Following Japanese Prime Minister Shinzo Abe's footsteps, European Central Bank (ECB) chief Mario Draghi appears to be implementing his own three-pronged plan to rescue the euro zone economy.
"It now appears – based on European Central Bank President Mario Draghi's recent Jackson Hole speech – that the ECB has a similar plan in store for the euro zone," Nouriel Roubini, chairman of Roubini Global Economics wrote in an op-ed published on Project Syndicate's website on Sunday, referring to "Abenomics" – Abe's economic revival plan consisting of fiscal stimulus, monetary easing and structural reforms.
At the annual central bank symposium in Jackson Hole on August 22, Draghi acknowledged that inflation expectations have declined – a key pre-requisite for Large Scale Asset Purchases (LSAP), according to strategists. He emphasized the need for policies to boost aggregate demand, suggesting the European Union should coordinate higher fiscal spending. He also suggested the ECB would be prepared to conduct LSAP to support EU-administered infrastructure spending.
Roubini is not the only market commentator to point out parallels between Abe and Draghi.
"The tone of Draghi's address was reminiscent of Yellen's dovish addresses on the labor market in the past and channeled the spirit of the three-arrows of Abenomics," said Greg Gibbs, head of Asia Pacific markets strategy at RBS, referring to Draghi's Jackson Hole address.
Draghi's 'three arrows'
Roubini says the first element of "Draghinomics" is an acceleration of the structural reforms needed to boost the euro zone's potential output growth. Potential output refers to the highest level of gross domestic product (GDP) growth that can be sustained over the long term.
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"Progress on such vital reforms has been disappointing, with more effort made in some countries (Spain and Ireland, for example) and less in others (Italy and France, to cite just two)," he said.
The second element is boosting demand, which has been suppressed by fiscal consolidation in recent years.
Now that a lot of front-loaded austerity has occurred and markets are less nervous about the sustainability of public debt, there is some flexibility in how fast the fiscal target can be achieved, Roubini said.