Cut taxes to create jobs, says head of euro bank
Published 23/08/2014 | 02:30
The President of the European Central Bank (ECB) says governments should cut taxes if they think it will help drive growth and create jobs.
In what will be seen as a shift away from the strict "austerity" policies that have dominated Europe's response to the debt crisis, Mario Draghi backed calls for more flexibility in how budget rules are applied.
The comments come just as Finance Minister Michael Noonan is finalising plans for Budget 2015 - and will boost calls for him to do no more than the minimum amount of cutting required to hit the 3pc deficit target next year.
Mr Draghi's call for growth-boosting action came as he also warned that high unemployment is a greater risk to the Eurozone than inflation or high wages.
Following the financial crash, rates of joblessness in Europe have remained high long after employment picked up in the US, Mr Draghi said.
He said that reflected a mix of so-called structural issues such as lack of skills that national governments can tackle, but also the impact of the sustained economic slump which has lingered longer in the euro area than either the US or UK.
"No one in society remains untouched by a situation of high unemployment. For the unemployed themselves, it is often a tragedy which has lasting effects on their lifetime income.
"For those in work, it raises job insecurity and undermines social cohesion.
"For governments, it weighs on public finances and harms election prospects," he said.
He made the comments in a speech at Jackson Hole, Kentucky, in the US, which is hosting a major conference of central bankers.
He said unemployment should be a concern for the ECB, because of the effect of joblessness in demand for goods and services.
That is likely to go down badly in Germany where Chancellor Angela Merkel favours strict interpretation of budget rules and where officials see fighting the risk of inflation - rather than driving up demand - as the right focus for central bankers .
But Mr Draghi advocated more leeway in how countries apply the strict regime of budget rules introduced after the crisis - though he stopped short or arguing that the 3pc budget deficit target should be loosened .
"First, the existing flexibility within the rules could be used to better address the weak recovery and to make room for the cost of needed structural reforms.
"This strategy could have positive effects even in the short-term if taxes are lowered in those areas where the short-term fiscal multiplier is higher, and expenditures cut in unproductive areas where the multiplier is lower.
"Research suggests positive second-round effects on business confidence and private investment could also be achieved in the short-term," he said.
He called for co-ordination between governments to drive growth.
Irish IndependentFollow @Indobusiness