In the United States and Europe there is the risk of witnessing an economic policy destined to follow the "flip flop" of the central banks, engaged in an exhausting chase behind the interest rate curve to stem inflation and immediately afterwards to avert too severe recessions. It is a scenario that would cause much more damage to an economy, that of the Eurozone, which despite the single currency continues to have autonomous fiscal policies and asynchronous relationships with the financial markets that buy sovereign debt issues. The fact is that in the USA in the first quarter of 2022 growth was negative (-1,6%), with a large downward revision for consumption. Even more significant are the data on business confidence, which fell much more than analysts' expectations in the June survey. Carlo Ambrogio Favero, macroeconomist, directs the Bocconi Finance Department and is a lead researcher at the Center for Economic Policy Research.
Has the central bank dilemma been resolved in favor of a recession?
“I would say no, for various reasons. And in any case, the real dilemma to be resolved concerns the ECB, the Fed faces an easier scenario to deal with. In the USA, inflation is driven by the great expansion of demand built with Biden's policies to deal with the pandemic. The problem of war is already being partly reabsorbed with a reorganization of the mechanisms of aggregate supply. In Europe, however, inflation depends on a shock on the supply side. The effects of a tight monetary policy are less recessive in response to a demand shock (FED).
We come from ten years of expansionary monetary policies, many economic systems have become accustomed to low or close to zero rates. What unprecedented consequences could the rate increase in this particular international situation have?
«The yield curve in the USA is homogeneous, in Europe it must be avoid the risk of fragmentation. In any case, I would distinguish the economic cycle determined by monetary policy and the economic trend which is instead determined in the medium-long term by productivity and demography. Productivity and the current demographic structure lead to a forecast of positive equilibrium real rateseven in recent years".
Should we not therefore expect “unpredictable” deviations in the coming months?
“Monetary policy must also look at the equilibrium of long-term rates. And this rate hike process certainly brings us close to a balance situation. Despite a Western demography in great pain, despite aging a lot, the economies continue to grow".
Back to the original question: the coming recession will be light and easily manageable, so don't worry about the dilemma?
" transition to the green it's making a major resurgence productivity. Productivity and demographics easily permit an interest rate policy close to 2%. Indeed, the current structure of the economy is close to even higher rates”.
The global repositioning of geopolitical alignments is also redefining the strategic positions of global currencies. What should we expect for the euro-dollar exchange rate?
“Europe has a much more difficult task than the USA, it must be reiterated. I expect the dollar to appreciate, because uncertainty about inflation will in any case lead to problems of fragmentation in Europe. Perspective is parity. I don't see a political and economic situation capable of seeing the euro higher than the dollar. The movements of the two currencies around parity will therefore be the benchmark for predicting the future”.
Will the friction between the two currencies also be a weapon to re-evaluate the export quotas between the two sides of the Atlantic?
"In the coming months, financial transactions and capital movements will determine the balance of power, rather than the current trade account".
If the ECB's monetary policy proves inefficient for managing economies that are still very different from each other, will we find the risk of stability in the eurozone on the agenda again?
“It is an extreme scenario. Geopolitics has strengthened the European Union in recent months, the consequences of an implosion of the single currency are not even imaginable. Even any single euro exit project would be a mistake, Brexit is there for all to see. For Italy it would even mean finding itself in a situation of total unmanageability of interest rates on public bonds”.
Inflation confronted us with the extreme energy fragility of our country. Could this be the lock pick to broaden our range of supplies?
“Absolutely yes, among other things we are lucky to be able to count on a premier like Mario Draghi and on a government that has moved a lot in this direction. Inflation is certainly an opportunity to modernize our industrial policy, “silver lining” the British call it. And it is at the same time an opportunity to partially reduce the size of our sovereign debt compared to the main macroeconomic indicators. If politics is able to manage this phase in the best possible way, we could also put the last 30 years of low growth and low productivity behind us”.
