Time.news – The coronavirus pandemic will leave more damage to the European economy than we see now. This is the starting point of Fabio Panetta’s long interview with the Spanish newspaper ‘El Pais’, in which the member of the Executive Council of the ECB calls for greater ambition in monetary and fiscal policy to stimulate inflation and growth in the euro area.
“There is a little less uncertainty, but it is still high. Vaccine distribution is accelerating, but it is still slow. And the pandemic is advancing rapidly in some countries, affecting growth prospects. – is the premise – although this year the United States will regain the pre-crisis level, the euro area will not do this until mid-2022“.
Panetta warns: “We may have definitely lost two years of growth. Inflation will remain below our 2% medium-term target, unlike in the US, UK or Canada. We need to be more ambitious to increase growth potential and bring inflation closer to our target. And we must give consumers and investors greater guarantees on the prospects of the European economy “.
For Panetta in general “it would not be wise to bet on a quick recovery. There are risks that can prevent the realization of the planned improvements – he warns – and even if we manage to get out of the pandemic soon, we will realize that the damage to the economy is greater than what we see now. Nothing prevents the euro zone from having a robust recovery, but for this the economy must be supported with the appropriate level of monetary and fiscal stimulus. Prudence tells us that it is better to inject too many stimuli than not be up to it “.
Furthermore, for the Italian member of the board of the central bank, there is “a significant risk of divergence“in the recovery between the various countries of the Union.” The pandemic has hit each country differently according to its exposure to the sectors most affected – he reasons – but there has been a common European response. If we wisely use the 750,000 million euros of the EU recovery tool – Next Generation Eu – the way out of the crisis can be more homogeneous. This tool should be linked to the reforms needed in each country. If funds are invested in growth sectors with the future in mind, the recovery will be more balanced. If successful, this plan could be the prototype of a future common fiscal instrument. ”
“The US stimulus plan is ambitious, especially this year, and this largely explains why its growth trajectory is moving away from that of Europe. Keeping the economy warm benefits employment, investment and productivity. And faster recovery helps the most disadvantaged members of society. In Europe we now need to implement the EU’s recovery facility so that the Commission can pay out the funds soon. IS we should consider new fiscal impulses so that demand returns to its potential more quickly.
Comparing the situation in Europe and the United States, he then observes: “The US stimulus plan is ambitious, especially this year, and this largely explains why its growth trajectory is moving away from that of Europe. Keeping the economy warm benefits employment, investment and productivity. And faster recovery helps the most disadvantaged members of society. In Europe we must now implement the EU recovery instrument so that the Commission can pay out the funds soon. And we should consider new fiscal impulses so that demand returns to its potential more quickly. ”
Panetta insists: “We need European resources to be released quickly“.
And on inflation he underlined: “In the United States, inflation returns to healthy levels because monetary and fiscal policies work together strongly. The forecast of inflation in the euro zone is unsatisfactory.. Inflation will rise temporarily this year, but for cyclical reasons it will fade in 2022. However, with a more dynamic policy mix we too could benefit from improvements in the global economy. ”
Given the scale of the crisis, should the ECB expand its arsenal of measures? “We have room for maneuver – replies Panetta – because we have used only part of the 1.85 billion euro program. But if we spend that money and still lose our target, we must do more. We cannot be satisfied with inflation of 1.2% in 2022 and 1.4% in 2023. And the argument that the time horizon can be extended is not convincing. The ECB has not achieved its goal for too many years. If we wait, it will be even more expensive as it would make it more difficult to anchor inflation expectations and risk a permanent reduction in economic potential. ”
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