Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Growing out of inflation: a new supply-side policy

Philippa Sigl-Glöckner and Enzo Weber 30th June 2022

The obvious response to inflation is to rein in demand via monetary policy—except supply, not demand, is the problem.

inflation,investment,supply
Genuinely in demand: a massive scale-up of renewable energy (Valmedia/shutterstock.com)

Inflation is back. The last time prices increased by 8 per cent per annum was in the early 1980s.

A decisive catalyst has been Vladimir Putin’s war against Ukraine, causing energy prices to soar to unimagined heights. A phenomenon long of little relevance prevails—scarcity. And not only scarcity of energy but also of various raw materials and intermediate products, as well as skilled workers.

The conventional response to inflation and shortages is well known: the central bank raises interest rates, companies and households borrow less and buy less, so demand matches supply again. This price mechanism does not however fit Europe today: elevated prices are not the result of excessive consumption but of uncertain energy and gas supplies, disrupted international supply chains and overdue investments in green technology.

Shrinking demand to fit restricted supply would be painful—and unnecessary. With the right strategy, it is possible to grow out of the current situation.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Essential role

Key to this is the market. Yet only the state can get the market going. It plays an essential role—enabling investment by setting the rules of the game (such as a price for carbon), planning large-scale infrastructure (such as the energy system) and subsidising otherwise not-yet-profitable projects (such as the ecologically-driven).

Accomplishing the green transition in the time required by climate goals—years, not decades—is a monumental task. Just consider the investments in electricity grids, infrastructure for hydrogen and transport, industrial plant and buildings which have to go hand in hand with the massive scale-up in renewable energy. Realising those will not be possible in the time left without a co-ordinating actor.

Hence, fighting inflation effectively today requires more than a monetary-policy response. Equally, simply focusing on the demand side to counter the recession won’t do the trick. A new supply-side policy is required, under which the state pulls out all the stops to enable necessary investments, set positive incentives, expand potential and so slow price growth.

Skill shortage   

One such ‘stop’ is shortage of skilled labour. Without workers, any effort to accelerate the transformation will only exacerbate bottlenecks. A well-developed care and nursing infrastructure is key: it enables women to pursue a full-time career and allows for improved career development. Abolishing incentives to remain in marginal or part-time jobs, for instance through the tax code, would work in the same direction.

Migration is becoming increasingly important to expand workforces. Yet migrants suffered most from the Covid-19 crisis across Europe and integration must be improved to make the best use of their potential. Before the long-term unemployment caused by that crisis becomes permanent, wage subsidies and further training incentives could help those affected get back on their feet today.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Finally, publicly-supported re- and upskilling would enable people mid-career to help shape the transformation, instead of being left in its wake. For such an educational policy to develop individuals’ strengths rather than just correct deficits, it must be proactive and continuous.

Self-defeating rules

An overly successful labour-market policy would however be self-defeating under the current fiscal rules set by the Stability and Growth Pact: if the economy exceeds potential, the government has to start saving money to cool it down. Today, the labour market is estimated to have reached its potential when people work roughly as much as in the past.

That may yield counter-intuitive results: the Spanish economy, for instance, is estimated to exceed its potential when unemployment falls below 12 per cent. The method for estimating potential output under the pact should therefore be adjusted, so that public investment can be supportive of labour-market and climate policy.

Public investment which effectively supports an expansion of potential requires long-term planning. If contractors have no idea what orders will look like in two years, they will be reluctant to invest in new machinery and expand their workforce. Thus, increases in government spending at short notice will only lead to higher prices. A new supply-side policy requires predictable investment, not stop-go.

The same applies to the regulatory framework. Chemical companies, for example, invest with horizons of ten years or more. An annually fluctuating carbon price or even unclear carbon-pricing mechanism makes it difficult for companies to present a convincing business case to their investors.

Given such uncertainty, it can often be more attractive to return funds to investors rather than to invest. And that seems to be happening across industries: record dividends are expected this year. For the market to play to its strengths and for companies to invest, a predictable set of rules is needed.

Industrial policy

A new supply-side policy inevitably goes hand in hand with specifying an industrial policy. This should be designed and delivered through a transparent process, which defines societal objectives and time horizons, evaluates results systematically and identifies where adjustments are necessary. This should help deal with issues of protectionism, bad planning and persistence.

