European Central Bank President Christine Lagarde. Reuters-Yonhap
European Central Bank (ECB) President Christine Lagarde warned that excessive fiscal spending by eurozone countries could affect monetary policy. Her message: aggressive cash injections in the name of responding to the energy crisis could intensify pressure for interest rate hikes.
According to Reuters and other outlets, Lagarde said after a meeting of eurozone finance ministers held in Nicosia, Cyprus, on Monday: “We discussed fiscal responses to the energy price shock,” adding that she “stressed that fiscal measures should be temporary, selective and tailored.”
“Measures that deviate from these three principles will be harmful and will eventually change the ECB’s monetary policy stance,” Lagarde said. Eurogroup President and Greek Finance Minister Kyriakos Pierrakakis backed her remarks, saying, “Fiscal policy and monetary policy must go hand in hand.”
Markets expect that even if the war in the Middle East ends, energy prices will be unlikely to stabilize quickly to previous levels. Investors are already betting on a policy rate hike next month. Alexander Demarco, Governor of the Central Bank of Malta and considered a dove who favors monetary easing, also signaled the possibility of a June rate hike on the same day, saying, “We need to send a signal that we are committed to achieving the medium-term inflation target.”
Major eurozone countries rolled out a range of support measures — including fuel tax and value-added tax cuts, oil price caps, and subsidies — after energy prices surged following the outbreak of the Middle East war in late February. However, the European Commission and academics point out that such measures not only undermine fiscal soundness but also offset the effect of curbing energy demand, potentially fueling inflation instead.
Italy and other heavily indebted countries, in particular, are demanding that energy crisis response costs be excluded from EU fiscal deficit calculations, similar to defense spending. However, the European Commission and most member states are opposed. Belgian Finance Minister Vincent Van Peteghem said, “It is difficult to create a general exception clause,” adding, “because this is not a demand problem but a supply crisis.”