Pnrr and monetary policy go in opposite directions? The economist Ferrero speaks

Why should the ECB continue to raise rates causing a technical recession now that Italy is growing faster than other countries in Europe? This is the question that many are asking right now, believing that the European central bank’s goal of controlling inflation should not be to the detriment of economic growth. This reasoning, however, clashes with any evidence of macroeconomic theory, which says exactly the opposite, you may like it or not. As explained to Il Foglio by the economist of the University of Oxford, Andrea Ferrero, Europe, in fact, is faced with a paradox: it is putting in place its “Marshall plan” (the Pnrr) which could in turn generate new inflation forcing monetary policy to become even more restrictive. A vicious circle. “So rates could stay high longer than expected,” Ferrero notes. The inflation risk linked to the Pnrr emerges little from the public debate but it is concrete. “It’s a matter of timing – says Ferrero – The Pnrr was conceived in 2020 to help Europe emerge from the pandemic, but afterwards, with the war in Ukraine and the energy shock, everything changed. Prices have risen uncontrollably and monetary tightening was needed to tame them which, in order to be effective, should not be confronted with a large and prolonged fiscal expenditure such as that envisaged by the European Plan”. Put simply, Christine Lagarde would gladly do without the Pnrr, even if for obvious reasons she cannot say so by simply inviting the member states and withdrawing the aid provided at the domestic level to face the expensive energy. According to Ferrero, who formerly worked at the Federal Reserve and has experience as an adviser to the Bank of England, the United States has already experienced this contradiction so much so that inflation has begun to gallop there earlier than in Europe following the huge aid package decided by the Trump administration and confirmed by that of Joe Biden. “Only there is a difference: in the United States, the fiscal stimulus, while massive, was of limited duration and when prices started to run, the Federal Reserve intervened in a timely manner and inflation was tamed in good time. part within a reasonable time. In Europe, on the other hand, the recovery and resilience plan, which has a much more complex structure, is starting to unfold its effects right now that the ECB is trying to bring inflation back under control”. In short, are Pnrr and monetary policy two forces that risk going in opposite directions and canceling each other out? “That’s what can happen.”