In turning up the rhetoric on his readiness to start quantitative easing, the European Central Bank president is also asking governments to open their own wallets. His message to European leaders preparing to gather in Brussels for a summit tomorrow is that it’s high time they boost domestic demand by using the “flexibility” built into their budget pact.
With the recovery in the 18-nation euro area stalling and deflation risks mounting, Draghi called last week for a three-pronged approach of monetary and fiscal easing combined with structural reforms. French President Francois Hollande’s purge of an anti-austerity coup attempt this week underscored how hard that will be, as German-led pressure to cut deficits threatens to leave the ECB on the hook for further stimulus.
“This is always about packages and deals, and certainly the notion that you have to combine supply-side measures with demand side measures is the right one,” said Guntram Wolff, director of the Bruegel institute in Brussels. “The question of whether France and Italy are going to be able to deliver or not is a bit more complicated.”
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