First, over the medium and long term, growth is determined by productivity, investment and the quantity of labour mobilised in the economy. At this time horizon, there is no trade-off  2  BIS Review 92/2007  between inflation and growth, and monetary policy is neutral with respect to output and employment. Second, inflation itself is strongly influenced by the expectations of economic agents, both households and enterprises. These agents are increasingly well informed. They quickly perceive developments that threaten their purchasing power or the value of their savings. If monetary policy is likely to encourage inflation, they adjust their behaviour very rapidly, for example by asking for higher wages, thereby triggering a wage-price spiral; or by demanding greater remuneration of their savings, resulting in higher long-term interest rates and slower growth. How, in the ECB Governing Council’s view, can monetary policy make an effective contribution to economic growth? First and foremost, by anchoring inflation expectations. If monetary policy is credible, confidence prevails and economic agents make their decisions in a more reliable environment. Economic signals are less blurred by concerns about inflation. Shocks are more easily absorbed, or at least are less amplified by economic agents’ attempts to shelter against the risk of inflationary pressures. Overall, the economy is less volatile, business cycles less pronounced and economic growth steadier. More fundamentally still, maintaining the internal value of money means preserving consumers’ purchasing power. French citizens, who are clearly committed to price stability, know this.

Thus, despite the significant improvement in the employment situation, the total number of hours worked in France each year hardly increased between 2000 and 2006. Higher costs and sluggish supply: overall, the French economy is still absorbing the effects of the reduction in the working week and the wage catch-ups which it has given rise to over the past ten years. And these effects have a delayed yet strong impact on the external performance of the French economy. Reforms In order to reinforce the growth dynamics beyond the current cycle, it seems necessary to considerably increase the quantity of labour. The European countries whose per capita income is expanding most rapidly have enlarged and activated their workforce via increases in participation and employment rates. This assessment is encouraging for France, which has, thanks to its demography, large growth reserves. If these could be “activated” by appropriate policies, France should, in a few years, be able to substantially raise per capita income and catch up with, or even overtake, the best European performers. This catching-up is feasible and the current economic recovery provides a particularly favourable context in which to implement ambitious reforms. It requires a radical change in habits and policies. In addition to reducing the social contributions weighing on overtime, it is also necessary to take measures to raise the participation rate. Some would be simple and not too costly: for example, allowing pensioners, without any restrictions, to draw a pension and a wage concurrently.