U.S. Treasury chief warns Europe against hobbling coronavirus recovery with tight spending rules

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U.S. Treasury Secretary Janet Yellen on Tuesday warned the EU against reimposing rigid spending rules before the economy has recovered from the pandemic.

Speaking to reporters, Yellen waded into a debate that is splitting the bloc by questioning whether there is enough flexibility in the eurozone’s spending and deficit rules — aligning more closely with the position of Southern capitals than with Northern countries such as Germany and the Netherlands.

The fiscal rules, which have been put on ice during the COVID-19 crisis, require governments to stay below a 60 percent debt-to-GDP ratio and cap budget deficits at 3 percent of economic output.

“It’s important to think about whether or not [the rules] create the flexibility that countries in the EU need in order to be able to address cyclical developments,” she told journalists at a briefing.

“We have been in a very low interest-rate environment. I expect we will remain there, although that's to be determined, but is 60 percent debt-to-GDP ratio the right kind of metric?”  

Yellen’s intervention on the highly political topic comes during a visit that has already seen the Washington administration successfully postpone a planned EU digital levy proposal until the fall at least.

With the debate over how to reintroduce the eurozone rules set to kick off in earnest after the summer, the former Federal Reserve chief pointed to the lessons from the last financial crisis, when a lack of fiscal stimulus slowed down the economic recovery.

“We did too little to address on the fiscal side,” she said. “Monetary policy got to a position where there wasn't much more it could do, and we needed some fiscal stimulus. We ended up with a very long, slow recovery.”

EU countries have pumped money into supporting their economies and will get further stimulus from the bloc’s recovery fund. But Yellen said she also heard concerns about getting back to normal as quickly as possible and would “worry” about a return to austerity policies.

“We should not pull back fiscal support too quickly,” she said.

The U.S. economy chief also said she was “pleased” the EU decided to delay a planned digital levy, arguing a global tax accord prevents digital services taxes that unfairly target U.S. tech companies.

But in a glimmer of hope for the EU's levy, Yellen said it was also not clear what was allowable under the terms of the deal.

“The delay allows an opportunity to consider these issues more carefully and to clarify what measures are permissible,” she added.

This article is part of POLITICO’s premium policy service: Pro Financial Services. From the eurozone, banking union, CMU, and more, our specialized journalists keep you on top of the topics driving the Financial Services policy agenda. Email [email protected] for a complimentary trial.

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