Francesco Saraceno: International cooperation is required to reduce profit shifting and tax evasion.

The surge of inflation since 2021 has become a major test for macroeconomic policies. Do you believe the EU’s policy response has been adequate so far?

No. The burden of fighting inflation has been left to the ECB, as if inflation were the result of an overheating economy. While acknowledging that inflation was structural and due to sectoral mismatches, commentators and eventually ECB staffers repeatedly stated that monetary policy should turn brutally restrictive to anchor expectations and avoid a wage-price spiral.  A much better response would have been using the many tools available to governments (from temporary and targeted price controls, to windfall profit taxes to targeted investment to ease bottlenecks) to address an inflation that was multidimensional.

According to Eurostat, a growing part of Eurozone households continue to feel poorer than before the pandemic. How do you assess this feeling? 

Inflation hurts the poor, this is well known. All the more in the recent inflation episode, when wages lost ground to prices and are only now, very slowly, catching up. Less known is that monetary restriction hurts the poor as well, as a slowing economy penalizes disproportionately low-wage earners.

Profit margins of energy companies have increased strongly during the last couple of years. However, there was no agreement at EU level about whether we should do something about them. Where is this heading to?

Profit margins have been constant in most of the economy, as firms could shift the burden of inflation on workers and families.  In some sectors, with more rigid demand or with the appearance of temporary monopolies, they were even capable of increasing them. This is not greed(flation), it is what firms are supposed to do. What has been lacking is an intervention of public authorities to correct this unfair and inefficient (excessive inequality is not only unjust; it is also bad for growth) market outcome. Taxing windfall profits is easier said than done, being difficult to determine what is “normal” profit beyond which the tax should be imposed. But this is no justification for not even trying. Especially because wages (and low wages within labor) have been losing ground for decades. The issue of redistribution should be on top of the list for policy makers

Working hours are increased, wages are stagnated, price hikes continue. What does it take to reverse this pattern? 

Redistribution should be at the center of the agenda (see above), but in a globalized world, where capital and skilled labor are extremely mobile, it is hard to implement it in an individual country. Therefore all the efforts should be geared toward enhancing international cooperation to reduce tax elusion. The OECD BEPS agreement has been (rightly) criticized for having too many loopholes. But even the more critical NGOs recognize that putting it in place is a crucial first step. Now that the principle of cooperation to ensure fair taxation and to reduce fiscal dumping has been set, all efforts should be aimed at closing the loopholes and reducing the amount of profits that escape the agreement.

Is the discussion to increase the EU’s own fiscal resources going to lead to some policy reforms? 

It is hard to say. The political climate has profoundly changed since the creation of NGEU and the collective recognition that solidarity and a common response to shock, if properly framed, is in the interest of even the richest countries. Today the discussion on fiscal rules looks backward, the creation of a central fiscal capacity is not even remotely in the agenda, and in this context it is likely that no major advances will be made in what concerns increasing the capacity of the EU to raise resources

Should the Stability and Growth pact be revised? Is it outdated? 

The SGP is procyclical, biased against public investment, baroque, impossible to enforce. In a word, non-credible. This is an assessment that is today shared even by the Commission.  The consultation process that had begun in February 2020 (before the pandemics) had yielded a document by the Commission, in November 2022, that while not perfect constituted a substantial improvement over the existing SGP. Backlash from some countries (most notably Germany) has progressively reduced the innovative aspect of the proposal, and the actual legislative proposal tabled in April 2023 had reintroduced yearly targets and a strong focus on debt reduction. That is deemed still too lenient by the German Finance minister, and it is likely that we’ll land on a compromise that will strongly de facto be just an updated version of the current rule. The new rule will most likely not create the fiscal space that is necessary to carry on tasks such as the ecological transition, public investment in public goods, and industrial policy. A simple golden rule scrapping investment from the 3% limit could have been significantly more effective. 

*Francesco Saraceno is an economist and Deputy Department Director at OFCE – Sciences Po in Paris, France.