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‘Stability and Growth Pact and fiscal compact really are not fit for purpose’ Frances Coppola

Summary:
As part of ‘Fiscal Matters’, which brings together social, environmental, civil society and academics to discuss the future of Europe’s fiscal policy, Frances Coppola, financial economist, author and blogger spoke about the optimal fiscal and monetary policy mix. We caught up with her after the event. EU Reporter: Do we have the right balance between monetary and fiscal policy at this moment? FC: At this moment, I think that governments and central banks are getting it about right in terms of monetary and fiscal policy, we've ended up because of the pandemic, in a paradigm where governments are doing whatever it takes to support their economies, just to keep people alive, to enable businesses to survive. Central banks are doing two things. First of all, they are stopping markets

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As part of ‘Fiscal Matters’, which brings together social, environmental, civil society and academics to discuss the future of Europe’s fiscal policy, Frances Coppola, financial economist, author and blogger spoke about the optimal fiscal and monetary policy mix. We caught up with her after the event.



EU Reporter: Do we have the right balance between monetary and fiscal policy at this moment?



FC: At this moment, I think that governments and central banks are getting it about right in terms of monetary and fiscal policy, we've ended up because of the pandemic, in a paradigm where governments are doing whatever it takes to support their economies, just to keep people alive, to enable businesses to survive. Central banks are doing two things. First of all, they are stopping markets freaking out. And secondly, they're supporting governments, so that governments can do whatever it takes. And I think that's actually quite a good balance between fiscal authorities and central banks.



EUR: In the past, you've supported the idea of quantitative easing (QE) for people. Is that needed if we have the right sort of fiscal stabilizers in place and support for people through that mechanism, rather than through a monetary response?



FC: Well, my view is that people's QE should always be about what you do in a crisis and QE was never intended - even traditional QE - was never intended to be something that you use just routinely for years on end, it's become that, but it was never intended to be something you do routinely, but something you use when you need it, part of your toolkit. So central banks should be able to backstop their governments, if that's what's needed at the time, governments should be able to do whatever it takes to support people, businesses, and the economy in a crisis. But we hopefully don't have crises all the time.



We also need fiscal stabilizers, like unemployment benefits, for example, and maybe universal basic income. These kinds of things, we need those as well for the ordinary kind of swings of the economy, which are not crises, exactly, just fluctuations. We can weather those without having to resort to exceptional tools, like helicopter money.



EUR: Should we be worried about things like inflation, and very low, even negative interest rates?



FC: My view is we are going to have some inflation. I wrote about this and said that the point of people's QE is to raise inflation, that you want inflation to come up a bit, because when you come out of the crisis, your demand side always recovers before your supply side. This crisis has been in the deepest recession for 300 years, the demand side is recovering faster than the supply side. So you would expect there to be some inflation, but if you stamp on the demand side, then you're going to hurt your supply side, because your supply side needs to come up to match the demand. So what you need to be doing is supply side friendly policies and to tolerate inflation for a while. The question is how long you tolerate for and so all these questions about what the productive capacity of your economy really is, come into play, and also the role of investment.



Investment is not just about the public sector, we need the private sector as well. We've got an awful lot of fairly unproductive money sitting around that could be better deployed on things like the green transformation that is so desperately needed to meet net zero.



EUR: With the European Commission reopening its consultation on the future of the EU's Stability and Growth Pact, what would you like to see happening?



FC: I've always thought the fiscal rules, the Stability and Growth Pact (SGP) as not only ineffective, because they are routinely broken, but counterproductive. It has been extraordinarily difficult for the Southern periphery to recover because of the SGP. I think it’s also why the ECB has had to continue with exceptional monetary easing for a very long time. The SGP and fiscal compact really are not fit for purpose. We need to rethink this. We need to have more leeway for governments to make their own decisions about how they support their economies and how they get them moving. How they generate the prosperity that the whole eurozone population wants.
Frances Coppola
I’m Frances Coppola, writer, singer and twitterer extraordinaire. I am politically non-aligned and economically neutral (I do not regard myself as “belonging” to any particular school of economics). I do not give investment advice and I have no investments.Coppola Comment is my main blog. I am also the author of the Singing is Easy blog, where I write about singing, teaching and muscial expression, and Still Life With Paradox, which contains personal reflections on life, faith and morality.

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