U.S.-Style Fiscal Boost Isn’t Answer for Europe, Weidmann Says
(Bloomberg) -- Europe has enough fiscal stimulus to rebound from the pandemic and shouldn’t look to the massive U.S. package as a model, according to Bundesbank President Jens Weidmann.
The central banker, who sits on the European Central Bank’s Governing Council, told reporters he is “optimistic” European Union member states will ratify their 750 billion-euro ($880 billion) joint recovery fund. Germany’s top court has blocked the nation’s government from authorizing participation while it assesses a legal challenge.
But Weidmann also argued that the tool, bolstered by national aid packages, shouldn’t be compared with the U.S. Congress has passed a $1.9 trillion economic relief bill and President Joe Biden announced a follow-up plan to pump $2.25 trillion into transport, renewable energy and efforts to combat climate change.
“The U.S. can’t be a reference,” Weidmann said, noting that capacity utilization there is due to rise far above normal levels as a result of the spending. “We have to find answers that fit our situation.”
The NextGenerationEU fund is the centerpiece of the continent’s economic response to the pandemic, consisting of grants and loans that will be handed primarily to the region’s worst-hit nations.“I don’t believe the volume of our measures poses a significant limitation,” the Bundesbank chief said at an event with journalists late on Wednesday.
Weidmann suggested he doesn’t expect the court to block Germany’s participation and appealed to the judges to resolve the issue swiftly -- as they have done in previous cases against ECB bond-buying programs.
That echoes ECB President Christine Lagarde, who said in a Bloomberg TV interview on Wednesday she hopes the issue will be “dealt with in short order.”
“Without wanting to make any projections regarding the time frame, the constitutional court has been very responsible in the past in arranging its schedule and kept an eye on the consequences,” Weidmann said.
Bond yields have jumped in a global reflation trade on the back of the U.S. economic rebound, but the euro zone is battling extended virus restrictions and a slow vaccination rollout.
European Central Bank Chief Economist Philip Lane said in a blog post on Thursday that the medium-term outlook for inflation in the currency area will remain subdued.
To push back against a rise in borrowing costs that risks undermining the bloc’s recovery, the ECB recently ramped up the pace of its emergency bond-buying program in recent weeks.
Weidmann said not every increase in market interest rates would pose a problem, arguing that any moves should be seen in context. Rises in bond yields aren’t necessarily passed on in full to companies and households, he said.
“From my perspective, financing conditions should be allowed to change in step with the economic recovery in the euro area,” he said. “It’s not about cementing a specific level of interest rates with the help of monetary policy.”
If nominal yields rise on the back of changes in inflation expectations, that would be a “welcome development” signaling the proper functioning of policy, he said.
Equally, higher real rates could simply be the side effects of an improving economy rather than a deterioration in financing conditions.
As for the euro area’s economic prospects, they depend on the course of the pandemic and are therefore uncertain, he said. Once the crisis is brought under control and restrictions can be removed, economies “should recover swiftly,” he said.
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