France’s Villeroy Urges Fiscal Stimulus in Germany, Netherlands

Bank of France Governor Francois Villeroy de Galhau pushed Germany and the Netherlands to use their fiscal firepower to reboot the ailing euro-area economy, warning that other countries have little room to help.

In his annual letter to French President Emmanuel Macron, Villeroy called for a combination of stimulus in nations with healthy finances and structural reforms in highly indebted countries like France and Italy.

“Germany and the Netherlands have slightly activated their fiscal policy without committing to a real stimulus,” said Villeroy, who is also a member of the European Central Bank’s Governing Council. “Those countries that have a fiscal margin for maneuver could use it today to support their own growth as well as the euro area’s.”

Villeroy’s comments are a rare case of a national central banker prescribing policy for other countries’ governments. His call comes amid a deepening malaise in the euro-area economy, which is struggling with the uncertainty of increased trade tensions and the political upheaval of Brexit.

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The ECB has already revised its plans to gradually exit stimulus by pledging to keep rates low for longer and offer a new round of cheap funding to banks. Villeroy repeated that officials could again change the timing of policy normalization and adjust their tools, depending on economic data.
“The intensity of the instruments will have to be calibrated with total pragmatism,” Villeroy said.
But France’s central-bank governor also said governments need their own shared mechanisms to stabilize the economy. In addition to fiscal bailout tools, the euro area must strengthen its banking union and harmonize capital markets.
“Faced with negative shocks, monetary policy should not and cannot be the only possible response,” Villeroy said.