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"Excessively low growth" has brought the European economy to a standstill following a series of violent shocks in the last two years, writes Jean Pisani Ferry, the director of Brussels-based economic policy think tank Bruegel, for Eurointelligence.
The EU is faced with increasing inflation and "low trend growth" which "prevents reliance on monetary policy to prop up output," says the September paper. A combination of the euro's appreciation, soaring commodity prices, the credit seize-up and shrinking property markets has dealt to a "knock-out blow" to the EU's economy, explains the author.
When French economists ask whether member states should resort to fiscal policy or borrow from the European Investment Bank, Pisani Ferry argues that fiscal support is justified as a "national response" to "national problems", as illustrated by the collapse of the Spanish property market. But it should not be applied to the euro area generally speaking, he says.
Indeed, "stimulating domestic demand would be at odds with the monetary policy stance" of the ECB, creating a "clash between two demand-side policies". According to Pisani Ferry, "having two managers of aggregate demand competing for leadership in a single monetary area is a recipe for chaos".
He concludes by recommending that governments take the following steps: