European Economic Policy in 2021-22

The EU economy was on the road to recovery in 2021, but continued to be shaped by high uncertainty about the further development of the COVID-19 pandemic. Key to the economic recovery was expansionary monetary and fiscal policy in the EU and euro area, which was characterised by high inflation rates toward the end of 2021. This paper discusses three main themes of EU economic policy in 2021-22: the monetary policy strategy review, the future of fiscal rules and the implementation of the NextGenerationEU instrument. The recently adjusted monetary policy strategies of the European Central Bank as well as the Federal Reserve tolerate higher inflation rates in the short term, but remain oriented toward the 2 percent inflation target in the medium term. Selected proposals for reforming EU fiscal rules take as their starting point the significant increase in member countries' indebtedness while pointing to the secular reduction in equilibrium interest rates that reduces the debt burden. Finally, the paper discusses the Recovery and Resilience Facility (RRF), the centerpiece of NextGenerationEU. The RRF is already in the implementation phase and is expected to lead to important investments and reforms in the coming years.