FRANKFURT (MNI) – Eurozone countries should commit to longer-term
fiscal consolidation, a strong focus on spending reduction and parallel
structural reforms to support potential growth and calm financial
markets, the European Central Bank said in its Monthly Bulletin
published on Thursday.
In a familiar argument, the central bank said that negative effects
of budget deficits would outweigh the positive impact of spending on
growth. It also warned that of potential fallout from fiscal problems to
wider financial markets.
The high debt-to-GDP ratios currently seen in many euro area
countries coupled with risk aversion in financial “carries potentially
large macroeconomic risks” and must therefore be addressed, the ECB
urged.
Dismissing concerns that fiscal consolidation could hamper the
Eurozone recovery, the central bank said that “credible and ambitious
consolidation raises expectations of future economic growth and induces
economic reactions, which may offset the demand effect in the short
term.”
The central bank argued that the reduction of financing needs leads
to lower long-term interest rates, improving financing conditions for
the private sector and stimulating productive investment. This is also
true for governments themselves, the report said.
At the same time, “empirical studies across a wide range of
industrial countries and time periods provide important evidence on the
growth-inhibiting effects of high government debt burdens,” the central
bank said.
Credible consolidation efforts do not only have a positive effect
on growth, the ECB argued, but can also “reduce the risk of negative and
mutually reinforcing links between government finances, the financial
sector and the rest of the economy.”
The ECB observed that the loss of confidence in the sustainability
of Greek public finances had created spillover risks for other euro area
countries and had also gone beyond the sovereign debt market.
“As witnessed during the financial crisis, uncertainty can easily
skip across different asset markets, so that volatility in government
bond markets adversely affects activity in other financial market
segments,” the ECB said.
This in turn, could spark a slowdown in the extension of credit
weighing hampering growth in the real economy. “The fact that government
bonds are frequently used as collateral for financial transactions adds
weight to such concerns,” the report said.
“The benefit of pursuing sustainability-enhancing policies is large
in the current risk-averse environment. In a global high-debt
environment, this benefit of macroeconomic stability is magnified, since
it reduces the risk of contagion to other countries,” the ECB asserted.
ECB Governing Council member Guy Quaden had called for credible
fiscal consolidation efforts in an interview published Wednesday, but
had emphasized fiscal consolidation should be enforced gradually.
“I do not plead, and nor does Jean-Claude Trichet, for brutal and
immediate austerity, except in the case of Greece. What is necessary is
quickly to put in place credible plans gradually to clean up public
accounts,” Quaden said.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
[TOPICS: MT$$$$,M$$FX$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]
