FRANKFURT — Eurozone governments must start to roll back support measures aimed at cushioning the impact of energy prices to avoid fiscal largess feeding inflation, European Central Bank President Christine Lagarde said Thursday.
Her comments underline growing tensions between monetary and fiscal authorities as the eurozone is battling an unprecedented cost-of-living crisis.
“As the energy crisis becomes less acute, it is important to now start rolling these measures back promptly in line with the fall in energy prices and in a concerted manner,” Lagarde said, adding that a lot of these measures had been signed off on for the full year of 2023 at a time when energy prices were significantly higher than they are today.
Lagarde reiterated previous warnings that fiscal measures to shield the economy from high energy prices that are not temporary, targeted and tailored to preserving incentives to consume less energy “are likely to drive up medium-term inflationary pressures, which would call for a stronger monetary policy response.”
The ECB president’s comments came after the central bank raised interest rates by 0.5 percentage points and promised a similar increase in March.
Eurogroup chief Paschal Donohoe attended the ECB Governing Council’s dinner on Wednesday, Lagarde said, offering a “very good opportunity to appreciate how the Eurogroup at finance minister level is going to look at … recommending recalibration in order to make sure that fiscal support will be adjusted to the lower energy prices which we do not see at the moment yet.”
Lagarde has often ascribed Europe’s success at saving the economy from the abyss during the pandemic to fiscal and monetary policy working hand-in-hand. But in the inflation battle, governments are less willing to be in lockstep with the ECB, keeping support measures to help consumers and businesses cope with the energy and cost-of-living crisis that are so broad that they could fuel price pressures down the line.
“The celebrated fiscal stimulus, which has eased recession fears, is indeed an additional concern for the ECB as it could transform a supply-side inflation issue into demand-side inflation,” said ING economist Carsten Brzeski, adding that this could extend inflationary pressures.