Macron calls for a revolutionary change in the functioning of the European Central Bank. The citizens of the entire eurozone would “stack” the debt of France and other highly indebted countries

French President Emmanuel Macron is calling for a revolutionary change in the functioning of the European Central Bank. It should be more tolerant of inflation as a result. It would relieve France of the cost of debt. However, the citizens of the eurozone would lose more of the purchasing power of their savings and income.

Macron announced his radical proposal on Thursday during a speech at the Sorbonne in Paris. According to him, the European Central Bank should have at least a triple mandate. Indeed, it should target not only inflation, but also economic growth, while at the same time it should take into account decarbonization efforts.

If the ECB pursues three goals at the same time, it will be a major breakthrough that has no parallels in the world or in the history of the ECB to date. At present, the central goal of central banks in the economically developed world is usually the achievement of price stability, by targeting only and only inflation. Even if, for example, the American central bank – the Fed – fulfills the so-called dual mandate. In addition to price stability, its goal is also full – i.e. maximum sustainable – employment.

However, with the proposal, Macron is clearly following the economic interest of France or other highly indebted eurozone states. The costs of servicing the debt of these countries are expected to increase quite dramatically in the coming years. For example, in France, according to this year’s government forecast, debt servicing costs will rise from less than 40 billion euros last year to more than 70 billion euros in 2027. The key reason for this increase is, in addition to recurring public finance deficits, the ECB’s current fight against inflation, which has caused significant growth interest rates across the eurozone, including on the French government’s debt.

The rating agency Fitch Ratings warned on Friday that France will probably not be able to reduce the deficit of its public finances below three percent of GDP until at least 2027. Thus, for at least the next few years, France is supposed to violate the basic rule on which the Eurozone stands, that is, the rule of a deficit of no more than three percent, as already established in the Growth and Stability Pact in the 1990s. Without him, Germany would probably never have agreed to the introduction of the euro. The Maastricht criteria for accepting the euro also correspond with it.

However, if the ECB were to include decarbonization efforts in its mandate, as Macron requests, it would tolerate higher inflation as a result. It can be argued that decarbonisation efforts, for example in the form of switching to more expensive green energy or expanding the range of application of emission allowances, are costly and therefore naturally inflationary. Therefore, if the ECB could justify higher inflation precisely with decarbonization, and it had this as its next mandate, it would not fight against such increased inflation – it would tolerate it. As a result, even with higher inflation than the medium-term two percent rate (the ECB’s current target), it could leave its interest rates unchanged, or raise them more slowly and mildly than under the current single mandate.

Macron’s proposal, which will almost certainly encounter resistance from a more fiscally disciplined and inflation-averse Germany, would mean that the costs of servicing France’s debt will grow more slowly, but at the price that the savings and incomes of the citizens of the eurozone will be devalued by inflation faster and more significantly than before. As a result, people in the Eurozone would actually “beg” to ensure that France does not get into a dangerous debt spiral, which in an extreme case ends in insolvency.

This would be such a fundamental change in the functioning of the economy of the entire eurozone that the argument of those who are now calling for a referendum on the possible adoption of the euro in the Czech Republic would gain more validity, justifying this call by the fact that the eurozone since 2004, when By joining the EU, the Czech Republic committed itself to joining, and has undergone significant changes. Now, if Macron’s proposal were to pass, it would be a massive change.

Lukáš Kovanda, Ph.D.

Chief Economist Trinity Bank