Macron’s speech + Piotr Buras inte • Table.Briefings

Dear reader,

It’s been five years since Emmanuel Macron’s famous Sorbonne speech, and now the French president has once again used the big EU stage to make his European policy ambitions clear. At the start of France’s EU Council Presidency, he spoke in favor of a sovereign Europe and a “common security order” in the European Parliament in Strasbourg. There is certainly momentum for ambitious EU reform these days, writes Eric Bonse. In the long run, this could even apply to the reform of the Stability Pact – even if Macron has left this topic out of the equation for the time being.

The danger of a Russian attack on Ukraine is greater than ever, says Piotr Buras in an interview with Till Hoppe. Against this backdrop, the head of the Warsaw office of the European Council on Foreign Relations is sharply critical of the German government, especially of Olaf Scholz. “Unlike Angela Merkel, he has lacked political leadership,” Buras said. The chancellor needs to assert himself, he said – even in his own party, where some have a “misconception of Brandt’s Ostpolitik”.

Since the negotiations on a new basis for bilateral relations failed, trouble has been brewing between Bern and Brussels. Swiss access to the EU’s single market is now frowned upon on the EU side as cherry-picking, with additional costs and red tape hanging over manufacturers and retailers in some areas. As Stephan Israel reports, today’s visit to Berlin by Swiss President and Foreign Minister Ignazio Cassis is therefore coupled with hopes of support from Germany. There is already a tailwind from the German industry.

Your
Sarah Schaefer

Macron’s speech: momentum for EU reform

By

Eric Bonse

In a programmatic speech, Emmanuel Macron pleaded for a confident and sovereign Europe. The EU must “build a common security order on our continent,” forge a new alliance with Africa and tackle long-delayed reforms, such as the Schengen area and energy policy, France’s president said on Wednesday in the European Parliament in Strasbourg. Macron explicitly acknowledged the controversial taxonomy, which considers nuclear power and gas sustainable power.

The head of state, who wants to run in the presidential election in April and score points with his EU track record, also reiterated his call for a “European digital model”. Shortly before the vote on the Digital Services Act (DSA) on Thursday, Macron spoke out in favor of fair competition. Facebook and others must be put in their place.

So is now the moment of the “European renaissance” and EU reform for which Macron has been longing for years? Can the French EU presidency provide the necessary impetus? The answer varies, depending on the party’s political perspective. Christian Democrats and Greens were left disappointed after Macron’s speech.

“Macron presented a lot of cloudy headlines today and little that was concrete,” criticized Markus Ferber (CSU), economic policy spokesman for the EPP Group in the EU Parliament. When things did get more concrete, the proposals “amounted to state interventionism and more bureaucracy,” Ferber complains.

The council presidency ‘got off on the wrong foot’

Rasmus Andresen, spokesman for the German Greens, was even more negative. The French Council Presidency had “got off on the wrong foot” – the taxonomy. Now, he said, there was a threat of a tough dispute over European energy policy. Macron also failed to make any concrete promises regarding the right of initiative for the parliament.

In contrast, the Social Democrats welcome Macron’s commitment to a “social Europe“. It would be “a step forward” to overcome the wage gap between men and women, to get more women on supervisory boards, and to push through better working conditions and a higher minimum wage, said Jens Geier, head of the SPD group.

Once you take off the party glasses, you can definitely see momentum for an ambitious EU reform. After all, not only France but also Germany is pursuing a pro-European agenda. The “traffic light” government in Berlin has even taken up controversial reforms such as the abolition of the veto in foreign policy.

Berlin and Paris are also on the same level when it comes to the current crisis between Russia and Ukraine. Like Macron, the German government is calling for the Normandy format to be revived and for the two conflict partners to sit down at the same table. Foreign Minister Annalena Baerbock even reiterated this in Moscow.

Not good prospects for reform of the Stability Pact

The new European security order envisaged by Macron is also likely to be met with an open ear in Berlin. Details will still have to be discussed. However, the close coordination between the Federal Chancellery and the Élysée Palace, which was already evident at Chancellor Olaf Scholz’s first EU summit in December, gives cause for optimism.

The prospects for reforming the Stability Pact are less promising – at least in the short term. At his first Ecofin Council in Brussels, Finance Minister Christian Lindner presented himself as a “friendly hawk” who would seek compromises. Yet, he ruled out an end to the “obsolete” debt rules, as demanded by France.

Macron did not mention the issue in his Strasbourg speech. The dispute is unlikely to be resolved under the French presidency. In the medium term, however, the chances are not bad, as “actual” fiscal hawks like the Netherlands have now also embarked on a reform course. Lindner is on the defensive.

How long the FDP leader can keep up his blockade will ultimately depend not on Macron, but on Scholz and the Green coalition partners. Because the fiscal rules are not just about debt, but also about investment – especially for an active climate policy. And there is strong momentum for that, across Europe.

Piotr Buras: ‘Olaf Scholz was invisible in this crisis’

Piotr Buras is Head of the Warsaw office of think tank ECFR.

Mr. Buras, the US, and Europe are threatening Russia with massive consequences should it invade Ukraine. Do you think this deterrence scenario is believable?

No, at least not from the European side. The Europeans have not done their homework, and Germany is partly to blame for this. The danger of a Russian attack on Ukraine and thus the destruction of the security order in Europe is greater than ever. But the EU has not even completed a sanctions package with which it could deter Moscow. Yet, economic punitive measures are the only means of pressure we have.

What responsibility does Germany bear for this? Are the Russians aware “about our determination,” as Chancellor Olaf Scholz said yesterday?

It was long overdue for Scholz to make a clearer statement, including the fact that he emphasized during the NATO Secretary-General’s visit on Tuesday that all options were still on the table – including Russia’s exclusion from SWIFT and a halt to Nord Stream 2. So far, the German government has not had a clear position, which was disastrous. The SPD gave a different message than the Greens and FDP.

To what extent is the new chancellor to blame for this erratic approach?

Olaf Scholz has been invisible in this crisis so far. Unlike Angela Merkel, he has lacked political leadership. From the perspective of the Central and Eastern European countries, this crisis is very serious, but the German Chancellor preferred to travel to Madrid at the beginning of the week. In the meantime, however, Scholz and Foreign Minister Baerbock seem to be pulling in the same direction.

Is Scholz’s party, the SPD, the problem?

Within the SPD, influential personalities such as Kevin Kuehnert do not support a hard line. The reason for this is a misconception of Brandt’s Ostpolitik, which was based not only on dialogue but also on deterrence. Now it remains to be seen whether Scholz is a strong chancellor who can also succeed in his party. In any case, there are still doubts whether the SPD will follow suit when things start to get tough in the conflict with Russia.

Is Berlin the major weak point in Europe’s response to Moscow, or just one of many?

