U.S. economic growth policy may not maintain positive int'l spillovers: ECB vice president

The recent development of financial markets reflected markets' increasingly optimistic expectation that the U.S. rise in its economic growth likely through expansionary fiscal policy.

However, the expected accelerated growth of the world's largest economy in the context of its "America first" policy might not maintain positive international spillovers, reminded Vitor Constancio, the vice-president of the European Central Bank (ECB), at the opening conference of the 19th Euro Finance Week here on Monday.

Financial markets, stock markets in particular, have "benefited" greatly from Donald Trump's victory in the U.S. presidential election, with equity prices markedly jumping up.

Trump had advocated during the campaign for more fiscal stimulus, including tax cuts to boost the growth of the U.S. economy and create more jobs.

"The markets' perception that the U.S. is embarking on a new phase of expansionary budgetary policy has lifted optimism, with visible effect in financial markets last week," Constancio said in his keynote speech at the annual event regarding finance in Frankfurt.

"We saw a beginning of a shift from bonds to equities last week," the vice president added, in the meantime, bond valuations worldwide had lost close to one trillion euros.

However, medium to long-term bond yields would be raised as result of markets' bond-selling, benefiting financial institutions' profitability, which is very likely "good news" for the European banking sector that currently finds itself in low and difficult profitability.

"We should be cautious in drawing hasty, positive conclusions from those market developments because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth," Constancio reminded.

He pointed out the possibility that rising protectionism based on the "America first" guideline in the United States would reduce the effect of higher gross domestic product (GDP) growth into higher U.S. imports, which would make the world trade collapse further and hurt all open economies dependent on exports.

Moreover, protectionist measures directed particularly against large emerging economies might further decelerate world economic growth and create instability in foreign exchange markets, said Constancio.

"Significant capital outflows and exchange rate depreciations already underway can hinder future growth," he pointed out.

In the ECB vice president's view, the world economy once again faces an abnormal degree of uncertainty and the real negative effects of heightened uncertainty can come later.

In order to address uncertainties, he called on Europe to adopt more expansionary macroeconomic policies and more reforms in the regulatory and competition policy fields to improve the economy's supply side. Endit