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France proposes "growth compact" for euro zone after ECB stimulus

Reuters | Brussels | Updated: 13-09-2019 14:38 IST | Created: 13-09-2019 14:36 IST
France proposes "growth compact" for euro zone after ECB stimulus
Image Credit: Pixabay

France proposed a "growth compact" for the eurozone economy on Friday, a day after the European Central Bank called on governments to use fiscal policy in addition to the bank's latest monetary stimulus package to support slowing growth.

Economic growth in the 19 countries sharing the euro halved to 0.2% in the second quarter compared to the first three months and the euro zone's biggest economy, Germany, is on the brink of a technical recession, having contracted 0.1% in that period. ECB President Mario Draghi said the eurozone economy was in a period of "protracted" economic weakness, with inflation staying low and the balance of risks tilted to the downside, as he unveiled a fresh stimulus package on Thursday, cutting interest rates and launching a new round of bond purchases.

He urged governments to spend their way out of the slowdown and use fiscal policy to help the ECB's stimulus. He singled out Germany, which is committed to running a balanced budget. Arriving for two-day informal talks of EU finance ministers in Helsinki, German Finance Minister Olaf Scholz declined to comment on the ECB call, but French Finance Minister Bruno Le Maire said he would present a proposal for a "growth compact".

"We should not be satisfied with the level of growth in the eurozone," Le Maire told reporters. "I would like to recall this morning the French proposal for a Compact for Growth based on three pillars: more investment from countries which have the necessary fiscal space to invest, more reforms for countries which lack productivity and competitiveness, and the necessity to reduce the level of public spending and public debt."

Countries with fiscal space to invest more are EU code for Germany and the Netherlands, both of which have been running budget surpluses for years. "It is really now time to decide, and have more investment, more growth," Le Maire said.

European Commission Vice President for the euro Valdis Dombrovskis said the ministers would discuss how to change government spending to make more room for investment. Ministers are also due to discuss a review of EU fiscal rules at the meetings in Helsinki on Friday and Saturday.

Austrian Finance Minister Eduard Mueller was also supportive. "The economy is weakening. The intention is to boost investments and also to strengthen the capital market," he said.

GERMAN BALANCE

More investment, although not immediately, could come from a eurozone budget that EU finance ministers will also discuss on Friday and which is to become reality from 2021, once crucial issues like ways of financing it is agreed. Germany, which is set to bring its public debt down to below 60 percent this year, was ready to pump "many, many billions of euros" into its economy to counter any significant slowdown in growth, Scholz said on Tuesday.

Sources have told Reuters that Berlin may set up independent public bodies to take on new debt and boost investment in key parts of the economy, without falling foul of strict national spending rules. Germany's debt brake allows a federal budget deficit of up to 0.35% of GDP. That is equivalent to about 12 billion euros ($13.3 billion) a year but once factors such as growth rates have been taken into account, Berlin only has the scope to raise new debt by 5 billion euros next year.

Sources told Reuters on Thursday however that Germany could enjoy a windfall of 5 billion euros or more this year as record-low bond yields -- largely the result of the ECB's loose monetary policy -- slash its borrowing costs. The International Monetary Fund is also pushing for Berlin to spend more to help revive eurozone growth.

"We have been urging Germany to spend more for long while," the head of the IMF's European department Poul Thomsen told Reuters earlier this week. "Germany certainly has space and we would be strongly supportive of that."

Also Read: Germany makes citizenship easier for descendants of refugees from Nazis


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