Wednesday

17th Oct 2018

Europe needs new stimulus to ward off crisis, US treasury warns

European governments need to "boost demand" in order to reduce unemployment and avoid deflation, the US Treasury secretary has told the G20 group.

Speaking after the meeting of G20 finance ministers and central bank governors in Australia on Sunday (21 September), Treasury secretary Jack Lew said that there was "an intensified call for boosting domestic demand in Europe".

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  • EU needs new economic stimulus measures, says US treasury secretary Jack Lew (r) (Photo: Joerg Rueger/German ministry of finance)

He added that EU governments needed to combine short-term stimulus measures with structural reforms to their economies.

"The combination of taking action to boost demand in the short run and make structural changes for the long run is an important combination, and it shouldn't become a choice between the two," he said.

The US has made it clear throughout the eurozone crisis that the main priority of European governments should be boosting demand in their fragile economies.

"The concern that I have is that if the efforts to boost demand are deferred for too long," said Lew, adding that "there is a risk that the headwinds get stronger, and what I think Europe needs is more tailwinds in the economy."

Earlier this month, the European Central Bank voted to cut interest rates to a historic low of 0.05 percent and unveiled a raft of bond-buying programmes in a bid to stimulate lending to businesses.

However, it has so far fallen short of launching a quantitative easing programme of government bond-buying similar to that introduced by the US Federal Reserve in the wake of the financial crisis.

The eurozone economy flat-lined in the second three months of this year and this, combined with an inflation rate that hit a new low of 0.3 percent in August, has increased fears of prolonged economic stagnation. The eurozone economy is now forecast to expand by a mere 0.9 percent this year.

But governments remain divided. A group of ministers led by Germany's Wolfgang Schuaeble maintain that governments should focus on cutting budget deficits, while the centre-left governments in France and Italy want to be given more leeway for public investment programmes.

For his part, European Central Bank president Mario Draghi has insisted that governments should not rely on the bank to provide all the stimulus measures needed to drive economic demand.

Earlier on Sunday, G20 ministers agreed on new measures to tackle corporate tax avoidance. Joe Hockey, Australia's treasury minister, who hosted the meeting, said that governments had agreed to automatic exchange of information using a Common Reporting Standard.

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