“Politicians and the public have become accustomed to tackling economic problems with an expansive monetary policy and ever-increasing government debt.”
(Photo: dpa)
Berlin According to top economists, the current high inflation in Europe should be combated early and resolutely as a lesson learned from the oil price shocks in the 1970s. “There is a risk of a stagflation scenario,” said Jan-Egbert Sturm from the ETH Zurich University of Applied Sciences on Tuesday.
Stagnation is a mixture of economic slack and sharply rising prices at the same time. “Accordingly, governments’ fiscal and financial policies must focus more on limiting public debt and fighting inflation,” said Sturm on the report of the European Advisory Group (EEAG), to which he belongs with five international colleagues. The corona pandemic and the Russian invasion of Ukraine led to shortages of energy and many other goods.
In the years since the global financial crisis of 2008/09, inflation rates have always been very low, said Clemens Fuest, President of the Munich Ifo Institute. “Politicians and the public have become accustomed to tackling economic problems with an expansive monetary policy and ever-increasing government debt,” emphasized the economist.
According to the expert group, the European Central Bank (ECB) is under pressure to keep interest rates under control in the interest of the financial and fiscal stability of some member countries. This could conflict with the goal of price stability.
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Cecilia García-Peñalosa, a professor at the Aix-Marseille School of Economics, said that this was a major challenge, since large expenditures for climate protection and digitization were pending and armaments budgets were being increased.
ECB prepares interest rate turnaround
Harold James from Princeton University warned: “It is risky to assume that this is only a one-off and temporary price increase.” Rising inflation solidifies when price expectations adjust and collective bargaining parties price in higher inflation.
In view of rapidly rising prices, the ECB is preparing the ground for a turnaround in interest rates. She wants to scale back her billion-dollar bond purchases more quickly and phase them out completely in the summer if the inflation outlook allows. The monetary watchdogs left it open whether the zero interest rate policy will end this year or next.
More: Economist: “Ukraine crisis shock bigger than 1970s stagflation”