FRANKFURT, Nov 12 (Businesshala) – European governments should be allowed to spend more when inflation is below the European Central Bank’s 2% inflation target and vice versa, ECB chief economist Philippe Lane said on Friday.
EU governments are debating how to reform EU financial rules to deal with the pandemic-induced boom in public debt and the huge investment needed to fight climate change.
Lane backed proposals to give governments more time to reduce their debt piles and said the new fiscal rules should also reflect the ECB’s 2% inflation target, ahead of a sudden spike this autumn. had proved elusive for a decade.
“Fiscal policy will be weak when inflation is running below the 2 percent target, but when inflation is running above the target,” Lane told a European Commission symposium.
Euro area inflation hit 4.1% in October and economists see it above the ECB’s target for next year, as higher energy costs and supply disruptions feed into wage and price expectations.
Lane, who insisted the current shock is temporary, said EU fiscal rules could be designed to differentiate between a supply- or demand-driven inflationary shock, albeit “at the cost of added complexity.” “.
He said simulations by ECB staff show that governments’ debt reduction pace could be reduced to 3% per annum from the current 5% and average over 10 years instead of three.
“Indeed, adjustment requirements can be calibrated to ensure compliance with the debt adjustment path over a ten-year future horizon,” Lane said.
Reforms to the EU’s Stability and Development Treaty are still up in the air and in Germany, the bloc’s largest member, the negotiating parties to form a new government are on the matter. (Reporting by Francesco Canepa Editing by Raisa Kasolowski)