Poll: Time for fiscal over monetary policy in euro zone - economists

September 15, 2016 6:37 AM EDT

Detail of a European map, including Great Britain, is seen on the face of a Euro coin in London, Britain, January 31, 2016. REUTERS/Toby Melville

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By Shrutee Sarkar and Rahul Karunakar

(Reuters) - Fiscal policy is needed for euro zone economies stuck in low gear rather than even more aggressive monetary policy easing, according to a majority of economists polled by Reuters.

It comes as an apparent failure of major central banks such as the European Central Bank and the Bank of Japan to significantly stimulate growth and inflation has pushed global debt yields to multi-month highs.

Doubts over the effectiveness of further monetary easing was also voiced by ECB Governing Council member Klaas Knot on Wednesday, the second rate-setter in two days to urge caution on any further easing action, hinting at diminishing returns from such policy measures.

A strong majority, close to 90 percent of economists in the latest poll, said the currency bloc should now use fiscal policy to add stimulus.

ECB President Mario Draghi called for this last week, repeating the message from central bankers at the Jackson Hole gathering last month. European governments have generally not taken up the call yet.

Economies in the euro zone, most under fiscal austerity programs, are restrained by the Stability and Growth Pact, which tries to prevent member countries from running a fiscal deficit of more than 3 percent of gross domestic product.

"The effectiveness of monetary policy has reached its limits. Thus, a supportive fiscal policy would be helpful. However, the political obstacles are still high and we do not expect too much," said Jens Oliver Niklasch, senior economist at LBBW.

When asked which euro zone countries were best positioned to implement fiscal expansion in the next six months, a majority of economists said Germany. A few said France and Italy as well as some smaller core countries.


With prospects for a surge in euro zone economic growth and inflation fleeting, no major new policy expansion is expected from the European Central Bank as it instead focuses on the details of its 80 billion euro ($90 billion) a month asset purchase program.

A majority of the more than 65 economists polled over the past week expect the ECB to extend its current monthly stimulus beyond March 2017, which will probably require technical adjustments so the central bank can increase the amount of eligible bonds.

Most expect the ECB to announce that extension in December - around the time the Federal Reserve is expected to next raise interest rates, which would probably be a better for any potential effect on financial markets and weakening the euro.

Some say that the announcement could come as early as next month.

Even with predictions for the ECB to extend its purchases, the euro zone economy is not expected to gain momentum any time soon and inflation is not expected to reach the bank's target of just under 2 percent until 2019 at the earliest.

The Reuters poll showed the euro zone economy growing 0.3 percent in each quarter this year, nudging up slightly to 0.4 percent quarterly next year.

That pace of growth is unlikely to lift inflation to the central bank's target anytime soon. It is expected to average just 0.3 percent this year, 1.3 percent next year and 1.5 percent in 2018. Those predictions for growth and inflation were largely unchanged from last month's poll.

"The hope was that low rates would boost investment, but the power of monetary policy transmission has visibly weakened post-crisis and even the increasingly aggressive and unorthodox measures have failed to sufficiently boost the economy," wrote Michala Marcussen, global head of economics at Societe Generale.

"Moreover, there is growing concern that a prolonged period of low and negative interest rates may come with a dark side."

(Analysis by Hari Kishan; Polling by Purnita Deb and Khushboo Mittal; Editing by Ross Finley/Jeremy Gaunt)

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