President Mario Draghi is urging indebted governments to move beyond spending cuts and tax hikes and introduce reforms that would boost growth and reduce the "tragedy" of unemployment.
Speaking after the bank's monthly policy-setting meeting, Draghi praised the progress made by the 17 European Union countries that use the euro in controlling their deficits in an effort to dig out of the region's 3 1/2-year economic and financial crisis.
Governments cut the average budget shortfall to 3.5 percent of economic output last year from 4.2 percent the year before.
But government cutbacks have plunged the eurozone economy into recession and sent its jobless rate to 11.9 percent, highest since the euro was launched in 1999. The ECB lowered its economic forecast for this year Thursday, saying the region's economy would shrink 0.5 percent instead of by the 0.3 percent projected in December.
Draghi went out of his way to urge steps for growth, such as shaking up hiring rules and simplifying regulations affecting the products companies make.
The ECB president said that austerity must be followed up with a "comprehensive structural reform agenda" to encourage growth and job creation in countries that have left large numbers of 20-somethings on the margins of their stagnant economies. In Greece, the unemployment rate for the under-25s is 59 percent while in Spain it is 55 percent.
He said it was "of particular importance" to tackle youth joblessness. Unemployment is "a tragedy, and youth unemployment is an even bigger tragedy," Draghi added.
Economists say that ultimately growth is the only way to reduce the large debt burdens weighing on eurozone governments such as Spain and Italy, and the three countries that have needed bailout loans from other countries: Greece, Ireland, and Portugal. Growth increases tax revenues as more people get jobs and businesses make more profits. Meanwhile, a bigger economy makes the debt smaller by comparison.
Analyst Christian Schulz at Berenberg Bank said the ECB was pushing governments to take action rather than offering help itself. "ECB inaction keeps the pressure on governments to continue structural reforms to improve growth prospects," he said.
Reforms such as making it easier to lay off established workers, so that companies will be more willing to hire young people when times are good, help governments as they don't involve an increase in spending. But the measures often run into opposition from entrenched interest groups. For example, Italy's Prime Minister Mario Monti could pass only a watered-down reform of rules that force companies to take back laid off workers if a court rules against them – a key deterrent to more hiring.
Draghi's comments come as Europe's leaders appear to be reconsidering harsh austerity as a way of combating the crisis. While governments are still under pressure to cut deficits, eurozone finance ministers meeting earlier this week indicated they were now willing to give countries more time to meet European Union requirements that they close their deficits, lessening the impact of cuts on growth.
Draghi said the ECB's latest, lower, economic forecast for this year was due to the impact of a worse-than-expected contraction of 0.6 percent in the fourth quarter carrying over in this year. He said his forecast for a gradual recovery in the second half of the year "remains unchanged."
Also Thursday the ECB decided to leave its key rate unchanged at a record low of 0.75 percent. The economy is weak enough for another rate cut, economists say, and inflation is low at 1.8 percent, meaning there's little risk a cut would worsen inflation.
The ECB maintains that its monetary stance is "accommodative," meaning interest rates are low enough to spur growth. Since Draghi took over as ECB president in November 2011, the bank has cut rates, flooded the banking system with cheap credit, and shored up government bond prices by offering to purchase unlimited quantities of bonds for countries that agree to reduce their deficits.
Nonetheless, the ECB has not gone as far as the Bank of England, Bank of Japan and the U.S. Federal Reserve, all of which have pumped newly created money into their financial systems to try to boost asset prices and spur growth. Unlike the Fed, the ECB's mandate is to focus on controlling inflation first, and only then think about reducing unemployment. Yet with inflation low, it is free to consider further moves.
Draghi held the door open to another rate cut, saying the bank "never pre-commits." Yet he and other top bank officials have questioned how much more good another cut would do since rate are already very low. The bank's top official for economic forecasts, Peter Praet, has cautioned that the bank could face diminishing returns and need to apply larger and large doses of stimulus if it carries its policies too far.