Cold turkey ahead?
In this conversation, participants discussed whether economies currently running on the steroids of extraordinarily expansionary monetary and fiscal policies may soon face a period of cold turkey. The lead speaker argued that some policy "normalisation" is actually warranted, but she stressed that stimulus withdrawal should be in a gradual manner and carefully timed and sequenced. In her view, monetary policy could go first by gradually reducing bond purchases, while maintaining a "low for long" regime regarding interest rates. National fiscal policies should start to move towards sustainable positions no later than next year with the speed of deficit reduction dependent on the continued strength of the recovery; underlying fiscal positions will obviously also play a role, but the debt criterion of the SGP should not be strictly administered. Support will also kick-in from the RRF as most national plans are quite heavily frontloaded. Issues of timing and sequencing of policy normalisation were also at the centre of the ensuing debate. Several participants cautioned against too fast and too strong tightening, but some others called for a "clearly defined return path" to normal conditions. The review of the EU fiscal rule book was considered an important process; there was agreement on the need for simplification, but views differed whether a thorough rewrite of the fiscal rule book, in particular regarding the debt criterion and the exemption of certain expenditure items, can or should be in the cards.