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Euro zone plans no joint fiscal stimulus, but ready if economy gets worse

Reuters | Brussels | Updated: 13-09-2019 18:36 IST | Created: 13-09-2019 18:29 IST
Euro zone plans no joint fiscal stimulus, but ready if economy gets worse
Image Credit: Pixabay

Eurozone finance ministers are not planning any joint fiscal stimulus to complement the European Central Bank's monetary package, but they are ready to act if the economy takes a turn for the worse, their chairman said on Friday. Economic growth in the 19 countries sharing the euro halved to 0.2% in the second quarter compared with the first. The euro zone's biggest economy, Germany, is on the brink of a recession, contracting 0.1% in that period.

ECB President Mario Draghi said the eurozone economy was in a period of "protracted" economic weakness, with inflation low and the balance of risks tilted to the downside, as he announced a fresh stimulus package on Thursday, cutting interest rates and beginning 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.

French Finance Minister Bruno Le Maire, arriving for informal eurozone finance ministers' talks in Helsinki, responded by proposing a "growth compact" for the eurozone that would focus on investment, reforms and debt reduction. But no joint fiscal action was discussed at the meeting of the 19 finance ministers representing countries that share the euro. They said the economy was, after all, still growing.

"We ... stand ready to act if risks materialize and things get worse," Mario Centeno, the chairman of eurozone finance ministers, the Eurogroup, told a news conference. "At the Eurogroup, we will coordinate our response. I should add that overall, and despite all the uncertainty, we remain positive about the euro area economy, which is still growing, albeit at a slower pace," he said.

ONUS ON GERMANY

To counter an economic slowdown after the collapse of Lehman Brothers, the EU in late 2008 agreed on a coordinated stimulus of 200 billion euros or 1.5 percent of EU GDP at the time. The European Economic Response Plan, as it was called, did not prevent a recession in 2009 but helped a recovery in 2010.

"In the last crisis, we were able to find a balance in our comprehensive response, combining fiscal policy, structural reforms at national and EU levels and also monetary policy," Centano said. "Going forward, in the face of a downturn, we need to find a new balance, and fiscal policy will surely play a part in this." Centeno, as well as European Commission Vice President for the euro Valdis Dombrovskis and French Finance Minister Bruno Le Maire, pointed to "countries with fiscal space" as those who should spend more to help revive growth.

In the EU code, that means Germany and the Netherlands. Both have been running budget surpluses for years and are big enough to have an impact throughout the eurozone if they start spending more. Those who already have high debt should embark on structural reforms to boost growth, top officials said. But Italy, the most indebted eurozone nation after Greece, said the EU's fiscal rules need to be relaxed.

"I'm going (to Helsinki) to discuss European policies, starting from the need of a more expansionary fiscal policy," said Roberto Gualtieri, Italy's new economy minister. Centeno also noted that in time, the eurozone budget which is to come into being in 2021, would help with investment spending.

"Another important element of a new balance of policies is ... the Budgetary Instrument for Convergence and Competitiveness for the euro area," he said. ECB executive board member Benoit Coeure, who took part in the ministerial meeting, told the news conference the future eurozone budget, now focused on investment, was welcome and would reinforce the actions taken by the ECB, but it would have been better if it also helped counter economic downturns.

The Netherlands has strongly rejected that possibility.


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