“If we are to fight the'inflation with only the lever of the monetary policy the risk of exceeding the rigor is very high. In fact, in the case of supply-side inflation, such as the European one originating from the energy shock and the interruption of sub-supply chains following the Covid 19 pandemic, monetary policy alone would have to greatly crush demand in order to bring prices back towards the traditional level of the 2%. And this involves the risk of ending up in a recession".
Marcellus Messori, a professor at Luiss and for many years an animator of the center for European policies, confesses that in such an uncertain moment and with very modest visibility on the possible evolution, it is certainly not easy for central bankers to make decisions. For this the Board of the ECB he had decided not to give prospective guidelines on his policy, but to make decisions from time to time on the basis of current data and the most reliable forecasts. And instead many governors, especially those of so-called frugal countries, have made statements to plead a tightening of monetary policy in order to avoid the triggering of a dangerous run-up between wages and prices, as happened in the now distant 80s.
Ignazio Visco, Governor of the Bank of Italy has reacted with a touch of bitterness, recalling that it had been agreed to act from time to time without giving operators prospective indications on future ECB decisions. Furthermore, according to Visco, the situation of uncertainty is such that the central bank must act with prudence, avoiding favoring wage pressures and excess profits (which, however, are not seen at the moment) without falling into the risk of a real recession.
“I am not scandalized that in such a difficult situation conflicts emerge between bankers and that a discussion is ignited. It would be better if it happened in a less disorderly way, with the risk of further increasing market uncertainty. But to understand the meaning of this discussion it is necessary to go back to the roots of the current European inflation born of a shock in energy and other raw materials, but which is now showing signs of slowing down even if a core inflation persists which raises fears of a persistence of the price increase for the coming months. We need to be concerned, and it is right in this context to proceed with prudence in making monetary policy decisions, avoiding laxity but also excessive restrictions".
If all the weight of the adjustment is placed on the shoulders of monetary policy, there is the risk of having unwanted effects either because they are not very effective or because they are too effective. It would therefore be good to combine the action of the ECB with a fiscal policy capable of acting on overcoming supply bottlenecks, at the same time controlling demand to prevent prices from continuing to run. Is it possible to activate this second lever as well?
“It would be desirable, and such a fiscal policy that we could define as 'selectively expansionary' could be implemented above all at the European level, i.e. keeping the budgets of the individual states in balance, instead entrusting Brussels with an expansion of investment expenditure on European public goods. Of course, not everything can be done together. However, gradual steps could be taken, for example by increasing European expenditure on security and defense, for infrastructural networks, including intangible ones, to be integrated. There is talk now of industrial policy also to respond to the challenges of the United States: well, it would be better if each country did not delude itself that it could go it alone. After all, we saw what happened last summer when each country set out on its own to try to replace Russian gas. Prices have skyrocketed precisely because there has been a lack of community coordination”.
In short, individual countries should cut current expenses (bonuses and various gifts) support internal investments and give their consent for those on European public goods. But to reach such a goal it seems to me that there are many obstacles to overcome. European industrial policy needs to be clarified, there are the rules of the new fiscal compact to be approved before the end of the year. In short, there is a maze of problems which makes it difficult not only for public opinion, but also for political decision-makers who must have the lucidity and strength to deal together on several closely connected tables.
“In fact we are facing a great opportunity to make a real leap in quality of the European institutions. Let's take for example the Next Generation EU project from which the Pnrr was born. The method used in that case has now been re-proposed by the Commission for the renewal of the fiscal compact. It follows that if the Pnrr does not reach the set objectives, all the credibility of that method will be lost. Above all Italy, which is the largest beneficiary of European funds, should make every effort to achieve the agreed objectives, precisely because it is watched carefully by all the others. We are the laboratory of a new future increase in the fiscal capacity of the EU”.
But in what sense are the new rules of the fiscal compact linked to what happens with the Pnrr? And even before that, can the proposals put forward by the Commission be judged positively? Isn't there a risk that the classification on debt sustainability could damage highly indebted countries such as Italy?
“The Commission's proposals are a promising starting point. I do not see particular dangers in the classification of the debts of the various countries. And after all, operators can already see the debt/GDP ratio rankings today and the spreads are there to indicate that a risk difference is already being priced in. Of course, the fact that Brussels certifies a high level of risk can be negative. It all depends on how it is used and above all on the adjustment plans that individual countries must agree with the Commission and on their credibility. Overall, the proposal that will be discussed at the next Ecofin contains some fundamental acquisitions. The first is that everyone has taken note that debt repayment cannot take place only by cutting the numerator, but that we need to focus on the growth of the denominator, i.e. of GDP. Without growth there is no way to reduce debt. And to achieve growth in Europe, greater European fiscal capacity is needed to make investments in common goods. In the coming months we will need to do many fundamental things together for the future of our continent. It will be difficult, but, as I said, it is also a great opportunity”.
