Spain, like many other countries in the developed world, has lived through a long decade of expansionary fiscal and monetary policies that have culminated in two strong inflationary shocks. First, a large supply shock after the reopening of the pandemic and a very strong increase in demand due to the pocketing of the savings accumulated in the health crisis. And, later, a rise in energy prices and supplies aggravated by the war in Ukraine.
All this has unleashed prices, whose general rate is close to two digits (9.8% in March). However, subjacent inflation, although high (3.4%) can be said to still be under control and, therefore, there is still time to stop this upward spiral in prices from becoming entrenched, but only if the measures are taken adequate and as soon as possible. That is at least what is believed by a group of expert economists gathered at a new meeting of the Future Forum, the economic research observatory organized by Cinco Días with the support of Grupo Santander, which analyzed possible solutions to the problem of inflation.
The first to expose the possible remedies to avoid, above all, the so-called second-round effects (contagion of the rise in the prices of supplies and raw materials to the final price and to wages) that can create an inflationary loop, was the director of Coyuntura Economic Director of Funcas, Raymond Torres, who proposed yesterday to act on three pillars: measures to de-index the economy; fiscal and monetary measures. As a result of these three courses of action, the rest of the participants in this forum made their own nuances or new contributions by way of ideas to contain the current inflationary shock.
The first of these routes, according to Torres, would consist of an income agreement but that could only materialize with two conditions. To begin with, this economist stressed that the accent should be placed on purchasing power but without linking wages to the CPI but rather to productivity or through other compensation in the form of professional retraining or training. And, secondly, he considered that this pact “will not be realistic” if the rise in the CPI is not paralyzed first, because otherwise, “very high agreements (for wage increases) could be reached that would harm the competitiveness of companies and of the economy”. For this reason, to stop this escalation, it would be necessary to act before on energy prices, he said.
This should be carried out through a “surgical fiscal policy” that includes “compensation to the sectors most affected by energy so that they remain safe in the market”; And, it would be important, added this economist, that the financing with European funds is linked to energy saving. Along these lines, he added that this surgical fiscal policy “must include investment in renewable policies.” To do this, it would be essential to link the gas price cap to that of the electricity forward markets, which already reflect investment in renewables. Hence the relationship between the fiscal pillar and the short-term containment of energy prices.
And the third course of action cited by this economist is that of monetary policy. At this point, Torres called for “a gradual adjustment of interest rates, but starting as soon as possible would be the most appropriate. Otherwise, it would force the ECB to make more aggressive adjustments, which would be more difficult for the economy to assume.
In this sense, Francisco Pérez, Professor Emeritus of Economic Analysis at the University of Valencia and Research Director of the IVIE pointed out that “Central Banks must make it clear that if it is necessary to adopt measures to control inflation in the medium and long term, there will be to take them.”
More critical was Fernando Fernández, Professor of Economics at IE University, who reproached: “We have been too optimistic in both fiscal and monetary policy. Therefore, now, the effects of the second round must be anticipated and not wait for them to occur”.
And that, for Férnandez, “cannot be controlled without a significant slowdown (of the economy), although I am not talking about a recession being necessary,” he explained. Specifically, he indicated that the ECB should make “significant rate hikes” and the governments restrictive fiscal policies. “We would have to be willing to sacrifice false growth today to avoid inflationary problems and a greater recession in the medium term,” said the IE University professor.
Regarding the rent agreement, these experts fully agreed on several issues. Mainly in that the agreed wage advances must be “totally linked to the productivity and competitiveness of the economy”, according to the professor of Economic Analysis at the University of Granada and director of Financial Studies at Funcas, Santiago Carbó.
Together with this coincident approach, the forum participants stressed the need for this pact to gather the greatest possible consensus and for it to be led by the Government, which should make it clear to economic agents (companies and workers) that a change has taken place and that everyone must assume part of the new burdens.
In this sense, Fernández introduced a fourth pillar of action that is closely related to the income agreement. It would be about “deindexing the entire economy.” With this he referred to the need to separate from the rise in the CPI or similar price levels issues such as the rise in pensions, the minimum interprofessional salary or the increase in the remuneration of public employees. Carbó and Francisco Pérez also fully agreed on this. The latter specified that “pensioners and civil servants have to be part of this income pact in which everyone throws their shoulders together.”
Although Alicia García Herrero, chief economist for Asia Pacific at Natixis, professor at the Hong Kong University of Science and Technology and senior researcher at the Bruegel think tank, went a bit further with her nuances to what was proposed for the income pact when considering that “an income policy is only carried out when the objective is understood (…) because it is worse to carry it out with the wrong objective than not to carry it out”. By this she meant that if the salary agreement in the end consisted of indexing remuneration to inflation, it would be better not to adopt any income policy.
In that case, “it would be easier simply to make a fiscal adjustment that ties down inflationary pressures and let the slowdown do the rest,” García Herrero concluded.
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