Monetary policy does not put capital where it is needed now

At the heart of the clashes between Member States over the corona recovery package, loans, subsidies and the associated conditions, lies the question of what is actually needed economically. The recovery fund is controversial in principle, especially in the so-called sparsely populated regions of the European Union. This puts Member States up against each other. In this context of controversy, the question 'what is needed' is becoming a political brainteaser.

The German point of view

In March, the Franco-German plan for a 500 billion Corona Recovery Fund was launched, against the background of a buy-back programme of over 900 billion already put in place by the European Central Bank (ECB). Germany expressed the opinion that responsibility for an economic crisis should not be laid at the ECB again. A standpoint based on two insights. Germany finds it undesirable that, since the euro crisis, the currency union is moving towards a debt union partly facilitated and also monetary financed by the ECB. In this respect, the ECB's excessive buy-back policy is not leading to the desired higher inflation. In the current economic situation, the policy does not drive spending, but only stimulates investment. The result is inflation of assets such as houses, says de Vries.

The second insight is that targeted budgetary measures offer a way out of this new European crisis. Monetary incentives are not or not sufficiently reaching the sectors and workers who have been severely affected by the pandemic. This is in contrast to budgetary and fiscal measures such as, for example, the Dutch NOW-regulation. The recovery plan is the first act of this insight at EU level.It is also a reappraisal of the historical lesson that governments can make a difference by stimulating in difficult times.

Focus on taxation

The current crisis is not the result of a drop in demand, but was caused by a simultaneous supply and demand shock because everyone had to stay at home. Pumping undirected money into the economy then makes little sense, concludes Casper de Vries. According to him, the answer to the question of how to make the French-German plan work is in the German view: start with the governments, by shifting the focus from the monetary to the fiscal field, and focus it on the real economy of hard working Europeans, rather than on the margins of investors.

According to de Vries, the fiscal authorities are to be found in the Member States. But how do you deal with these different national governments and the supranational dimension? One possible approach is external effects. If these are present at European level, then spending belongs at EU level. Casper de Vries thinks it is a good idea to create budgetary resources at European level. But linking this to the simple conclusion that budget law should move from national to European level is a bad idea. After all, the EU is not a political union.

Where to go from here

For a meaningful recovery, clarity on how monetary and economic policies can return to 'normal' over time, and in conjunction, is essential, rather than focusing on more monetarily financed deficits. According to de Vries, monetary and economic policies should complement each other in times of crisis, and this can only be achieved if the economy recovers. He therefore believes that it is about time that there is an honest debate about these matters in the EU. What is needed now? According to de Vries, the EU must get down to work on this question, without taboos and without opting for simple solutions. The fundamental problems must not go unchallenged, concludes Casper de Vries.