ifo President Fuest: ECB Takes Action Too Late
The ifo President Clemens Fuest has described the interest rate decision by the European Central Bank (ECB) as “a correct move, but one that comes too late. With inflation at 8 percent, it was unacceptable for the ECB to stick with negative interest rates and bond purchases until today. Price increases are spreading beyond energy and food to impact other areas,” he said Thursday in Munich at the ifo annual meeting.
This also has consequences for fiscal policy. “The governments of the euro countries now need to be careful. In the light of greatly increased debt levels by the coronavirus, and the current supply shortages and interest rate increases, taking on additional public debt is dangerous.” He said it was important to finance new tasks such as support for Ukraine or rising defense spending by reallocating expenses. “The European Commission should do more to demand this of member states.”
At the same time, Fuest rejected any further relaxation of the currently suspended debt rules as well as any efforts to make them more flexible. “That would be a signal for fiscal policy to pay even less attention to sustainability than it has to date.” Rather, what is needed is a change in the way the rules are applied. “EU coordination should focus more on prioritizing spending and thus on improving the quality of public finances.”
However, it would be wrong to expect too much from the debt rules and the monitoring of fiscal policy, Fuest said. The process has become so complex that the general public no longer understands it; consequently, there is little public pressure to comply with the rules. Moreover, national governments barely follow the EU’s recommendations. Ultimately, the power to decide on economic policy reforms and public debt lies with the national parliaments, which are the seat of democratic legitimacy. Experience shows that in the event of a conflict, national governments and parliaments disregard European debt limits and economic policy recommendations. This is hardly a problem that can be solved by modifying the rules. Despite these weaknesses, he said, the rules are useful because they provide for some degree of reflection and coordination among member states.
