THE CHALLENGES EUROZONE STAGFLATION POSES FOR HOUSEHOLDS, BUSINESSES AND HIGH-DEBT COUNTRIES: SOME POSSIBLE SOLUTIONS

The paper presents a holistic perspective of challenges and possible solutions to the euro area’s current vulnerabilities. Stagflation, structural energy problems, decarbonization, irreversible supply chain modifications, shock waves on crypto currencies and the war in Ukraine concur in shaping a permacrisis with severe consequences for households, firms and high-debt governments. This unstable environment represents a major challenge to economic policies. Monetary policy is primarily tasked with lowering inflation to the medium-term target of 2%, but without unduly prolonging the stagnation. Fiscal policy was very successful in establishing the NGEU–PNRR framework. This required the suspension of the EC fiscal framework – the SGP – which will be reinstated at the end of 2023 with reforms now under discussion. The NGEU is a major step forward, but it is a temporary mechanism: ways and means are explored to consolidate it. A true European debt – having as counterpart reproductive commonly agreed infrastructures – is a key element of the solution proposed, which would ultimately comprise the creation of a political, fiscal, and monetary union. Current inflation is partly predicated upon the excessive, prolonged expansion of the monetary base by the ECB. The end of monetary easing and of negative interest rates was highly appropriate, but, if the monetary expansion is reversed too abruptly, the ensuing depression can discredit the entire process.