The vice-president of the European Central Bank, Luis de Guindos, expressed concern on Monday about a possible fiscal slippage in the United States under the upcoming Trump presidency, worsening the uncertainty weighing on growth prospects in the euro zone . In the United States, where the public debt ratio is close to 100% and the budget deficit close to 7%, President-elect Donald Trump has promised to reduce taxes without curbing public spending, recalled Mr. de Guindos at the opening of a banking conference in Frankfurt. “This could result in an additional budgetary policy on top of the 7% public deficit” and so “raise concerns in the markets”warned the central banker.
The prospect of inflationary policies during Donald Trump’s second term – customs duties, tax cuts and an increase in the budget deficit – has already had an effect on the dollar, which has appreciated significantly in recent days against the euro. Within the ECB, concerns have shifted in one year from a risk of inflation that is too high to that of growth that is too sluggish. “Comparing the current situation to a year ago, the balance of macroeconomic risks has shifted from concerns about high inflation to fears about economic growth”declared Mr. de Guindos in his speech. The inflation rate in the euro zone is on track to stabilize at 2%, the ideal score targeted by the ECB. However, economic activity “was weaker than expected” in the last quarter and this led the institution to cut its economic projections twice in recent months.
The prospects remain, “shadowed by uncertainty surrounding economic policies and the geopolitical landscape, both in the Eurozone and globally”added Mr. de Guindos. Trade tensions “could further intensify, increasing the risk of extreme events materializing”he argued, without specifying which ones, while the ECB will present its half-yearly report on financial stability on Wednesday. These “cyclical headwinds” only go“aggravate the structural problems of low productivity and low potential growth in the euro area”according to Mr. de Guindos.
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