Central banks and finance ministers around the world will have a very tough job in the coming weeks and months. They are faced with rising inflation, high levels of indebtedness by governments, businesses and individuals, and the need to get the economy going strongly after the coronavirus. They do appear to be stuck between a rock and a hard place.

The most logical reaction to rising inflation is to increase interest rates. However, with the high level of indebtedness, increasing interest rates will only make things worse. Moreover, an increase in interest does not really help to get the economy going, rather it slows it down. On the other hand, getting the economy going after the coronavirus may increase the risk of high inflation.

The debts that have been accumulated by governments to respond to the coronavirus in the last two years, by businesses to keep afloat in the times of economic crisis, and by consumers to maintain a decent lifestyle, have to be paid at some point or other.

Meanwhile, we also know there are some key priority issues such as addressing climate change; upgrading workers’ skills; the need to maintain the digital transformation of economies and businesses; fighting cybercrime and other white-collar crime; adopting good governance practices; and reducing income inequalities. All these require resources that are becoming ever scarcer, and a tighter monetary policy and fiscal policy will make them even more scarce.

The objective that central banks and ministers of finance should have is to tame inflation by raising interest rates, without jeopardising economic growth prospects and without causing further poverty, while enabling governments to tackle the policy issues I have mentioned. I do not believe that anyone would disagree with this. However, a very fair question would be: “How can this be done?"

Social welfare has not weakened but income inequality has increased. Rising inflation is making such inequality worse

The last crisis of this nature, in 2008, was not handled exactly well. Central banks supported their economy by keeping interest rates down and by making cheap money readily available. Governments were, however, forced to tighten their fiscal policy with the result that social welfare got hit badly and wages were left to languish. The end result was that inequalities increased, there was underinvestment in workers’ skills, asset prices (property and equities) rose significantly, making the very rich even richer, and large sections of society becoming impoverished as wages stagnated.

We felt only some of this in Malta. Property prices did rise beyond any imaginable levels. Wages in a number of sectors did remain low, but the impact on the Maltese was mitigated because non-Maltese took most of these jobs. Social welfare has not weakened but income inequality has increased. Rising inflation is making such inequality worse, as we know that inflation is a disease that afflicts the lower and middle classes in a disproportionate way.

So is there a way out of this situation? Can central banks and governments get out from the position they are in? Although this may sound very leftish, and people who know me are fully aware that I am a centrist by nature and a strong believer in the social market economy, I believe that central banks should make money more expensive for the rich (such as property speculators) through interest rate rises, while providing cheap money for investing into areas that are beneficial to the common good such as the environment, social housing and healthcare.

Such a policy cannot be applied independently of governments. While central banks and governments need to respect each other’s independence, they can work in tandem. Neither can ignore the social impact of their economic decisions.

The European Union has provided a model for this to succeed through its recovery plan, NextGeneration EU. Governments around the world need to follow suit. This approach may help us to get unstuck from between a rock and a hard place.