ECB De Guindos calls for fiscal policy to be given a greater role

A top European Central Bank official called for fiscal policy to be assigned a greater role in the single currency bloc's policy mix and for the creation of a European fiscal policy capacity.

Speaking at the Rafael del Pino foundation in Madrid, ECB vice-president, Luis de Guindos, said that the risk outlook for the euro area economy was again tilted to the downside.

More poignantly, he also warned of the dangers of falling into a "vicious cycle" of falling inflation expectations, prices and a "binding" lower bound for nominal interest rates "from which it its difficult to escape".

"We have learned from the experience in Japan that it is possible to get caught in a vicious cycle of declining inflation expectations, falling inflation and a binding lower bound on nominal interest rates from which it is difficult to escape.

"It is thus of utmost importance that we enhance the firepower of euro area stabilisation policy by means of a policy mix that, while continuing to make full use of monetary policy, assigns a more substantive role to fiscal stabilisation policy.

"Laying the institutional foundations for a European fiscal capacity would be an important step in this direction."