EU Fiscal Watchdog Calls for Spending Control to Ease Rate Hikes

Jorge Valero
·2 min read

(Bloomberg) -- European Union governments should intensify efforts to reel in public spending and take the burden off monetary policy in tackling inflation, the bloc’s fiscal watchdog said.

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“A sizable restrictive fiscal impulse would help the European Central Bank in the pursuit of its inflation target,” according to a report by the European Fiscal Board published Wednesday. “A fiscal policy stance that is too expansionary would imply higher interest rates with a potential knock-on effect on output and other macroeconomic variables.”

The European Commission, the EU’s executive arm, told member states in the spring to adjust public expenditure this year and next, including phasing out support measures to ease high energy prices. Based on member states’ plans submitted to Brussels, the institution projected a reduction of fiscal support for the euro area of 0.8% of gross domestic product in 2024 and an additional 1.25% of GDP related to phasing out energy measures.

Despite the economic slowdown and monetary tightening over the past year, the EFB report said that employment has been resilient. But it warned that higher wages and corporate profit margins could push prices higher and force more rate hikes beyond what is expected.

Against this backdrop, the fiscal board assessed that the improvement of public accounts should go beyond what is projected as members of the ECB governing council decide whether to keep raising interest rates in the autumn.

“Within the overall monetary and fiscal effort, some additional rebalancing toward fiscal policy should be considered,” wrote the EFB chair Niels Thygesen in the report. “This could ease the pace of raising interest rates and help contain risks of financial instability.”

The five-member board, established in 2015, is made up of independent experts on fiscal policy, public finances and macroeconomics and typically meets once a month. The board’s mandate is purely advisory and the task of enforcing EU fiscal rules remains with the bloc’s executive.

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