Draghi Calls for More Stimulus in Europe to Restore Prosperity

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Italian Prime Minister Mario Draghi made a bold call for more economic stimulus in European countries to help bring growth back to pre-pandemic levels.

“Protracted uncertainty means that the case for monetary and fiscal expansion remains compelling,” the former European Central Bank chief said in speech in Barcelona on Friday. “We will not reach this objective without additional effort. So we must act on it promptly and effectively.”

Draghi Calls for More Stimulus in Europe to Restore Prosperity

That call for all-in stimulus from an ex-central banker known for expansive policy easing may unsettle countries such as Germany, where concerns linger that the crisis led to excessive loosening of fiscal discipline. Italy’s public finances are propped up by ECB support, and its hopes of a sustained rebound are tied to aid from the European Union.

“Having protected the supply side of our economies, we must now ensure that demand rises to meet those levels of supply,” Draghi said. “Ideally, we should aim to exceed the pre-pandemic growth trajectory.”

The euro-zone economy is seen growing 4.6% this year by the ECB, which raised its forecasts for this year and next at its decision last week. Italy, which suffered a contraction of 9% in 2020, may now experience a rebound of 5% this year, according to two government officials.

Draghi shared a less optimistic forecast of 4.2%, but added, “I think frankly that these figures will be revised upwards, and probably significantly upwards, as confidence returns among companies and families.”

Fiscal Prudence

Accompanying the Italian premier’s call for expansive stimulus was the insistence that budget consolidation should follow in due course.

“We must also reassure investors that we will return to fiscal prudence as soon as the recovery is self-sustained,” he said, insisting that the goal to keep in mind is growth with spending concentrated “increasingly where the effects on growth are higher.”

Such a commitment may not be enough for some of the EU partners that are helping to bankroll the region’s recovery fund, which is set to help Italy more than any other country.

Armin Laschet, the front-runner to succeed Angela Merkel as Chancellor of Germany, on Thursday called for a reinstatement of EU budget rules once the pandemic is over, signaling that Germany may return to its traditional role as the bloc’s fiscal watchdog.

The EU has suspended that regime, which normally limit budget deficits to 3% of economic output, through 2022 to give countries enough time to recover.

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