They Said It About Fiscal Policy - Recent Comments of Governing Council Members
31 January 2023
FRANKFURT (Econostream) – The following is a compendium of comments made by European Central Bank Governing Council members related to the relevance of fiscal policy for monetary policy. We include comments made since the December 15 Council meeting.
Christine Lagarde (ECB)
20 January 2023
‘The fiscal support that was expanded in 2022 must be better directed, better targeted.’
‘The main thing I wanted to avoid in 2023 is that fiscal policy will work in a counter cyclical way vis-à-vis monetary policy.’
‘[Fiscal policy] must be made such that it is not going to push monetary policy actors to do a bit more.’
‘[The ECB] will do what is necessary [but] we don’t have to be pushed to do more than necessary.’
‘…now we need to be careful that the domestic causes that we are seeing, which are mainly related to fiscal measures and wage dynamics, do not lead to inflation becoming entrenched.’
‘Fiscal support measures to shield the economy from the impact of high energy prices should be temporary, targeted and tailored to preserving incentives to consume less energy. Fiscal measures falling short of these principles are likely to exacerbate inflationary pressures, which would necessitate a stronger monetary policy response.’
‘Fiscal measures to compensate households for high energy prices and inflation are set to dampen inflation over next year but will raise it once they are withdrawn.’
Isabel Schnabel (ECB)
24 December 2022
‘Governments need to protect the most vulnerable parts of society. However, the steps taken should be targeted and should not mute the price signals. Germany’s gas bill cap is a good example of how to maintain proper incentives. In addition, investments and structural reforms are necessary for fighting the root causes of inflation. Speeding up the green transition would make us less dependent on fossil fuels in the medium term. In reality, only a regrettably small share of the government measures in the euro area were targeted. The measures rarely maintained proper incentives, and there were next to no additional investments in the green transition. That is why many of these measures actually tend to fuel inflation in the medium term.’
Luis de Guindos (ECB)
22 December 2022
‘Furthermore, I am concerned that markets might consider fiscal policy to be incompatible with monetary policy, that there is a potential conflict. This is what happened in the United Kingdom in September.’
Fabio Panetta (ECB)
24 January 2023
‘A good part of the upward revision of the December inflation projections for 2024 and 2025 reflects the fact that the price-based measures taken and announced by governments are expected to curb energy prices and inflation in 2023, when they are introduced. But they are expected to have the opposite effect when they are withdrawn, likely in 2024, pushing inflation up with carry-over effects in 2025, delaying the return to our target. The effect on inflation is in good part due to the fact that most of these fiscal measures are not limited to vulnerable population groups, but rather provide generalised support that is, on balance, inflationary.’
‘My concern is that this effect of fiscal measures – which is included in our baseline projection – is largely the result of judgement and is surrounded by very high uncertainty. Discretionary fiscal policy is hard to predict. For example, spending on energy support will likely be lower if energy prices continue to decline – indeed, last week the German government made an announcement of this sort, saying that falling prices could lower its spending on energy price brakes.’
‘And importantly, this interaction between monetary and fiscal policies is highly inefficient. The risk is that fiscal measures that were introduced to shelter consumers from high energy bills and protect their purchasing power could, paradoxically, trigger a contractionary monetary policy reaction that would hit the real economy, reducing households’ incomes and increasing the interest bill for governments. It would be like giving with one hand and taking away with the other.’
Philip Lane (ECB)
17 January 2023
‘Governments will have to pull back from the high level of fiscal support they offered during the pandemic. But by and large it should be a normalisation of fiscal policy rather than a sudden stop in fiscal support.’
‘We’re not yet at the level of interest rates needed to bring inflation back to 2 per cent in a timely manner. Governments also do need to pull back from the high deficits that remain. So, a significant fiscal adjustment will be needed in coming years. But, that adjustment should be a return to some normal situation, as opposed to a forced overcorrection.’
‘Let me add that a lot of the fiscal support in Europe consists of price subsidies, which are different from broad-based increases in government spending or broad-based reductions in taxes. The direct impact of fiscal policy is to lower inflation right now. But in our projections, it is expected to raise inflation in 2024 and 2025 when these subsidies are scheduled to be removed. So, when you look at what’s happening now, there are two different conversations. One is how fiscal policy is currently lowering inflation through subsidies, followed by the reversal of those subsidies later on. The other is the broader issue about the appropriate level of fiscal support in the economy.’
