Deutsche Bank analysts point out that we heard from a number of ECB Governing Council members over the last 24 hours with the ECB’s Chief Economist Philip lane advocating fiscal easing.
“He said “If there were fiscal expansion in these current conditions, the multiplier will be quite big. This goes back to finance ministers thinking about fiscal policy as a macro tool.” On growth, he said “Our assessment is that we’re not at the edge, but of course we’re closer to the edge than we were.” However, Bundesbank President Jens Weidman, who also spoke overnight was measured in his response on fiscal easing as he said that while some additional spending might be possible in the short term, “with respect to macroeconomic stabilization, any further stimulus appears unnecessary, unless a perceptible deterioration in the economic outlook becomes apparent. Germany’s output gap is about to close and forecasts don’t foresee a marked deterioration.”
“On the other hand, Dutch governor Klaas Knot and French Governor Francois Villeroy de Galhau both called for a review of both the ECB and EU’s economic strategy with Klass Knot saying that the ECB could increase its flexibility by introducing a symmetric band around the inflation aim, and governments could simplify the Stability and Growth Pact to put more emphasis on debt levels relative to budget deficits.”
“French Governor Francois Villeroy de Galhau also said that Germany among euro-area countries has fiscal room to spend more and could help take some weight off the ECB. Lastly, Austrian Governor Robert Holzmann, said that one of the main tasks of Christine Lagarde will be to restore harmony in the decision-making Governing Council and added “I expect that Lagarde will start a process in the ECB that more strongly integrates national central banks.”