I wouldn’t put all the blame on Berlin for the disaster of European policy in this crisis. But the German government must recognize that Germany has a special responsibility, owed to its economic weight and because of Nord Stream 2. So far, it has not lived up to this responsibility, but there are some rays of hope. These include Baerbock’s very clear message during her visits to Kiev and Moscow.

How strong is the Nord Stream 2 leverage anyway?

Some argue that we have no influence on Putin at all. But then we could simply forget about our foreign policy and European sovereignty. Then we could only hope Americans will solve our problem for us. In my opinion, we do have instruments in the form of economic sanctions and Nord Stream 2. These should not simply be taken off the table.

Is there a lack of strategic thinking here in Berlin?

Bluffing is part of diplomacy. No one can tell whether it is the truth when they say that Nord Stream 2 will be shut down in the event of an attack. Other things are true, but should not be spelled out publicly at this time. One of them is that Ukraine will not become a member of NATO. In Germany, some political leaders, especially in the SPD, are thinking the exact opposite. They warn against Kiev becoming a NATO member and do not want to touch Nord Stream 2 under any circumstances.

Germany is phasing out nuclear power and coal and will be relying even more on natural gas in the coming years to compensate for that. This will also increase dependence on Russia.

This is a special approach by Germany, which is rather unfortunate in the current geopolitical climate. However, increased dependence on Russian gas does not necessarily make Berlin susceptible to extortion – if the political will is there to prevent such attempts.

Berlin and Paris want to revive the Normandy format to defuse the conflict with Moscow. Can this succeed in the current situation?

I doubt it. If anything, the four-way talks can make some progress if some tensions have been eased first.

Conflict with Brussels: Swiss President seeks support in Berlin

In Switzerland, the government is called the Federal Council, and there the seven members alternate every year in the role of head of state. When Foreign Minister Ignazio Cassis visits Berlin today, he also comes as Federal President in personal union. This means that, in addition to Foreign Minister Annalena Baerbock, the Ticino native will also be able to meet Chancellor Olaf Scholz and, above all, Federal President Frank-Walter Steinmeier.

The change in Berlin first of all offers the chance for a fresh start. The conflict between Switzerland and the EU over a new legal basis for the complex bilateral relationship has recently spread to Berlin. EU Commission chief Ursula von der Leyen is said to have complained bitterly to then German Chancellor Angela Merkel about the affront after the Swiss government unilaterally declared an end to negotiations on a so-called framework agreement after eight years.

Swiss access is considered cherry picking

For Ignazio Cassis, it is more than just a courtesy visit. The foreign minister has already visited Vienna since taking office as president of the Confederation on January 1st and is now hoping for support in Berlin in the conflict with Brussels. However, since the unilateral breakdown of negotiations, the ball has been in Switzerland’s court there and answers are expected as to how the government in Bern intends to resolve the points of conflict arising from the failed framework agreement.

Switzerland enjoys sectoral access to the EU single market thanks to 120 bilateral agreements. A model that the EU explicitly did not offer the British. For Switzerland, too, tailored access was originally intended only as a transitional solution. This was in the expectation that Switzerland would one day join the EU after all, or at least the EEA.

The Swiss approach is now frowned upon in Brussels as cherry-picking. In addition, the administration of the predominantly static agreements has become increasingly complicated. The EU Commission and member states have therefore been demanding for years that Switzerland adopt new EU law “dynamically” in the future and accept the European Court of Justice as the final arbiter of disputes.

BDI calls for return to talks

Ignazio Cassis has received some argumentation help from the Federation of German Industries (BDI), which has published a position paper in time for the visit. It is necessary to resume constructive talks quickly after the failure of the framework agreement, demands BDI CEO Joachim Lang. In view of geopolitical tensions, a protracted conflict with Switzerland is “superfluous,” he said. Cooperation must be based on the three priorities of European strategic sovereignty, the Green Deal, and European competitiveness.

However, because of the blockade around the framework agreement, the slow erosion of the status quo now looms first. For example, the EU recently refused to update the agreement on technical barriers to trade (MRA) for the medical products sector. Also at risk is a key update for the machinery sector, due in 2023. “There is already considerable economic disruption in trade between the EU and Switzerland, especially of medical products and in the foreseeable future in mechanical engineering,” warns BDI chief executive Joachim Lang.

Horizon Europe point of contention

In concrete terms, manufacturers and retailers face additional costs and bureaucracy. Companies will have to appoint additional representatives and in some cases have their products certified twice. Without a framework agreement, it is also not possible to conclude an electricity agreement that is intended to ensure that Switzerland and its storage power plants are connected to the internal energy market. At present, Switzerland cannot participate in the so-called market coupling, and participation in the Terre market for balancing energy is also in limbo.

In its position paper, the BDI further criticizes Brussels for treating Switzerland like an ordinary third country in the EU’s Horizon Europe research program, unlike in the past, and for refusing full association. Switzerland’s participation in Horizon Europe is important for German companies and a thriving European innovation ecosystem, he said. Switzerland’s full association must be the goal, he said.

The BDI position paper is a tailwind for Ignazio Cassis in Berlin, but only up to a point: A stable partnership with Switzerland requires “an appropriate balance of rights and obligations,” warns CEO Joachim Lang. Fair competitive conditions continue to be on the agenda. The uniform interpretation of internal market law by the ECJ is also imperative. It is precisely in the conflict over rules for state aid or the binding dispute resolution mechanism that the talks between Bern and Brussels have recently failed. Stephan Israel

EU Commission considers shortening quarantine times

Against the backdrop of massively increasing numbers of infections with the Omikron variant, the EU Commission is preparing for a change of strategy in the fight against the COVID pandemic. The high number of people affected may necessitate a “more pragmatic approach” to dealing with those infected, said EU Health Commissioner Stella Kyriakides in an interview with Europe.Table and other European media outlets.

This could shorten quarantine times. In addition, he said, the commission is working with the European Medicines Agency (EMA) to look at adapting vaccines to Omikron. “All options are on the table, we are ready to act,” Kyriakides said. On Friday, EU health ministers and the Commission will meet in a special virtual session to discuss the next steps.

Kyriakides was cautious about a possible end to the pandemic and the transition to an endemic situation. “There have already been many twists and turns,” she said, “so I’m not going to make any predictions.” What is clear, she said, is that the EU will continue to rely on vaccination and boosters. “Vaccination has not failed,” the commissioner stressed. Currently, she said, 70 percent of the adult population in the EU is fully vaccinated and 40 percent is boosted. However, she said, this is still not enough to provide sufficient protection against COVID. The vaccination campaign must therefore continue. ebo

DSA Final Debate: New gold standard sought

The final debate on the European Parliament’s position on the Digital Services Act (DSA) was characterized by weighty words on the role of the European regulatory framework. A set of rules that – depending on the perspective – is intended to put a stop to the Internet giants, fraudsters and radicals on the Net, or even the Wild West. EP rapporteur Christel Schaldemose (S&D) spoke of a “gold standard of digital regulation” that, like the General Data Protection Regulation, should serve as a model internationally and be emulated.

