Study Urges EU Exit Strategy for Monetary Policy Before Fiscal

Nov. 8 (Bloomberg) -- European central bankers should begin reversing expansionary monetary policies before governments roll back their economic stimulus measures, according to a study by Allianz SE, Europe’s biggest insurer.

“Given the long time-lag of monetary policy, an exit from monetary-policy expansion should begin earlier than for fiscal policies,” the authors said in the study, which was released in conjunction with Brussels-based research group Lisbon Council. “If exit strategies are delayed too long, we risk entering a new boom-bust cycle.”

European Central Bank President Jean-Claude Trichet said on Nov. 5 that the ECB will withdraw some liquidity operations after evidence mounted that the region’s economy is pulling out of the recession. The Bank of England on the same day slowed the pace of bond purchases. Both central banks kept their benchmark interest rates at record lows.

“We must make sure that the progress we see will lead to sustainable growth, not more financially fueled growth,” Michael Heise, chief economist of Munich-based Allianz and principal author of the study, said in a statement. “We must learn the lessons of the past, and not allow another bubble to develop.”

Governments have committed billions of euros to boost the economy, while the ECB is lending banks as much money as they want for up to a year and purchasing covered bonds in an effort to get credit flowing again. The banking industry “remains fragile” and further losses at financial institutions may total 400 billion euros ($596 billion) through next year, the European Commission said last week.

‘Active Consolidation’

The Allianz study forecasts the euro-area economy will expand 2 percent next year, compared with the 0.7 percent growth projected by the commission. Both see a 1.5 percent increase in gross domestic product in 2011.

The authors of the study call for “active consolidation of government expenses” beginning in 2011. Starting that year, state spending “should be held 2 percentage points below nominal GDP growth,” according to the study.