When the last recession hit, starting with the crisis in the international financial markets, followed by a severe downturn in the economy, governments had little space for manoeuvring with their fiscal policies. It, therefore, fell on the makers of monetary policy to seek to stimulate the economy. They did this through low interest rates (and we have low interest rates till today) and through buying assets, thereby pumping liquid money into the economy.

Students of economics know there  are two pillars of macroeconomic policymaking – fiscal policy and monetary  policy. For decades, both were used to influence the economy. However, there have been wide divergencies in opinions as to which is the better tool to tackle an economic recession.

Monetary policy involves influencing the demand and supply of money, mainly through interest rates, while fiscal policy involves changing government spending and taxation.

Fiscal policy is the domain of the government, while monetary policy is the domain of independent central bankers. This is why we have tended to link those who believe that monetary policy should be the major tool to stimulate an economy to the right of the political spectrum (not the populists as these are neither right nor left), while we link those who support the supremacy of fiscal policy to the left of the political spectrum.

Both have an effect on the distribution of income, but increased government – and, therefore, fiscal policy – spending is likely to be more advantageous to those less well off and, therefore, linked to  left-wing policies.

The decision of the UK Conservative Prime Minister Margaret Thatcher to embrace monetarism in the late 1970s reinforced this view that right-wing leaning politics is more likely to be associated with monetary policy rather than fiscal policy.

Beyond political thinking, one also needs to keep in mind that because  fiscal policy is the domain of the  government, it needs to be decided in a  democratic fashion.

The difficulty of which tool to choose will always remain there

Even if there would be consensus to increase government spending or to reduce taxation, there would never be consensus as to where the increased spending should be allocated or which segment of society is to benefit more from the reduced taxation. It could also well be that once a decision is taken, it is overturned at a subsequent election if there is a change of government.

On the other hand, decisions on monetary policy are taken by supposedly independent central bankers who are believed to view economic issues in an objective manner.

In the last severe recession, EU economies relied essentially on monetary policy to achieve growth. With interest rates being so low and with a possibility of a slowdown, can EU economies rely on monetary policy again?

Many are arguing for a more active fiscal policy and to get rid of the shackles of past agreements. The previous president of the European Central Bank had repeatedly argued that governments should use fiscal policy not only to redistribute income or to allocate resources to one activity instead of another, but also to substitute monetary policy in fighting a recession.

However, it may be that we have forgotten the lessons on the 1970s, 1980s and 1990s when public sector spending had reached unsustainable levels simply because a political compromise needed to be reached before any decision could be taken.

As such, although fiscal policy is required to give a broad direction to the economy, it is not certain that it can be used as a short-term measure to stabilise an economy.

All this may sound very theoretical. However, it is not, as economic policymaking ‒whatever tools are used ‒ has a direct impact on the purchasing power of consumers. For example, the protracted period of low interest rates has ensured that discretionary spending by consumers has been higher than say 15 years ago when interest rates were much higher. The same happens when tax rates are reduced.

What needs to happen in future, that is whether to give more weight to monetary policy or more weight to fiscal policy, is very much like looking at a crystal ball.

The difficulty of which tool to choose will always remain there. Governments and central banks have to learn how to create more synergies between their economic policies and possibly agree on which tool is the better one to stabilise an economy in the short term and which tool is better to provide direction to the economy in the long term.