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European Central Bank Governing Council Member Jens Weidmann said higher borrowing costs for euro-area countries such as Spain can act as an impulse to fiscal reform.
“Monetary policy alone can’t solve the crisis,” Weidmann told reporters in Washington today. “Higher interest rates are also a spur toward reforms.”
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. He unexpectedly announced a 10 billion-euro ($13 billion) package of budget cuts on April 9, less than two weeks after unveiling the most austere budget in more than three decades.
Spain, where unemployment is approaching 24 percent, is one of eight economies in the 17-nation bloc that the European Commission forecasts to contract this year.
While the outlook for global growth has improved since last year, Europe’s debt crisis remains the main downside risk, Weidmann said.
The International Monetary Fund this week raised its global growth forecast for the first time in more than a year, projecting expansions of 3.5 percent in 2012 and 4.1 percent in 2013. The euro-area economy is predicted to shrink 0.3 percent this year, an improvement from the 0.5 percent contraction forecast in October.
Governments will pledge about $400 billion in additional funding to the Washington-based lender after a meeting of Group of 20 finance ministers and central bankers in Washington today, German Finance Minister Wolfgang Schaeuble said today. Japan said on April 17 it will provide $60 billion to the IMF’s effort to expand its resources and shield the global economy against any deepening of Europe’s debt crisis.
Weidmann said that an increased global fund to tackle financial crises shouldn’t prevent countries from undertaking fiscal reforms.
“The firewall that we are talking about here won’t be able to actually put the fire out,” Weidmann said. “It also can’t be designed in such a way that it undermines the necessary reforms. Reforms will show their positive effects over the long term, and so that trust can grow, after measures have been announced they have to be implemented.”
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