The Danish Social Democrat placed particular emphasis on making it easier in future for users and consumers to contact service providers on the Net – whether in the case of illegal products or the obligation of providers to check possibly illegal content.

Commission Vice President Margarethe Vestager stressed that the DSA is “a way for democracy to show its power.” The signal, she said, is that “there is no area where democracy does not rule.” It was a “historic debate that will hopefully put an end to what has not unjustly been called a Wild West on the net, ” said EU Internal Market Commissioner Thierry Breton.

Another dispute over upload filters

Just that morning, Breton had circulated a joking video with a Western scene via Twitter, with which he referred to the DSA debate. SPD MEP Tiemo Wölken reminded the commissioner in plenary that it was the Commission and Council that had pushed for automated filters for content in copyright: “He couldn’t have done that if this House hadn’t brought in an exception for parody.”

Wölken accused the EPP of wanting to introduce upload filters for content. This refers to the obligation to automatically block similar content after it has been blocked (Amendment 515, submitted by many CDU/CSU MEPs, among others).

Moritz Körner (FDP/Renew) emphasized that the platforms should not be held liable for the content in order to avoid overblocking and upload filters. He rejected the amendments from the ranks of the EPP, pointing out that they “come from colleagues who obviously still haven ‘t understood the Internet .” The compromise does not include a requirement for clear names or data retention, which Körner considers a success.

Kim van Sparrentak (GroenLinks, Greens/EFA) was already unhappy with the Shaldemose report: “This deal that was struck in IMCO was warmly welcomed by Big Tech,” she criticized, calling for polarizing algorithms to be turned off by default.

EPP deputies try to prevent dark pattern ban

Also, whether so-called dark patterns should be banned again occupied the parliamentarians in view of amendments. “This is irresponsible, this is one of the very great achievements,” criticized Evelyne Gebhardt (SPD/S&D), “taking the piss” called the motion her Social Democratic colleague Tiemo Wölken, which the parliamentary interpreters somewhat less harshly conveyed in other EU languages.

“Instead of finally ending the unscrupulous business with our most personal data, the Digital Services Act unfortunately stops at this point after the first step,” criticized Martin Schirdewan (Left Party). He welcomed the ban on personalized advertising for minors, but said a complete ban on the use of sensitive data such as political views or sexuality was needed.

Alexandra Geese (Greens/EFA) said the European Parliament should have banned surveillance-based forms of advertising via DSA. Geese’s group, however, had not been able to win a majority for this with corresponding motions. The DSA was only a first, but important step.

Cultural committee feels ignored

Sabine Verheyen (CDU/EVP), on the other hand, put forward much more substantive arguments in support of her criticism of the report: This is a chance for a real milestone, she said. But: “The DSA, as it is now, will have serious consequences for areas of culture, sports and media,” said Verheyen. She advocated an exemption for media that had been proposed several times by the Culture Committee.

Criticism on which she agreed with other members of the Culture Committee: Petra Kammerevert (SPD/S&D) complained: “Not a single one of our demands was taken on board.” Journalism and media would be harmed if Internet companies were allowed to decide on the admissibility of their content. The competence of the member states for culture and media had been completely bypassed.

While the last speeches in the debate on the Schaldemose report were still running, the deputies were already able to vote on the amendments. The result of these votes on the amendments should be available on Thursday morning.

The DSA debate in the Strasbourg plenary was also the last debate of Social Democrat Evelyne Gebhardt, who was also involved in the negotiations and is leaving the EP after 28 years.

Gas from Norway: Prime Minister Støre dampens expectations

The situation in the energy markets remains tense, with prices for natural gas climbing from one high to the next, while gas storage levels in Europe are at an all-time low. The situation is exacerbated by the ongoing Ukraine conflict and the icy atmosphere between Moscow and the West.

Germany gets more than half of its natural gas needs from Russia, and concerns are growing that Moscow could suspend supplies from the state-controlled energy company Gazprom in an emergency. This raises the question of alternatives.

About a third of the gas in Germany comes from Norway. But Norwegian Prime Minister Jonas Gahr Støre dampened expectations during a visit to Berlin. There is no way that his country’s energy companies could compensate for a shortfall from Russia, the Social Democrat said on Wednesday at an event organized by the Association of Chambers of Industry and Commerce. On the contrary, he said, they are already at the limits of their capacity.

In the evening, Støre also spoke with German Chancellor Olaf Scholz about continuing gas supplies to Germany. Norway remains a reliable partner, the prime minister announced. However, he said, the partnership was to be taken “one step forward.” The scenario for future gas supplies is no longer “business as usual,” he said. Norway, too, is in the midst of the green transformation and is therefore focusing on carbon capture and storage (CCS) and thus on blue hydrogen.

While Europe’s largest CO2 landfill is being built off the coast of Norway, the CCS process is controversial in Germany. Environmentalists warn of the danger posed by leakage, which could have a damaging effect on the environment. til

Blinken pledges further support to Ukraine

Russia and the West are increasingly irreconcilable in the conflict over Ukraine, but want to keep the channel of talks open with a new diplomatic offensive. Russia warned Wednesday against supplying weapons to the former Soviet republic. In contrast, US Secretary of State Antony Blinken pledged further assistance to Ukraine, including military equipment, during a visit to Kyiv. But the US remains committed to a diplomatic solution, said Blinken, who will meet with Russian Foreign Minister Sergei Lavrov in Geneva on Friday.

According to the Interfax news agency, Russian Deputy Foreign Minister Sergei Ryabkov said that the security situation in Europe is “critical.” Therefore, the West should not supply weapons to Ukraine. Britain said it has already begun providing anti-tank weapons to the Eastern European country. The German government still officially rules out such a route. However, there are increasing voices within the coalition and especially from the FDP calling for a review of this position.

Hope for diplomatic channels

Blinken stressed in Kyiv the US determination to support Ukraine in the conflict with Russia. Given the massive troop presence on the border, Russia could launch an invasion at any time. He said he hoped his planned meeting with Lavrov would keep diplomatic channels open. Russia, however, has so far pursued the opposite of de-escalation despite all diplomatic efforts. Ukraine’s Foreign Minister Dmytro Kuleba accused Russia of destabilizing his country. Moscow is trying to stir up panic in Ukraine and undermine the economy and the financial system.

