ECB’s Villeroy: Fiscal Policies Must Avoid Further Fueling Inflation

15 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member François Villeroy de Galhau on Friday called on euro area government to better coordinate their fiscal policies with monetary policy so as to avoid contributing to inflation.

In a speech delivered in Santiago de Compostela, Spain and posted to the website of the Banque de France, which he heads, Villeroy, who declined to comment specifically about Thursday’s rate hike decision by the Governing Council, said that the ‘collective fight against inflation calls for a more appropriate policy mix: the revision of the European economic governance framework provides a major window of opportunity to realign fiscal and monetary policy. ‘

‘Alongside high inflation, public debts have reached historical levels mainly due to unprecedented waves of shocks, but also, for several countries, to legacy debts’, he said. ‘Now that these shocks are fading, governments must avoid an overly expansionary stance that would further fuel inflationary pressures. We therefore need a more coordinated and realigned fiscal and monetary stance.’

Villeroy reiterated comments from earlier in the week noting the ‘encouraging news’ on the inflation front. After the retreat of headline inflation since early this year, ‘it seems that core inflation is following suit’, he said.

‘Obviously, these inflation rates remain too high: we must and we will bring inflation back towards our 2% target by 2025’, he said. ‘I reiterate this morning this clear commitment which is fully consistent with our latest ECB forecasts. Monetary policy is the first line of defence, and the main remedy for this disease. ‘