Another crisis, another opportunity: inflation as a chance to rethink the EU monetary policies

The economic integration of EU Member states has proven to be a practicable instrument for ensuring stability on the continent and providing a viable alternative to isolationism. The introduction of the euro as a common currency was an attempt to effect a single market and strengthen economic and political integration. While it is clear that single EU Member States cannot, in the long term, compete alone in international global markets, the single currency project has revealed built in and politically induced flaws. European financial institutions therefore need to be updated and upgraded to ensure the Union’s finances are kept safe.  

Current attempts to mitigate the effects of the crisis brought about by the COVID-19 pandemic represent an opportunity to assess the resilience of our financial institutions. On the one hand, the crisis has highlighted the long-standing problem of an incomplete banking union, accompanied by political interference in decisions in times of crisis. On the other hand, Member States have used the European Central Bank (ECB) as a source of privileged financing and benefited from historically low interest rates. The ECB’s balance sheet has grown to a staggering 9 trillion euros, some 7 trillion more than 2014. Securities purchased under the pandemic emergency purchasing programme (PEPP) and the asset purchase programme (APP) over the pandemic are the latest catalysts for the political role of the ECB. 

An expansive monetary policy and purchases of state bonds have kept interest rates and yields on savings at a historic low while encouraging debt for state, business, and private actors. This has disrupted classic banking while encouraging stocks, real estate, and other commodities investments, creating bubbles ready to burst. With actors in the market showing a reduced trust in fiat money and traditional banking business, the emergence of alternative commodities and businesses could represent a way forward and the start of the emergence of a new financial system.  

The explosive potential of inflation rates at the beginning of 2022 and the slow realisation of the potential societal fallout is pushing institutions to rethink the principles of monetary union and speed up its completion. The existing endemic crisis in growth rates and inflation in the Euro Area monetary and banking system has created new dynamics affecting the financial and banking system across Europe.  

FEU Issue 2 Inflation Rising

This issue of the Future Europe Journal attempts to add content to the long-standing discussion about the necessary changes in the organisation of the monetary and banking union. Questions about the independence of the ECB during the pandemic vis-à-vis monetary strategy and a comparative analysis of bailout policies may give rise to suggestions for new rules to secure fiscal sustainability in the European Monetary Union. All these topics are brought together by our guest editor, Juan Castañeda, in order to focus the discussion that liberals and democrats have to engage in. 

But, ironically, this may in fact provide a way out of the uncertainty characterising EU monetary and financial integration: the experience of the adverse shock after the war in Ukraine might force the monetary institutions to provide the system with resilient and responsive features, at least in the short term.  

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