Draghinomics a new economic policy of EU and lessons for vietnam

178 | Policies and Sustainable Economic Development Draghinomics: A New Economic Policy of EU and Lessons for Vietnam VU THANH TUNG University of Finance and Banking - billvutung@yahoo.com Abstract During recent years, Europe has faced many economic problems EU (European Union), its member countries, and ECB (European Central Bank) have tried all their best to find solutions to overcome this hard period The President of the ECB, Mario Draghi, has built ‘‘Targeted Longer-term Refinancing Operation’’ (TLTRO), which is considered as one of the most important economic plans in the modern world in order to recover Europe economy This event has affected not only EU but also the world, including Vietnam By studying content of Draghinomics, using qualitative method to analyze successes and limits of the theory, this paper draws some experienced lessons for Vietnam when our country is on the way of restructuring the economy Keywords: Draghinomics; EU economy; Vietnam Introduction Europe is a large continent, and EU is one of the biggest economic zone in the world EU’s GDP was 22% of global GDP (16.2 trillion euros) in 2015 In the list of top ten countries whose GDP are highest in the world, EU has Italia, England, France, and Germany Therefore, EU economy’s health greatly affects the whole world After a long way of development, Europe growth has been slower gradually That GDP of Europe accounted for 32% of total the world GDP in 1980 was just a nice memory Beginning in 2012, EU’s recession has lasted until now This has been caused by the US financial crisis 2009 and internal problems of EU such as government debts, high unemployment, markets down, conflicts between members…Recently, Brexit (Britain exits EU) has made Europe’s situation much worse On July 8, 2016 IMF (International Monetary Fund) forecast GDP of the Eurozone (containing 19 members) would only reach 1.6% this year, compared with 1.7% it made in the previous time, and GDP in 2017 would fell to 1.4% General Director of IMF, Christine Lagarde (2014), has warned that the European crisis would have been out of control of ECB If six member countries of EU in financial difficulties not get enough support, EU will collapse and peace in Europe will disappear Thomas Barnett (2015), the leading strategist of the famous consultancy firm Wikistrat in the US, judged that “the US, which is considered to be one of the most important pillars of globalization, is entering a hard period and focusing on local industries And now, Europe, another key pillar of the world, would have exploded.” Not only EU but also all Europe have been trying to find possible solutions to “break the back of the Beast.” As the President of ECB, Mister Mario Draghi (2012), promised to “whatever it takes” to save the euro and the EU economy The man, called “Super Mario of Europe” by the magazine Libération (France) for his success in persuading the ECB Board of Directors to demolish a “taboo”— recorded in the Europe agreements, not to fund the budget deficit by printing money, has actually done what he had said He now uses Draghinomic to make EU restored to its normal life If the Eastern world has Abenomics, the economy theory of the Japan Minister Shinzo Abe, the Western world is also welcoming Draghinomics This paper uses qualitative method to explain basic content of Draghinomics By listing, comparing, and contrasting the secondary data, the paper points out what are successes and limits of this well-known theory Although this economic policy is rather new in the world and we should have been waiting for its results patiently, the author hopes to draw some good lessons for the Vietnam’s economy 180 | Policies and Sustainable Economic Development Overview on Draghinomics 2.1 Origin of the nickname “Draghinomics” Draghinomics means the economic theory of Mister Mario Draghi The nickname was registered a birth by the illustrious economist Nouriel Roubini, the professor of New York University's Stern School of Business and the chairman of Roubini Global Economics, an economic consultancy firm Actually, Draghinomics represents “Targeted Longer-term Refinancing Operation” plan The term ‘‘Name-nomics’’ appeared in 1980s when American called the economic theory of the US President Ronald Reagan “Reaganomics” Like Abenomics, the economic revival program of Japanese, TLTRO is the initial sign of an economic stimulus program for the Eurozone It plays a key role to promote the necessary restructuring for the potential growth of Eurozone, and to get this zone over the danger of falling into deflation TLTRO is appreciated the shocking solution of ECB directing to European banks 2.2 Background of Draghinomics Economic stagnation European banks were engaging in an inevitable and rapid deleveraging process that had been an expected repercussion of the credit bubble Now that deleveraging is a bank-specific initiative, the ECB cannot influence its scale It was in this context that ECB did a complete assessment of banks’ state of health before making them directly supervised Since the summer of 2013, the banks that fall under ECB’s live supervision have strengthened their balance sheets by almost 203 billion euros The crisis of banking sector and enormous government debts