FRANKFURT (Reuters) - Fiscal spending in “core” euro zone countries, such as Germany, would help weaker economies in the region’s periphery at a time when European Central Bank rates are stuck at zero, an ECB research paper showed on Thursday.
The authors argue for fiscal stimulus in the euro zone’s core to counter the effects of “structural reforms”, which temporarily reduce prices and wages, in peripheral countries, such as Greece, Portugal and Spain.
The paper provides further ammunition to ECB President Mario Draghi, who has long been calling for countries to use the “fiscal space” they have under European rules and raise the pace of reform.
His plea has fallen on deaf ears so far, with Germany, which is sitting on its biggest budget surplus since records began with reunification in 1990, reluctant to loosen the purse strings.
The study found that spending in core countries, which include Germany, France and the Netherlands, would boost euro zone inflation, thereby lowering the cost of borrowing for firms and households in real terms.
If ECB interest rates remained at zero despite the inflation rise, this would then stimulate domestic demand in peripheral economies as well as their exports to core countries, according to the three authors.
“A fiscal expansion in the core may benefit the periphery provided the monetary authority ... does not react to the resulting inflationary pressure,” Bank of Spain economists Óscar Arce, Samuel Hurtado and Carlos Thomas - part of an EU task force working on low inflation - wrote in the paper.
Reporting By Francesco Canepa; Editing by Richard Balmforth