ECB’s Trichet backs austerity measures

EU finances.pngLast year, governments focused on stimulus measures, to support the global economy.

Now Jean-Claude Trichet, head of the European Central Bank (ECB), says that “with hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto ‘stimulate’, ‘activate’,’ spend’!”

Writing in the Financial Times, he is effectively calling for a 180° change in policy. Instead of providing further support for auto and house sales, he wants governments to cut expenditure, and focus on “fiscal sustainability“.

He forecasts that Eurozone government debt will rise by 20% between 2007-11, and by 35%-45% in Japan/USA, and warns that “the economy may be close to…a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors“, due to:

• Lower tax revenues as a result of the downturn
• The cost of the recent spending increases
• The “volume of taxpayer risks” created by the need to prevent financial sector collapse.

He warns that potential liabilities in this latter area are now 27% of GDP in the Eurozone and the USA.

Trichet concludes that the ECB “expects governments to confirm their determination to consolidate their public finances“. It is hard to under-estimate the potential significance of his comments for chemical industry demand in H2 and 2011.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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