degenerated into growth slump years ago so that it threatened biggest economies of Eurozone, Germany, France, and Italia The “domino effect” came true in EU Germany is on the edge of regression, whereas France is coming to the deadlock, and Italia growth is nearly the same as 15 years before In 2014, growth in the Eurozone stalled in the second quarter, following four quarters of sluggish recovery from a crisis over high government debt Unemployment remains at 11.5% after increasing for a long time Figure Unemployment has increased in 2008-2013 Source: Eurostat (2014) Eurozone has severely low inflation, which can slow growth for many years There was a sudden decline in exports and industrial activities in Germany, the dominant Eurozone economy Markets have gone down more and more Both internal problems and the global market turmoil made investors in the European economy worry about its falling into recession The Stoxx 50 index of top Eurozone stocks fell down by about 5.7% over the past three months Exchange-traded funds such as the Vanguard FTSE Europe ETF (VGK), the iShares MSCI EMU Index Fund (EZU), the iShares MSCI Germany Index Fund (EWG), the iShares MSCI EAFE ETF (EFA), and the iShares MSCI Italy Index Fund (EWI) fluttered to track European equities Figure Eurozone growth in 2004-2015 Source: Euro Stat (2014) 182 | Policies and Sustainable Economic Development Recently, investors in European markets has recognized the spreads for Italian and Spanish ten- year government bonds widen relative to German bonds This widening showed faltering investor confidence in the future of not only leading economies in EU but also other European countries On October 16 2014 Italy’s leading financial index fell by 1.2%, strengthening the market’s belief that Europe were weakening Worsening economic data, an extravagant debt-to-gross domestic product ratio, a burgeoning unemployment rate, and a very low inflation rate are some of the key factors that have instilled negative sentiments in investors in ETFs (exchange-traded funds) that track European equities Figure Europe is weakening Source: NYSE Arca (2014) Eurozone yields have been still lower than 3% from pre-recession peak in early 2008 Therefore, it is not surprising that inflationary pressures are absent That market belief in the inflation target of the Eurozone in the next years had been eroded caused financial markets to fear that inveterate disease Although Eurozone might have overcome the worst period of the debt crisis, but lending to small and medium enterprises (SMEs) are still weak That is why this zone cannot get a break in economic growth Huge government debts The Eurozone crisis, in particular, resulted in debt crises in several EU member states, and many countries had the collapse of financial institutions, increasing unemployment rates, and high government debts According to EU rules, member countries that use the Euro are not allowed to run annual deficits of more than 3% of GDP; Spain, Italy, and France all ran deficits above the ceiling Figure EU Government debt has increased in 2002-2013 Source: Eurostat (2014) Notably, Greece’s financial collapse required IMF and ECB bailout packages of $147 billion and $173 billion in 2010 and 2012 respectively However, Eurozone’s growth continues to stagnate due to high unemployment and deflation GDP of the second quarter in 2014 remained sluggish The third- quarter forecast had nothing positive due to the Ukraine crisis Figure Real GDP of EU in 2002-2013 Source: Eurostat (2014) Deflation and low inflation Core inflation was 0.8% month in January 2014, which was only marginally better than the recorded low level of 0.7% at the end of 2013 In some countries, inflation was low, but it was more worrying than in others whose deflation pushed real interest rates go up It caused concerns that Eurozone would fall into deflation Along with increases in government borrowing, rising labor costs and trade deficits have resulted in economic distress for EU In order to keep the debt burden not to go up and repay debts, banks, households and governments must cut their huge expenditure; lenders and consumers also cut spending at the expense of investor confidence ECB’s responsibility Economic situation of the Eurozone stagnation cannot blame ECB’s harsh financial policies as well as the fragility of the banking system, both of which have crippled growth But ECB must be responsible for the ominous low rate of inflation, which was 0.4% and much lower than the ECB’s 2% target ECB has dealt with banks’ problems slowly The inspections and monitoring which had been carried out in 2104 brought the opportunity of clearing credit records and recapitalize weak banks, but they proved quite late This delay led to the credit crunch so that banks must curtail lending To promote credit growth, ECB injected over 1000 billion Euros into the banking system in 2011 and 2012 in order to deal with the liquidity crisis when the debt crisis was at its peak Instead of using this large amount of cash to lend businesses, commercial banks tended to deposit money at ECB When the crisis got over, banks had to repay LTRO borrowings Now banks owe ECB only 435 billion euros, or 45% of the initial LTRO loans Interest rates in the money market increased, thereby raising Euro and the pressure