Will we ever get out of this economic crisis?
The real challenge over the next few years will be to avoid the shipwreck of the eurozone economy in what is often called a Japanese-style deflationary scenario – but with the Chinese slow-down feeding into it. This scenario is looking more and more plausible as prices have been stagnating for two years now and the inflation rate remains desperately low. Technically, of course, this could be described as disinflation rather than deflation – or as tendentially low inflation, so as not to stigmatise a generalised fall in prices. There would also be grounds for distinguishing between good and bad deflation: a fall in oil prices leads to good deflation, whereas a drop in demand and wages produces bad deflation. Or we could cling to technical definitions – strictly speaking, deflation is when at least 60% of the prices on the inflation index (oil products excepted) fall, which is not the case.
But these subtle academic distinctions are neither here nor there. What we are going through is a crisis of demand, which is too weak. Hence, we have a growth rate that is not sufficient to ensure proper funding of our collective commitments. Many different factors are having an impact, and they are all part of major economic trends: an ageing population, the digitalisation of the service economy, the shifting of growth centres to other continents, a lack of industrial policy vision, an inability to modernise our economies through non-confrontational social dialogue, the maintenance of a partially ineffective Welfare State, an insufficiently entrepreneurial mindset, etc.
How can we escape this deflationary scenario? There is no single way out, but rather a series of overlapping solutions. These involve both budgetary and monetary policies, which will have to be unleashed simultaneously.
Economics often distinguishes between supply policy and demand policy. Policies that stimulate supply aim to flexibilise production costs and loosen the constraints on goods and services. Demand policies, on the other hand, take a Keynesian approach. They set out to stimulate demand for goods and services by increasing public investment and consumption, the aim being to boost private demand in turn (including through social transfers and fiscal reductions).
Managing an economy entails balancing demand and supply policies, but one thing is certain – at a time of very weak growth and of deflation, there is a vital need to stimulate domestic demand and exports. If the economic actors are terrified by a sombre economic outlook, they will rein in their consumption and investment. In which case, it falls to a higher being, representing society as a whole, to move beyond individual doubts and make large-scale collective investments designed to provide traction for private consumption and investment. The Juncker plan applies this logic, but its scale is much too limited.
Certainly, at the onset of the crisis, the automatic stabilisers did come into play, resulting in lower tax revenues and higher social spending. But, probably scared off by the increase in public debt and the need to equalise public indebtedness thresholds, States returned all too quickly to deficit reduction constraints.
At this level, it becomes plain just how incongruous it was to have so quickly imposed a Stability and (cynically) Growth Pact. This Pact demands the reduction of excess public debt by 5% per year, in order to get the public debt-to-GDP ratio down to 60%. This rule is now linked to what is called the “golden rule”, which means not exceeding a “structural” deficit (i.e. one that disregards cyclical fluctuations) equal to 0.5% of Gross Domestic Product (GDP). This Pact prevents the use of demand policies and thus helps to stoke recession and deflation.
Since the start of this crisis, I have expressed my conviction that inflation is a necessity. The crisis should have been immediately “monetised” by diluting debt. Some countries (the United States, the United Kingdom and Japan) did so very rapidly. That intellectual propensity stemmed from an intuitive sense that inflation enables the quiet dilution of debts incurred in a recessionary context when interest rates go down. So this was all a matter of refinancing public debt through a money supply increase implemented by the ECB. And the ECB did finally opt for the printing press, but too late. As the 1930s taught us, two years of mistakes can cost ten years of deflation. And we have used up those two years of mistakes. Why did the ECB drag its feet? Of course, the Germans’ reservations were one reason, but it was mainly because of the need to safeguard the existence of the euro by making it a strong currency, and therefore a currency that was too expensive. The euro has weathered the monetary storm, but the price has been deflation.
So to pull the eurozone out of its deflationary course, two aims would have to be aligned. Implementation of the Stability and Growth Pact would need to be postponed, so that each country could individually apply major investment programmes, without incurring any penalties for the debt increases that would result. These loans would cost virtually nothing, given the low level of interest rates. Concurrently, we would absolutely have to continue softening monetary policy through a permanent cash injection which, even if not decisive, would give the economy some breathing space. The present quantitative easing should be extended beyond the time limit that was set.
In conclusion, monetary and budgetary austerity has, at the very least, contributed to this situation of deflation and recession. All of this reflects the incompleteness of the eurozone and the peculiar position of the monetary authorities, who have been obliged to follow a monetary logic of deflation. Strangely, however, there have been few public expressions of concern at this situation. The fact of the matter is that deflation is accompanied by very low interest rates. And States, swamped by public debt and soon to be engulfed by pension funding woes, know that any rise in interest rates would reveal their financial vulnerability. So the monetary authorities of the eurozone have perhaps implicitly kept their own debts at bay by acting to the detriment of growth and employment. This will not be tenable in the long run – unless we take the unthinkable step of completely nationalising the economy.