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14th Aug 2022

Rising prices expose lack of coherent EU response

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The increasingly sharp debate over the rising cost of living exploded in the European Parliament on Tuesday (5 July), with lawmakers from all stripes, liberal, left, green and conservative, calling on the EU to act.

"People are struggling to make ends meet, and we need action now," Agnes Jongerius, a lawmaker for the Socialists and Democrats, said. "I am urging the commission and the council to take the lead."

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Suggestions to tackle the outfall from inflation, which hit 8.6 percent in June, ranged from instituting a minimum wage, or capping the price of energy, to insulating homes and taxing windfall earnings from some electricity companies who have profited from turbulent prices.

On Tuesday, the EU Commission proposed using the remaining pandemic funds—some €200bn in unused loans—to speed up investments in renewables and energy efficiency measures like the isolation of homes.

This could effectively lower households' electricity and gas bills in the medium term but will not help the poorest deal with immediate financial troubles.

In normal circumstances, the institution in Europe tasked with maintaining stable prices is the European Central Bank.

Augustin Carsten, director of the Bank for International Settlements (BIS), the Basel-based supervisor of central banks, called on central banks to do everything in their power to stem inflation as soon as possible because rising prices were at risk of becoming "entrenched."

Most recent inflation can be traced back to surging energy costs and higher food prices, but a comprehensive BIS-report detailed how price rises are starting to spread across the economy.

But the ECB is limited in what it can achieve.

Its main tool to battle inflation is higher interest rates. Increasing the cost of borrowing will dampen economic activity and lower demand, eventually pushing inflation down.

But this comes at the cost of lower wages and unemployment, which will worsen the economic situation for the households and businesses lawmakers want the EU to protect.

"The ECB is entering this battle against inflation with one hand tied behind its back. A decade after the Euro crisis, our economic and monetary union is still deeply incomplete," liberal lawmaker Luis Garicano said, calling instead for joint European debt and a new pandemic-type European borrowing instrument.

"They do not have any long-term solution. This is a non-strategy of temporary fixes which is going to run out of road very soon," Garicano said.

A new meeting of heads of government and heads of state is now planned in October to address the issue of rising prices.

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