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:
- Ensure that credit scarcity does not endanger the most fragile businesses, perhaps by supporting borrowing by SMEs.
- Act on the supply side to alleviate the conflicting objectives of the ECB and allow it to support growth. More competition could increase growth and prevent prices from rising.
- Promote nominal wage settlements in line with productivity and price stability.
- Boost the growth potential of their economies so that they can set off again at a brisker pace.
