Our main concern is that across euro area countries domestic vulnerabilities are still very large, which implies a limited ability to withstand adverse external shocks and to kick start a new phase of sustainable growth. The vulnerabilities of many euro area countries are related to the high stock of debt, both public and private, and to a number of structural rigidities and institutional bottlenecks that prevent an optimal allocation of resources across factors of production, and thus limit total factor productivity growth. The current environment not only urgently calls for the implementation of structural reforms, but also provides the right conditions for their implementation. With our monetary policy, the ECB is greatly contributing to an environment favourable to implementing structural reforms: our accommodative monetary policy stance helps countries to gain time, time to implement the necessary measures to increase resilience and thus support sustainable growth. However, there is only a limited role for demand-side policies. Fiscal space is limited and monetary policy cannot carry the burden of the adjustment alone. For the euro area to become more resilient and sustain stronger growth, national governments need to bring about further structural change 1. Work in this regard has already started, and the reform wave of the countries hardest hit by the crisis is showing some initial results, such as a GDP recovery related to comprehensive labour market reforms. Other reforms, mainly on product markets, are expected to bring about GDP gains, but they need to be implemented in full.
Among these reforms I believe that particular attention needs to be given to all legal, administrative and bureaucratic impediments that can lead to an increase of the overall costs for debt workouts, make the distinction between viable and non-viable firms more difficult, and hamper firms’ exit from and entry to markets as well as investment. In concrete terms, this means improving the efficiency of insolvency regimes. In corporate debt restructuring, experience to date shows that an effective insolvency regime is critical to facilitate the early rescue of viable firms and the speedy exit of non-viable ones. IMF analysis also shows that weak debt enforcement and ineffective insolvency frameworks tend to lower the recovery values of problem loans 3. Our internal analysis finds that in order to be able to cope with high private debt ratios and to deleverage reasonably quickly, the strength of the insolvency framework is important. Also, recent analysis from the European Commission found evidence that in the presence of a high stock of private debt, the quality of insolvency frameworks is important for financial stability and for spurring entrepreneurship and thereby mitigating the impact of deleveraging on growth. In particular, it was found that a good insolvency framework is associated with speedier adjustment of non-performing loan ratios. 4  2  See OECD, “Economic Policy Reforms 2015: Going for Growth”, 2015.