Euro zone fiscal policy must keep large role for years: ECB's Knot
FRANKFURT, June 11 (Reuters) - Europe needs new budget rules so government spending can maintain an oversized role for years to come while monetary policy remains constrained, European Central Bank policymaker Klaas Knot said on Friday.
Governments have spent record amounts over the past year to save their economies from a pandemic-induced downturn but as the recovery takes hold, a debate is underway on how and when to bring back temporarily suspended budget rules.
Instead simply of reinstating the rules, Knot argued for an overhaul of the Stability and Growth Pact as central banks have limited scope for manoeuvre and fiscal policy is more powerful when rates are at or near their effective lower limit.
"As the current low interest rate environment is likely to persist, we need a structurally larger role for fiscal policy in macro-economic stabilization for the foreseeable future," the head of the Dutch central bank said in a speech.
"Fiscal flexibility is needed and has to be an integral feature of the framework, rather than an all-or-nothing button which may, or may not, be pressed in an emergency," Knot added.
The new framework needs to improve coordination of national fiscal policies within euro zone, much like the bloc is doing with the New Generation EU Fund, and must have flexibility beyond automatic stabilizers and emergency measures.
But the new rules must not give governments a free rein to spend so "robust and credible" rules are also needed to keep debt sustainable and ensure that spending adds to productivity, so the expenditure would eventually pay for itself, Knot added.
Reporting by Balazs Koranyi; Editing by Toby Chopra
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.