Istituto di Economia Internazionale - The Challenges Eurozone Stagflation Poses for Households, Businesses and High-Debt Countries: Some Possible Solutions

Recent Articles

Read more about our latest published articles.

Review’s Archive

Corresponding Author:
Rainer Masera, School of Business, University G. Marconi, Rome - Italy

The Challenges Eurozone Stagflation Poses for Households, Businesses and High-Debt Countries: Some Possible Solutions

Volume 76 - Issue 4, November 2023
(pp. 547-566)
JEL classification: E0; E4; E5; E6; E63
Keywords: Stagflation; Vulnerabilities of the Euro Area; Economic and Monetary Union; NGEU; Public Debt; Concentric Europe

Abstract

The paper presents a holistic perspective of challenges and possible solutions to the euro area’s current vulnerabilities. Stagflation, structural energy problems, decarbonization, irreversible supply chain modifications, shock waves on crypto currencies and the war in Ukraine concur in shaping a permacrisis with severe consequences for households, firms and high-debt governments. This unstable environment represents a major challenge to economic policies. Monetary policy is primarily tasked with lowering inflation to the medium-term target of 2%, but without unduly prolonging the stagnation. Fiscal policy was very successful in establishing the NGEU–PNRR framework. This required the suspension of the EC fiscal framework – the SGP – which will be reinstated at the end of 2023 with reforms now under discussion. The NGEU is a major step forward, but it is a temporary mechanism: ways and means are explored to consolidate it. A true European debt – having as counterpart reproductive commonly agreed infrastructures – is a key element of the solution proposed, which would ultimately comprise the creation of a political, fiscal, and monetary union. Current inflation is partly predicated upon the excessive, prolonged expansion of the monetary base by the ECB. The end of monetary easing and of negative interest rates was highly appropriate, but, if the monetary expansion is reversed too abruptly, the ensuing depression can discredit the entire process.

Read the full article

Download the article in PDF format to read and print.

Bibliography

Arrow, K. and M. Kurtz (1970), “Public Investment, the Rate of Return, and Optimal Fiscal Policy”, J. Hopkins Press: Baltimore.

Bergeaud, A., G. Cette and R. Lecart (2019), “The Circular Relationship between Productivity, Growth and Real Interest Rates”, Vox, Bruxelles, <https://cepr.org/voxeu/columns/circular-relationship-between-productivity-growth-and-real-interest-rates> .

Bernanke, B., V.R. Reinhart and B.P. Sack (2004), “Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment”, Federal Reserve Board, Discussion Paper No. 48, Washington, DC.

Blanchard, O. (2019), “Public Debt and Low Interest Rates”, American Economic Review, 109(4), 1197-1229.

Brunnermeier, M., S. Merkel and Y. Sannikov (2020), “The Fiscal Theory of the Price Level with a Bubble”, Princeton University, Working Paper 2020-47.

Buiter, W. (2022), “Will Europe’s New TPI Be an ATM?”, Project Syndicate, July 22.

Buti, M. (2022), “La riforma del patto di stabilità e crescita”, speech delivered at the Conference “Governance economica dell’Ue: proposte e prospettive di riforma”, Istituto Affari Internazionali, December 14, Rome.

Debrun, X., J.D. Ostry, T. Willems and C. Wyplosz (2019), “Public Debt Sustainability“, IMF: Washington, DC., November 28.

Delors, J. (1993), White Paper, Commission Report, Bruxelles, December.

Domar, E. (1993), “On Deficits and Debt”, The American Journal of Economics and Sociology, 52(4), 475-478.

Donohoe, P. (2022a), “Opening Remarks”, Eurofi, European Council, February 25.

Donohoe Plan (2022b), Agence Europe, Bruxelles, May 3.

Draghi, M. (2020), Speech delivered at Rimini Meeting2020, August 18.

EC (2015), The Five Presidents’ Report: Completing Europe’s Economic and Monetary Union, European Commission: Bruxelles, June 22.

EC (2022a), EU Modelling System, European Commission: Bruxelles.

EC (2022b), Economic Forecast for Italy, European Commission: Bruxelles, May 16.

EC (2022c), “Communication on Orientations for a Reform of the EU Economic Governance Framework”, COM (2022) 583 final.

ECB (2012), “Technical Features of Outright Monetary Transactions”, European Central Bank: Frankfurt, September 6.

ECB (2022), “Financial Stability Review”, European Central Bank: Frankfurt, November 16.

Enria, A. (2021), “European Banks in the post-Covid World”, Morgan Stanley Virtual European Financials Conference, March 16.

ESM (2022), Glossary: OMT, Luxembourg.

Fazio, A. (2021), L’inflazione in Germania nel 1918-1923 e la crisi mondiale del 1929, Treves Editore.

