ECB’s Knot: Eurozone fiscal policy must keep large role for years

Commenting on the euro area’s fiscal policy, the European Central Bank (ECB) policymaker Klaas Knot said that Europe needs new budget rules so government spending can maintain an oversized role for years to come, per Reuters.

Key quotes

"As the current low-interest rate environment is likely to persist, we need a structurally larger role for fiscal policy in macro-economic stabilization for the foreseeable future."

"Fiscal flexibility is needed and has to be an integral feature of the framework, rather than an all-or-nothing button which may, or may not, be pressed in an emergency."

But the new rules must not give governments a free rein to spend so "robust and credible" rules are also needed to keep debt sustainable and ensure that spending adds to productivity, so the expenditure would eventually pay for itself.”

Separately, ECB policymaker Robert Holzmann noted that if inflation went over 3% that would lead the central bank to a re-think of strategy.

EUR/USD reaction

Having faced rejection just below 1.2200, EUR/USD has given up all of its gains, courtesy of a rebound in the US dollar across the board.

The spot is currently trading at 1.2166, daily lows, modestly flat on the day.