of deflation To prevent this situation from happening again, at the meeting in June 2014, ECB lowered interest rates on deposits by negative If commercial banks want to deposit at ECB, they must pay fees Some reasons of crisis The root cause of financial diseases in Europe is told to be three issues which are closely related together: (i) EU leaders not have enough courage to promote structural reforms strongly to raise economic growth; (ii) European voters and residents have not really seen the urgent need to reform radically; and (iii) So tight monetary and fiscal policy strangled growth, and made reform much more difficult to be done The Eurozone has been plagued by near-zero growth, high unemployment, and deflation in the wake of the Great Recession If monetary union did not bring nothing but stagnation, unemployment, and deflation, eventually some other Brexit will come true again The situation will be very difficult without a push from the EU leaders The existence of these problems prompted Super Mario to implement his economic program in 2014 2.3 Contents of Draghinomics In his plan, Mister Mario Draghi has set forth a three-part strategy including: EU economy ’s recovery Pro-business reforms to cut bureaucracy and Added government spending from countries that can Monetary stimulus from the ECB Figure Three steps of Draghinomics On September 18, 2014 ECB officially started to run Targeted Longerterm Refinancing Operation whose initial capital was 400 billion euros Its target is to promote economic recovery across the continent after years of crisis Mister Mario Draghi (2014) expressed his confidence that TLTRO and ECB’s recent policies would help Eurozone economy ‘”re-stand on its feet.” Draghi’s three-part economic program focuses on aggressive structural reforms, fiscal policy, and massive monetary policy through quantitative and credit easing They may be called Draghi’s three- pillared strategy or his three arrows policy (similar to Abnenomics) Three Arrows of Draghinomics Structural reforms Fiscal Stimulus Massive monetary policy Figure Three arrows of Draghinomics Structural reforms While monetary and fiscal policy plan to promote short-term growth, structural reforms aim to create long-term growth on the supply side The first core principle of Draghinomics is the adoption of rapid structural reforms to improve output growth across the Eurozone Draghi has stressed the importance of economic reforms to drive recovery In a recent speech at the Brookings Institution in Washington on October 9, 2014 the ECB Chief argued, “Without reform, there can be no recovery.” He meant reforms were the only way to lift growth rates because problems of EU tended to be more structural than cyclical, relating to the structure of economy as opposed to business cycles ECB can only directly control monetary policies, so EU members must implement structural reforms in order to stimulate economic activity Labor markets are a key area of focus for reforms Like Abenomics of Japan, Eurozone is creating more flexible labor markets and encouraging women to join in labor force There is scope to raise labor participation rates in Europe’s case However, given the unfavorable demographic trends in most European economies, structural growth will have to rely on productivity Increasing productivity will also help match aggregate demand boosted by monetary policy Fiscal stimulus The second principle, fiscal policy, aims to maintain debt sustainability and long-term growth Draghi gives prominence to positive fiscal policy through the use of tax cuts rather than increased spending Actually, expansionary policy may increase income and the propensity to consume The economic multiplier effect suggests that an injection of extra income with greater use of aggregate fiscal policy will lead to improved spending There are two key conditions for the fiscal policy to be effective in its stabilization role First, EU governments must have fiscal space lest budgetary constraints restrict the implementation of certain policies Second, the fiscal policy must have ensured the sustainability of public finances Structural fiscal consolidation Framework for fiscal governance Draghinomics's Fiscal Policy Measures Figure Two keys of fiscal policy in Draghinomics Once confidence in public finances is restored, EU members is free to exploit the fiscal space so that fiscal policy can cooperate with monetary policy in improving aggregate demand Governments always have the option of regenerating their fiscal space by expanding source of revenue For those not having fiscal space, fiscal policy can still support demand by altering the composition of the budget, in particular, by cutting distortionary taxes and unproductive expenditure Moreover, structural reforms in Eurozone can help the governments achieve higher potential output, and raise future government revenues Monetary policy Since European banks have lowered their loan-to-deposit ratios and restructured their capital, they have not been in a position to pass on low interest rates to customers Thus, Draghinomics used the monetary policy to act on two keys: Carry out an expansionary policy to combat conditions of low inflation and substantial slack in the economy; fix the transmission process of monetary policy so that this way