European public finances under pressure?
This paper should be read as complementary to my last briefing paper (N3, September 2001) The European policy mix At its meeting on 8 November, the Governing Council of the ECB decided to reduce the minimum bid rate on the main refinancing operations of the Eurosystem by 50 basis points to 3.25%. This decision was welcomed even if it could have been taken earlier, most of the forward looking "informations" on which it was grounded being already available: the slowdown of the expected rates of growth of both output and prices in the Euro area. If we consider current forecasts for inflation (1.8%) and growth (1.5%) in the area for 2002, that means that monetary policy is neutral, putting fiscal policy under pressure. In my last briefing paper, I exposed the reasons why the job of stabilisation should better be left to monetary policy than to discretionary fiscal policy. The policy mix adapted to present circumstances should thus imply both an expansionary monetary policy and a neutral fiscal policy, which means that the automatic stabilisers should be left to play their role. With a neutral monetary policy (but may be the ECB will soon take some steps in the good direction), there is a strong incentive for government to use discretionary fiscal policy to remedy to the present slowdown of growth