Investment in the euro area’s economy will only return to pre-crisis levels if governments work with the European Central Bank to achieve reforms and stimulate growth, ECB President Mario Draghi said.

“A decisive rise in investment is essential to bring inflation closer to where we would want to see it, to stimulate the economy, and to bring down unemployment,” Draghi said at an event in Milan. “No monetary stimulus, indeed no fiscal stimulus, can be successful unless accompanied by the right structural policies — policies that foster potential growth and instill confidence.”

Since June, the Frankfurt-based ECB has cut interest rates, pledged cheap bank loans, and committed to purchasing private-sector debt in a bid to rekindle lending and fend off deflation. At the same time, policy makers are urging governments not to drag their feet on measures to free up labor markets and boost demand.

“The level of business investment in the euro area has only slightly improved since 2008, whereas in the U.S. it is above its pre-crisis level,” Draghi said. “We will not see a sustainable recovery unless this changes.”

The ECB President will attend a meeting of euro-area finance ministers in the Italian city.

ABS Program

The first allotment of a four-year bank-funding scheme tied to loans to the real economy, the TLTRO, takes place on Sept. 18, the first step in Draghi’s stated aim of pushing the central bank’s balance sheet back toward 3 trillion euros ($3.9 trillion), from the current level of 2 trillion euros.

The ECB announced this month that it also intends to help boost lending to the real economy further through purchases of asset-backed securities and covered bonds.

“We expect the two purchase programs to effectively complement the TLTROs in enhancing the functioning of the monetary policy transmission and in providing further monetary accommodation,” Draghi said. “The Governing Council stands ready to take further action if needed, in compliance with its mandate to maintain price stability.”

Draghi addressed concerns over the quality of the ABS assets it intends to buy, after Bundesbank President Jens Weidmann voiced misgivings about the program.

“It is worth recalling that senior tranches of ABS have proven to be high-quality assets,” Draghi said, citing statistics on low default rates for mortgage-backed securities as well as those for consumer finance and loans to small businesses. Those levels aren’t reflected in current regulatory treatment of ABS, he added.

Differentiated Treatment

“In this respect, the ECB welcomes efforts to have a differentiated regulatory treatment of simple, transparent ABS built on real assets,” he said. “Moreover, the provision of public guarantees should be considered to support lending to SMEs, as other countries do, such as the U.S.”

As a counterpart to stimulus measures and structural reforms, Draghi said governments also need to foster growth by lowering the tax burden and reducing “unproductive current expenditures,” while raising public-sector investment where possible.

Draghi’s emphasis on the public sector’s role in spurring economic revival come against a backdrop of inflation, at 0.3 percent in August, that’s far below the ECB’s target of just below two percent, and unemployment that’s close to a record. ECB Vice President Vitor Constancio said yesterday that embarking on quantitative easing, or buying government debt, is a move that can’t be excluded.

“Only if structural, fiscal and monetary policies go hand in hand will the euro area see investment return,” Draghi said. “We will only manage to stimulate investment if structural, fiscal and monetary policies mutually reinforce each other.”