August 5, 2021

De Cos calls for maintaining expansionary fiscal policy and more reforms to reduce debt and deficit


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The governor of the Bank of Spain, Pablo Hernández de Cos, continues to think that a expansionary fiscal policy and very active is the correct response to the coronavirus crisis to avoid permanent damage, in a context in which the Spanish economy has been more damaged in relative terms than other eurozone countries.

This has been revealed in an interview with ‘Central Banking’, in which he has been asked about his intervention in the Congress of Deputies, in which he warned of the risks of raising pensions and public salaries in 2021 and of the probability that the macroeconomic forecasts on which the Budgets are designed will be revised downwards.

The governor explained that the coronavirus crisis has had “a very profound effect” on the Spanish economy due, in part, to the fact that its productive structure is more skewed towards sectors most affected by the crisis, as well as some structural problems such as the high level of temporary workers, which adds volatility to the labor market, or the large proportion of SMEs, more vulnerable to this type of crisis.

In this scenario, he recalled that the Bank of Spain has advocated that the optimal fiscal policy is to have “a very active expansionary policy” that prevents the transitory shock from permanently damaging the economy. I still think that is the correct answer. Positive vaccine news is crucial, but we know that it will take some time to translate into positive financial results. Therefore, it is important that fiscal policy continues to be very supportive, “he said.

In his opinion, this is “absolutely compatible” with recognizing that one of the main negative consequences of the crisis will be that the Spain’s public debt level will be much higher. “My proposal in Congress has been that we first acknowledge the problem. Second, that we begin to prepare for the consolidation process that will be necessary to stabilize and reduce the public debt and deficit, even if, as I have argued, it is not the right time to start it. And that this is accompanied by the implementation of structural reforms that we know are absolutely necessary, “he said.

On the other hand, the governor of the Bank of Spain has stressed that active employment policies must allow the labor market to function flexibly so that companies that suffer a permanent reduction in demand can adapt. In this sense, he assured that the European Union recovery fund is “crucial” and “has the ability to make a difference”, although the funds must be deployed through a very selective process that does not only take into account their impact on short term.

“It is even more important that they focus on increasing the growth of the potential production of this economy with a medium-term perspective. It is a difficult combination: these projects must be defined as quickly as possible, but they must be designed to have a lasting effect, “he warned.

Hernández de Cos, who is also a member of the Governing Council of the European Central Bank (ECB), has also been asked about the new measures that the European body approved on December 10 in response to the rebound in the pandemic.

The ECB expanded in 500,000 million the volume of its program Asset purchase against the effects of the pandemic (PEPP) and said that it was not necessary to exhaust the program in its entirety if favorable financing conditions could be maintained.

Asked if this last point implies that the program will not be expanded or that there is a lack of will on the part of the ECB to provide new stimuli, Hernández de Cos stressed that the body wanted to give that message a signal of efficiency and that the key it resides in maintaining favorable financing conditions.

“If we can maintain favorable financing conditions without using the full envelope, we will. But if this is not the case, for whatever reason, and we need to make full use of what we have already approved or even increase it, we are also ready to do so ”, he assured.

Hernández de Cos has also ruled out that the extension of the PEPP is transforming it into a control mechanism for the yield curve, since the program does not incorporate the commitment to buy the amount necessary to maintain yields at the target level and does not look to the returns of any particular issuer or sector, although it has recognized that yield curve control ‘is a option worth exploring», Although complex in the euro area due to the existence of 19 sovereign yield curves.

Regarding the ECB’s measure of raising the total volume of loans that banks can request from 50% to 55% of the eligible loan portfolio under the third program of long-term financing operations with a specific objective (TLTRO- III), De Cos has acknowledged that a large number of eurozone banks are already at, or close to, their debt reserve for TLTRO-III operations and has noted that if this number remains high, ‘it probably suggests the advisability of a greater increase in that limit ». “But for that we will have to wait and see,” he pointed out.

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