On Thursday, Blinken will first travel to Berlin to discuss the further course of action with German Chancellor Olaf Scholz and Foreign Minister Baerbock. The foreign ministers of France and Great Britain are also to be involved. Scholz urged Russia to ensure de-escalation. “The Russian side is aware of our determination,” the chancellor said at the World Economic Forum’s virtual Davos meeting. “I hope it is also aware that the benefits of cooperation are much higher than the price of further confrontation.” Dialogue must be maintained, he added. rtr

Chip supplier ASML may not supply top products to China

The Dutch chip supplier says it has not yet received a license to ship the latest versions of certain semiconductor manufacturing equipment to China. Under pressure from the US government, Dutch authorities have so far refused to grant ASML export permits for equipment whose applications are also classified as military – including photolithography systems.

However, the group, which largely dominates the market for this technology, is allowed to supply older devices to the People’s Republic. ASML CEO Peter Wennink believes it is unlikely, but not impossible, that the Chinese will be able to replicate the top technology. “They will certainly try.” rtr

Scholz also wants developing countries in the climate club

German Chancellor Olaf Scholz has called for broad, worldwide membership in the climate club he has proposed. “We don’t want to be an exclusive club,” Scholz said Wednesday at the virtual World Economic Forum in Davos. “By addressing issues such as technology transfer and climate finance, we hope to bring developing and emerging countries on board.”

Germany will drive the initiative forward as part of its current G7 presidency. The most important Western industrialized countries have a special role to play in this, he said. “We will use our G7 presidency to make the G7 the core of an international climate club,” Scholz said in his speech, which was delivered in English.

The German government wants a paradigm shift in international climate policy: “By no longer waiting for the slowest and most unambitious, but by leading by example,” Scholz said. One will turn the cost factor of fighting climate change into a competitive advantage, he said. This will succeed, he said, if we agree on common minimum standards.

The club members are to commit to meeting the climate target of a maximum global warming of 1.5 degrees and becoming climate-neutral by 2050 at the latest. They should also work together to promote CO2 pricing and ensure that products from countries with lower climate protection standards do not have a competitive advantage. In addition, the WTO rules must be followed. rtr

Why did almost no one see inflation coming?

By Jason Furman

*Jason Furman is a professor of economic policy practice and served as chairman of President Barack Obama’s Council of Economic Experts*.

In 2008, as the global financial crisis was ravaging economies everywhere, Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody see it coming?” The high inflation of 2021 – especially in the United States, where the year-on-year increase in consumer prices reached a four-decade high of 7% in December – should prompt the same question.

Inflation is not nearly as bad as a financial crisis, particularly when price increases coincide with a rapid improvement in the economy. And whereas financial crises may be inherently unpredictable, forecasting inflation is a staple of macroeconomic modeling.

Why, then, did almost everyone get the US inflation story so wrong last year? A survey of 36 private-sector forecasters in May revealed a median inflation forecast of 2.3% for 2021 (measured by the core personal consumption expenditures price index, the US Federal Reserve’s de facto target gauge). As a whole, the group put a 0.5% chance on inflation exceeding 4% last year – but, by the core PCE measure, it looks set to be 4.5%.

The Fed’s rate-setting Federal Open Market Committee fared no better, with none of its 18 members expecting inflation above 2.5% in 2021. Financial markets appear to have missed this one as well, with bond prices yielding similar predictions. Ditto the International Monetary Fund, the Congressional Budget Office, President Joe Biden’s administration, and even many conservative economists.

Contradiction in the assessments

Some of this collective error resulted from developments that forecasters did not or could not expect. Fed Chair Jerome Powell, among many others, blamed the Delta variant of COVID-19 for slowing the reopening of the economy and thus driving inflation higher. But Powell and others had earlier argued that the increase in inflation in the spring of 2021 was spurred by an overly rapid reopening as vaccination reduced case numbers. It is unlikely that both of these excuses are correct. The emergence of Delta, like the pandemic in 2020, probably kept inflation lower than it otherwise would have been.

Supply-chain disruptions were another unanticipated development that allegedly blew up inflation forecasts. But while the pandemic has caused some genuine bottlenecks in production networks, most are churning out much more than last year, with both US and global manufacturing output and shipping up sharply.

This brings us to a more important source of forecasting error: not taking our economic models seriously enough. Forecasts based on extrapolation from the recent past are nearly always as good as, or better than, those based on more sophisticated modeling. The exception is when there are economic inputs that are well outside the realm of recent experience. For example, the extraordinary $2.5 trillion in fiscal support for the US economy in 2021, amounting to 11% of GDP, was far larger than any previous fiscal package since World War II.

Central influences remained unconsidered

A simple fiscal multiplier model would have predicted that average output in the last three quarters of 2021 would be 2-5% above pre-pandemic estimates of potential. To think that a stimulus of this magnitude would not cause inflation required believing either that such a huge adjustment was possible within a matter of months, or that fiscal policy is ineffective and does not increase aggregate demand. Both views are implausible.

Economic models also gave us substantial reason to believe that several factors would reduce the US economy’s potential in 2021. These included premature deaths, reduced immigration, foregone capital investment, the costs of hardening the economy to COVID-19, pandemic-induced exits from the workforce, and all of the difficulties of rapidly reassembling an economy that had been torn apart. Such constraints made it very likely that additional demand would push inflation even higher.

A final set of errors arose because our models were missing key inputs or interpretations. To the degree that people relied on economic models, they often used a Phillips curve to predict inflation or changes in inflation based on the unemployment rate. But these frameworks had difficulty reckoning with the fact that the natural rate of unemployment likely rose, at least temporarily, as a result of the COVID-19 crisis.

More important, unemployment is not the only way to measure economic slack. Estimates from before the pandemic s how that the “quit rate” and the ratio of unemployed workers to job openings are better predictors of wage and price inflation. These other indicators of slack were already tight at the beginning of 2021 and were very tight by the spring.

A useful model

In retrospect, the mental model I find most useful for thinking about 2021 is to apply fiscal multipliers to nominal GDP, use them to predict how much of the fiscal stimulus will be spent, and then try to predict real GDP by understanding what the economy’s productive capacity is. The difference between the two is inflation.

Multipliers indicated that total spending in 2021 would go up a lot, while production constraints suggested that output would not increase by as much. The difference was unexpectedly higher inflation.

Where does this leave us in understanding inflation in 2022? Instead of making inertial forecasts that the future will resemble the past, taking our models seriously means accounting for high levels of demand, continued supply constraints, and ever-tighter labor markets with rapidly rising nominal wages and higher inflation expectations. Some types of inflation, notably in goods prices, are likely to decline this year, but others, including services inflation, will likely increase.

I therefore expect another year of significant US inflation, maybe not as high as in 2021 but plausibly in the 3-4% range. But the most important forecasting lesson from last year is humility. We should all be adding some large error bands around our expectations and be prepared to update our outlooks as the economic situation unfolds.

In cooperation with Project Syndicate, 2022.

