Un compromis monétaire favorable à l'Europe
Authors:   Département des diagnostics de l'OFCE, Sigogne Philippe , Fayolle Jacky , Baudchon Hélène , Chagny Odile , Falah Amel , Passet Olivier , Rifflart Christine , Chauvin Valérie , Péléraux Hervé , Milewski Françoise , Bouthevillain Carine 
Published: October 2008

A window is being opened to free Europeans countries from the pitfall of deflation, in case of suitable economic policies. The recent recovery of the dollar should not be viewed as a speculative move, being prone to a prompt reversal. It is probably more due to favourable expectations of foreign investors concerning the American growth performances and the further sustainability of the external position. Would European and Japanese monetary authorities keep short term interest rates unchanged for a while, exchange rates corrections could be durably achieved. The dollar would then reach 1 ,9 DM and 130 yens by the end of 1997. Intra-European exchange rates normalisation means a more favourable background for European firms. In the recent past, strong currencies have bound them to carry out a price war and lower trading as well as investment outlays. Now, one can expect some improvement of export market shares and, above all, a recovery of production and investment triggered by more attractive prices. A support from European fiscal policies is needed to consolidate this environment, particularly by avoiding an undue tightening during the pre electoral period. Sustained by a world trade upsurge in 1997 and 1998, international growth will be more balanced within the OECD countries. American growth stays firm. The impact of massive investments on supply have reduced inflationary risks. Now, monetary authorities can afford to manage-expansion with no sharp downturn. Liquidity conditions have been shrinking since 1994 and require just a further marginal action from the Federal Reserve. American growth, still firm in 1997 (2,8 %) will softly land in the following year (2 %). Japan is taking advantage of the slump of the yen but the coming budgetary reorganization will cut households' income and weaken private demand. In this context, it is the responsability of the monetary policy, by the way of the exchange rate adjustment, to settle a more dynamic pace of expansion. Net exports contribution might be essential to allow an economic growth above 3 % in 1998. Until now, German growth has only been fed by an export rebound. Private consumption is impeded by the employment downward adjustment and the industrial restructuring. Profitability of firms is improving but investment plans will go up only if price competitiveness is insured. In 1997, social saving plans will heavily pressure households' income. If actual adjustment succeeds to match the Maastricht critérium, fiscal policy might alleviate the burden on households in 1998 and become slightly expansionary. Economic growth would be stronger and would consolidate the fiscal achievements. Consumption might get a fresh impetus and domestic demand could relay the export upturn. Posting a moderate pace in 1997 (2,2 %), German growth should be more vigorous in 1998 (3,5 %). The present forecast of French growth (2,5 % this year, 3,1 % next year) is highly dependant on a shift in the monetary and financial environment : the recent and future rise of the dollar would ensure more exports, through a world-trade pick-up and market shares gains. Export profit margin would also turn up ; they were cut to make up for the loss in competitiveness so thus lying heavy weight on wages, employment, investment, etc... The expected rebalancing of the dollar would all the more unfreeze spending behaviour that it would reinforce the present rebalancing among the EMS currencies. Persistent low interest rates would allow uncertainty to be partly lifted. An export-led recovery would then materialize : as firms move away from their restrictive stance, it would imply the end of destocking, the resumption of hiring and then the pick-up of investment. Thus, domestic demand would accelerate : as soon as 1997 for the total domestic demand thanks to stock building, in 1998 for the final domestic demand thanks to investment. Economic policy will remain poised to match the Maastricht criteria : public consumption and investment are subdued and will be all the more so if risks of a wider deficit emerge. Productive investment would be the dynamic component of domestic demand, especially in 1998. But consumption has little ground for expansion, for it has been stimulated in 1996 by car subsidies : the drop in the saving rate has already occurred. Growth would be compatible with a further slowdown of inflation (despite the rise of imported energy prices), a growing trade surplus (thanks to industry) and would enable the unemployment rate to be curbed down. Job creations would progressively accelerate and reproduce in 1998 their 1988-89 pace, despite a lower GDP growth : the development of part-time jobs and the consequences of weak job creations in 1994 in the manufacturing industry would allow a neat resumption in the short term. Private income would be only slightly affected, but unemployment would stop growing and would even shrink assuming a neutral labour policy. Finally, the Maastricht criteria would be fulfilled, expenditures being capped and revenues raised if necessary.