W A Wijewardena: Why inflation tax is an evil? Article by Mr W A Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, published in Sunday Times on 10 June 2007. *  *  *  A popular folk story talks of a villager making a chance meeting of a demon in the forest and using his craftiness to get the demon to work for him. Understandably, the demon being an untiring person proves to be a marvelous worker. His contribution to the villager far exceeds that of even a thousand workers. According to the story, everything is well and good as long as the villager is able to keep the demon under his control. But, on the day the villager loses his grip over the demon, it would set upon the villager and devour him. So, though the villager would have a jolly-good life in the short run, he runs the great risk of losing everything, including his life, in the long run. Governments’ use of inflation as a tax to force-mobilize resources for funding government projects has been equated to the fate of the villager in that folk story. In the short run, a government could forget about all its fiscal problems and enjoy the temporary solace provided by it. But in the long run, when inflation becomes uncontrollable, it will have to sacrifice all its temporary gains. When an initially mild inflation degenerates into an uncontrollable hyper-inflation later, it has been termed as a mass killer.
According to SWIFT data, almost 40% of transactions are denominated in euro. It truly is the second most important currency in the world after the dollar. The European Commission has recently taken steps to further strengthen the role of the euro, which are most welcome. iv Among other things, the Commission has launched the Capital Markets Recovery Package that introduced targeted amendments needed to develop euro-denominated derivatives for energy and raw materials. 1. Supplying euro denominated safe assets and enhancing Capital Markets Union An international currency is only as strong as the safe assets it can offer. The euro sovereign debt market is still fragmented and only a few Member States are issuing global assets in a sufficient quantity. In this regard, there have been interesting recent developments in Europe. In June 2021, Europe launched Next Generation EU (NGEU) which will raise over 800 billion euros through a joint issue of European bonds. More broadly, the deepening of European Capital Markets Union should, at end, be instrumental. v It would help both for the allocation of capital within the euro area and for the stability and balance of the International Financial System. Such an initiative is important as we face new policy challenges. The transition to a greener economy will require immense financing, and the digital transformation will also require both public and private investments. This all calls for investments in global public goods to be increasingly managed at the EU level. Two open questions remain.