The Eurozone must not return to its pre-crisis “normal”


Lorenzo Bini Smaghi, former executive director of the European Central Bank, explained why the former German Minister of Finance Recently pushed It is wrong to return to “normal”.

As the recovery strengthens, Europe has begun to discuss how and when monetary and fiscal policies should “return to normal.”Former German Finance Minister and current Bundestag Chairman Wolfgang Schäuble (Wolfgang Schäuble) recently Underline the Financial Times The need to restore fiscal rules as soon as possible.

The purpose of his statement was to put pressure on high-indebted countries to reduce their budget deficits and avoid moral hazard—similar to the thinking before the pandemic. However, this assumes that the years before Covid-19 were “normal”. They are not. In fact, they are not even good.

In 2019, GDP growth in the Eurozone slowed (to 1.3%), inflation rate hovered around 1%-well below price stability-labor productivity stagnated, and overall current account surplus continued to exceed 3%. As a percentage of GDP. For many European citizens, especially its young people, it ends a decade that has actually been lost.

This situation is not only abnormal, but also unsustainable.

It is generally recognized that before the crisis, the combination of monetary policy and fiscal policy was unbalanced. The European Central Bank restarted its asset purchase program in September 2019 to deal with deflationary pressures, while the overall fiscal situation continued to be relatively tight, with an overall basic surplus of approximately 1% of GDP (relative to a deficit of 2.5%). we). Budget policies vary from country to country. Although the debt (relative to GDP) of some countries such as France, Italy, and Spain is gradually falling, in other countries, especially Germany and the Netherlands, debt is falling rapidly due to large budget surpluses.

Subsequent ECB presidents Mario Draghi (until October 2019) and Christine Lagarde (Christine Lagarde) have repeatedly called for a more balanced and supportive fiscal policy to reduce the burden on the central bank. Just before the pandemic, in January 2020, Lagarde reminded: “Governments with fiscal space should be prepared to act in a timely and effective manner. In countries with high public debt, governments need to adopt prudent policies and achieve structural balance goals. …”

Therefore, Schaeuble’s statement that the restoration of normalcy should only involve high-indebted countries is wrong. It should also affect countries that have consistently implemented excessively restrictive fiscal policies, thereby creating an unbalanced policy mix in the euro area.

The German constitutional debt brake introduced in 2009 is particularly important in this regard, because it accounts for about one-third of the Eurozone’s GDP, and German national debt plays a “safe asset” role in the global financial system. The implementation of this rule resulted in a primary surplus. From 2011 to 2019, year after year, debt was reduced by more than 20 percentage points, the largest among all major advanced economies. As a result, the total outstanding valued German debt was reduced by 110 billion euros during this period. Excluding the amount purchased by the European Central Bank system under the quantitative easing policy, the floating debt on the market has been reduced by 442 billion euros in seven years. This is more than one-third! No wonder public bond yields have become negative.

According to recent forecasts, the restoration of the debt brake in 2023 will bring the debt-to-GDP ratio back to less than 60% as required by the Eurozone economic rule “Growth and Stability Pact” in less than five years. Compared with 2019, excluding the foreseeable central bank holdings, the total amount of government bonds traded on the market will be reduced by another 150 billion euros. With an increase in global net savings, this will have a major deflationary impact on financial markets.

The European Central Bank will have to consider how to adjust its policies to adapt to the new environment. A question to be considered in the forthcoming strategic review is whether it is still wise to purchase assets of different countries based on their share of capital. Switching to another method, such as the purchase of shares based on trading bonds, would be adversely affected in Germany. However, the country’s economic policies may ultimately leave the central bank with no choice.

Schaeuble cites the ghost of John Maynard Keynes to support his argument. However, if Europe really wants to heed Keynes’s suggestion to call on the government to increase spending during difficult economic times, it should revise its fiscal policy framework in a more symmetrical manner. The Growth and Stability Pact aims to avoid excessive budget deficits and high debt-to-GDP ratios. It should also be adjusted to prevent excessive fiscal restrictions that may be caused by the interruption of rigid national debt. Otherwise, the Eurozone may return to the same disappointing results that prevailed before the pandemic.



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