actually reaches firms and households The third arrow of Draghinomics relates to quantitative and credit easing which are the forms of buying government bonds and promoting credit growth for the private sector Rate cut and open market purchases Forward Guidance Draghinomics's Monetary Policy Measures Figure Measuring ECB’s monetary policy Under quantitative easing (QE), ECB will buy large amounts of sovereign bonds to increase the amount of money in financial markets QE, which creates money for buying financial assets without central banks printing, and other unconventional monetary policies have been implemented to boost economic activities ECB is even open to the option of quantitative easing, if need be Inflation outlook could have been one of the key reasons for making QE that was similar to what FED (Federal Reserve System) , BOJ (the Bank of Japan) or BOE (Bank of England) had done before—buying government bonds on a large scale Since June 2014, ECB has launched the TLRTO, which has a built-in incentive mechanism to encourage loans to companies ECB was ready to offer cheap long-term loans to banks if they lend the money on to firms TLTRO is a program that allows banks to borrow funds at low rediscounted interest rate, only 0.05% until 2018, so as to provide credit to the economy If banks cannot reach the object lending for investment or consumption, they will have to pay back the amount borrowed in 2016 With TLTRO, ECB aims to lend trillion euros over the next years in order to make inflation reach target levels and support the economy by directing the flows of credit into businesses This huge program has been implemented into phases: In the first one, for the period between September 2014 to December 2014, European banks had the right to borrow up to 400 billion euros through auctions (financial instruments were valuable papers); In the second one, in March 2015– June 2016, next auctions were held to provide 800 billion euros in loans Mister Draghi also mentioned the issue of risk sharing in QE plans Accordingly, the central bank of each EU member was responsible for the majority of government bonds issued by itself when having insolvency or debt restructure In addition, central banks and ECB were be in charge of 12%, 8% of bonds bought from European institutions, respectively TLTRO might have been a test for the investors’ belief in the loan business, especially SMEs, which are the backbone of the European economy In September 2014, ECB began to run plans to purchase outright high-quality asset-backed securities and covered bonds They will provide market incentives for commercial banks to originate more liquid securities ECB considered it as a way of stimulating the flow of credit to businesses Figure 10 Maximum “stock TLTRO” allowances based on actual credit flows Source: ECB (2015) Until now, TLTRO of ECB has the following process: Table Process of TLTRO 1.0 Time Contents aseSeptember of QE, ECB18, lent 82,6 billion euros, with rediscounted interest rate only 0,05% The first phase of QE, ECB lent 129,84 billion euros, with rediscounted December ph 2014 11, The interest rate only 0,05% second 2014 Early 2015 ECB introdu ced a QE program to purchase $70 billion in sovereign debt monthly for at least one year January 2015 Mario Drag hi proposed a package of quantitative easing 1.100 billion euros: March 19, 2015 from 1/2015 to The third ry month ECB would inject around 50 billion euros (58 billion $) to purchase bonds hase of QE, ECB successfully bid 97,8 billion euros of debt instruments, far from predictions of experts 143 banks participated in the auction Time Decembe r 13, 2015 Contents ECB launched cheap loans program 18,3 billion euros (20 billion $) for 55 European banks Source: Author’s collected data New plan TLTRO – 2.0 Draghi and ECB have upped their game from the first round of TLTRO On March 10, /2016 The Governing Council of ECB decided to launch a new series of four targeted longer-term refinancing operations (TLTRO II) They will offer attractive long-term funding conditions to commercial banks to promote ease private sector credit TLTRO II has intended to reinforce the ECB’s monetary policy and to strengthen the transmission of monetary policy by further incentivising bank lending TLTRO II will contribute to a return of inflation rates to levels below, but close to 2% in the medium term Now this series of four loans—conducted between June 2016 and March 2017—will have a fixed maturity of four years from their settlement date The interest rate will start at nothing, but could become as low as the current deposit rate, which is currently -0.40 percent, if they meet their loan targets Draghinomics vs Abenomics Like Abenomics, Draghinomics plans to recover the economy through three arrows: structural reforms, fiscal policy, and monetary policy They all aims to drag their economies out of recession with a three-step longterm plan Rapid structural reforms were done to improve output growth and make recovery head in the right direction Both ECB and BOJ have used quantitative and credit easing to stop deflation and rebuild investor confidence Fiscal consolidation has been a cornerstone for sustainable growth and more employment However, unlike Draghi’s planned tax cuts, Japanese national sales tax was raised in order to