MNI: EC Fears Govts Undermining ECB Inflation Fight-Officials

The European Commission is likely to scold eurozone finance ministers at their meeting over the weekend, telling them that measures to help consumers cope with soaring energy prices are not only expensive but untargeted and likely to prejudice the European Central Bank’s fight against inflation, EU officials told MNI.

Whilst Europe’s Stability and Growth Pact borrowing limits have been suspended through next year, Brussels is likely to remind ministers that it will enforce the rules once they return. Officials could also deliver a warning in the next fiscal policy guidelines, though these are not due until spring next year.

ECB President Christine Lagarde, who will attend the joint Eurogroup-ECOFIN meeting of ministers and central banks in Prague, is also likely to plea for more fiscal restraint in support of tighter monetary policy. While the ECB and Eurogroup found coordination easy during the pandemic, when the challenge was to match easy money with fiscal largesse, governments have found it politically more difficult to support the central bank’s inflation fight by tightening purse strings.

Even the usually-dovish EU Economy Commissioner Paolo Gentiloni felt obliged on Wednesday to issue a warning to governments. While Gentiloni defended his May decision to extend the Escape Clause from the Stability and Growth Pact rules, he called on governments to ensure “that fiscal policy does not increase inflationary pressures.”

While the Eurogroup called in July for governments to keep energy measures ‘targeted and temporary’ - three quarters of the measures adopted so far are “untargeted” and total an already whopping 0.9% of GDP.

WRONG INCENTIVES

In addition to the fiscal cost of responses to higher energy prices, governments’ focus on price caps and limiting consumers’ electricity bills risk sending out the wrong incentives and undermining the shift to cheaper renewables by keeping gas prices low, EU officials said. Efforts should focus more on protecting the vulnerable, ensuring the green transition and investment in energy security, they added.

Fiscally-conservative governments are also likely to point to energy spending as an argument for keeping tight fiscal rules in upcoming talks over changes to the Stability and Growth Pact. (See MNI BRIEF: Hawks To Swoop On Energy Spending At Eurogroup)

Friday’s emergency meeting of EU energy ministers will also be a key focus for finance ministers and central bankers. Agreeing a coordinated EU approach to energy market reform, including how electricity prices are formed, will be vital if governments are to be dissuaded from splashing out with additional spending.

“When one or two countries do something that is immediately attractive to people, it automatically raises incentives for others to do the same. The snowball starts rolling and it’s hard for other countries to resist doing the same...,” one senior EU official said. “The Eurogroup needs to do its best to stop the snowball rolling,” the official said.