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MNI (Frankfurt)

The European Union should revamp its debt rules to allow economies to borrow twice as much in order to take advantage of low interest rates and to boost growth potential which has fallen behind that of the United States, former French finance ministry and New York Fed advisor Thomas Philippon told MNI.

Under the EU's Stability and Growth Pact, currently suspended due to the Covid-19 emergency, EU countries' public debt is supposed to be limited to no more than 60% of gross domestic product, but this should be increased to 120%, said Philippon, who was senior economic advisor to the French finance minister in 2012-2013 and also served on the New York Fed's Monetary Policy Advisory Panel.

"The question is whether the decrease in your [debt] interest is permanent or transitory. Given the data that we have today, given the likely sources of the low interest rate, I think it's a bet that I would take, recognising that like everything it's not for sure," Philippon said in an interview, in which he pointed to questions over the growth potential of a region whose digital infrastructure lags that of the U.S. by far.


Philippon also called for the European Central Bank to add average employment to its mandate and to establish a permanent, inflation-boosting tool after the conclusion of net purchases under its EUR1.85 trillion Pandemic Emergency Purchase Programme, currently scheduled for March. Without such an additional tool, the ECB will struggle in its attempts to establish the symmetrical nature of its inflation target, according to which it should respond equally to periods of undershooting the target as it does to periods when prices run in excess of the objective, he said.

"If every time you feel you are falling short of your inflation target you invent a new instrument to try to go against that, then that's a push towards the status quo," Philippon said."That's how the target becomes de facto an asymmetric target. I would be in favour of finding a way to make the target symmetric, and that means that if we undershoot there should be a soft, quasi-automatic way to think about your programme that would help you achieve that."

The ECB should also adjust its activities to help finance the transition to a green economy, said Philippon, adding: "We are so far behind the curve in addressing climate change that, at this point, I'll take anything, even if it is a bit of mission creep."

Turning to his native country, the economist, now professor of finance at the New York University Stern School of Business, said the French economy has a good chance of rebounding strongly, but the government should add additional fiscal stimulus if the recovery stalls.

MNI Frankfurt Bureau | +49-69-720-146 |