UK Economy

ECB's Trichet calls for start to fiscal tightening

LONDON/SAN SEBASTIAN, Spain (Reuters) - European Central Bank policymakers increased pressure on Friday on industrialised countries to cut public spending immediately in order to consolidate the present recovery.

Jean-Claude Trichet, President of the European Central Bank (ECB) addresses the media during his monthly news conference at the ECB headquarters in Frankfurt July 8, 2010. REUTERS/Ralph Orlowski

ECB President Jean-Claude Trichet said that while policymakers around the world had been right to correct the fragile fiscal situation, the timing was still disputed and an immediate start to belt-tightening was vital.

Politicians and central bankers in the United States and Britain have warned that pulling support hastily could push the world economy back into trouble.

“There is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now,” Trichet wrote in a guest column in the Financial Times published on Friday.

Trichet said systemic economic stability and sustainable growth relied on the capacity of public finances to intervene in crises.

“We expect governments to confirm their determination to consolidate their public finances,” Trichet wrote.

He added: “Now is the time to restore fiscal sustainability. The fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope.”

Other ECB policymakers rushed to support Trichet’s view. Executive Board member Gertrude Tumpel-Gugerell said it was time to withdraw the massive fiscal stimulus.

“It is true the fiscal stimulus measures have made a contribution equivalent to roughly 2 percent of GDP in the euro area,” she said.

“But, with the economic outlook improving, it is now time to phase out these special measures and to start fiscal consolidation.”

However, she cautioned those who expected a fast recovery.

“Yet, the return to normality could be gradual. It requires support,” she said.

Her fellow Executive Board member Jose Manuel Gonzalez-Paramo rejected suggestions the common currency zone could slide back into a recession.

“The latest data shows the risk of a double-dip (return to recession) is minimal.”


Fed Chairman Ben Bernanke said on Wednesday he stood ready to ease monetary policy further if the U.S. recovery and job creations withers.

With fears of a double-dip recession mounting in recent weeks, Bernanke reassured lawmakers the Fed is prepared to take steps if the situation worsens appreciably.

Bernanke said the economy still needed fiscal support now and it did not make sense to try to rein in this year’s deficit. However, he stressed that the current fiscal path was unsustainable, and said Congress should shoot for a deficit equal to 3 percent or less of gross domestic product two to three years from now. This year’s deficit is expected to be around 10 percent of GDP.

“It is very important to... demonstrate as best as we can that we are serious about addressing our long-term issues,” he said at a congressional hearing earlier this week.

President Barack Obama -- who before last month’s G20 summit also urged European governments not to cut debt too quickly -- has pledged to halve the deficit by 2013, a promise that the Group of 20 rich and emerging nations also adopted in Toronto.

Bank of England rate-setters also discussed easing policy this month, for the first time since February, reflecting growing concerns about UK economic prospects.

But data on Friday showed Britain’s economy grew by 1.1 percent in the second quarter, twice as fast as expected and suggesting the recovery was on a firmer footing than many feared, though growth may lose momentum in the third quarter.

German sentiment data on Friday was also well above expectations and Trichet said history suggests the near-term costs of tightening public spending would be slight.

“Provided consolidation is pursued as part of a comprehensive reform strategy, the short-term costs for economic growth tend to be contained or very limited,” Trichet wrote.

Budget cuts were more effective than tax hikes, he added.

Trichet also criticized last year’s global push for budgetary stimulus.

“With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: ‘stimulate,’ ‘activate,’ ‘spend,’” he wrote.

The euro steadied against the dollar after Trichet’s comments, retaining gains made the previous day on strong euro zone data and U.S. corporate earnings.

Reporting by Karolina Tagaris; editing by Mike Peacock