The dilemma facing the ECB; Wolfgang Schäuble, German finance minister (2009-17)
In more and more countries, debt has now outstripped annual GDP, which has considerably reduced the chances of the governments “outgrowing” their debts.
Central banks’ increasing purchases of sovereign bonds on the secondary market are swelling the money supply and increasing the risk of inflation.
With the European Central Bank running the printing press overtime, the monetary base in the eurozone rose from almost €1 trillion in 2009 to nearly €5 trillion at the end of 2020. It will be €6 trillion in June 2021, and further increases have already been agreed.
There are already signs of galloping inflation, though not in the case of consumer goods, where annual price growth remains within the ECB target of “below, but close to, 2%.”
Applying the monetary brake too vigorously would send interest rates soaring and threaten the stability of the countries with the highest debt ratios. If the interest-rate turnaround takes too long, however...
Balanced budgets are almost unattainable in high-debt countries without external pressure.
So, what is to be done?
The European Redemption Pact; modeled on Alexander Hamilton’s historic sinking fund, established in 1792 for the then-infant US.
That external constraint on fiscal policy – and not the mutualization of individual states’ debts, which is occasionally recommended for the EU – was the crux of the oft-cited “Hamiltonian moment.”
It is a good example of how crises can also present opportunities.
Wolfgang Schäuble Project Syndicate 16 April 2021
Prodi: It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."
https://englundmacro.blogspot.com/2011/12/prodi-it-is-politically-impossible-to.html
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