Insight
A new EU fiscal regime could make the ECB truly independent by John Springford, 30June 2022 The ECB must be free to target inflation and prevent spreads rising without encouraging fiscal irresponsibility. A new, credible fiscal regime is needed, with a permanent EU green investment fund at its centre. In an emergency meeting on June 15th, the European Central Bank (ECB) announced that it would introduce an ‘anti-fragmentation’ tool (although it said it needed more time to work out the details). The tool would involve the central bank buying sovereign bonds of southern European countries – especially Italy – to persuade financial markets that the ECB would act to prevent borrowing costs from spiralling out of control. Due to the size of its debts, Italy is the most serious problem, and its borrowing costs rose rapidly in June, causing a headache for central bankers. But the ECB also needs to avoid encouraging fiscal irresponsibility. If the ECB buys up Italian debt to keep yields down, a new Italian government might be encouraged to borrow more. The EU’s fiscal rules are intended to constrain government borrowing, but they are widely disparaged as ineffective at best, and counterproductive at worst. The EU first suspended the rules after the pandemic spread to Europe, and continued to suspend them after Russia’s invasion of Ukraine. And massive public investments are needed in energy infrastructure, insulation of buildings, transport and defence to meet climate targets and counter the Russian threat. A new fiscal regime could allow the ECB to ensure monetary policy is effective, without weakening the resolve of governments to keep debts sustainable. A permanent investment fund modelled on the current recovery fund (Next Generation EU, NGEU) could help to address both issues. First, it would enable some burden-sharing with fiscally constrained countries on European public goods like climate and defence, relieving some spending pressures; and second, it would give the Commission more powers to enforce compliance with fiscal targets agreed with member-states. Southern European borrowing costs rose swiftly after the ECB signalled that it would end asset purchases and start tightening monetary policy on June 9th. Member-states have refused to use the EU’s emergency lending programmes set up during the eurozone’s sovereign debt crisis. The ECB’s Outright Monetary Transactions programme (OMT) and the EU’s European Stability Mechanism (ESM) were designed to CER INSIGHT: A new EU fiscal regime could make the ECB truly independent 30 June 2022
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