It implies stagnant real incomes, thus limiting welfare gains and complicating the management of the debt overhang for firms and households. It is accompanied by high levels of structural unemployment, which is both socially very costly and creates a drag on aggregate demand. And it reduces the amount of stimulus that monetary policy can provide to the economy without generating inflation.
For all these reasons, engineering a boost to potential output is the key policy challenge facing the euro area today – and it is an essential part of a consistent recovery strategy. However, raising potential growth is not a task for monetary policy. Monetary policy can act on the output gap, but it is structural policies that act on potential output.