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The managing director of the International Monetary Fund (IMF), Kristalina Georgieva, warned Tuesday against triggering public spending to tackle inflation, focusing measures on supporting the most vulnerable, thus preventing fiscal policy from fueling price rises.
“Fiscal policy has to give a cushion for the most vulnerable. The risk is always that there is pressure to do more for everybody and this pressure has to be resisted because, if we’re going for a very generous sort of support which the populations in many countries are demanding and putting pressure on politicians, then fiscal policy becomes the enemy of monetary policy, it actually makes the fight against inflation much more difficult,” Georgieva said at an event organized by the European think-tank Bruegel.
The former European Commissioner added, in this sense, that for those countries with fiscal space to give this specific support “is easy”, while in those where this room for maneuver does not exist “it is incredibly difficult because the only way fiscal policy can act is by reprioritizing spending”.
The message comes at a time when eurozone governments have accelerated the adoption of public aid and tax cuts to cushion the impact for businesses and families of record inflation —9.1% in August— driven by rising energy prices exacerbated by the Russian war in Ukraine, which has spread to the rest of the shopping basket.
The IMF managing director, who has lowered her growth forecast for the Eurozone several times in recent months, stressed that the bloc faces a “tough” end to 2022 and an “even tougher” 2023 and underlined that, in this context, the “priority” of central banks must be to control inflation that risks being “devastating” for the global economy.
“Next year inflation will still be with us and this means that monetary policy will have to continue to tighten, which means higher rates,” Georgieva said, recalling that other jurisdictions, such as the United States with the Federal Reserve, are ahead of Europe in adopting these measures.
The European Central Bank raised interest rates in July for the first time in twelve years, by 50 basis points, and a further increase is expected at its meeting next Thursday, while it has adopted an “anti-fragmentation” mechanism that allows it to buy debt flexibly if the financing costs (and thus the risk premiums) of some countries soar.
The IMF managing director considered that this mechanism (known as TPI) is a “strong statement of intent” since it would provide stability if there is more pressure in one place than in another, but she recalled that fiscal policy can also complement the central bank’s action to address different situations in different countries.
