France, Germany pledge unity to support economy against inflation

Brian Leclere - 12 September 2022 - APP Economy MARKET_WATCH

Euro zone finance ministers agreed on Friday to act together to protect households and companies from soaring energy prices, coordinating their support policies with the European Central Bank to avoid adding to inflationary pressures.

The ministers from the 19 euro zone countries agreed support should focus on providing money to help people and industry cope but that this should be regarded as an emergency measure and be carefully targeted where possible.

Support for companies should be coordinated across borders to preserve fair competition.

“We acknowledge and we agree that we must reduce inflation,” the chairman of euro zone finance ministers Paschal Donohoe told a news conference. “The failure to do so will make our citizens, the people of Europe, poorer for longer,” he said.

France, Germany and other countries have announced multibillion-euro packages to help business and consumers cope with soaring inflation. The Bruegel think-tank estimates EU government support has already reached 282 billion euros ($285 billion), with more on the way.

But the support itself can fuel inflation, creating a vicious circle.

“Our interventions will be coordinated with the monetary policy of the ECB and we will make all efforts to avoid adding to the inflationary pressure to which the ECB and we as finance ministers are responding to,” Donohoe said.

The ECB raised its key interest rates by an unprecedented 75 basis points and promised further hikes, prioritising the fight against inflation as the bloc is likely heading towards a winter recession and gas rationing.

Asked how the ministers would reconcile pumping more money into to the economy through support measures while avoiding adding to inflation, Donohoe said the answer was in the scale and design of the measures, but that it was a complex challenge.

European Economic Commissioner Paolo Gentiloni said the difficulty was in keeping the support targeted and temporary.

“I know it is very difficult because when you introduce a measure the tendency to leave it there is inevitable and it is difficult to limit your support to certain groups,” he said.

ECB President Christine Lagarde noted that there was some improvement in the design of European support schemes but noted there was still need for improvement.

“It was 10% of the measures that were tailored and targeted, now we are moving to 15%, and there is a clear need of improvement in that respect,” she said, adding that when it came to efficiency, income transfers were preferable to price caps.

 

In Brussels, EU energy ministers are discussing a long list of proposals from the European Commission to tackle the region’s energy crisis, including a price cap on Russian gas, a windfall levy on non-gas power plants, a bloc-wide cut in electricity demand, and emergency credit lines for power firms facing soaring collateral requirements.

Source: France, Germany pledge unity to support economy against inflation

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