Taming the inflation beast: Lessons from southern Europe

Inflation is a persistent economic challenge that affects nations worldwide. It is an economic phenomenon that occurs when the general price level of goods and services rises, resulting in a decrease in the purchasing power of a currency

This rise in prices can erode the savings of citizens, impact the cost of living, and even lead to higher interest rates. Especially now in postpandemic times with persistent geopolitical tensions, the European Union (EU) is kept on its toes to combat inflation and a cost-of-living crisis. In its task to maintain price stability in the EU, the European Central Bank (ECB) is aiming for a 2% inflation rate over the medium-term. In order to reinforce progress towards its target, the ECB has over the past months repeatedly increased its three key interest rates as part of its monetary policy decisions. Currently, the ECB’s deposit rate is at 4%, which is the highest level since the euro launched. Meanwhile, the headline inflation rate in the EU marked 5.90% at the end of August. Looking at a selection of EU member states, the inflation rate in Malta in August was 5%, in Italy 5.5% while Germany’s inflation rate is at 6.1% and Sweden's at 7.5%.

Hungary is tailing the list of member states having to deal with a hefty inflation rate of 16.4%. It is evident that inflation across the EU varies and hence do the remedies each member state is choosing.

Just at the beginning of September, Italy's government forged an "anti-inflation pact" with producers and retailers to curb rising prices of staple goods in Italian shopping baskets and alleviate the financial burden on households. In particular, food inflation reached 9.6% in August in Italy after decreasing slightly for the first time since July 2022. The initiative, spanning three months from October to the end of the year, commits participants to resist increasing prices, which have surged amid the pandemic and Russia’s war on Ukraine. In return retailers and companies participating in the pact can make use of marketing materials such as a sticker of a shopping cart in the colours of the Italian flag. The “anti-inflation quarter” is hoped to tackle inflation and boost the country´s economy through an increase in public consumption. Italy’s government, which is becoming known for its interventionist measures, however, has also received criticism from consumer organisations doubting the substantial benefits the campaign ought to bring suspecting that it is the retailers that will primarily use the good PR to boost themselves. Prior, companies had to deal with allegations of “greedflation” meaning that they were allegedly exploiting higher costs to boost their profits. Retailers, particularly in the food sector, counter these claims, citing their slim profit margins, which have been further squeezed due to increased supplier prices and labour costs.

Another suggestion to combat inflation, particularly in smaller EU nations like Malta, is to reduce consumption tax. In Malta's case, this could involve reducing the Value

Added Tax (VAT) on food items to 7%. This reduction in VAT aims to alleviate the financial burden on consumers, making essential goods more affordable. Additionally, the proposal includes closely monitoring the hospitality sector, which plays a pivotal role in Malta's economy. By controlling menu prices in hotels and restaurants, the government can contribute to stabilizing the overall cost of living.

Moreover, in some southern European countries, a significant issue contributing to inflation is tax evasion. Businesses often fail to declare the VAT they collect, depriving governments of much-needed revenue. This practice can exacerbate inflationary pressures and lead to higher interest rates. To address this concern more stringent measures are required. This might involve increased inspections of businesses, especially in the hospitality sector, to ensure compliance with tax regulations. Another effective strategy is to integrate cash registers with government agencies, enabling real-time monitoring of transactions. Such measures can discourage tax evasion and contribute to economic stability. This shows yet again the urgency for governments and industries to take on the challenge of digital technology and artificial intelligence, as these tools can play a pivotal role in enhancing tax enforcement, reducing inflationary pressures and safeguarding economic wellbeing.

As the winter season approaches, many EU countries anticipate further price increases, threatening to drive interest rates higher, potentially impacting economic growth and stability. In conclusion, inflation remains a pressing issue for numerous EU countries. While each nation may have its unique challenges, solutions like Italy’s “anti-inflation pact” or Malta's proposal to reduce consumption tax and intensify efforts to combat tax evasion can help alleviate the inflationary burden. As we navigate these economic challenges, EU member states need to brace themselves for a chilly winter ahead. The coming months will test the resilience of their economies, but with diligent policy measures, they can strive to keep inflation in check and ensure a more stable and prosperous future.

“As the winter season approaches, many EU countries anticipate further price increases, threatening to drive interest rates higher, potentially impacting economic growth and stability.”