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European Central Bank President Christine Lagarde is facing calls to refocus her lobbying for looser fiscal policy on a euro-zone budget, rather than seeking national stimulus.
While both she and the ECB have previously pressed governments to spend more rather than rely on monetary policy to fight slower economic growth, some are starting to wonder if that’s really a battle worth fighting. The evidence that national stimulus helps the euro economy is limited, while heckling governments is politically fraught and potentially fruitless.
Even Lagarde’s predecessor, Mario Draghi, shifted emphasis in his final remarks as president to stress the need for a common euro-area budget. With a small one now at the design stage in Brussels, focusing the ECB’s political energy on enhancing that policy might be a smarter ambition.
“Talking about the things that need to happen in terms of a European framework is a more natural area for them,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “That probably also makes more sense from the economics point of view, to have a central budget facility than to have this uneven stimulus situation.”
Ever since the economy began weakening earlier this year, ECB officials armed with limited monetary ammunition have been leaning on thrifty countries such as Germany and the Netherlands to loosen purse strings.
In September, Draghi intensified his rhetoric, declaring it’s time for fiscal policy “to take charge.” Lagarde observed the same month that more than half of euro members had a deficit below 0.5% of gross domestic product, giving them space to act. She took charge of the ECB on Nov. 1.
At his final press conference, Draghi added the caveat that national budget policies have “limited spillovers” on the region, and a “central fiscal capacity” would be much better. He also pointed to the shaky ground the ECB stands on when its officials preach to euro members, saying he would “never dare to judge” the policies of a specific country.
“Fiscal policy is a political competence,” ECB Chief Economist Philip Lane concurred in an interview with Italian newspaper La Repubblica this week. “It’s not for the ECB to be involved.”
Previous experience suggests it’s a form of persuasion that tends to fail anyway. “In the past, it’s never worked very well to try to insist that Germany spend more for the good of the euro area,” Oscar Arce, head of research at the Bank of Spain, mused this month.
So policy makers both in public and in private are starting to argue that the ECB would be on stronger ground if they focused instead on lobbying for a euro-area budget.
Arce’s boss, Bank of Spain Governor Pablo Hernandez de Cos, said this month that “the political economy of such a thing would be much easier and much more effective than trying to ask the Netherlands or Germany for more fiscal expansion.” Slovenian Governor Bostjan Vasle told Reuters that he’s in favor of an instrument to accompany the ECB “on the fiscal side, with enough capacity.”
Tax Money
Achieving a sizeable, euro-area fiscal instrument will still be an uphill struggle for Lagarde because of the difficulty in convincing countries to share tax money.
Progress on the matter has been limited. Two years after French President Emmanuel Macron first laid out a sweeping vision for a common budget, governments assented last month to only a small arrangement.
Finance ministers can’t agree on whether the facility should be funded from the broader EU budget, paid for by all the bloc’s governments, or whether it could be topped up by other sources in the future. The budget would also be limited to investments and reforms rather than helping economies in periods of weakness, as originally touted.
At an estimated 20 billion euros ($22 billion), it would represent a tiny fraction of euro-area output. Even the overall European Union budget is only 1.1% of GDP, compared with around 20% for the U.S. federal budget, according to Societe Generale (PA:SOGN).
What Bloomberg’s Economists Say
“For a common budget to help the ECB, it must look more like Macron’s initial ambition -- a tool to stabilize the economy in a downturn. European leaders are on course for something more limited in scope and it will be hard to turn that tanker around. It may not be until a fresh crisis hits that deeper fiscal integration becomes possible.”
--Jamie Rush. Read the EURO AREA REACT
But the fiscal initiative gives the ECB a foot in the door to argue its case, and may still be a more effective goal to aim for rather than straying further into national politics.
Whatever Lagarde pushes for, she will need to use all her political skills, as a veteran former finance minister and erstwhile head of the IMF, to win governments and voters over. As Kounis of ABN Amro says, it’s all about convincing politicians on how to spend money.
“The issue is that, in the end, it needs to be agreed by countries anyway,” he said.