EU macroeconomic coverage in an age of shocks and the case for monetary-fiscal coordination
The EU’s macroeconomic coverage framework needs to be designed to attain the long-term objectives of the EU. On this briefing we examine the way it may assist ship three key tenets specified by the Treaty on European Union: sustainable financial and social progress; peace and safety; and democracy and the rule of regulation.
The EU’s present macroeconomic coverage is unable to rise to 4 challenges to those objectives which have all intensified on the similar second — environmental breakdown, disruptions to world commerce, threats to army safety, and the rise of authoritarianism. What is required is a fast, large-scale, coordinated and long-termist strategy. The present strategy is incremental, uncoordinated and short-termist.
Deficit guidelines should be relaxed to permit for higher member state funding in inexperienced and social infrastructure. On the similar time, the European Central Financial institution (ECB) should undertake a extra versatile strategy to inflation focusing on to cope with an oncoming period of persistent supply-side shocks. In any other case, persistently excessive rates of interest will stunt the economic system and delay funding, driving down dwelling requirements and delaying local weather motion. To permit for this flexibility, fiscal policymakers should take extra duty for stopping and mitigating the impacts of inflation.
The ECB should additionally do extra to fulfil its secondary mandate to assist the EU’s common financial aims. Specifically, it should align its insurance policies to assist the decarbonisation objectives specified by the European Inexperienced Deal, which may also assist safe long-term value stability. In the long term, the institution of an Financial Coordination Council would offer the institutional framework and democratic legitimacy to attain better-coordinated financial and monetary insurance policies.
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