Euro zone countries with fiscal space, such as Germany, should use it to promote growth in a region hurt by the global trade war, European Central Bank policymaker Francois Villeroy de Galhau said on Thursday.
The escalation in trade disputes has slowed global trade and the effects are “very acute” in export-reliant Germany, said Villeroy, who is also governor of the French central bank.
The euro area’s public debt is lower than the debt of the United States and Japan, so it can deploy more fiscal stimulus than it’s been using, he said.
“Countries with fiscal space should use it quickly, even more so when they suffer an asymmetric shock like Germany,” Villeroy told the Europlace international forum in Tokyo “Those with high public debt should make their public finances more growth-friendly.”
With the economy barely growing and borrowing costs at record lows, the German government is facing growing pressure at home and abroad to use more fiscal stimulus.
Under its new president, Christine Lagarde, the ECB can conduct a strategic review of its policies, including the relationship between monetary and macro-prudential policies, Villeroy said.
A “soft coordination” between the two may be “more promising” than the conventional approach of separating them, Villeroy said, since macro-prudential tools have limitations in addressing increasing financial stability concerns.
He also called on countries to resist the temptation to water down post-crisis bank regulation known as Basel III, describing it as a “fair and reasonable compromise” among the United States, Japan and Europe.
“The Basel III agreement is intended to apply everywhere in a consistent manner, including of course in the United States.”
