EU needs fiscal policy in fight to raise inflation, Bruegel says

By Rebecca Christie

European Union leaders need to bring taxes and public spending into the fight to speed up inflation in order to spur growth and fend off another round of crisis, according to the Bruegel research organization.

For the euro area and the rest of the EU, inflation needs to move toward the European Central Bank’s target of just below 2 percent, Bruegel Director Guntram Wolff and senior fellow Zsolt Darvas wrote in recommendations to the EU’s incoming leadership. The European Commission and the European Council can’t count on the ECB to do all the work to restore price levels, they wrote.

“You should state this necessity clearly and support an expansionary policy stance,” Darvas and Wolff wrote. “You should also highlight to finance ministers that monetary policy alone would be too slow in pushing inflation back to 2 percent, and therefore national fiscal and income policies should also play a major role in this process.”

Germany, the Netherlands and the Nordic countries need to boost domestic consumption and bring down their current account surpluses, the Bruegel authors said. “Public and private investment and wages will have to rise.”

Austerity policies have been the linchpin of European economic strategy, with Germany and its allies calling for continued emphasis on debt reduction while France and Italy seek a more expansive approach. ECB policy makers meeting in Frankfurt on Thursday may discuss whether quantitative easing is needed to bolster prices and economic output.

Debt restructuring

Wolff and Darvas said the EU needs to brace itself for the crisis to re-emerge. This could include laying the groundwork for future debt restructuring such as Greece faced as a condition of its second bailout.

“You might have to advocate debt reprofiling or even restructuring if debt is unsustainable,” Bruegel said. “As this would have substantial implications for financial stability, significant work to reduce the impact on the financial sector is needed.”

The EU think tank, funded by the European governments, institutions and corporations that are its members, is offering recommendations across the spectrum of the European Commission’s responsibilities.

On financial services, the EU needs to face that its “compliance with global standards has become spottier than many Europeans acknowledge,” according to senior fellow Nicolas Veron and affiliate fellow Silvia Merler. For example, the EU has been “a laggard rather than a pioneer” on the newest Basel capital standards.

Trade Deal

The EU will need to rethink its approach to its proposed trade deal with the U.S., the Trans-Atlantic Trade and Investment Partnership, and make sure it doesn’t become a “west against the rest” strategy, said visiting scholar Suparna Karmakar and senior fellow Andre Sapir. The new trade commissioner also will need to keep an eye on labor, trade and environmental regulations to make sure they don’t turn into protectionist trade barriers, they wrote.

In the area of competition, the EU should not be swayed by criticism that its anti-cartel actions are “ruthless,” said research fellow Mario Mariniello. “Most importantly, the fines imposed appear minimal compared to the degree of harm caused to the European economy by collusion,” he said.

Mergers should be assessed based on their potential benefits as well as effect on the marketplace. In the case of cartels, the EU should weigh personal sanctions on individual employees who make decisions at companies that engage in collusive behavior, Mariniello said.

Digital Content

EU citizens should be able to access digital content from anywhere and the EU will need to rethink its copyright policies, according to the Bruegel memos. The think tank also urged the commission to do more to create a single market for the digital economy.

“Youtube and Netflix account for more than 50 percent of downstream traffic in the U.S.; cleaner more unified licensing rules on digital content can have a strong impact,” wrote Mariniello. “Net-neutrality regulation ought to be the same everywhere in Europe, and you should not shy away from challenging national laws that clash with European law.”

The memos will be available on Bruegel’s website: