Tuesday, December 6, 2022

Universal government spending may lead to higher inflation in Eurozone, Brussels warns

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The European Commission has warned eurozone countries that the “significant” fiscal expansion they are adopting to fight the energy crisis may worsen inflation. It urged common-currency nations to move towards more targeted measures that support only vulnerable households and businesses.

Economy Commissioner Paolo Gentiloni stressed that the latest data from Brussels point to a fiscal expansion of €200 billion in 2022, equivalent to 2% of GDP.

“This significant fiscal expansion risks increasing inflationary pressures and this is what we do not want to happen although we know that it is necessary to intervene and respond to this situation.”

Gentiloni added that nations must work “collectively” to push forward packages of measures that are “affordable”, which are focused on “the most vulnerable” and “preserve price signals”.

Large amounts of spending, even if meant to protect consumers from inflation, will increase demand in the economy and could lead counter-productively to prices rising at even higher rates. It is also pushing government debt to levels previously unseen in the post-war era.

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