Germany’s Bundesbank urged troubled euro-area governments such as Spain to set aside short-term growth concerns and press ahead with budget cuts to win back investor confidence.
“Putting too much weight on short-term, demand-side risks misjudges the root cause of the current crisis, namely a profound loss of confidence in markets,” Bundesbank board member Andreas Dombret said in a statement today. “Taking consolidation plans too lightly might give some relief in the short term, but it also undermines the credibility of medium- term budget goals.”
Spanish unemployment is approaching 24 percent as the economy, the fourth-largest in the 17-nation euro area, contracts under the weight of the government’s austerity measures. At the same time, Spain’s 10-year borrowing costs have jumped more than 1 percentage point since March 2, when Prime Minister Mariano Rajoy said the country will miss a 2012 deficit goal set by the European Union.
“In the Bundesbank’s view, the latest rise in risk premia for some euro countries shows the ongoing fragility of the situation,” Dombret said. “This increase should therefore be an incentive to dispel latent doubts in the markets and create confidence through decisive implementation of economic obligations.”
Dombret cautioned against “calls for a further loosening of monetary and fiscal policies,” saying a “balanced approach” to the situation is required.
Turning to the German economy, Europe’s largest, Dombret said it is in “remarkably good shape,” and growth should gather pace as unemployment at a two-decade low fuels domestic demand.
Dombret was briefing reporters ahead of the International Monetary Fund’s meetings in Washington this week. He re-stated the Bundesbank’s readiness to raise Germany’s contribution to the IMF’s resources to 41.5 billion euros ($54.6 billion), subject to conditions.
Dombret said members’ contributions should create a “fair sharing of the burden,” and that funds should not go into a special reserve for indebted euro-area nations.
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