'Free money' is not a prerequisite for inefficient policies

Switch to scenarios

Jacobs reasons that it is hard to estimate the effect of the war in Ukraine on growth rates and inflation, the same holds for a possible bankruptcy of the Russian state. Even before the war in Ukraine, there were plenty of developments that were – and still are – hard to put a number on. Therefore, the Dutch Central Planning Agency and the Dutch Central Bank are currently working with scenarios, and not with predictions.

Dutch Central Bank’s instruments

The Dutch Central Bank bases its monetary policy on wage development and expected inflation. Since both are not rising, the Professor argues that we do not have to fear yet for stagflation. When expected inflation does start to rise, he speculates that the Central Bank will be precarious when it comes to raising the interest rate, since a rise in interest rate may exacerbate the negative economic effects of the war in Ukraine. Finally, with a big part of the inflation coming from outside our economy, the Dutch Central Bank’s possibilities to tackle inflation are limited. If you look at the current inflation of 7%, over 4 percentage points can be attributed to rising energy prices.

Reflex to the government

This rise in inflation has led to citizens demanding compensation from the government. The Professor argues that a government's intervention to this higher inflation is justifiable. However, he disapproves of the way how the government intervenes.

By reducing the excise duties on fuel and VAT on gas and electricity, the Dutch government is squandering public money, because the government is compensating everyone instead of only the disproportionally affected groups in society. The government is therefore shifting the bill of this compensation scheme to future generations

'Free money is not a prerequisite for inefficient policies. After all, money is never free, you have to be able to pay it back again.'

European Union’s Budgetary rules

If the war in Ukraine continues, the Professor thinks that we should not be too strict on our budgetary rules. Again, this may exacerbate the negative effects of the war in Ukraine. From a long-run perspective, the Professor reasons that the European Union’s budgetary rules should be adjusted to allow for public investments that are socially rewardable. Such as adjusted financing rules for climate investments. His biggest fear, is that governments will spend public money inefficiently under the defence that ‘money is free’. Free money is not a prerequisite for inefficient policies. After all, money is never free, you have to be able to pay it back again.