EU finance ministers push for simpler fiscal rules

BERLIN/HELSINKI: Central bank chiefs of Germany and the Netherlands hit out on Friday at ECB chief Mario Draghi for unleashing a huge stimulus package aimed at propping up the flagging eurozone economy, calling the action unnecessary and disproportionate. Slamming Draghi for "overshooting the mark", Bundesbank chief Jens Weidmann told Bild daily that "such a far-reaching package was not necessary".

ECB governors on Thursday pushed the deposit interest rate further into negative territory and relaunched net purchases of government and corporate debt. But the deep split among the central bankers burst into the open a day after Thursday's monetary policy meeting.

Around 10 of the 25 members of the ECB governors were against relaunching the quantitative easing program of purchasing 20 billion euros ($22 billion) worth of debt monthly from November, sources said. Ahead of the meeting, several eurozone central bankers, including Weidmann, had openly warned against unleashing a new round of stimulus so swiftly.

"This decision to buy more public debt will make it harder for the ECB to exit from this policy. The longer (such policies) last, the more the side effects and financial stability risks of the very expansive monetary policy will grow," warned the German central banker. He also noted that at the losing end of the expansionary policy are millions of savers, who will see the value of their holdings dwindle in banks. Separately, the head of the Dutch central bank, Klaas Knot, issued a statement saying the "broad package of measures… is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness".
Knot, like Weidmann a hawkish member of the ECB's governing council, said there was no need for the measures when the "euro area economy is running at full capacity". "Neither is there a risk of deflation, nor are there any signs pointing to a euro area-wide recession. The only observation is currently that the inflation outlook lags behind the ECB's aim," he said.

The highly unusual open criticism was noted by the analysts, who pointed out that while it was not uncommon for central bankers to give interviews after a monetary policy meeting to air their views, Knot's decision to issue a full-blown statement was "a clear first".

'Count Draghila'
Draghi had pointed to three reasons for the ECB's heavy hand in September: data and surveys showing the eurozone economy already slowing, looming threats such as protectionism and Brexit, and downward revisions to the bank's economic forecasts. The ECB's "big bang" blast of measures has touched a nerve particularly in Europe's biggest economy-a nation of savers and a fast-ageing society where the government's mantra has been to keep its budget balanced in preparation for rising pension and health outlays in the coming decades.
Publishing a doctored photo of Draghi with sharp teeth, Bild daily had headlined their story: "That's how Count Draghila is sucking our accounts dry." The outrage also cut across to centre-left media, with the Tagesspiegel broadsheet slamming Draghi's latest salvo as "horror policy", warning that it served neither savers and pension funds nor life insurers.

Rather, it warned that the cheap money was keeping afloat "zombie firms" that should have gone bust under normal circumstances. Likewise, Sueddeutsche newspaper said that while Draghi had in his eight years in office saved the eurozone with his bold action, "Thursday's decisions show that he has now lost his way".

Meanwhile, European Union finance ministers were holding a first discussion yesterday about how to simplify the EU's complex fiscal rules to help make public finances more sustainable and stabilise economies throughout business cycles. Originally designed in 1997, the EU rules, called the Stability and Growth Pact, put limits on borrowing in the economic union of countries that share the euro currency, but left members sovereign over government debt and deficits.

After modifications in 2005, 2011 and 2013, the rules have become so complex that the European Commission, which is the guardian of EU laws, each year publishes an almost 100-page handbook to explain how they work, along with many exemptions and exceptions.
The two key elements of the rules are a limit on the nominal budget deficit of 3 percent of GDP and a ceiling on public debt of 60 percent. "When we talk about simplification, it does not mean revising the key fiscal targets, just how they are measured and what parameters we use," European Commission vice president Valdis Dombrovskis told reporters on entering the talks.

"We now heavily use directly unobservable parameters like the output gap, or structural balance, so the discussion is if we should use more directly observable parameters like nominal debt and expenditure increases," he said. Officials said, however, that changing the rules could take more than a year of discussions and legal process that would be driven by the new European Commission starting on Nov 1. Dombrovskis will retain his post in the new EU executive.

The ministerial discussion at the informal talks in Helsinki will be based on a report by the independent European Fiscal Board (EFB), requested by the Commission, which argues the elaborate rules should be boiled down to a medium-term cap on public debt. Countries that have debt above 60 percent would have to keep net government primary spending, which is expenditure less interest payments on public debt, at or below the rate of the economy's potential GDP growth, which is the rate of growth that does not trigger higher inflation. - AFP