ECB Members Seek New Ways as Inflation Fades With Draghi Era

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European Central Bank policy makers urged governments and their own institution to consider changing strategy after years of monetary stimulus combined with fiscal restraint left the euro zone still stuck with feeble growth and inflation.

The calls in speeches and a newspaper interview, a week before President Mario Draghi holds the final monetary-policy meeting of his eight-year term, ranged from greater public spending to a review of the European Union’s two-decade old pact to rein in government debt and deficits. They come amid an extended squabble over last month’s decision to cut interest rates and buy bonds yet again, a step that has raised concerns the central bank is running out of options.

“Our assessment is that we’re not at the edge, but of course we’re closer to the edge than we were,” chief economist Philip Lane said in Washington on Wednesday, where the International Monetary Fund is holding its annual meetings. “If there were fiscal expansion in these current conditions, the multiplier will be quite big. This goes back to finance ministers thinking about fiscal policy as a macro tool.”

The ECB has long called for governments that can afford it, notably Germany, to join the effort to revive the euro-zone economy by raising spending. For just as long, it has essentially been ignored -- Germany, the bloc’s largest economy, has continued to run a budget surplus and pledged to balance its books despite probably now being in recession.

That may be about to change as politicians face the risk of a global downturn amid the uncertainties of U.S. President Donald Trump’s trade protectionism and the U.K.’s exit from the EU. German lawmakers who have previously resisted the idea of fiscal stimulus are starting to come around, according to people familiar with the discussions.

Bundesbank President Jens Weidmann, in a speech in New York that mostly focused on the wrongs of trade tariffs, wasn’t willing to take the fiscal argument very far. He said that while some additional spending might be possible in the short term, “with respect to macroeconomic stabilization, any further stimulus appears unnecessary, unless a perceptible deterioration in the economic outlook becomes apparent.”

For Dutch governor Klaas Knot, who along with Weidmann and about a third of the Governing Council opposed the resumption of quantitative easing at September’s policy meeting, a wider initiative is needed. He said the next step must be an overhaul of both ECB and EU economic strategy.

“Not only has inflation been subject to a downward trend, but also its inertia has increased since the crisis,” he said in New York. “I support calls for a broad review of the ECB’s strategy, which should have as one of its main aims the widening of our policy scope.”

Knot said the ECB could increase its flexibility by introducing a symmetric band around the inflation aim, currently set at just below 2%. Governments could simplify the Stability and Growth Pact to put more emphasis on debt levels relative to budget deficits.

French Governor Francois Villeroy de Galhau also backed the call for a strategy review in a speech in New York, saying that despite his opposition to renewed bond-buying all stimulus decisions were taken “equally legitimately, and they provide clarity well into the future.” He singled out Germany among euro-area countries he said have fiscal room to spend more and help take some weight off the ECB.

“Have no doubt: we are committed, and the whole package will be implemented,” he told students at New York University’s Stern School of Business. “We have to maintain an accommodative monetary policy in the face of the economic slowdown and low inflation.”

Despite the call to turn the page on recent spat, some dissenters are sticking to their guns. Austrian Governor Robert Holzmann, another opponent of the most recent monetary measures, told German newspaper Handelsblatt that he saw no sign that negative interest rates are boosting consumption or investment.

He also suggested that one of the main tasks of Draghi’s successor from Nov. 1, Christine Lagarde, will be to restore harmony in the decision-making Governing Council.

“I expect that Lagarde will start a process in the ECB that more strongly integrates national central banks,” he was quoted as saying.

--With assistance from Yuko Takeo.

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Tony Czuczka

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