Inflation will damage the public coffers of eurozone countries, says ECB

FRANKFURT, Feb 13 (Reuters) – A study by the European Central Bank showed on Monday that rapid inflation in the euro zone will weigh on public finances over time, contradicting some opinions that states could benefit from a dilution debt and increased tax revenue.

According to the European Central Bank (ECB), in a period of more normal inflation and without automatic adjustment of expenditure, the debt ratio of the EU would decrease. But the energy crisis, the slowdown in growth that followed and the rigidity of spending rules mean that the budgetary situation of the States is negatively affected after one year.

“In subsequent years, however, spending pressures intensify and more than offset the benefits on the revenue side, causing the fiscal balance level to deteriorate by almost 0.5% of GDP in 2024,” he said. pointed out the ECB in an article in the Economic Bulletin.

While inflation normally boosts tax revenue, the increase in revenue from the energy shock is modest, weighing on corporate profitability, reducing overall growth and putting pressure on nominal government spending.

“Furthermore, the monetary policy response needed to prevent this inflationary shock from causing undue side effects translates into higher interest payments on public debt,” the ECB added.

The ECB has raised interest rates by 3 percentage points since July and markets are expecting at least another percentage point hike before rates top.

Around a third of government spending is also mostly linked to inflation, so strong price growth automatically forces governments to spend more, the ECB said.

The ECB added that excess government spending intended to limit the damaging effects of inflation was only temporary and would reverse, so inflation would simply spread over a longer period.

“The impact on growth (of discretionary spending) is only estimated to be positive in 2022, before turning slightly negative in 2023 and more strongly negative over the period 2024-25,” the ECB said.

(Reporting by Balazs Koranyi; Editing by Mark Potter, Spanish editing by José Muñoz in the Gdansk newsroom)