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  • Writer's pictureKarl Pichelmann

Settling for "a new macroeconomic normal"?

The Bureau conversation discussed the likely features of "a new macroeconomic normal" following the inflationary shock in the wake of the pandemic and the Russia´s military aggression against the Ukraine with a view to evaluate the possibilities for a soft landing.

The lead speaker argued that the extraordinary expansionary monetary and fiscal policies of recent years are going to be gradually reversed. Monetary policy has already embarked on a determined tightening course, and while inflationary pressures are set to abate still further interest rate increases must be expected during this year. While he expected the main ECB policy rate to climb into the 4-5 % bracket, he considered a value of about 1.5% as a plausible "Wicksellian real rate" over the medium term, suggesting a range of between 3.5-4 % for nominal rates to settle in once inflation gets closer to target. As regards fiscal policies, the suspension clause of the SGP will in all likelihood be deactivated in 2024 and a return to a broadly neutral stance of fiscal policies or, perhaps, even a resumption of a gradual consolidation path may be in the cards. The establishment of a new fiscal capacity ("funding for green tech industry") at the EU level was mentioned as a dedicated possibility, but the lead speaker did not consider this to be a likely game changer. In summary, he opined that a soft landing at a "new normal" appeared possible at the current juncture, but the macroeconomic risks were in his view still tilted to the downside.

Several participants considered the sketched scenario as overly optimistic. While acknowledging that short-run recessionary risks have somewhat diminished, uncertainties related to the geopolitical situation, in particular the war against the Ukraine, were being seen as still weighing heavily on the outlook. An unfettered transatlantic industrial subsidy race was clearly deemed as undesirable; however, one discussant warned of a significant industrial production risk for Europe arising from a thoughtless and overly rash green transition. Participants also pointed to medium-term inflationary pressures stemming from the restructuring of global value chains, demographic developments and the need to tackle climate change. Some feared that the associated distributional tensions will put democratic institutions to a new test. All participants agreed that a co-operative common European approach will be indispensable to tackle the challenges ahead

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