EUROPE.TABLE EDITORS

Till
Hoppe

Charlotte
Wirth

Falk
Steiner

Timo
Landenberger

Corinna
Visser

Lukas
Knigge

Eric
Bonse

Sarah
Schaefer

Manuel
Berkel

Lisa-Martina
Klein

Markus
Grabitz

Stephan
Israel

Claire
Stam

Dear reader,

It’s been five years since Emmanuel Macron’s famous Sorbonne speech, and now the French president has once again used the big EU stage to make his European policy ambitions clear. At the start of France’s EU Council Presidency, he spoke in favor of a sovereign Europe and a “common security order” in the European Parliament in Strasbourg. There is certainly momentum for ambitious EU reform these days, writes Eric Bonse. In the long run, this could even apply to the reform of the Stability Pact – even if Macron has left this topic out of the equation for the time being.

The danger of a Russian attack on Ukraine is greater than ever, says Piotr Buras in an interview with Till Hoppe. Against this backdrop, the head of the Warsaw office of the European Council on Foreign Relations is sharply critical of the German government, especially of Olaf Scholz. “Unlike Angela Merkel, he has lacked political leadership,” Buras said. The chancellor needs to assert himself, he said – even in his own party, where some have a “misconception of Brandt’s Ostpolitik”.

Since the negotiations on a new basis for bilateral relations failed, trouble has been brewing between Bern and Brussels. Swiss access to the EU’s single market is now frowned upon on the EU side as cherry-picking, with additional costs and red tape hanging over manufacturers and retailers in some areas. As Stephan Israel reports, today’s visit to Berlin by Swiss President and Foreign Minister Ignazio Cassis is therefore coupled with hopes of support from Germany. There is already a tailwind from the German industry.

Your
Sarah Schaefer

Macron’s speech: momentum for EU reform

By

Eric Bonse

In a programmatic speech, Emmanuel Macron pleaded for a confident and sovereign Europe. The EU must “build a common security order on our continent,” forge a new alliance with Africa and tackle long-delayed reforms, such as the Schengen area and energy policy, France’s president said on Wednesday in the European Parliament in Strasbourg. Macron explicitly acknowledged the controversial taxonomy, which considers nuclear power and gas sustainable power.

The head of state, who wants to run in the presidential election in April and score points with his EU track record, also reiterated his call for a “European digital model”. Shortly before the vote on the Digital Services Act (DSA) on Thursday, Macron spoke out in favor of fair competition. Facebook and others must be put in their place.

So is now the moment of the “European renaissance” and EU reform for which Macron has been longing for years? Can the French EU presidency provide the necessary impetus? The answer varies, depending on the party’s political perspective. Christian Democrats and Greens were left disappointed after Macron’s speech.

“Macron presented a lot of cloudy headlines today and little that was concrete,” criticized Markus Ferber (CSU), economic policy spokesman for the EPP Group in the EU Parliament. When things did get more concrete, the proposals “amounted to state interventionism and more bureaucracy,” Ferber complains.

The council presidency ‘got off on the wrong foot’

Rasmus Andresen, spokesman for the German Greens, was even more negative. The French Council Presidency had “got off on the wrong foot” – the taxonomy. Now, he said, there was a threat of a tough dispute over European energy policy. Macron also failed to make any concrete promises regarding the right of initiative for the parliament.

In contrast, the Social Democrats welcome Macron’s commitment to a “social Europe“. It would be “a step forward” to overcome the wage gap between men and women, to get more women on supervisory boards, and to push through better working conditions and a higher minimum wage, said Jens Geier, head of the SPD group.

Once you take off the party glasses, you can definitely see momentum for an ambitious EU reform. After all, not only France but also Germany is pursuing a pro-European agenda. The “traffic light” government in Berlin has even taken up controversial reforms such as the abolition of the veto in foreign policy.

Berlin and Paris are also on the same level when it comes to the current crisis between Russia and Ukraine. Like Macron, the German government is calling for the Normandy format to be revived and for the two conflict partners to sit down at the same table. Foreign Minister Annalena Baerbock even reiterated this in Moscow.

Not good prospects for reform of the Stability Pact

The new European security order envisaged by Macron is also likely to be met with an open ear in Berlin. Details will still have to be discussed. However, the close coordination between the Federal Chancellery and the Élysée Palace, which was already evident at Chancellor Olaf Scholz’s first EU summit in December, gives cause for optimism.

The prospects for reforming the Stability Pact are less promising – at least in the short term. At his first Ecofin Council in Brussels, Finance Minister Christian Lindner presented himself as a “friendly hawk” who would seek compromises. Yet, he ruled out an end to the “obsolete” debt rules, as demanded by France.

Macron did not mention the issue in his Strasbourg speech. The dispute is unlikely to be resolved under the French presidency. In the medium term, however, the chances are not bad, as “actual” fiscal hawks like the Netherlands have now also embarked on a reform course. Lindner is on the defensive.

How long the FDP leader can keep up his blockade will ultimately depend not on Macron, but on Scholz and the Green coalition partners. Because the fiscal rules are not just about debt, but also about investment – especially for an active climate policy. And there is strong momentum for that, across Europe.

Piotr Buras: ‘Olaf Scholz was invisible in this crisis’

Mr. Buras, the US, and Europe are threatening Russia with massive consequences should it invade Ukraine. Do you think this deterrence scenario is believable?

No, at least not from the European side. The Europeans have not done their homework, and Germany is partly to blame for this. The danger of a Russian attack on Ukraine and thus the destruction of the security order in Europe is greater than ever. But the EU has not even completed a sanctions package with which it could deter Moscow. Yet, economic punitive measures are the only means of pressure we have.

What responsibility does Germany bear for this? Are the Russians aware “about our determination,” as Chancellor Olaf Scholz said yesterday?

It was long overdue for Scholz to make a clearer statement, including the fact that he emphasized during the NATO Secretary-General’s visit on Tuesday that all options were still on the table – including Russia’s exclusion from SWIFT and a halt to Nord Stream 2. So far, the German government has not had a clear position, which was disastrous. The SPD gave a different message than the Greens and FDP.

To what extent is the new chancellor to blame for this erratic approach?

Olaf Scholz has been invisible in this crisis so far. Unlike Angela Merkel, he has lacked political leadership. From the perspective of the Central and Eastern European countries, this crisis is very serious, but the German Chancellor preferred to travel to Madrid at the beginning of the week. In the meantime, however, Scholz and Foreign Minister Baerbock seem to be pulling in the same direction.

Is Scholz’s party, the SPD, the problem?

Within the SPD, influential personalities such as Kevin Kuehnert do not support a hard line. The reason for this is a misconception of Brandt’s Ostpolitik, which was based not only on dialogue but also on deterrence. Now it remains to be seen whether Scholz is a strong chancellor who can also succeed in his party. In any case, there are still doubts whether the SPD will follow suit when things start to get tough in the conflict with Russia.

