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Trichet says excess borrowing can hurt morale

  Government borrowing above that allowed by the European Union’s budget rules can do more harm than good, European Central Bank President Jean-Claude Trichet said in an interview broadcast on Tuesday.

 

“It’s important that the rules are respected,” Trichet told the BBC. “If you augment too much your own borrowing, you might be punished by markets,” he said.

EU stability and growth pact rules state that national governments should have a balanced budget over the medium term, and not exceed a budget deficit of 3% of gross domestic product. Trichet added that government spending can be ineffective if citizens have lost confidence in a country’s public finances.

“You also have Ricardian effects. If you are at the limits of what you can do, you can lose more with absence of confidence and loss of confidence than you would gain from the simple channeling of additional spending.”

Nonetheless, some extra spending was needed because of global economic problems, he said. “As a whole ... those who have room for maneuver should use their room for maneuver fm to face up to very difficult and challenging circumstances.” (Reuters)