Stronger stimulus package urged for Germany

GERMANY SHOULD launch a much more ambitious economic stimulus package and eastern European aid programmes must be accelerated in a concerted response to the gathering economic crisis, a European Central Bank (ECB) policymaker has urged.

Ewald Nowotny's comments are one of the boldest calls yet by a central banker for more aggressive government action at a time when much of the continent is in recession. They also point to differences within the ECB's 21-strong governing council, which includes Mr Nowotny as Austria's central bank governor.

Mr Nowotny favours co-ordinated expansion programmes equivalent to 1 per cent of countries' gross domestic product (GDP), with an emphasis on spending that would reduce energy consumption. But Germany's stronger finances meant it could commit 2 per cent of GDP - about €50 billion, he said.

So far Berlin has envisaged a package worth just €12 billion over two years. "There is really a lot of room for manoeuvre, especially in Germany, so I think you should use it," Mr Nowotny said.

European Union funding for regional aid could be frontloaded in eastern Europe, where growth was also slowing dramatically, he added, with less "co-financing" by national governments. Some €350 billion had been allocated for the newest member states under the EU's "cohesion fund" programme running until 2013.

"Especially in this situation, I think that both in the interests of the countries concerned and of the EU, one should make every effort to accelerate these programmes."

So far ECB policymakers - who have a reputation as cautious even among central bankers - have trodden carefully on fiscal stimulus packages. Jean-Claude Trichet, its president, fears already-profligate governments could risk undermining economic confidence further.

Jürgen Stark, another council member, warned bluntly on Tuesday: "There is a substantial risk that the mistakes of the 1970s will be repeated . . . I really cannot see why discretionary fiscal policies, which have proven to be ineffective in the past, should work this time."

But EU fiscal rules give flexibility in "exceptional circumstance". Mr Nowotny, who took over in September as the first Social Democrat to head Austria's central bank, argued that even countries with little room for manoeuvre should allow the operation of "automatic stabilisers", whereby taxes fall and public spending rises. He indicated the ECB would cut its main interest rate again in December, saying the euro-zone slowdown and tumbling inflation expectations "obviously gives room for further measures from the side of the ECB".

But Mr Nowotny denied the ECB was lagging behind other central banks, which have cut interest rates faster and lower.

"Nobody I really think knows how deep this recession will go . . . so therefore it makes perfect sense not to use all your firepower at once," he said. Moreover, emergency liquidity being pumped into financial markets was having "a deep impact, although it takes some time to become effective".

Some ECB policymakers have warned cutting interest rates too far could sow the seeds of the next financial crisis but Mr Nowotny said as far as he knew the minimum level to which official interest rates could fall "was never debated" at the Frankfurt-based institution.

His comments on eastern Europe carry extra weight because Mr Nowotny, an economics professor, spent four years until 2003 as vice-president of the European Investment Bank, and Austrian banks have spearheaded much of the recent investment in the region. Austrian banks' liabilities there are equivalent to about 80 per cent of the country's GDP, including Bank Austria, which is Italian-owned.

"The view in some parts, especially Britain and the US, of seeing central and eastern Europe as a high-risk region is too simple," he argues, with the performance and stability of countries varying.

The region would remain the most dynamic part of the EU. Mr Nowotny did not expect any significant Austrian retreat from the area. - ( Financial Timesservice)