Is Berlin the major weak point in Europe’s response to Moscow, or just one of many?

I wouldn’t put all the blame on Berlin for the disaster of European policy in this crisis. But the German government must recognize that Germany has a special responsibility, owed to its economic weight and because of Nord Stream 2. So far, it has not lived up to this responsibility, but there are some rays of hope. These include Baerbock’s very clear message during her visits to Kiev and Moscow.

How strong is the Nord Stream 2 leverage anyway?

Some argue that we have no influence on Putin at all. But then we could simply forget about our foreign policy and European sovereignty. Then we could only hope Americans will solve our problem for us. In my opinion, we do have instruments in the form of economic sanctions and Nord Stream 2. These should not simply be taken off the table.

Is there a lack of strategic thinking here in Berlin?

Bluffing is part of diplomacy. No one can tell whether it is the truth when they say that Nord Stream 2 will be shut down in the event of an attack. Other things are true, but should not be spelled out publicly at this time. One of them is that Ukraine will not become a member of NATO. In Germany, some political leaders, especially in the SPD, are thinking the exact opposite. They warn against Kiev becoming a NATO member and do not want to touch Nord Stream 2 under any circumstances.

Germany is phasing out nuclear power and coal and will be relying even more on natural gas in the coming years to compensate for that. This will also increase dependence on Russia.

This is a special approach by Germany, which is rather unfortunate in the current geopolitical climate. However, increased dependence on Russian gas does not necessarily make Berlin susceptible to extortion – if the political will is there to prevent such attempts.

Berlin and Paris want to revive the Normandy format to defuse the conflict with Moscow. Can this succeed in the current situation?

I doubt it. If anything, the four-way talks can make some progress if some tensions have been eased first.

Conflict with Brussels: Swiss President seeks support in Berlin

In Switzerland, the government is called the Federal Council, and there the seven members alternate every year in the role of head of state. When Foreign Minister Ignazio Cassis visits Berlin today, he also comes as Federal President in personal union. This means that, in addition to Foreign Minister Annalena Baerbock, the Ticino native will also be able to meet Chancellor Olaf Scholz and, above all, Federal President Frank-Walter Steinmeier.

The change in Berlin first of all offers the chance for a fresh start. The conflict between Switzerland and the EU over a new legal basis for the complex bilateral relationship has recently spread to Berlin. EU Commission chief Ursula von der Leyen is said to have complained bitterly to then German Chancellor Angela Merkel about the affront after the Swiss government unilaterally declared an end to negotiations on a so-called framework agreement after eight years.

Swiss access is considered cherry picking

For Ignazio Cassis, it is more than just a courtesy visit. The foreign minister has already visited Vienna since taking office as president of the Confederation on January 1st and is now hoping for support in Berlin in the conflict with Brussels. However, since the unilateral breakdown of negotiations, the ball has been in Switzerland’s court there and answers are expected as to how the government in Bern intends to resolve the points of conflict arising from the failed framework agreement.

Switzerland enjoys sectoral access to the EU single market thanks to 120 bilateral agreements. A model that the EU explicitly did not offer the British. For Switzerland, too, tailored access was originally intended only as a transitional solution. This was in the expectation that Switzerland would one day join the EU after all, or at least the EEA.

The Swiss approach is now frowned upon in Brussels as cherry-picking. In addition, the administration of the predominantly static agreements has become increasingly complicated. The EU Commission and member states have therefore been demanding for years that Switzerland adopt new EU law “dynamically” in the future and accept the European Court of Justice as the final arbiter of disputes.

BDI calls for return to talks

Ignazio Cassis has received some argumentation help from the Federation of German Industries (BDI), which has published a position paper in time for the visit. It is necessary to resume constructive talks quickly after the failure of the framework agreement, demands BDI CEO Joachim Lang. In view of geopolitical tensions, a protracted conflict with Switzerland is “superfluous,” he said. Cooperation must be based on the three priorities of European strategic sovereignty, the Green Deal, and European competitiveness.

However, because of the blockade around the framework agreement, the slow erosion of the status quo now looms first. For example, the EU recently refused to update the agreement on technical barriers to trade (MRA) for the medical products sector. Also at risk is a key update for the machinery sector, due in 2023. “There is already considerable economic disruption in trade between the EU and Switzerland, especially of medical products and in the foreseeable future in mechanical engineering,” warns BDI chief executive Joachim Lang.

Horizon Europe point of contention

In concrete terms, manufacturers and retailers face additional costs and bureaucracy. Companies will have to appoint additional representatives and in some cases have their products certified twice. Without a framework agreement, it is also not possible to conclude an electricity agreement that is intended to ensure that Switzerland and its storage power plants are connected to the internal energy market. At present, Switzerland cannot participate in the so-called market coupling, and participation in the Terre market for balancing energy is also in limbo.

In its position paper, the BDI further criticizes Brussels for treating Switzerland like an ordinary third country in the EU’s Horizon Europe research program, unlike in the past, and for refusing full association. Switzerland’s participation in Horizon Europe is important for German companies and a thriving European innovation ecosystem, he said. Switzerland’s full association must be the goal, he said.

The BDI position paper is a tailwind for Ignazio Cassis in Berlin, but only up to a point: A stable partnership with Switzerland requires “an appropriate balance of rights and obligations,” warns CEO Joachim Lang. Fair competitive conditions continue to be on the agenda. The uniform interpretation of internal market law by the ECJ is also imperative. It is precisely in the conflict over rules for state aid or the binding dispute resolution mechanism that the talks between Bern and Brussels have recently failed. Stephan Israel

EU Commission considers shortening quarantine times

Against the backdrop of massively increasing numbers of infections with the Omikron variant, the EU Commission is preparing for a change of strategy in the fight against the COVID pandemic. The high number of people affected may necessitate a “more pragmatic approach” to dealing with those infected, said EU Health Commissioner Stella Kyriakides in an interview with Europe.Table and other European media outlets.

This could shorten quarantine times. In addition, he said, the commission is working with the European Medicines Agency (EMA) to look at adapting vaccines to Omikron. “All options are on the table, we are ready to act,” Kyriakides said. On Friday, EU health ministers and the Commission will meet in a special virtual session to discuss the next steps.

Kyriakides was cautious about a possible end to the pandemic and the transition to an endemic situation. “There have already been many twists and turns,” she said, “so I’m not going to make any predictions.” What is clear, she said, is that the EU will continue to rely on vaccination and boosters. “Vaccination has not failed,” the commissioner stressed. Currently, she said, 70 percent of the adult population in the EU is fully vaccinated and 40 percent is boosted. However, she said, this is still not enough to provide sufficient protection against COVID. The vaccination campaign must therefore continue. ebo

DSA Final Debate: New gold standard sought

The final debate on the European Parliament’s position on the Digital Services Act (DSA) was characterized by weighty words on the role of the European regulatory framework. A set of rules that – depending on the perspective – is intended to put a stop to the Internet giants, fraudsters and radicals on the Net, or even the Wild West. EP rapporteur Christel Schaldemose (S&D) spoke of a “gold standard of digital regulation” that, like the General Data Protection Regulation, should serve as a model internationally and be emulated.

