Except if there are, as during these last three years, major events, by nature unforeseeable, hurting the world economy, we would not know in 2023 a heavy recession. But the crisis will leave lasting traces which will affect the action of the public authorities and the behaviors of the economic agents. The world is coming into a new era. That already had occurred in the past, in the days following the Second World War with a long growth period and after the Berlin Wall fall, which had marked the end of the Cold War, with the emergence of the globalization. That time, it is the tools of the economic policy which will have to be adapted, and that will lead to significant changes.
The first one regards the central banks which, for forty years are at the heart of the major economic decisions. A clear mandate had been given to them, to bring down inflation at a level considered as acceptable, 2%. They had, with a total independence, to use the tools put at their disposal, the basic interest rates fixation and the intervention on bonds markets in order, in the case of an inflation slippage, to slow the economic activity and so to reach their objectives. It is then that, in 1980, the policy put into place by Paul Volcker had lead the basic rate of the Federal Reserve above 15% when inflation was overpassing 10%. We are far, today, to notice an action with the same nature. The last Fed increase, occurred in December has sent the rate to 4.5% when inflation, which had reached 9% in July was still at 6.5% at the end of the year. This inflation slowing has been enough for considering that the next rate increases will only be by 25 basis points, the now anticipated peak being in 2023 around 5%. But inflation will be very probably superior to that level and the real interest rate will remain negative by large, which can hardly lead to slow the activity and to bring down inflation around 2%.
The same phenomenon characterizes the action of the European Central Bank, whose mandate is stricter than the scope inside which is acting its American counterpart. When the forecast inflation in the eurozone in 2023 is 6.3%, its basic rates would stay largely below that. In the past, it had figured with determination, monetary rigor. The era of the hawks, in both sides of the Atlantic is well over and that for three reasons. First, the effects of their action are not any more the same than in the past. They regard the currencies rates. When the Fed has started its tightening during last Spring, the dollar immediately increased by around 10% against the euro. It has been enough that, these last weeks, the markets take into conscience that this tightening was going to slow, for the dollar loses most of its progression against the euro, whose value is now 1.085 against 0.98 a month ago.
But these fluctuations are without any connection with the target of slowing activity in order to soften the inflationist tensions. To the opposite, a much stronger rate increase, directly though the basic rates rise or through interventions on financial markets in an opposite direction compared with what has been done these three last years by the ECB to keep rates at a low level, would have heavy consequences for the States which are going out highly indebted from the recent events. Major financial crisis could then hit them.
The third reason is political. It leads monetary authorities to prefer inflation to possible recessions, generated by their action, which would make the current governments more fragile. In the actual context and which will last because tensions are not going to disappear, that would favorize the coming into power of extremist political parties. A major watershed is so coming in the central banks attitude. They became aware, without publicly recognize it, of that some remedies are worse than the disease and that the fight against inflation couldn’t ignore the financial and political risks that a too much aggressive action could generate for the related countries and so for the world.
The second major change is the rise of protectionism. It comes from the nascent rivalry with China and from the consequences of the sanctions adopted against Russia after the invasion of Ukraine. The temptation has always been strong in the United States and the Buy American Act is not something new. To the opposite, the European Union had been founded on the free-trade principle and it has built its unique market. But the American reaction to the new world environment with the adoption of an openly protectionist Act, under the pretext of fighting against inflation and supporting the energy transition constitutes a strong signal, showing that the liberal vision of the international trade which had allowed the birth of global supply chains is now over. That is not only about Chinese chips and Europe is starting to worry about it. The institution of carbon taxes at the borders could constitute a first step and retorsion measures against the U.S. and new protections toward China are seriously studied. The logic according to which exchanges liberalization was an acquired point and must continually be deepened is over and for a long period.
The third change, which is the logical consequence of the previous one, is the comeback of States intervention in enterprises life. The re-industrialization and the rebuilding of the supply chains, made necessary by the political threats, regarding Russia or China, cannot be achieved in following the market rules because they will generate supplementary costs and enterprises will not spontaneously engage them. It is the reasoning the American administration has done and it is going to be followed by Brussels which has opened the door, which was unthinkable three years ago, to a reform of the supports offered by the States to enterprises. To that international environment which creates new constrains must be added environmental stakes. The market rules will not naturally lead to build shorter supply chains, to reduce greenhouse gas emissions and to develop renewables. The States will so facilitate the necessary investments through subsidizing them or through offering privileged financial conditions.
The energy crisis in Europe has also shown a major weakness. The liberalization of the production and of the marketing of natural gas and electricity has exposed countries to a high foreign dependance for these strategic goods. It has not protected consumers and enterprises against massive price increases and several big suppliers have even had, as Uniper in Germany, to be nationalized or to receive very important public subventions. The States comeback to protect essential public services is so unavoidable.
These ones will also have to intervene in order that the conversion of transport modes into less CO2 emitting sources occurs in the announced timing. Important aids are already promised regarding the construction of batteries plants in the U.S. as in Europe and to repatriate the production of the semi-conductors which will notably equip private vehicles and trucks in the future.
The economic world is so really at a turning point and the rules as the ways of thinking which have been applied these last decades are now obsolete. A large effort of reflection and of concertation is essential in order that this new reality is well understood both by political leaders and by concerned economic agents.