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U.S. Treasury Secretary Janet Yellen on Tuesday warned the EU not to reintroduce rigid spending rules before the economy recovers from the pandemic.
Speaking to reporters, Yellen plunged into a debate that divided the bloc by questioning whether the eurozone’s spending and deficit rules are sufficiently flexible – which are based on the location of southern capitals rather than northern countries like Germany and the Netherlands orientate.
Fiscal rules, put on hold during the COVID-19 crisis, require governments to stay below a debt ratio of 60 percent and limit the budget deficit to 3 percent of economic output.
“It’s important to think about whether or not [the rules] create the flexibility that countries in the EU need to be able to react to cyclical developments, ”she told journalists at a briefing.
“We are in a very low interest rate environment. I assume we will stay there, although that has yet to be determined, but is the 60 percent debt ratio the right measure? ”
Yellen’s intervention on the highly political issue comes during a visit during which the Washington government has already successfully postponed a planned EU digital levy proposal to at least autumn.
With the debate about reintroducing euro area rules set to begin in earnest after the summer, the former Federal Reserve chief cited lessons from the last financial crisis, when a lack of fiscal stimulus slowed economic recovery.
“We haven’t done enough to address the fiscal side,” she said. “Monetary policy got in a position where it couldn’t do much and we needed some fiscal stimulus. In the end, we had a very long, slow recovery. “
The EU countries have pumped money into supporting their economies and will receive further impetus from the bloc’s reconstruction fund. However, Yellen said she was also concerned about getting back to normal as soon as possible and was “concerned” about a return to austerity.
“We shouldn’t be withdrawing fiscal support too quickly,” she said.
The US economist also said she was “pleased” that the EU decided to postpone a proposed digital levy, arguing that a global tax treaty would prevent taxes on digital services that are wrongly targeted at US tech companies.
But in a glimmer of hope for the EU levy, Yellen said it was also not clear what was allowed under the terms of the agreement.
“The delay provides an opportunity to look into these issues more closely and clarify what actions are allowed,” she added.
This article is part of POLITICSPremium Policy Service: Pro Financial Services. From the Eurozone, the Banking Union, the Capital Markets Union and more, our specialist journalists will keep you up to date on the topics that determine the financial services policy agenda. E-mail [email protected] for a free trial.