Bank of Korea Governor Kim Choong- Soo said the “alarming” growth outlook in the euro area may be one reason why government bond yields in Spain and Italy are elevated.
While fiscal tightening may be needed in many countries, “consolidation may unfortunately bear fruit only after a long spell of painful economic contraction,” Kim said in a speech in Frankfurt today. “And it could even defeat its purposes, at least in the short run.”
Kim said unconventional central bank policy measures on both sides of the Atlantic have “been pivotal in calming the markets” and “bought us time for necessary fiscal adjustment.”
However, “the welcome role of these policies in crisis management is now rapidly approaching its limit,” he said. “Further monetary easing could do more harm than good when the financial markets are already flooded with cheap liquidity but remain nonetheless timid in their lending to the private sector.”
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