The Danish Social Democrat placed particular emphasis on making it easier in future for users and consumers to contact service providers on the Net – whether in the case of illegal products or the obligation of providers to check possibly illegal content.

Commission Vice President Margarethe Vestager stressed that the DSA is “a way for democracy to show its power.” The signal, she said, is that “there is no area where democracy does not rule.” It was a “historic debate that will hopefully put an end to what has not unjustly been called a Wild West on the net, ” said EU Internal Market Commissioner Thierry Breton.

Another dispute over upload filters

Just that morning, Breton had circulated a joking video with a Western scene via Twitter, with which he referred to the DSA debate. SPD MEP Tiemo Wölken reminded the commissioner in plenary that it was the Commission and Council that had pushed for automated filters for content in copyright: “He couldn’t have done that if this House hadn’t brought in an exception for parody.”

Wölken accused the EPP of wanting to introduce upload filters for content. This refers to the obligation to automatically block similar content after it has been blocked (Amendment 515, submitted by many CDU/CSU MEPs, among others).

Moritz Körner (FDP/Renew) emphasized that the platforms should not be held liable for the content in order to avoid overblocking and upload filters. He rejected the amendments from the ranks of the EPP, pointing out that they “come from colleagues who obviously still haven ‘t understood the Internet .” The compromise does not include a requirement for clear names or data retention, which Körner considers a success.

Kim van Sparrentak (GroenLinks, Greens/EFA) was already unhappy with the Shaldemose report: “This deal that was struck in IMCO was warmly welcomed by Big Tech,” she criticized, calling for polarizing algorithms to be turned off by default.

EPP deputies try to prevent dark pattern ban

Also, whether so-called dark patterns should be banned again occupied the parliamentarians in view of amendments. “This is irresponsible, this is one of the very great achievements,” criticized Evelyne Gebhardt (SPD/S&D), “taking the piss” called the motion her Social Democratic colleague Tiemo Wölken, which the parliamentary interpreters somewhat less harshly conveyed in other EU languages.

“Instead of finally ending the unscrupulous business with our most personal data, the Digital Services Act unfortunately stops at this point after the first step,” criticized Martin Schirdewan (Left Party). He welcomed the ban on personalized advertising for minors, but said a complete ban on the use of sensitive data such as political views or sexuality was needed.

Alexandra Geese (Greens/EFA) said the European Parliament should have banned surveillance-based forms of advertising via DSA. Geese’s group, however, had not been able to win a majority for this with corresponding motions. The DSA was only a first, but important step.

Cultural committee feels ignored

Sabine Verheyen (CDU/EVP), on the other hand, put forward much more substantive arguments in support of her criticism of the report: This is a chance for a real milestone, she said. But: “The DSA, as it is now, will have serious consequences for areas of culture, sports and media,” said Verheyen. She advocated an exemption for media that had been proposed several times by the Culture Committee.

Criticism on which she agreed with other members of the Culture Committee: Petra Kammerevert (SPD/S&D) complained: “Not a single one of our demands was taken on board.” Journalism and media would be harmed if Internet companies were allowed to decide on the admissibility of their content. The competence of the member states for culture and media had been completely bypassed.

While the last speeches in the debate on the Schaldemose report were still running, the deputies were already able to vote on the amendments. The result of these votes on the amendments should be available on Thursday morning.

The DSA debate in the Strasbourg plenary was also the last debate of Social Democrat Evelyne Gebhardt, who was also involved in the negotiations and is leaving the EP after 28 years.

Gas from Norway: Prime Minister Støre dampens expectations

The situation in the energy markets remains tense, with prices for natural gas climbing from one high to the next, while gas storage levels in Europe are at an all-time low. The situation is exacerbated by the ongoing Ukraine conflict and the icy atmosphere between Moscow and the West.

Germany gets more than half of its natural gas needs from Russia, and concerns are growing that Moscow could suspend supplies from the state-controlled energy company Gazprom in an emergency. This raises the question of alternatives.

About a third of the gas in Germany comes from Norway. But Norwegian Prime Minister Jonas Gahr Støre dampened expectations during a visit to Berlin. There is no way that his country’s energy companies could compensate for a shortfall from Russia, the Social Democrat said on Wednesday at an event organized by the Association of Chambers of Industry and Commerce. On the contrary, he said, they are already at the limits of their capacity.

In the evening, Støre also spoke with German Chancellor Olaf Scholz about continuing gas supplies to Germany. Norway remains a reliable partner, the prime minister announced. However, he said, the partnership was to be taken “one step forward.” The scenario for future gas supplies is no longer “business as usual,” he said. Norway, too, is in the midst of the green transformation and is therefore focusing on carbon capture and storage (CCS) and thus on blue hydrogen.

While Europe’s largest CO2 landfill is being built off the coast of Norway, the CCS process is controversial in Germany. Environmentalists warn of the danger posed by leakage, which could have a damaging effect on the environment. til

Blinken pledges further support to Ukraine

Russia and the West are increasingly irreconcilable in the conflict over Ukraine, but want to keep the channel of talks open with a new diplomatic offensive. Russia warned Wednesday against supplying weapons to the former Soviet republic. In contrast, US Secretary of State Antony Blinken pledged further assistance to Ukraine, including military equipment, during a visit to Kyiv. But the US remains committed to a diplomatic solution, said Blinken, who will meet with Russian Foreign Minister Sergei Lavrov in Geneva on Friday.

According to the Interfax news agency, Russian Deputy Foreign Minister Sergei Ryabkov said that the security situation in Europe is “critical.” Therefore, the West should not supply weapons to Ukraine. Britain said it has already begun providing anti-tank weapons to the Eastern European country. The German government still officially rules out such a route. However, there are increasing voices within the coalition and especially from the FDP calling for a review of this position.

Hope for diplomatic channels

Blinken stressed in Kyiv the US determination to support Ukraine in the conflict with Russia. Given the massive troop presence on the border, Russia could launch an invasion at any time. He said he hoped his planned meeting with Lavrov would keep diplomatic channels open. Russia, however, has so far pursued the opposite of de-escalation despite all diplomatic efforts. Ukraine’s Foreign Minister Dmytro Kuleba accused Russia of destabilizing his country. Moscow is trying to stir up panic in Ukraine and undermine the economy and the financial system.

