EU’s Economic Guardians Are Split on Post-Pandemic Strategy
The European Union’s top economic policy makers are exposing a gulf in their views on how to run the economy after the pandemic.
European Central Bank Executive Board member Fabio Panetta said on Monday that monetary officials should retain the “unconventional flexibility” they granted themselves during the crisis, keeping borrowing costs low until government spending helps push up inflation. Hours later, his policy-making colleagues Jens Weidmann and Robert Holzmann said the ECB’s emergency powers are temporary and must end once the emergency is over.
Panetta also said the ECB should consider retaining the flexibility ingrained in its 1.85 trillion-euro ($2.2 trillion) pandemic emergency bond-buying program when it expires. An older quantitative-easing program is tied to limits on how much of a country’s bonds can be bought.
The contrasting monetary viewpoints are echoed in fiscal debates. EU economic comissioner Paolo Gentiloni said on Monday that the bloc’s debt rules “must be realistic, otherwise they are not applicable.” The EU’s executive arm will launch a revision this fall of the Stability and Growth Pact, which set limits for member countries’ public finances, he told Italy’s la Repubblica newspaper
The divergent thinking comes at a crucial time, with the euro zone rebounding as infection rates drop and restrictions allow a gradual reopening of businesses. That’s prompted some commentators to float the prospect of reining in the extraordinary support provided to companies and households, and considering how to tackle the massive public and private debt burdens.
Panetta said it’s still unclear how long the demand surge will last.
“We do not seem to be on track to ‘run the economy hot,’” he said at a conference of Mediterranean central bankers. He called on governments and the public to recognize that the current mix of fiscal and monetary stimulus is “clearly superior” to before the pandemic, when political leaders were focused on debt reduction.
ECB Vice President Luis de Guindos said at a separate event later on Monday that the economic outlook is brightening and the central bank is “attentive” to the risk that accelerating inflation will persist. But he also stressed the annual price rises are expected to remain below the goal of just-under 2% over the medium term.
Still, Weidmann said he sees upside risks to inflation, that both monetary and fiscal support should be reduced after the crisis, and that the ECB’s pandemic program “must be ended as soon as the emergency situation has been overcome.” He said he doesn’t think 2022 will warrant classification as a “crisis year.”
His stance was echoed by Austria’s Holzmann. Both men sit on the ECB’s Governing Council.
ECB officials have increasingly tried to curtail any shift in the EU toward renewed austerity. President Christine Lagarde told leaders last week that they need to “water the green shoots” of the recovery, and has said it’s too early to even talk about about exiting the central bank’s crisis tools.
Executive Board member Isabel Schnabel said the ECB will do everything necessary to sustain the recovery, but that “maybe we should be worried more about fiscal policy.”
The EU’s Stability and Growth pact, which was suspended when the coronavirus hit, requires countries to aim for budget deficits of less than 3% and debt burdens below 60% of gross domestic product. With public debt in the euro area rising to 102% of output since the pandemic, it’s questionaable how realistic those targets are.
Armin Laschet, the front-runner to succeed Angela Merkel as German chancellor, has said stability policies will have to be reinstated when the effects of the pandemic on the global economy are over, though he has also suggested that he’s open to a softer line. Austrian Finance Minister Gernot Bluemel has taken a tough stance.
Italian Prime Minister Mario Draghi, a former ECB president, insisted last week that euro-area fiscal rules can’t return to how they were before.
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