What will the ECB make of the new German government’s fiscal plans? At first sight, comments by Wolfgang Schäuble, the new finance minister, appear provocative. “It would make no sense to start talking about saving measures in a phase when we want to concentrate on growth stimuli. It would have the opposite effect,” Schäuble said in a German newspaper interview at the weekend. The idea of balancing the budget in the current parliament was “Utopian”.
The ECB, in contrast, has urged governments to ensure that fiscal consolidation “starts as soon as possible and at the latest when the recovery takes hold,” with efforts to be stepped up in 2011.
Certainly, a stronger commitment by eurozone governments to eventual fiscal discipline would be welcomed by the ECB. But the central bank is realistic about the current weakness of the eurozone recovery, the need for economic support measures to be continued – and the relatively strong fiscal starting position in Germany. With Schäuble, there will be a firm supporter of European integration, with distinctly conservative instincts, at the head of the most important finance ministry in the 16-country region. My guess is that the ECB will also be wary about attacking the new German government as Berlin is usually its strongest ally when it comes to defending the ECB’s independence and hawkish instincts.