European policymakers eye up fiscal policy in response to slowdown
Two senior European policymakers have said fiscal policy – spending and taxing – should be a tool to boost the region’s struggling economy and deal with a potential shock.
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European Central Bank (ECB) vice president Luis de Guindo said a “dedicated centralised fiscal capacity” could focus on “common area-wide stabilisation” at a speech in Madrid today.
In a similar vein, incoming economic commissioner for the European Union Paolo Gentiloni pledged “adequate” fiscal efforts to tackle slowing growth in the region during his confirmation hearing in Brussels this morning.
Fiscal policy – taxing and spending – is increasingly viewed as a solution to the Eurozone’s economic problems. A decade of ultra-loose monetary policy – the tools of central banks, chiefly setting interest rates – and government cuts have failed to push inflation back to its desired levels.
The Eurozone economy has been pummelled in 2019 by a slowdown in global trade driven by the US-China tariff war and weaker Chinese demand, among other factors. Survey data from earlier this week showed its manufacturing sector in free-fall.
De Guindos said that part of the solution to low inflation and growth would be a large fiscal system in the Eurozone, which would amount to common taxing and spending policies across the bloc.
He said that with interest rates in the area and inflation very low, “fiscal policy becomes more effective in stimulating aggregate demand” as there is no reason to fear it disrupting the economy.
“It would therefore be desirable for fiscal policy in the euro area to support business cycle stabilisation more actively,” he said.
Gentolini told EU lawmakers: “Our economic policies should be strongly oriented toward growth and investment.”
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He said he would push for the EU to use fiscal policy to let governments to invest for growth while also seeking to reduce public debt. He called for a review of EU fiscal rules to make them simpler.
(Image credit: Getty)