Band 19, Heft 1

Significant shifts in the composition of consumer spending as a result of the COVID-19 crisis can complicate the interpretation of official inflation data, which are calculated by the Central Bureau of Statistics (CBS) based on a fixed basket of goods. We focus on Israel as a country that experienced three lockdowns, additional restrictions that significantly changed consumer behavior, and a successful vaccination campaign that has led to the lifting of most of these restrictions. We use credit card spending data to construct a consumption basket of goods representing the composition of household consumption during the COVID-19 period. We use this synthetic COVID-19 basket to calculate the adjusted inflation rate that should prevail during the pandemic period. We find that the differences between COVID-19-adjusted and CBS (unadjusted) inflation measures are transitory. Only the contribution of certain goods and services, particularly housing and transportation, to inflation changed significantly, especially during the first and second lockdowns. Although lockdowns and restrictions in developed countries created a significant bias in inflation weighting, the inflation bias remained unexpectedly small and transitory during the COVID-19 period in Israel.

The long-awaited Review of Monetary Policy Strategy of the European Central Bank has been released. According to the Governing Council, “price stability is best maintained by aiming for 2% inflation over the medium term”, with “symmetric commitment” to this target. “Symmetry means that the Governing Council considers negative and positive deviations from this target as equally undesirable”. This orientation seems contrarian to the view, expressed by some dissenting scholars, that 2% should be set as a ceiling, and that persistent inflation below 2% observed over the last decade was to be adopted as the “new normal”. The aim of this paper is not to examine and assess the new policy strategy of the ECB per se , but to warn about pitfalls in detecting undesirable (expectation-driven) deviations of inflation from target versus permanent changes in the ouput-inflation relationship.

The paper assesses whether Special Drawing Rights (SDR), namely international reserve assets and claims on freely useable currencies of its members created and allocated by the International Monetary Fund (IMF), are inflationary. This question has been already raised in the economic literature, but the paper does so by specifically analyzing its most recent and highest allocation in August 2021 on the one hand and its use by member countries to combat the COVID-19 crisis on the other. Moreover, the article revamps the logical-conceptual debate on the essence of money as issued by banks and what the IMF (which is not a bank) is monetarily speaking capable of.

The COVID-19 pandemic has highlighted the vulnerability of international supply chains and the dependency of the economy of the European Union (EU) on goods from non-EU countries. The scarcity of microchips that has persisted since the COVID lockdowns has laid bare the dependency of the EU on overseas producers of this essential high-tech product. The Russian attack on Ukraine has magnified this issue due to the close economic ties and geographic proximity between the EU and both countries. While ensuring production capability in a crisis is primarily the task of enterprises themselves, a supply disruption can also have tremendous consequences for an entire economy and therefore justify state interventions. The EU has reacted to these circumstances with its concept of Open Strategic Autonomy and the initiative for an EU Chips Act. This concept of autonomy should entail the incorporation of the benefits of an open economy and the aspiration of the EU to co-determine the global framework in a favourable way. But it also calls for more market interventions. However, these require an economic and political justification and close monitoring. The measures should be discussed with international partners in order to prevent retaliation measures or international subsidy races.

We believe that fiscal rules help to consolidate budgets in the post-Corona period. Fiscal rules reduce fiscal deficits and debt-to-GDP ratios, promote economic growth, mitigate room for fiscal manipulation and encourage politicians to prioritize individual policies.

The COVID 19 pandemic resulted in a major increase in fiscal imbalances and public spending. Spending and debt ratios reached new historic records in many advanced countries. To some observers this means heightened concerns about sustainability, while others argue for even more public spending financed with more “interest-free” debt. The facts, however, show that more public spending would be a risky strategy given very high public debt ratios. Moreover, there is much room for expenditure reductions and efficiency gains, that would allow to attain more sustainable public finances, boost real economic growth, enhance resilience against crises and pay for future challenges such as population aging, climate change and geopolitics.

Fiscal rules such as the European Stability and Growth Pact and the German debt brake have been suspended in the Covid19-pandemic in order to provide emergency measures and to overcome the crisis. Now, the controversial debate is back again: When should governments return to fiscal rules? Should they return to fiscal rules, at all? This article argues that it is not so much a question whether governments should return to fiscal rules at all, but to which kind of rules they should return. Following the deficit bias argument and the need for fiscal policy coordination in a monetary union some kind of limitation for government debt and some kind of fiscal rules may easily be justified. However, that does not mean that governments should return exactly to the previously existing rules, because these are economically flawed. Recently the argument for reform has become even stronger due to new empirical evidence about the macroeconomic effectivity of fiscal policy, the experience of the dysfunctionality of the existing rules during the Euro crisis and the fact that the cost of public debt has been reduced dramatically because of persistently low if not negative nominal interest rates.

It is striking that economists in particular firmly believe in the benefits of rule-binding, even though this belief runs counter to the standard assumption of economic theory that we humans are self-interested and therefore extremely resourceful when it comes to circumventing inconvenient government regulations, e.g. taxes. In Public Choice Theory, politicians are even assumed to have nothing but self-interest as their guiding motive for action. Why then, in this world of thought, should ultra-self-interested politicians of all people adhere to simple rules such as the debt brake instead of bypass them, if – as is also assumed in this model world all that matters to them is short-term electoral success, for which government debt can be helpful.

The purpose of the “debt brake” laid down in the German constitution is to limit public debt. However, public law mechanisms are unsuited in practice to prevent excessive government deficits. This article argues that, contrary to the prevailing opinion, the effects of the debt brake are not limited to public law. Rather, infringements of the debt brake may result in civil law consequences. It is argued that state loans or bonds violating the debt brake may be null and void and the parties in this case must make restitution under unjust enrichment law. Therefore, (potential) creditors have an interest to monitor government borrowing. A form of "private enforcement" of the debt brake is, therefore, possible.

This short paper highlights the role of the national fiscal rule, the so-called debt brake, for limiting Germany’s general government deficit. It argues that Germany was only able to comply with the European deficit limit, after this rule has been introduced in 2011. However, due to the creation of large special budgets, the debt brake no longer ensures compliance with the European fiscal rules.