create sustainable debt Draghi strongly dignifies that QE and fiscal consolidation will be ineffective if governments not implement supply side structural reforms; whereas the Japanese government has neglected to address structural changes Successes and challenges of Draghinomics 3.1 Successes Showing signs of a brighter life for Eurozone In April 2016, ECB published its Annual Report showing that everything is fine: “Quantitative easing is working just fine, confidence is resuming, and the recovery is under way.” After months of Draghinomics, initial reports said that unemployment had decreased and inflation had risen within the Eurozone Interestingly, the Eurozone’s manufacturing component (M-PMI) ticked up to 51.4 The volume of retail sales (excluding autos) in the Eurozone rose 2% in January to the best reading since September 2008 The EMU MSCI stock price index rose 0.1% on March 22, 2016 It has risen Policies and Sustainable Economic Development | 192 up 14.0% since 2016 year’s low on February 11 This valuation multiple was back up to 13.8, but well below the current bull market’s peak of 16.4 on April 16, 2015 Boosting the recovery in bank lending Looking back what had been done by Draghinomics, we can see at least TLTRO are not only about size, but rather it is expected to further improve the transmission of monetary policy to market segments The banking sector’s lending cycle was turning to follow the ECB’s Comprehensive Assessment last year, helped by easing measures such as rate cuts, forward guidance, TLTROs Under TLTRO 1.0, European banks could borrow an initial allowance of 7% of their outstanding loans to the non-financial private sector Commercial banks’ loans to nonfinancial enterprises and households had begun to fall in 2012, and TLTROs appeared to have stopped this decline Monthly credit flows to the private sector have picked up and leading indicators that they will continue to improve despite a setback in January (see charts below) Borrowing costs have continued to ease, including for SMEs Figure 11 Monthly flows of credit to households and enterprises Source: ECB (2015) There are signs that money supply has already improved Lending to EU companies and households has grown at its fastest pace since 2011 Loans in banking sector to non-financial corporations and household saw their best growth rate since late 2011 Source: ECB (2015) Figure 12 Eurozone credit impulse and domestic demand in 20022015 Figure 13 Retail interest rates on new SME loans’ heave eased significantly in 2009-2015 Source: ECB (2015) Improving liquidity of financial markets In terms of total outstanding ECB liquidity, TLTROs substituted for part of the liquidity, which was drained by the redemptions of 3-year LTROs, keeping the total liquidity, allocated through refinancing operations about 500 billion euros 192 | Policies and Sustainable Economic Development Source: ECB (2015) 3.2 Figure 14 Eurosystem refinancing operations by maturity in 20072016 Challenges facing Draghinomics Unexpected results We can say that outcome of some QE phases had not been like Mister Super Mario’s expectation For example, on September 18, 2014, in the first QE, European banks lent 82.6 billion euros in the auction That number is lower and lower than ECB’s forecast (174 billion euros) In early 2015, ECB launched a QE program to purchase $70 billion in sovereign debt monthly for at least one year That expansion drove down interest rates and the euro, subsequently creating available credit for investments and exports However, outcome of this QE was unsuccessful At least $1.7 trillion in European sovereign bonds reached negative yields: 5-year government bonds from Germany, Sweden, and Denmark currently yield less than zero This means that prior to fine-tuning for inflation investors had to pay more to own bonds While the ECB has already tried buying high-quality asset-backed securities and covered bonds recently, the European economy seems stalled with unemployment as high as 11.5% and inflation painfully low at 0.3% in September 2014 It is not easy to lift inflation up at once Deflation or low inflation is one of the most worrying 0.4% in September 2014 A year later, CPI of 19 countries in Eurozone fell 0.1% in September 2015, far below the target level 2% of ECB If Draghinomics cannot treat this disease well, how can economy growth increase again? The more loans have been allowed, the more balance sheet of the ECB has been increasing, and it will appear as much as excess liquidity in the banking system If that comes true, the euro may have continued to decrease Draghi’s strategy remains a big challenge for members of the EU Although Draghinomics may be a good way to revive the EU economy’s life, ECB must have high Policies and Sustainable Economic Development | 193 acceptance among EU members However, Draghi, in his role as a central banker, only controls the monetary pillar, while governments control the other two pillars Some limits can be explained by the fact that: (i) with tight EU rules on public deficits, there is little room for more government spending on projects that would help economic growth; and (ii) political headwinds in some member countries challenge the economic reforms In spite of the President of ECB’s intentions and announcements, several EU governments