Re-opening boom or post-pandemic blues?
BfEI conversation #1: executive summary
The conversation took the Commission´s Spring Forecast 2021 as the starting point for a debate about likely economic developments over the next 12-18 months. While one participant argued that in the presence of "true uncertainty" in the Knightian sense scenario analysis would provide more useful insights, there was broad agreement that the Commission forecast represents a "reasonable baseline" of economic perspectives for 2021 and 2022. Most of the debate focussed on the appropriate macroeconomic policy settings in the EU in the present external environment. A wide majority of participants felt quite comfortable with the current stance of fiscal and monetary policy, actually cautioning against too early and too abrupt withdrawal of expansionary stimulus, thereby repeating the mistakes made some ten years ago. However, some other participants argued that the TTT principles for cyclical fiscal intervention (timely, temporary and targeted) may no longer apply next year, thus warranting a quicker return to a trajectory of fiscal sustainability; similarly, increasing distortions from the extraordinary monetary expansion should be more seriously considered. Unsurprisingly, the latter group of participants was also more concerned about the build-up of inflationary pressures stemming from demand-pull elements arising from a public spending spree plus the unwinding of high household savings and cost-push factors such as higher commodity prices, increased user cost of capital in services due to distancing requirements, and reallocation costs in the transition towards green and digital. Still, the majority of participants were "inflation-relaxed" arguing that most of the upward pressure should be of a temporary nature. Coming back to the lead question of the conversation, the chairman concluded that there appeared to be little support for an alarmist view in any direction; and using the RRF terminology, in his view, the likely economic performance over the next 12-18 months calls for a gradual movement in policy settings away from "recovery" more towards "resilience", strengthening investment and structural reform in both the private and the public sector to foster inclusive productivity and convergence.