Draghi to ask governments to chip in to counter Brexit fallout

Sun Jul 17, 2016 4:17am EDT
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By Francesco Canepa

FRANKFURT (Reuters) - European Central Bank President Mario Draghi is likely to plead for governments to do more to boost the euro zone's economy in the coming week as the fallout of Britain's vote to leave the EU and weaker global growth threaten the bloc's fragile recovery.

Governments in China, Japan and Britain have already started easing their fiscal stance or hinted at plans to do so as sub-par global growth and inflation show that central banks' ultra-easy monetary policy has run up against its limit.

The ECB is not expected to change its monetary stance on Thursday, its last meeting before an eight-week summer break. But a reiteration of Draghi's long-standing call on governments to spend more where possible and speed up growth-boosting reforms is once again likely to fall on deaf ears.

The only country with significant fiscal firepower, Germany, is reluctant to give up its budget surplus and has resisted any attempt to pool more money at the European level in the absence of greater power-sharing.

"We fear, therefore, that Mr Draghi’s calls for a loosening of the purse strings will go unheard, at least for now," economists at BNP Paribas said.

"As things stand, then, the burden of responding to the Brexit shock will remain with the ECB, which is all too aware that it has fewer and fewer tools with which to respond."

Calls for greater fiscal spending have been intensifying, with OECD head José Ángel Gurría and doyen investor George Soros throwing their weight behind the argument in recent weeks.

The need for more stimulus was particularly visible in the euro zone, where unemployment is high in many peripheral countries and resentment toward the euro project is growing.   Continued...

European Union flags flutter outside the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, April 21, 2016. REUTERS/Ralph Orlowski