Draghi Says Fiscal Boost Could Allow ECB to Raise Rates Sooner

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Mario Draghi said looser budget policies complementing the European Central Bank’s monetary stimulus would augur a quicker end to ultra-low interest rates, lessening the damage they cause.

“Fiscal policy playing a more supportive role alongside monetary policy would lead to a faster return to price stability and therefore fewer side effects,” the ECB president said in Athens on Tuesday.

The remarks provide a different take to a persistent theme of the ECB president during his final months in office, calling for European governments who can afford to loosen purse strings to do so in support of economic growth. Draghi told reporters at his most recent press conference that “it’s high time for the fiscal policy to take charge.”

“Fiscal policy becomes more powerful when monetary policy is close to the effective lower bound, as the multipliers are higher,” the ECB president said. “Furthermore, in certain situations, supportive fiscal policy can complement monetary policy in cutting through the obstacles that are weighing on demand -- which is the case in the euro area today.”

Draghi also built on other recent comments calling for enhanced coordination of budget policies in the euro region, while reiterating his insistence on more spending. He said that net public investment in all large euro countries “has essentially been zero over the last decade.”

“Monetary policy will continue to do its job,” Draghi said, referring to the ECB’s recent, and controversial, decision to ramp up stimulus including quantitative easing to combat slowing growth. “If fiscal and structural policies also play their role in parallel -- and more so than we see today -- the side effects of monetary policy will be less, and the return to higher rates of interest will be faster.”

Draghi was in Athens attending a ceremony to be admitted to the Academy of Athens, Greece’s highest research institution.

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