On Thursday, Blinken will first travel to Berlin to discuss the further course of action with German Chancellor Olaf Scholz and Foreign Minister Baerbock. The foreign ministers of France and Great Britain are also to be involved. Scholz urged Russia to ensure de-escalation. “The Russian side is aware of our determination,” the chancellor said at the World Economic Forum’s virtual Davos meeting. “I hope it is also aware that the benefits of cooperation are much higher than the price of further confrontation.” Dialogue must be maintained, he added. rtr

Chip supplier ASML may not supply top products to China

The Dutch chip supplier says it has not yet received a license to ship the latest versions of certain semiconductor manufacturing equipment to China. Under pressure from the US government, Dutch authorities have so far refused to grant ASML export permits for equipment whose applications are also classified as military – including photolithography systems.

However, the group, which largely dominates the market for this technology, is allowed to supply older devices to the People’s Republic. ASML CEO Peter Wennink believes it is unlikely, but not impossible, that the Chinese will be able to replicate the top technology. “They will certainly try.” rtr

Scholz also wants developing countries in the climate club

German Chancellor Olaf Scholz has called for broad, worldwide membership in the climate club he has proposed. “We don’t want to be an exclusive club,” Scholz said Wednesday at the virtual World Economic Forum in Davos. “By addressing issues such as technology transfer and climate finance, we hope to bring developing and emerging countries on board.”

Germany will drive the initiative forward as part of its current G7 presidency. The most important Western industrialized countries have a special role to play in this, he said. “We will use our G7 presidency to make the G7 the core of an international climate club,” Scholz said in his speech, which was delivered in English.

The German government wants a paradigm shift in international climate policy: “By no longer waiting for the slowest and most unambitious, but by leading by example,” Scholz said. One will turn the cost factor of fighting climate change into a competitive advantage, he said. This will succeed, he said, if we agree on common minimum standards.

The club members are to commit to meeting the climate target of a maximum global warming of 1.5 degrees and becoming climate-neutral by 2050 at the latest. They should also work together to promote CO2 pricing and ensure that products from countries with lower climate protection standards do not have a competitive advantage. In addition, the WTO rules must be followed. rtr

Why did almost no one see inflation coming?

By Jason Furman

In 2008, as the global financial crisis was ravaging economies everywhere, Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody see it coming?” The high inflation of 2021 – especially in the United States, where the year-on-year increase in consumer prices reached a four-decade high of 7% in December – should prompt the same question.

Inflation is not nearly as bad as a financial crisis, particularly when price increases coincide with a rapid improvement in the economy. And whereas financial crises may be inherently unpredictable, forecasting inflation is a staple of macroeconomic modeling.

Why, then, did almost everyone get the US inflation story so wrong last year? A survey of 36 private-sector forecasters in May revealed a median inflation forecast of 2.3% for 2021 (measured by the core personal consumption expenditures price index, the US Federal Reserve’s de facto target gauge). As a whole, the group put a 0.5% chance on inflation exceeding 4% last year – but, by the core PCE measure, it looks set to be 4.5%.

The Fed’s rate-setting Federal Open Market Committee fared no better, with none of its 18 members expecting inflation above 2.5% in 2021. Financial markets appear to have missed this one as well, with bond prices yielding similar predictions. Ditto the International Monetary Fund, the Congressional Budget Office, President Joe Biden’s administration, and even many conservative economists.

Contradiction in the assessments

Some of this collective error resulted from developments that forecasters did not or could not expect. Fed Chair Jerome Powell, among many others, blamed the Delta variant of COVID-19 for slowing the reopening of the economy and thus driving inflation higher. But Powell and others had earlier argued that the increase in inflation in the spring of 2021 was spurred by an overly rapid reopening as vaccination reduced case numbers. It is unlikely that both of these excuses are correct. The emergence of Delta, like the pandemic in 2020, probably kept inflation lower than it otherwise would have been.

Supply-chain disruptions were another unanticipated development that allegedly blew up inflation forecasts. But while the pandemic has caused some genuine bottlenecks in production networks, most are churning out much more than last year, with both US and global manufacturing output and shipping up sharply.

This brings us to a more important source of forecasting error: not taking our economic models seriously enough. Forecasts based on extrapolation from the recent past are nearly always as good as, or better than, those based on more sophisticated modeling. The exception is when there are economic inputs that are well outside the realm of recent experience. For example, the extraordinary $2.5 trillion in fiscal support for the US economy in 2021, amounting to 11% of GDP, was far larger than any previous fiscal package since World War II.

Central influences remained unconsidered

A simple fiscal multiplier model would have predicted that average output in the last three quarters of 2021 would be 2-5% above pre-pandemic estimates of potential. To think that a stimulus of this magnitude would not cause inflation required believing either that such a huge adjustment was possible within a matter of months, or that fiscal policy is ineffective and does not increase aggregate demand. Both views are implausible.

Economic models also gave us substantial reason to believe that several factors would reduce the US economy’s potential in 2021. These included premature deaths, reduced immigration, foregone capital investment, the costs of hardening the economy to COVID-19, pandemic-induced exits from the workforce, and all of the difficulties of rapidly reassembling an economy that had been torn apart. Such constraints made it very likely that additional demand would push inflation even higher.

A final set of errors arose because our models were missing key inputs or interpretations. To the degree that people relied on economic models, they often used a Phillips curve to predict inflation or changes in inflation based on the unemployment rate. But these frameworks had difficulty reckoning with the fact that the natural rate of unemployment likely rose, at least temporarily, as a result of the COVID-19 crisis.

More important, unemployment is not the only way to measure economic slack. Estimates from before the pandemic s how that the “quit rate” and the ratio of unemployed workers to job openings are better predictors of wage and price inflation. These other indicators of slack were already tight at the beginning of 2021 and were very tight by the spring.

A useful model

In retrospect, the mental model I find most useful for thinking about 2021 is to apply fiscal multipliers to nominal GDP, use them to predict how much of the fiscal stimulus will be spent, and then try to predict real GDP by understanding what the economy’s productive capacity is. The difference between the two is inflation.

Multipliers indicated that total spending in 2021 would go up a lot, while production constraints suggested that output would not increase by as much. The difference was unexpectedly higher inflation.

Where does this leave us in understanding inflation in 2022? Instead of making inertial forecasts that the future will resemble the past, taking our models seriously means accounting for high levels of demand, continued supply constraints, and ever-tighter labor markets with rapidly rising nominal wages and higher inflation expectations. Some types of inflation, notably in goods prices, are likely to decline this year, but others, including services inflation, will likely increase.

I therefore expect another year of significant US inflation, maybe not as high as in 2021 but plausibly in the 3-4% range. But the most important forecasting lesson from last year is humility. We should all be adding some large error bands around our expectations and be prepared to update our outlooks as the economic situation unfolds.

In cooperation with Project Syndicate, 2022.