have been reluctant to implement these policies Publicly or privately, they have expressed the views that some plans of Draghinomics had been contrary to their domestic interests As a result, progress of reforms remains slow in countries, such as France and Italy According to French political circles, the political trade-offs is greater than ever At the conference “The Financial Foundation and Investments” held in Septemper 2014 in the Elysee Palace, the French President, Francois Hollande, warned of the consequences that French banks would have faced if joining in TLTRO This way would have forced French financial institutions under pressure and made them accessed to credit actively, while credit demand in markets was not truly big Mister Mario Draghi (2014) acknowledged that there were disagreements within the Board of Governors in EU, the first time since November 2013 Although majority supported, but some members said that the stock purchase program with security assets would have resulted in getting too much credit risk for ECB Jens Weidmann (2014), President of the German Central Bank, announced that balance sheet of ECB had greatly increased following a series of monetary easing measures recently, and ECB President had encouraged banks to lend more at low interest rates, which had never been in the history In addition to tax relief, Draghinomics suggests that lowering expenditures in unproductive areas can create growth opportunities Austerity and fiscal consolidation must be established through policymaking in order to restore investor confidence But in the EU, he cannot get the coordination of all 18 member states and budgets One big power whose decisions have large impact on Europe economies is Germany, the dominant Eurozone country However, opinions formed by ECB and Germany rarely go hand in hand For example, while ECB requires governments to spend more because Mister Draghi supposes that shrinking the deficit rapidly was less important than boosting growth On the other hand, European governments with balanced budgets, such as Germany, have decided not to follow this advice Germany wants to focus on reducing deficits The policy limbo Economic growth requires as much government spending as possible However, with constrained budgets and a restriction on using borrowed money, Eurozone countries seem to be stuck in a policy limbo To ensure the stability of the euro, EU makes rules to prevent member countries from borrowing excessive amounts of money to boost spending Moreover, EU and ECB have pushed for bailed-out countries such as Cyprus, Ireland, Greece, Portugal, and Spain to keep spending down in return for the rescue loans that those countries had received However, these policies can block the economic growth, which is necessary to make debts sustainable and to reduce unemployment across Europe Lessons from Draghinomics for Vietnam Our macroeconomics still has many problems Both EU and Vietnam is in recession now, and the economic relationship between our country and Vietnam has been closer recent years EU Vietnam Free Trade Agreement will be officially signed in the near future Therefore, we can learn some good lessons from Draghinomics 4.1 Solving national debt Public opinion are worrying about Vietnam’s debt According to Prime Minister Nguyen Xuan Phuc (2016), until 2015, our public debt has accounted for 62.2% of GDP (the debt ceiling - 65%), still safe, but government debt has been equal to 50.3% of GDP (more than the debt ceiling - 50%) Vietnam’s foreign debt has accounted 43.1% Our debt level is rather high and the repayment pressure is heavy The obligation to pay interest is approximately 8.4% of total budget revenues in 2015 If economic growth in 2016 will not achieve its objectives, the percentage of debts may be even higher Notably, these numbers are measured by the way of Vietnam Ministry of Planning and Investment’s method According to IMF, in international standard, calculating national debt must have state companies so that Vietnam’s debts are over 100% GDP In comparison with EU, many Eurozone countries have been stuck in debt crisis Typically, Greek has been in the most terrible debt crisis in its history One of the important reasons for Brexit is that British did not want to suffer huge debts of other EU members Figure 15 National debt of some Eurozone countries in 2015 Source: World Bank (2015) EU governments are trying to cut the debt EU economy’s health was far better than Vietnam’s, but now Eurozone is struggling with enormous debt burden That is the lesson for us to be extremely careful in using public debt The policies to control national debts have to be planned for long term We need to reduce public costs and avoid corruption in using national debt, especially debts from foreign countries such as ODA… 4.2 Structural reforms as a basis for fiscal and monetary policy Draghi has dignified economic reforms in the process of recovering Eurozone economies Because ECB had found labor markets a key area of focus for reforms, Draghinomics made labor markets more flexible and encouraging women to work Those are the lessons from which Vietnam should learn Economic growth could not have been improved without depending on productivity The way our enterprises pay salary should base on work efficiency Vietnam