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ECB's Draghi Says Active Fiscal Policy Can Speed Up Monetary Policy Tightening

ECB's Draghi Says Active Fiscal Policy Can Speed Up Monetary Policy Tightening

Eurozone governments can support the central bank by actively pursuing fiscal policy reforms and thus, pave the way for raising rates quickly than expected, outgoing European Central Bank President Mario Draghi said Friday.

“We have seen in other regions where fiscal policy has played a greater role since the crisis that the return to price stability has been faster,” Draghi said in a speech in Milan, citing the United States as an example.

“A more active fiscal policy in the euro area would thus make it possible to adjust our policies more quickly, which we are well aware are having adverse effects on certain sectors of society and certain intermediaries,” Draghi said.

The former chief of Bank of Italy will step down from his role as the ECB President on October 31.

Draghi is set to be succeeded by the former IMF Managing Director Christine Lagarde.

Economists said the former French finance minister is set to inherit a fractured policymaking body at the ECB as several hawkish policymakers, especially those from Germany, have voiced opposition to the latest round of stimulus measures announced in September.

In the ECB history thus far, Draghi is the only chief who did not raise interest rates during his 8-year long tenure.

The Italian economist also raised several eyebrows as he was bold enough to undertake several unconventional measures at the ECB, mainly asset purchases and negative interest rates, which were inconceivable in the euro area years ago.

“Central bank independence is not an end in itself,” Draghi said.

“Its purpose is to ensure that the central bank is credible in its pursuit of price stability, while making sure that monetary policy is never subservient to fiscal policy – what is known as “monetary dominance”.

QE opponents, the main being the Bundesbank President Jens Weidmann, fear further asset purchases, especially buying government bonds, would take the ECB too deep into uncertain territory. They are also worried about the urgency and effectiveness of such actions.

And the hawks on the Governing Council have been quite vocal this time. Much worse, the German member on the ECB Executive Board, Sabine Lautenschlager, quit her post late September, apparently due to her opposition to the loose monetary policy.

The material has been provided by InstaForex Company – www.instaforex.com