In a general climate of uncertainty and even concern, central bank action is at the centre of attention. In accordance with their mandate, it contributes to the restoration of economic equilibrium by effectively combating inflation. It also influences the evolution of the financial markets and is therefore an essential element of the economic policies of States. The two main central banks of the developed world, the Federal Reserve in Washington and the European Central Bank, have pursued expansionary policies of money creation to deal with the crisis caused by the Covid-19 epidemic. The Chinese central bank, for its part, has been asked by the Beijing authorities to mitigate the consequences of the real estate crisis, and has adopted easing measures to support activity, but without having so far obtained convincing results.
To combat the inflationary surge generated by rising energy prices and the disruption of many supply chains caused by Russia's invasion of Ukraine, the Fed and the ECB raised their interest rates before gradually reducing them in the face of the reversal in price trends. In a political context marked by uncertainty, where governments in Europe do not have a majority and where in the United States the president-elect's programme raises many questions, central banks have emerged as the few stable institutions capable of carrying out coherent action over the long term.
Added to this is the heavy debt of the States. Traditional policies to support demand relied on new government spending or tax cuts for households to stimulate consumption and thus business investment. They are no longer possible today in the countries of the euro zone to which the Maastricht criteria apply, and especially in Germany, which has even included very strict rules on public debt in its constitutional texts. As for the United States, the "Make America Great Again" (MAGA) philosophy is essentially based on direct state aid to companies to invest and reconquer their domestic market.
Monetary policy therefore prevailed over fiscal policy and, to use the terms of the debate of the 1970s, Milton Friedman won his fight against Keynes. It was not the first time, but today it has given central banks an influence on the global economy that has rarely been seen before. We have just paid tribute to Jimmy Carter, who died at the age of 100. It was at the end of its mandate, in 1979, that, in order to combat the inflationary wave born of the second oil crisis, the Federal Reserve raised interest rates to an unprecedented level of close to 15%.
The action taken by Paul Volcker led to a severe recession in 1982 (-1.9%) and above all to a brutal rise in the dollar. Between 1980 and 1982, the American currency appreciated by nearly 50% against the franc. The increase continued until 1985, but the main consequence for France, which was supplying itself with oil denominated in dollars, was a sharp deterioration in its trade balance. Contrary to what is often heard, it was not the Keynesian stimulus of 1981 that caused this deficit but the effects of US monetary policy on the cost of oil imports.
Today, we are not there yet, but the slight gap between the policies of the Fed and the ECB has still resulted in a 5% appreciation of the dollar over the past year. The transfer to central banks of an essential part of the economic policies of States is nevertheless problematic in a world where capital circulates freely, even if there are threats to the exchange of goods. These institutions are obliged to work together, and the result is policies that are well coordinated but do not necessarily meet the needs of the countries concerned.
The significant and growing gap between the United States and the European Union is constantly denounced. Despite very different situations and internal rules, their monetary policies are practically aligned with each other. To cope with the resurgence of inflation in mid-2022, they raised their key rates at the same pace and with similar amplitudes. This has done little to dampen US growth. Inflation has started to fall, while remaining significantly above 2%, but this has not stopped the Fed from cutting rates by 100 basis points in one year.
In the euro area, rising interest rates, in a context of already weak growth, have plunged the economy into stagnation. While inflation was already significantly lower than that observed in the United States, the ECB reduced its rates by only 100 basis points. At the same time, it put an end to the policy of "Quantitative easing" which had consisted of facilitating the financing of budget deficits. These stemmed from the measures taken by countries to mitigate the shock suffered by companies at the time of the lockdown and then during the sudden increase in energy costs. The rise in interest rates had also increased the burden of public debt. The modest decline that followed only partially offset the effects on the debt burden of previous increases.
The euro area still has higher real interest rates than those observed before the two crises, even though activity has not really picked up. And, what is rarely mentioned, rising rates are not neutral. It has different effects depending on the sector. First of all, it penalises the construction of housing. France is experiencing the opposite situation to that of China with an unprecedented drop in the number of housing starts. This affects the morale of households, which are experiencing increasing difficulties in finding affordable housing given the high cost of the loans they will have to take out.
The increase also affects capital-intensive industrial sectors requiring heavy investments in equipment that companies can only finance by taking on debt. We cannot set ourselves the objective of reindustrialising the European continent, completing the energy transition and access to new technologies at the same time, while continuing to impose high interest rates and when the objectives of reducing inflation have been largely achieved. The question does not arise in the United States, where there are no constraints on the level of public deficits and where the State does not hesitate to give direct and massive aid to companies under the MAGA program, which would be prohibited by the treaties in the European Union.
In most Western countries, we witness, at each election, a rise in populist movements due to deep discontent with the decline in purchasing power amplified by the deterioration of public services, and the deterioration of industrial production apparatuses with serious consequences for employment. But the conduct of economic policy has largely been transferred to the central banks, which, because of their independence, are not accountable to the political institutions of the states concerned. If this situation persists and its consequences become more serious, this could constitute a major flaw in the democratic system of these countries. This is why a redefinition of the status of these institutions may be necessary sooner or later.