The government needs to stop adding fuel to the fire. So says economics professor Casper de Vries of the Erasmus University of Rotterdam. According to the professor, stimulus policies (such as those to support businesses) go against monetary policy. ‘It is important for the government to maintain itself. And then the tide will turn and those wage increases will no longer be necessary.’
The increases in inflation and interest rates that are happening now are nothing new – the Netherlands was in a similar economic situation in the late 1970s. Researchers from the Scientific Council for Government Policy Arthur van Riel and Casper de Vries wrote about it in the economist journal ESB.
Chords
De Vries sees important similarities between the current situation and the crisis of the 1970s: a sharp rise in energy prices combined with rising inflation. An important difference, on the other hand, is that there was also a high unemployment rate back then, and the labor market is now very tight, largely due to an aging population.
‘The generation is global’
De Vries doubts this is bad news. Unemployment soared in the 1970s because wage costs rose so rapidly and companies looked to invest in automation. However, according to De Vries, the ‘jump’ between wages and inflation shouldn’t last long: ‘Then perhaps we should start to worry. But yeah, aging is everywhere.’
‘It’s important that the government sticks to it’
Stop stimulating
What the government should do, according to De Vries, is stop stimulating and compensate. Of course, this comes with an annoying price tag in the form of failing companies and failing families. But, says the professor, ‘the government needs to stop adding fuel to the fire. It is important that the government stands firm. And then the tide will turn and those wage increases will no longer be necessary.’ Deferring the pain isn’t an option, says De Vries, as this will only make the problem worse.
Too late
Incidentally, the inflation is not solely the fault of the Dutch government. European central banks, unlike their American counterparts, have been slow to use the interest rate weapon to fight inflation. Europe has been buying government bonds for some time, partly to protect southern countries from the poverty trap. And that prevented the ECB from raising interest rates, which should have happened much sooner. “They finally did it only in the spring of last year and it was too late.”
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
