29 September 2019

Financial Times: Draghi backs calls for fiscal union to bolster eurozone

European Central Bank president Mario Draghi has thrown his weight behind French president Emmanuel Macron’s call for fiscal transfers between eurozone member states to bolster the long-term future of the single currency.

In an interview with the FT, Mr Draghi said higher government spending was “more urgent than before” to counter the global slowdown. He also said that a long-term commitment to fiscal union was essential for the eurozone to compete with other global powers.

“Given the inherent weakness of national states in a globalised world, what matters is to make the union stronger. In some areas, further integration achieves this goal,” Mr Draghi said, later adding: “To have a stronger EMU [economic and monetary union], we need a common eurozone budget. Clearly the political debate on that still has a long way to go. But I am optimistic.”

Mr Draghi’s intervention — as he prepares to step down after eight years as ECB president at the end of October — is likely to arouse further controversy in Germany and fiscally conservative member states.

The Italian is already facing a backlash after the ECB’s latest monetary stimulus. Nine out of 25 members of his governing council voiced reservations on a package that included a revival of asset purchases under the ECB’s €2.6tn quantitative easing programme and fresh rate cuts — easy-money measures they think will have the dangerous side effect of inflating asset prices.

Mr Draghi said the positive consequences of the stimulus package still outweighed negative consequences such as penalising savers and inflated asset prices in, say, commercial real estate.

But more government support “could greatly help” lower the burden on the central bank. “The extraordinary [monetary] stimulus may have to last a long time if there is no support from fiscal policy.” [...]

The departing ECB president said he was optimistic that a pact on fiscal policy would happen in the longer term because public attitudes towards economic integration had shifted since the Greek crisis. “Many more people understand the importance of these reforms than a few years ago — there will at some point be a commitment.”

He added: “People have understood the benefits of the single currency, trust is going up. The opponents of the euro have not succeeded.” [...]

Full article on Financial Times (subscription required)

Related interview on Financial Times: Mario Draghi declares victory in battle over the euro

[...]In a dig at the German economic establishment with whom Mr Draghi has frequently clashed, he says: “I [have] talked about fiscal policy as a necessary complement to monetary policy since 2014. Now the need is more urgent than before. Monetary policy will continue to do its job but the negative side effects as you move forward are more and more visible.” He adds: “Have we done enough? Yes, we have done enough — and we can do more. But more to the point what is missing? The answer is fiscal policy, that’s the big difference between Europe and the US.” [...]

ECB watchers suspect Mr Draghi would have liked to have finished his term by ending the stimulus, proving incontrovertibly that his actions worked. In fact, while the acute point of the eurozone crisis has passed, chronic problems remain. Mr Draghi blames external factors such as President Donald Trump’s trade conflict with China and the risk of a hard Brexit, but internally the eurozone remains vulnerable. Unemployment in the south is still high, especially among the youth. The region’s economic engines such as Germany and the Netherlands have stuttered, their exporters under pressure.

The package unveiled earlier this month will see the resumption of a €2.6tn quantitative easing programme that was supposed to end for good last December. The ECB has committed to spending €20bn a month until inflation shows signs of nearing its target of just under 2 per cent. It has also cut rates to fresh all-time lows and signalled that borrowing costs will remain ultra-loose for years, with no calendar cut-off.

The programme, which Ms Lagarde was informed of, led to objections from nine of the council’s 25 members — seven subsequently voted against it — chiefly over the decision to restart QE. Among the nine were governors from countries representing more than 50 per cent of the bloc’s economic output. [...]

Mr Draghi defends the programme as necessary. “The outlook has worsened, especially for manufacturing. Inflation was no longer on track to meet our target,” he says, adding that the policies will work, albeit at a slower pace than if governments were spending more.

He agrees with Mr Macron that it is time to back a new common eurozone budget — a transformational and “existential” development to complement monetary policy.

What gives him comfort, he says, is that the ECB’s record in the crisis years has built an enduring legacy. It is not about the man, but the mandate itself which, he implies, his successor will be obliged to respect.

Opponents of the euro — the sovereigntists — have lost, he says. They were defeated in the battle for the euro in the Greek crisis and they lost the political battle in the European Parliament elections this year.

“All policy decisions depend on the circumstances, but I have no reason to think that people who are going to be sitting in those chairs in the coming years will interpret the extent of our mandate in a way different from what the governing council that met in the summer of 2012 actually did.” [...]

Full interview on Financial Times (subscription required)

 

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