Friedman, M. (1969), The Optimum Quantity of Money, MacMillan.

Gennaro, A. and R. Masera (Eds) (2020), Riflessioni sul futuro dell’Europa, Aracne editrice: Roma.

Goodhart, C. (2021), Interview, Central Banking, September.

Gruen, D., J. Romalis and N. Chandra (1997), “The Lags of Monetary Policy”, Bank for International Settlements: Basel.

Hicks, J. (1979), Causality in Economics, Basil Blackwell: Oxford.

Issing, O. (2008), The Birth of the Euro, Cambridge University Press: Cambridge.

Kay, J. and M. King (2020), Radical Uncertainty: Decision-making for an Unknowable Future, Bridge Street Press: London.

Kelton, S. (2020), “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy”, Public Affairs.

King, M. (2021), “Monetary Policy in a World of Radical Uncertainty”, Institute of International Monetary Research: Buckingham, UK.

Kohl, H. and F., Mitterrand (1990), “Letter by the German Federal Chancellor Helmut Kohl and French President Francois Mitterrand to the Irish Presidency of the EC. 19 April 1990”, Agence Europe, April 20.

Lagarde, C. (2022a), “Macroprudential Policy in Europe – Building Resilience in a Challenging Environment”, ESRB 6^th Annual Conference, Frankfurt, December 8.

Lagarde, C. (2022b), “Lagarde Says Inflation Crisis Came from ‘Nowhere’”, The Journal, Dublin, December 20.

Lindner, C. (2022), “Finance Ministers put Banking Union Plans on Ice”, Politico, September 13.

Macron, E. (2018), “Concentric Circles in Europe”, Annual Ambassadors’ Conference, Elysée, Paris.

Masera, R. (2020), “Leverage and Risk-Weighted Capital in Banking Regulation”, The IUP Journal of Bank Management, 19(1), 7-57, February.

Masera, R. (2021), “The Case for a Different Stability and Growth Pact: Towards a Fiscal and Political Union in the Euro Area”, SSRN, December 20.

Masera, R. (2022), “Nuovi rischi e regolazione delle criptovalute”, Bancaria, 78(3) marzo, 5-11.

Mundell, R. (1971), Monetary Theory, Goodyear Publishing Company: Pacific Palisades.

Paganetto, L. (a cura di) (2022a), Il piano italiano di ripresa e resilienza. Una sfida da vincere, Unilink University Press: Roma.

Paganetto, L. (a cura di) (2022b), “Equità e Sviluppo”, Unilink University Press: Rome.

Patuelli, A. e G. Sabatini (2022), “Stretta sugli istituti, credito a rischio: servono moratorie e stabilità normativa”, Il Sole 24 Ore, 8 novembre.

Phelps, E. (2022), Foreword, in: L. Paganetto (Ed.), “Equità e sviluppo”, Eurilink University Press: Rome.

Pittaluga, G.B. (2022), Welcome Note presented at the Annual Conference of the Institute for International Economics of the Chamber of Commerce of Genova (“La politica monetaria della BCE e riflessi sull’economia italiana”), November, 11.

Rossano, D. (2022), “Fondo interbancario di tutela dei depositi”, Convegno Università Parthenope, Capri, June, 16-17.

Savona, P. (2021), “Features of an Economics with Cryptocurrencies”, Lectio Magistralis, Università di Cagliari, October 1.

Schnabel, I. (2022a), “A New Age of Energy Inflation: Climateflation, Fossilflation and Greenflation”, ECB and its Watchers XXII Conference, Frankfurt, March 17.

Schnabel, I. (2022b), “United in Diversity – Challenges for Monetary Policy in a Currency Union”, Speech to the Graduates of the Master Program in Money, Banking, Finance and Insurance of the Panthéon-Sorbonne University, June 14.

SCOPE (2022), “Asset Quality Review: Do Rising Interest Rates Mean Rising NPLs for European Banks?”, Berlin, June 20.

Serra, N. and J. Stiglitz (Eds) (2008), The Washington Consensus Reconsidered, Oxford University Press: Oxford.

Solow, R. (1956), “A Contribution to the Theory of Economic Growth”, The Quarterly Journal of Economics, 70(1), 65-94.

Treaty of Paris (1951), The three Proposed European Communities, Paris.

Visco, I. (2022), “The Interaction between Monetary and Fiscal Policies in the Pandemic Crisis and beyond”, Banca d’Italia: Roma, March 17.

Recent Articles

Review’s Archive

The Challenges Eurozone Stagflation Poses for Households, Businesses and High-Debt Countries: Some Possible Solutions

Abstract

Read the full article

Bibliography

Register your account

Authors’ login

Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
of the Genoa Chamber of Commerce