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Lagarde promotes high government spending

D.he governments in the euro zone should, according to Christine Lagarde, President of the European Central Bank (ECB), continue to support the loose monetary policy with extensive government spending. This should support the recovery after the historic economic slump in the wake of the coronavirus crisis, said Lagarde on Sunday in a guest speech at the annual meeting of the Arab central bank governors.

Confidence in the private sector is based to a large extent on expectations of government spending. A generous financial policy is crucial to keep jobs and support private households now until the economic recovery gets stronger.

Guest of the Arab central bank chiefs

Lagarde emphasized that the economic recovery from the crisis is substantial – but remains “uneven”, “uncertain” and “incomplete”. By unevenly they mean large differences in the passage of time between countries. The economic slump in China took place mainly in the first quarter of this year, and the Chinese economy recovered very strongly in the second quarter – just when the downturn was taking place in other economies. But the recovery in China also did not take place in all economic sectors, the drifting apart of different economic sectors is currently very noticeable. Chinese industrial production rose by 4.4 percent in July compared to the same month last year, while retail is still lagging behind.

In the Arab countries to which Lagarde addressed her speech, the crisis-induced drop in the price of oil and the decline in tourism had particularly strong economic effects; currently even where the pandemic is being tackled more successfully. The latest forecast by the International Monetary Fund for the Arab world sees a steeper decline in economic output and a slower recovery than the rest of the world before, with a decline of 5.7 percent this year and an increase of 3.5 percent next year.

The uncertainty about the recovery of the economy around the world depends in particular on the further development of the pandemic and the timing of a medical solution, said Lagarde. What is noticeable in the euro zone is that industry is recovering faster than expected, but many parts of the service sectors are recovering more slowly. The statistics of the ECB also showed a sharp increase in the conservative saving of consumers with the outbreak of the pandemic. That has only weakened somewhat since then.

Inequality through digitization

Lagarde also addressed the issue of inequality. In addition to a more relaxed monetary policy, structural policy is also necessary to ensure that the changes are sustainable, she said. Digitization is currently indispensable and desirable for many things – but history shows that technical upheavals sometimes led to more inequality in the beginning.

“In order for the changes to be sustainable, it is crucial that we do not overlook those who could be replaced by technology, but create the framework conditions so that they can live in prosperity in a more digital world.”

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