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Euro Area Economics: Greenflation?

Author(s): Jacob Nell, Joao Almeida, Markus Guetschow

Date published: Mar 2020

SUERF Policy Note, Issue No 138
by Jacob Nell, Joao Almeida and Markus Guetschow
Morgan Stanley


JEL-codes: E52, E62, E63, Q58.
Keywords: Monetary policy, fiscal policy, coordination of monetary and fiscal policy, climate change, green new deal, contingent liabilities, green bonds, fiscal rules, German fiscal policy.

Could green stimulus drive reflation? We think looser fiscal rules or conventional ECB action to reflate Europe are less likely, but see a potential 40bp of upside from a greener Germany and the Green New Deal.

Conventional fiscal stimulus or action led by a green ECB seem unlikely… In the euro area – although we see some upside risks – our base case has modest growth, inflation below target and the ECB on hold over our forecast horizon. With the ECB having limited scope to add further monetary stimulus, some have looked to fiscal stimulus to reflate Europe. But this appears challenging: many euro area countries do not have the ability in the current fiscal framework to add fiscal stimulus, agreement on meaningful euro-level fiscal capacity still seems far off, and the surplus countries with headroom, principally Germany, while they are financing some modest incremental easing (together amounting to ~0.4pp of euro area GDP) look unwilling to add substantial fiscal stimulus.

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SUERF Policy Note, Issue No 138SUERF Policy Note, Issue No 138

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