The European Semester or the process for drawing up National Recovery and Resilience Plans could be a model, especially since key questions of industrial policy can only be answered in the European context: how to create new green value chains cost-effectively and how to combine the potential of globally integrated markets with greater diversification and resilience.

Answering these questions and delivering a coherent supply-side policy is not a trivial exercise. To meet the new challenges, administrations will require additional analytical capacities, as well as mechanisms for cross-departmental co-ordination and implementation of common goals.

Today, the question is not whether the state engages in strategic economic development but rationally how. The litmus test for a new supply-side policy—the rapid switch to renewable energies—is already in full swing.

Philippa Sigl-Glöckner

Philippa Sigl-Glöckner runs the think tank Dezernat Zukunft, which focuses on monetary, financial and economic policy. She previously worked for the German Ministry of Finance and the World Bank.

Enzo Weber

Enzo Weber is head of research in forecasts and macroeconomic analyses at the Institute for Employment Research (IAB). He is also professor of empirical economics at Regensburg University.

Home ・ Economy ・ Growing out of inflation: a new supply-side policy

Most Popular Posts

Ukraine,workers' rights,laws,labour,protection,liberalisation,zero hours Ukraine to pass laws wrecking workers’ rightsThomas Rowley and Serhiy Guz
airport chaos,chaos at airports,queues, security, key workers,essential workers Airport chaos: security guards and cleaners still keyMark Bergfeld
China,Ukraine China to the rescue?Branko Milanovic
Boris Johnson, Brexit, Conservative,conservatism Boris Johnson: blustering onPaul Mason
deglobalisation,deglobalization,Davos Getting deglobalisation rightJoseph Stiglitz

Most Recent Posts

labour law,ukraine,trade unions,social dialogue,ILO,International Labour Organization Ukraine could abandon key labour principleThomas Rowley and Serhiy Guz
cars,vehicles,transport,industry,jobs,skills,Europe,retraining Vehicles and just transition—turning the wheelSarah Mewes and Gloria Koepke
hybrid working,working from home,new normal Blurring of boundaries in work’s ‘new normal’Rolf Schmucker
ECB,European Central Bank,Draghi,whatever it takes,euro ‘Whatever it takes’, ten years onLászló Andor and David Rinaldi
pandemic preparedness,pandemic response,financial intermediary fund,FIF,Covid-19 Effective pandemic response must be truly globalMariana Mazzucato and Jayati Ghosh

Other Social Europe Publications

National recovery and resilience plans
The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020

Eurofound advertisement

Fifth round of the Living, working and Covid-19 e-survey: Living in a new era of uncertainty

The fifth round of Eurofound's e-survey, sampled between March 25th and May 2nd 2022, sheds light on the social and economic situation of people across Europe two years after Covid-19 was first detected on the European continent. It also explores the reality of living in a new era of uncertainty caused by the war in Ukraine, inflation and rising energy prices. The e-survey reveals the heavy toll of the pandemic, with respondents reporting lower trust in institutions than at the onset, poorer mental wellbeing, a rise in unmet healthcare need and an increase in households experiencing energy poverty.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

Discover the summer issue of the Progressive Post!

The summer issue of the Progressive Post magazine from FEPS is out! It offers compelling analysis on: the energy-crisis challenge, Ukraine war, western Balkans, enlargement, housing crisis, rural areas, minimum wage and much more!

Almost five months into the war, and against the backdrop of soaring energy prices, rising inflation, a changing international order, rampant disinformation, the Ukrainian refugee emergency and all the other consequences triggered by the Russian war against Ukraine, the EU finds itself at a historic turning point. It must choose between sticking together, taking bold decisions, and acting accordingly—or, on the other side, allowing indecisiveness and divisions to gain the upper hand.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Workers on the route

Discover the new issue of HesaMag, the health and safety magazine with a European view (aussi disponible en français), published twice a year by the ETUI, and take your seat for an exclusive journey through the day-to-day reality of transport workers across Europe, from Romanian drivers to Dutch dockers and French female flight attendants, just to name a few.


MORE INFORMATION HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube