RECOVERY? OR DEFLATION AND NEW FINANCIAL CRISES?

Paper presented at the Fifth International Conference of Political Economy “The Crisis: Scholarship, Policies, Conflicts and Alternatives” organized by the “International Initiative for Promoting Political Economy (IIPPE)”. September 16-18, 2014, Naples, Italy

Introduction The global economic powers are once again hailing an economic recovery–the second time they have done so. The first time was in 2009, when, thanks to expensive bailout programs, a relative stability was achieved in the financial markets, and the stock markets began to rise. That time, however, the European crisis put a damper on the triumphalism. This time around, the optimism rests on the recovery of the U.S. economy, where to a certain extent growth has resumed and the unemployment rate has fallen, though neither has returned to its pre-crisis level. In its April 2014 report (IMF, 2014a), the International Monetary Fund (IMF) estimated U.S. economic growth of 2.8% and 3% for 2014 and 2015, respectively–exceeding the average of 2% for the preceding three years. At the same time, IMF managing director Christine Lagarde predicted a possible end to hard times: « This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous in another way–the year in which the ‘seven weak years’, economically speaking, slide into ‘seven strong years’ “(Lagarde, 2014). The triumphalism of April was scaled back as early as July. The IMF reduced its latest projections of worldwide GDP from 3.6% to 3.4%, though it increased those for 2015 from 3.9% to 4.0%. Its prognosis for growth in the U.S. decreased more than a full percentage point, from the April estimate of 2.8% to 1.7% in July (IMF, 2014b). It attributed the diminished expectation of growth to the sharp first-quarter contraction in U.S. GDP (-2.1%) and to slowing growth in emerging countries. Nevertheless, it found cause for optimism: Financial conditions have eased since the April 2014 WEO was released. Long-term interest rates in advanced economies have declined further, in part reflecting expectations of a lower neutral policy rate over the medium term; indicators of expected price volatility have declined as well, and equity prices have strengthened. With euro area inflation in April below expectations, the European Central Bank cut its policy rate and deployed other easing measures at its June meeting. In this environment, capital flows to emerging market economies have recovered despite generally weaker activity, bond spreads for emerging market sovereigns have declined, and exchange rates and equity prices have stabilized or even strengthened in some of these economies. (IMF, 2014b) In my opinion, though it is true that financial markets have been more stable in 2014, than in 2013 when the Fed announced monetary normalization, the global crisis not only continues, but appears to be far from over. At this moment, two problems seem most important to me. One is the ongoing symptoms of a new recession in Europe, in spite of the weak recovery in some countries; the new European recession is determined by the maintenance of austerity programs and the reinforcement of deflationary trends. The other problem is the Fed’s gradual withdrawal of monetary stimulus programs, the tightening of monetary policy planned for the middle of 2015, and the repercussions of these changes on emerging economies. The United States and the European Union show conflicting economic signs. While the U.S. economy shows signs of recovery and the Fed is getting ready to end the monetary stimulus, deflationary trends are deepening in the European Union, and the ECB is moving ahead, if hesitantly, with the application of extraordinary stimulus measures. In this paper my objective is to offer some reflections on the development of these two contradictory realities. In the next part, I will examine the progress of the deflationary trends in Europe, and in Part 3, I will analyze programs of quantitative easing and their main effects. In Part 4, I will sketch out some ideas about the progress of monetary normalization in the U.S. and the risks implicit in this process. In the final section I will present some conclusions.

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