The Brief – A dangerous odyssey: Should EU leaders restrict growth to curb inflation?

European officials announced on two separate occasions this week that they are intentionally pursuing policies that will, at least in the short term, impede Europe’s economic growth.

At first glance, such measures would appear to constitute acts of self-sabotage. Why would the EU consciously enact policies that harm its own economy?

Yet, the officials assure us, there is method to this madness. Such policies, they say, are necessary to prevent a resurgence of Europe’s inflation crisis, which is finally abating after plaguing the European economy for much of the past two years.

The EU’s actions are arguably reminiscent of Odysseus’ conduct in one of the more famous episodes in Homer’s Odyssey: In figurative terms, the EU is tying itself to a mast of policies to avoid an economic siren song that promises stronger growth but will ultimately only deliver fatally high inflation.

The first such announcement was made on Monday (11 March), when the Eurogroup, the informal regular gathering of eurozone finance ministers, revealed that the EU’s stringent new fiscal rules mean that member states will have to cut government spending next year. 

“At the current juncture, fiscal stimulus would stimulate inflation more than growth [and] correspondingly higher financing costs for the governments,” European Commission Executive Vice President Valdis Dombrovskis told a press conference on Tuesday (12 March), following a question by Euractiv.

Dombrovskis’ purported justification was vehemently contested by experts, who argued that substantial increases in government expenditure are necessary to protect Europe’s fragile industrial base and finance the green and digital transitions.

Sebastian Mang, an economist at the New Economics Foundation, noted that such green investments will actually help curb inflationary pressures.

“If we are able to transition to a new energy grid that is not reliant on fossil fuels, then we will not be as dependent on international fossil fuel price fluctuations, which will help ensure price stability,” Mang told Euractiv.

Monetary moderation — or madness?

Dombrovkis also provided a second reason for limiting government expenditure.

“[We need] a somewhat restrictive fiscal stance to avoid a situation where fiscal policy would contradict monetary policy in its task to reduce inflation,” he said.

The “monetary policy” he referred to is the series of record interest rate hikes implemented by the European Central Bank (ECB) over the past year-and-a-half, which are designed to limit households’ and firms’ borrowing capacity and, ultimately, drive down prices.

Dombrovskis’ remarks came just the day before Oscar Arce, the ECB’s director general for economics, delivered a speech in Brussels in which he projected that the ECB’s policy will restrict Europe’s growth capacity until 2026.

Once again, Arce’s justification was the need to tame the inflationary beast, which, currently at 2.6%, is only slightly above the bank’s 2% target rate.

Much like the EU’s fiscal policy, the ECB’s tight monetary policy has been criticised by many experts — with the reaction among trade unions especially vociferous.

“[The ECB’s policy] is piling financial pressure on working people,” Esther Lynch, the general secretary of the European Trade Union Confederation, which represents 45 million European workers, told Euractiv. 

“It is killing investment needed to green the economy and risks unleashing a chain reaction of company closures that will lead us towards another job-destroying recession.”

A capital idea?

There is, however, one policy area in which the EU appears to be trying to free itself from previously self-imposed constraints and achieve higher growth.

On Monday, the Eurogroup announced a series of measures aimed at deepening the EU’s Capital Markets Union (CMU). Allowing funds to move more freely across member states, the group said, is critical to “promote sustainable growth and financial stability in the EU”.

Many politicians and experts, however, have expressed scepticism about whether the proposed measures go far enough.

Danuta Hübner (EPP), an MEP who worked as a rapporteur on several files falling under the CMU remit, dismissed the statement as “feeble” and expressed dismay that member states’ commitment to the CMU remains “subordinated to national interests”.

“The final statement does not meet the level of ambition needed,” she told Euractiv.

Thus, in the one area where the EU is attempting to loosen policy restrictions to stimulate economic growth, it is not going far enough.

To cite another Greek myth: Unless the EU frees itself from the relevant fiscal, monetary, and capital constraints, growing the European economy might well turn out to be a Sisyphean task.

Cover photo: The Brief is Euractiv's evening newsletter. [Euractiv illustration by Esther Snippe, Photos by EPA/Shutterstock]