government could have promulgated policy to calculate salary payment depending on how productivity of the economy is One of the key reason making Draghinomics less effective is that EU leaders not have enough courage to promote structural reforms strongly so as to raise economic growth Vietnam’s situation is nearly the same Without the government’s support, no reform can be done Moreover, we should note that tight monetary and fiscal policy of EU members strangled growth, and made reforms much more difficult to be done Recent years, Vietnam has also used so tight monetary and fiscal policy that the economy’s growth become slower, banking system fell into recession, lending activities reached deadlock, and our enterprises worked so bad Since “success does not consist in never making mistakes,” Vietnam should adjust our policies 4.3 Fiscal stimulus: tax cuts is better than increased spending One key note we make of Draghinomics is that the fiscal policy must ensure the sustainability of public finances Mister Draghi gave prominence to positive fiscal policy through the use of tax cuts rather than increased spending In the current context of Vietnam, budget deficit has been so high for many years We should find good ways to solve deficit unless high inflation will return However, one thing from Draghinomics that the author hardly agrees is that ECB prefer boosting growth to shrinking the deficit rapidly Many members of EU, such as Germany and France, have decided not to follow Draghi’s advice Vietnam used to whatever to get GDP as high as possible Our country had a mistake in the growth model whose economic growth relied on investment so much that galloping inflation lasted for a long time Therefore, dealing deficit is the most important to our macroeconomics now 4.4 Monetary policy: QE is very important and necessary ECB used the expansionary monetary policy to combat conditions of low inflation and substantial slack in the economy The third arrow of Draghinomics relates to quantitative and credit easing QE was done in many period of TLTRO, and it played a key during the whole process Vietnam can learn from ECB’s purchasing large amounts of sovereign bonds, outright high-quality asset-backed securities and covered bonds in order to increase money supply in open markets If the amount of money is raised, lending activities will be able to be pushed to funds firms in the economy 4.5 Investing more in the private sector Lending to EU companies and households has grown at its fastest pace since 2011 After Draghinomics had been run, loans were promoted in banking sector to non-financial corporations and household To ECB, SMEs are the backbone of the European economy The wide and deep economic policy of EU government has spent a large capital to invest in private sector and companies It is very necessary for Vietnam to study and use We have invested in public sector so much for many years but the effect was rather poor On the contrary, private sector has little capital, but the result has been very good Conclusion Although we have not seen last outcome of Draghinomic yet, it seems to be a very practical and useful model Despite the fact that there are some good economic news, initial optimism, we will have to wait for the long-term sustainable growth in multiple years How Mister Mario Draghi has used his plans to recover EU economy’s health and what EU has received are valuable lessons for Vietnam Draghinomics is necessary for reforming and restructuring our economy If policymakers can make this model suitable with Vietnam situation, bring into play advantages, and overcome limits of this theory, the growth quality will be improved or much raised The author personally hopes that this paper is valuable for readers, analysts, and economists, and that Draghinomics will be applied successfully in Vietnam References Eurostat (2014) Will European Central Bank turn quantitative easing Retrieved August 14, 2016 from http://marketrealist.com/2014/10/will-europeancentral-bank-turn-quantitative-easing/ ECB (2015) ECB: TLTRO, more important than you think Retrieved August 14, 2016 from http://etudes- economiques.creditagricole.com/medias/Persp15_86_FDECB_20150319 _EN.pdf Mario Draghi (2012) Whatever it takes to save the euro Retrieved August 14, 2016 from http://www.bloomberg.com/news/videos/b/7b1f62e9-989c-487b-83bd0e1cdf87a551 NYSE Arca (2014) Draghinomics: Why Europe needs help fast Retrieved August 14, 2016 from http://marketrealist.com/2014/10/europe-needs-help-fast/ World Bank (2015) Euro-Zone 2015: Can Stimulus Jump-Start Economy? Retrieved August 14, 2016 from http://www.cmegroup.com/education/featuredreports/euro-zone-2015-can-stimulus-jump-start-economy.html ... world, EU has Italia, England, France, and Germany Therefore, EU economy’s health greatly affects the whole world After a long way of development, Europe growth has been slower gradually That GDP of. .. stimulate economic activity Labor markets are a key area of focus for reforms Like Abenomics of Japan, Eurozone is creating more flexible labor markets and encouraging women to join in labor force... years How Mister Mario Draghi has used his plans to recover EU economy’s health and what EU has received are valuable lessons for Vietnam Draghinomics is necessary for reforming and restructuring