Lagarde insists governments must keep on recovery spending

Employment subsidy schemes have already been extended in several countries but some are advocating longer extensions

Eurozone governments must keep spending heavily to aid the recovery from pandemic-induced recession, complementing already super-easy monetary policy, ECB President Christine Lagarde said on Sunday. “Confidence in the private sector rests to a very large extent on confidence in fiscal policies,” she said in a speech.

With debt levels blowing past 100% of GDP this year, concerns are rising that politicians will struggle to push through more support and some subsidies, raising the risk that employment and income schemes could abruptly end. Employment subsidy schemes have already been extended in several countries but some are advocating longer, one- or two-year extensions to bolster confidence while the bloc recovers from recession that could slash 8% from output this year.

“Continued expansionary fiscal policies are vital to avoid excessive job shedding and support household incomes until the economic recovery is more robust. Keeping job support schemes in place is critical to avoid a sharp increase in unemployment later in the year,” Lagarde pointed out in a speech to the Annual Meeting of the Council of Governors of the Arab Central Banks and Monetary Authorities. She also urged a final deal on the EU’s 750 billion euro recovery fund, which is still under negotiation and subject to political wrangling.

For its part, the ECB is ready to adjust all of its instruments as needed since there is no place for complacency, Lagarde said, largely repeating the bank’s standing message. The ECB has eased policy several times this year and now estimates that its measures will add 1.3 percentage points to growth and 0.8 percentage point to inflation through 2022.

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