Pablo Hernández de Cos (Banco de España)
22 January 2023
‘The responsibility for achieving price stability in the euro area lies with the Governing Council of the ECB. That explains the monetary policy decisions we have been taking and now we have to stay the course. But it is also important that fiscal policy goes hand in hand, focusing on the most vulnerable, avoiding a generalized fiscal impulse that generates additional pressure on inflation. And with measures that do not introduce significant distortions in price signals, that encourage the economy to adapt to the energy shock, and that are temporary, so as not to generate an additional increase in public debt and the structural public deficit. But, beyond demand policies, offsetting the effects of the supply shock we are suffering requires policies that increase the growth rates of productivity, employment and the economy’s potential GDP. And common European policies that strengthen the single market, with joint financing mechanisms, are essential. I also believe that it is necessary to reach an income pact that allows the inevitable loss of income due to the rise in the price of imported raw materials to be shared out between the margins of companies and wages, in order to avoid an inflationary spiral.’
François Villeroy de Galhau (Banque de France)
20 January 2023
‘Budgetary support was undoubtedly necessary, but it cannot be a lasting solution.’
‘They can cushion the shock but cannot make it disappear.’
‘And so, especially in France, because our public finances are in a difficult situation, we must reduce and eliminate all these subsidies.’
Klaas Knot (De Nederlandsche Bank)
21 January 2023
‘…the growth outlook for 2023 will not be very abundant. There will be no room for monetary policy support and little, if any, for fiscal policy support. The Euro Area economy will have to rediscover its growth engines.’
‘There is no room for large scale fiscal expansion.’
‘If there were to be large scale fiscal expansion […] it would enlarge our inflationary problem.’
Mário Centeno (Banco de Portugal)
29 December 2022
‘Monetary policy normalization is entering a more restrictive phase, so inflation will decline sharply in the coming months. Bank of Portugal forecasts indicate that inflation will drop from 10.3% in the fourth quarter of 2022 to 3.7% in the fourth quarter of 2023. But this result will only be achieved if the second-round effects of wages and margins profits are contained and if fiscal policy fails to stimulate aggregate demand. We are at full employment and the public debt exceeds everything the Portuguese economy produces for 14 months; public policies in this domain must be contained and directed to the most needy layers.’
‘I think at the moment we have no reason to complain about fiscal policy in Europe, unlike what happened in the US.’
Ignazio Visco (Banca d’Italia)
23 January 2023
‘Budgetary policies can certainly help, with temporary and targeted interventions, to alleviate the effects of inflation on the weaker sections of the population, but this should be done through a redistribution between income recipients, containing the burden of adjustment on future generations. This is essential both to avoid an overheating of demand and a slower return of inflation and to prevent risks to financial stability associated with perceptions, even if not entirely shared in substance, regarding the sustainability of public finances.’
Olli Rehn (Suomen Pankki)
16 January 2023
‘But the near term is shrouded in uncertainty, and we need to keep an open mind to adjust our policies if needed. What we know for sure is that when supply factors constrain the economy, expansionary fiscal policy will lead to a rise in prices and costs, which makes our job more demanding.’
Yannis Stournaras (Bank of Greece)
22 January 2023
‘Both at the Eurozone level and in Greece, the fiscal policy stance in 2022 (defined as the change in the primary fiscal outcome, excluding the effect of the business cycle) is estimated to have been restrictive, following the fiscal expansion implemented in 2020-2021 to limit the effects of the pandemic. In 2023, the fiscal adjustment in the Eurozone is estimated to be softer, and its fiscal position will be relatively neutral, taking into account the slowdown in economic activity and the maintenance of some measures aimed at supporting household disposable income and the operation of businesses, in order to limit the impact of the energy crisis on the economy. So far, there is no contradiction in the mix of monetary and fiscal policy followed, without this implying that there should be complacency or that there is no room for improvement. The current multi-crisis juncture requires monetary and fiscal policies that are compatible (complementary) with each other, and jointly aim at a clear path for both the desired level of inflation and debt sustainability. The restrictive direction of fiscal policy is therefore judged to be the most appropriate in the current conditions of gradual normalization of monetary policy.’
‘Given that high inflation affects the lower income groups of the population proportionally more, support measures are deemed necessary. However, they should be targeted and temporary within the available fiscal space. This is necessary, as the fiscal policy should have a restrictive direction, in order to act in addition to the monetary policy, contributing to the reduction of inflation and at the same time ensuring fiscal stability.’
Peter Kažimír (National Bank of Slovakia)
19 December 2022
‘Unfortunately, fiscal policy is slowly but surely being added to the already "established" causes behind double-digit price growth. It's great that governments are trying to help the economy, businesses and people in these uncertain times. The problem is that they don't do it the way it needs to be: addressed, tailored and temporary. Today, the vast majority of fiscal measures are too general, costly, and we simply will not be able to afford them for several years in a row. The measures often interfere directly with the formation of prices for consumers. Although these measures dampen the inflationary shock in real time, they also spread the contagion of higher prices into the following years. This is not the best for inflation. And not even for the environment, since the motivation to save energy is also disappearing. I would like to see something positive. Who knows, maybe higher interest rates and the newly announced QT, or smaller purchases of government bonds by central banks, will force governments to be more responsible and finally start to take the need to reduce their debts seriously.’