An Εurozone/EU member-country’s economic policy can use inflation as an opportunity to achieve two goals: First, to increase the competitiveness of the economy and therefore its employment and growth rate. Second, to reduce the Public Debt-to-GDP ratio. Combining the above, with the imposed need to relieve as much as possible the citizens, especially the weaker social strata from a drastic reduction of their standard of living. The above may seem paradoxical at first glance, but it is not.
Inflation could be seen as a deterioration in the external trade conditions of the Member State’s economy under consideration, in the sense that it’s obliged to pay more abroad to buy the same goods or alternatively pay the same for to buy fewer goods. All this happens if we have an inflation, in the specific economy under consideration, which is imported. But this is one aspect of the phenomenon, there is another aspect of the phenomenon which is more important in terms of economic policy opportunities. In other words, the deterioration of trade conditions and imported inflation operate in practice as it did in the devaluation of the national currency and before the adoption of the common currency of the euro.
We know that monetary devaluation is a relatively painful, but at the same time useful and often necessary act in an economy that has its own national currency. It offers the opportunity to make this country’s economy more competitive, at least in the short term, and to balance the foreign trade balance by making imports more expensive and its exports cheaper, but also more competitive. In this sense, the devaluation of the national currency is a way out of a security situation in which a country that has lost its national currency and has now adopted the euro has lost it.
In the specific case we are considering, in the case of imported inflation, in an economy that is a member of the euro area, there are possibilities for this imported inflation to function as a form of monetary devaluation which will increase the competitiveness and the product of the economy in question. leading to a reduction in unemployment and providing time for the implementation of the required structural and other changes to make this economy even more competitive.
A necessary condition for this is that domestic inflation should not be added to the imported inflation or because this is to some extent unavoidable, it is a necessary condition that inflation in the value added of products and services produced in the euro area Member State concerned is less than the imported and mainly lower than the average inflation of the euro area-of the common monetary union. For this to happen, however, we must avoid creating the well-known inflation-cost-price spiral. By avoiding this, we will allow all sectors of the domestic economy that target the international market to gain a competitive advantage, attract more investment and through them create new jobs.
If the economy of the specific member country that we are examining returns to a satisfactory growth rate of its nominal GDP, which will be higher than the service rate of its public debt, it will have beneficial effects on the ratio of Public debt to GDP.
Any attempt to boost citizens’ incomes to offset imported inflation is futile, as the process of the inflation spiral is created, which ultimately only succeeds in destroying the productive economy. In addition, the most important policy of maintaining a stable income for working citizens is to secure their work. While for those who do not have a job in the specific economy under consideration is the provision of real income that comes from work. This can only be allowed by the proper handling of the monetary devaluation that entails the existence of imported international inflation.
In economics, however, there are no magic solutions. There is a partial relief of citizens from the pressures of inflation which threatens to drastically reduce their standard of living leading the financially weaker even to poverty. To some extent this can be achieved by transferring part of the current burden to the future in the form of a budget deficit in the annual state budget.
This method, which in fact is fully compatible with monetary devaluation, is the so-called “fiscal devaluation”. The fiscal devaluation concerns the reduction of VAT on basic consumer goods and other taxes on energy. Something that will certainly have short-term effects on the budget.
However, before the implementation of this economic policy of “fiscal devaluation”, it is a social necessity to cut all unnecessary expenditures in the annual state budget of the general government of the specific member country.
The policy of fiscal devaluation, in this case, will cause the smallest possible budget deficit in the state budget. Then, which fiscal problem that will arise in the future will tend to be corrected in a short time with the increase in taxable material that will come from the increase in nominal GDP.
