ECB’s Villeroy: Many U.S. Economists See Stimulus Leading to Risk of U.S. Overheating

31 March 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Wednesday observed that many American economists felt that the U.S. fiscal stimulus could result in economic overheating.

In a speech for Collège d’Europe, Villeroy, who heads the Bank of France, said with respect to U.S. fiscal stimulus plans that ‘according to many U.S. economists, this could lead to a risk of the economy overheating, "making monetary policy more difficult to use in the future", as Olivier Blanchard - not exactly known as a proponent of austerity - has said.’

At the same time, he said, it ‘could have more positive lasting effects in two respects: it strengthens supply, perhaps also in education; it could reverse the race for more and more tax cuts in advanced economies.’

The challenge for Europe is not about the size of its own fiscal response to the crisis caused by the pandemic, but rather ‘the speed of its execution’, he said. ‘Once again, speed is our collective handicap. Governments must now implement the recovery plan they have adopted and they must do so quickly. In other words, we in Europe must move from words to deeds.’

Villeroy noted that current low official borrowing costs do ‘not mean that public debt sustainability issues are no longer relevant: it only means that governments have more time to ensure debt sustainability.’

Although the 60%-of-GDP cap on debt established by the Treaty is appropriate, the requirement that EU member states above this level reduce their debt at an average rate of at least one twentieth per year of the number of percentage points above 60% ‘is too demanding and should be adapted for each country’, he said.

He suggested that interest payments be included in the net expenditure target so as to ‘give governments more fiscal space as long as interest rates remain low.’

‘However, if interest rates come under pressure, as they do during an economic recovery, more effort will be needed on primary expenditure’, he said. ‘In sum, the long-term sustainability of public debt must be ensured by credible but flexible fiscal rules.’