Europe needs new budget rules to protect spending while monetary policy remains constrained

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Europe needs new budget rules to protect spending while monetary policy remains constrained

On Friday, Europe needs new budget rules so the government's spending can maintain an oversized role for years to come while monetary policy remains constrained, European Central Bank policymaker Klaas Knot said.

Governments have spent record amounts in the past year to save their economies from a partial collapse, but as recovery takes hold, a debate is underway on how and when to restore a fiscal-definition-imposed restriction?

Instead of reinstating the rules, Knot argued for an overhaul of the Stability and Growth Pact as central banks have limited scope for manoeuvre and fiscal policy is stronger when rates are below or near their effective lower limit.

As the current low interest rates environment is likely to continue, we need a structurally larger role for fiscal policy in the macro economic stabilization for the foreseeable future, said the head of the Dutch central bank in a speech.

Fiscal flexibility is necessary and has to be an integral feature of the framework, rather than an all-or-no button which can, or may not, be pressed in an emergency, Knot added.

The new framework needs to improve the coordination of official fiscal policies within the Eurozone, much like the bloc does with the New Generation EU Fund, and need flexibility beyond national stabilizers and emergency measures.

But the new laws must not give governments a free reign so robust and credible rules are also needed to reduce debt and ensure that spending increases in productivity, so the expenditure would eventually pay for itself, Knot added.

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