Ireland turns on EU as bloc’s economic model ‘doesn’t work in vacuum’
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Gabriel Makhlouf suggested the bloc’s approach was outdated – warning it needed radical improvement if Brussels was to hit its 2050 target. And he feared the EU was failing to learn the lessons of recent crises – not least that of the pandemic. Mr Makhlouf, who is Governor of the Central Bank of Ireland, said a radical rethink of EU economic policies was required – emphasising the European Central Bank could not do all the work.
The EU has already suspended the fiscal rules of its Stability and Growth Pact, aimed at ensuring members of the EU27 live within their means.
In addition the ECB has launched a massive monetary support scheme based on its €1.85trillion (£1.57trillion) asset purchase programme.
However, Mr Makhlouf suggested the ECB might have to extend emergency bond purchases in support of both the private and public sectors as part of its Pandemic emergency purchase programme (PEPP) past the current March 2022 deadline.
He told Politico: “Monetary policy doesn’t work in a vacuum. Monetary policy needs friends.
“The Stability and Growth Pact was essentially a creature designed 30 years ago.
“The question we all need to be asking ourselves is whether this is the right plan for the next 30 years.
“We should take the opportunity over the next year to look at how it can be improved.”
Mr Makhlouf, who was previously secretary to the New Zealand Treasury and also worked as private secretary to Gordon Brown when he was the Chancellor of the Exchequer, said fresh thinking was required, especially in light of the EU’s climate targets.
He explained: “We weren’t discussing 30 years ago the need to achieve net-zero.
“We weren’t making these long-term commitments back then. Now we are.
“But we don’t spend enough time, as policymakers, thinking long-term macro side.”
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Current fiscal rules placed too much emphasis on balancing budgets and debt-to-GDP ratios, Mr Makhlouf stressed, which he said was too restrictive an approach.
He said: “The composition of investment is as important as its absolute level as a proportion of GDP, especially when so much of economic activity is going to have to be done a different way over the next 30 years to achieve net zero.”
Debt sustainability should not be ignored – but become fixated about debt simply hampered the broad aim of improving economic welfare, Mr Makhlouf said.
Mr Makhlouf also stressed the importance of cooperation among members of the EU27.
He said: “It’s important that we learn the lessons of the last two crises, the one we’re in right now and the one that we had in the last decade.
“One is if fiscal and monetary policy work in a coordinated fashion, it ultimately benefits the community as a whole.”
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Makhlouf said it was important to recognise the tendencies of individual EU countries – for example Germany with its fiscal conservatism and determination to balance the books.
He added: “We need to make sure we think as creatively as possible, as to how to construct a narrative that will support this direction.
“Those of us not part of that system need to help the politicians develop a narrative that they can then use for the wider community.
“We need help so that monetary policy can operate beyond the lower bound.”
The ECB has done its part, in his eyes, by slashing interest rates into negative territory and letting its balance sheet balloon to €8trillion. But these measures haven’t been enough to nudge inflation — durably — up to its target rate of two percent for more than a decade — due to insufficient help from the fiscal side.
The pandemic had thrown a huge spanner in the works when it came to EU-wide fiscal policy, with the rise of the more infectious strain currently sweeping the continent complicating things still further, Mr Makhlouf acknowledged.
He said: “The Delta variant has obviously just increased uncertainty.
“I would have been more confident a few months ago that we can end the programme in March 2022, because I thought the pandemic emergency would be over.
“But today, compared to two months ago, that is less clear.”
Nevertheless, he predicted that the current approach should allow Europe to emerge from recession while bringing inflation under control.
Mr Makhlouf said: “I am a great believer in patience as a general rule. Right now our current monetary policy is providing a sufficiently accommodative stance to achieve our goals.”
The next ECB policy meeting in September should discuss winding down the emergency programme to avoid any sudden end to bond buying, Mr Makhlouf said, while stressing: “Talking about it is a completely different question to whether we’re going to make some decisions.
“I don’t think that if you end PEPP, you need to find some equivalent increase somewhere else, because PEPP has a specific purpose.
“I believe in retaining flexibility across all our instruments, from interest rates to asset purchase programmes and everything in between. Flexibility is quite important to me.”
Mr Makhlouf also dismissed suggestions of a split on the issue among member states.
He said: “The more uncertainty we have, the more likely it is that people will have different perspectives, see things in different ways.
“You’ve got a governing council with 25 people on it and all people who will have views of how the economy works, what the outlook is telling them.
“It would be staggering if we all thought exactly the same way. In fact, it would be bad for the ECB and bad for Europe if we promoted group think over diversity of thought.”
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