During a dialogue with the European Parliament’s Committee on Economic and Monetary Affairs on Wednesday 2 February, the President of the Eurogroup, Paschal Donohoe, did not hide that the record inflation currently observed - equal to 5.1% in January in the euro area - is a source of concern for the countries of the euro area, even if, despite the uncertainties linked in particular to the Covid-19 pandemic, the economic recovery is expected to continue in 2022 and 2023.
Inflation, which has been “increasing markedly since mid-2021”, is “affecting growth and the purchasing power of citizen’s incomes”, said Mr Donohoe. He acknowledged that the narrative on inflation had “changed somewhat, as the factors that have been driving prices up are taking longer to dissipate than expected”, citing energy prices and supply not keeping up with demand as bullish factors.
However, “there are, so far, no signs of significant second-round effects stemming from wage increases, and inflation is expected to start decreasing this year and subsequently drop below the ECB’s 2% target in 2023”, he stressed, echoing the official position of the ECB Governing Council, which will meet this Thursday in Frankfurt.
Caroline Nagtegaal (Renew Europe, Netherlands) warned that the ECB’s reluctance to normalise its monetary policy, combined with the increasing indebtedness of States for tackling the pandemic and getting the economy moving again, was “adding fuel to the fire”. The level of inflation is higher over a longer period of time, noted Mr Donohoe, who is convinced that prices will moderate in the medium term. And he considers that the ECB has taken the situation into account by announcing the end of its ‘PEPP’ operation of the massive repurchase of securities initiated at the start of the pandemic (see EUROPE 12855/8).
The president of the Eurogroup pointed to the strength of the recovery in Europe, where, in addition to low unemployment, it has taken 2 years to return to pre-pandemic levels, compared to 7 years after the 2008 financial crisis. “We recognise the risks, but you would have criticised me in the same way if we had not reacted to the pandemic as we did”, he replied to France Jamet (Identity and Democracy, France), an MEP hostile to the ‘whatever it takes’ strategy advocated by French President Emmanuel Macron.
In 2022, euro area countries will maintain a moderately expansionary fiscal stance (see EUROPE 12867/9). Asked for clarification by Johan Van Overtveldt (ECR, Belgium), Mr Donohoe said that governments should now target their support more to the economic sectors that have suffered most from the crisis. This means that they will reduce their public deficits to gradually bring them in line with their “structural deficit” (excluding the effect of the economic cycle), but at different rates. And that, in order to maintain the highest possible level of investment, the European Recovery Plan must be fully engaged, especially in the most indebted countries.
For 2023, when fiscal rules will again apply, the nineteen euro area countries will discuss the appropriate budgetary stance at the level of the euro area in March, on the basis of prior proposals from the European Commission.
As for the ongoing reflection on a reform of the fiscal rules (see EUROPE 12871/3), the president of the Eurogroup told Chris MacManus (The Left, Ireland) that there was no consensus on the creation of a common fiscal capacity nor, at this stage, on the exclusion of certain expenditures or investments from the calculation of the public deficit. One of the questions some ministers are asking is: if you start introducing exemptions to the rules, where does it stop, and how do you clearly delineate the type of expenditure? Mr Donohue indicated. (Original version in French by Mathieu Bion)