Eurozone crisis: Former ECB chief economists issue damning warning over EU debt 'trap'
EUROZONE leaders have been issued a stern warning by former European Central Bank's (ECB) economists over what they call a "debt trap" set out by the pandemic.
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The warning comes over the possibility of a period of high inflation caused by the ECB's unwillingness to raise interest rates as national debts surge. Peter Praet, the ECB’s top economist from 2011 to 2019 told Politico the financial measures he helped introduce during his time at the top EU bank could make a worrying comeback.
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Member states have agreed on an unprecedented borrowing package to overcome the economic effects of the coronavirus pandemic.
As inflation picks up thanks to the various stimulus packages issued by governments across the world and an increase in spending among consumers, the ECB is under pressure to rain interest rates which in turn could damage member states with the highest debts.
The mounting debt could be lethal for some countries like Italy and Greece, where the debt-to-GDP ratio has topped respectively 150 percent and over 200 percent.
The top bank has promised to keep interest rates around zero and massive bond buys to help member states borrow as much as possible at low costs.
But skyrocketing debts may make it difficult for the central bank to focus on its mandate of ensuring price stability.
Juergen Stark, who served as the central bank’s chief economist 2006-2011, warned fiscal policy needs will trump monetary policy considerations if inflation hits.
He said: "The ECB will tolerate inflation if it comes.
"The collateral damage of tightening policy would be severe, and nobody wants to go there."
He added: “A reduction of purchases and tighter monetary policy would leave governments struggling, and over time might force some member states into insolvency.
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