Low-debt EU countries should spend more while others save, Gentiloni says

FILE PHOTO: European Economy Commissioner-designate Paolo Gentiloni of Italy attends his hearing before the European Parliament in Brussels, Belgium October 3, 2019. REUTERS/Yves Herman

BRUSSELS (Reuters) - European Union countries must better coordinate fiscal policies so low-debt countries spend more to boost the region’s economy while high-debt countries shore up their finances, European Commissioner for Economic Affairs Paolo Gentiloni said.

Speaking at a European Central Bank conference in Frankfurt, Gentiloni said he supported the ECB’s view that the bank would achieve its inflation target much faster if it were helped by the fiscal policies of euro zone governments.

He also noted that EU budget rules gave the EU authority to limit government deficits and debt levels but not to force countries to spend more.

“This limits our ability to achieve an appropriate fiscal stance for the euro area. It may not be a problem in a normal macroeconomic environment but, as I have said, the conditions that we are living through are not normal - though they may persist,” Gentiloni said.

Forecasts are for euro zone growth to remain weak at around 1% for the next two years, he said, down from around 2%, once the region’s trend growth. Low growth has been accompanied by low core inflation at 1% to 1.5%, despite years of ECB efforts to push it higher.

“A low growth and inflation rate environment constrains monetary policy to a policy of low interest rates, operating close to (or, indeed, at) the effective lower bound. If conditions were to deteriorate, the risk of monetary policy being constrained could materialise,” Gentiloni said.

The ECB, euro zone finance ministers and the Commission have long urged Germany and the Netherlands, which have budget surpluses and relatively low debt, to invest more to boost their growth and, indirectly, help the whole euro zone. But both are reluctant to go on a major spending spree.

At the same time, the EU has been battling Italy, where politicians have been pushing to borrow and spend more, to keep fiscal policy prudent. At 2.38 trillion euros, Italy’s nominal debt is the highest in the EU.

“Since budgetary policies are the responsibility of member states, the coordination of fiscal policy becomes essential,” Gentiloni said. “Fiscal responsibility in high-debt countries should go hand in hand with more supportive policy action in low-debt countries.”

Reporting by Jan Strupczewski