Will inflation lead to another Covid-related economic crisis?

Before and during the pandemic, we might have thought that all European economic indicators were under control† We are left with supply chain bottlenecks, higher shipping costs, a worrying worsening foreign trade deficit and labor shortages as the pandemic is not over. Is it temporary? Many economists believe that rising costs in manufacturing will weigh on inflation for a long time to come. The combination of the recovery plans of the countries of the European Union, the federal recovery plan for Europe of EUR 750 billion, and very large forced savings by European households (EUR 600 billion) will certainly lead to a very sharp increase in consumer demand.

The limits of the ECB…

The ECB is today hitting its own limits in pursuing its core mandatemaintain price stabilityinterpreted by the ECB as controlling inflation so that it does not exceed 2% over a year. In 2008, in light of the financial crisis, the ECB injected EUR 4,000 billion from 2011 to 2017, representing a third of the euro zone’s GDP It cut its key rate to zero (the lowest) and bought public and private debt Today the ECB is under great pressure to reduce its program of debt purchases The debt policies of several European countries, including France, is tragically high The ECB has run out of resources to produce liquidity The austerity policies in Europe may become unavoidable.

ECB follows Fed policy which has just stated that it wants to raise the key rate as soon as two conditions are met: inflation above 2% and maximum job creation. For inflation, Europe will average 2.2% in 2021. The expected inflation rates of 1.7% in 2022 and 1.5% in 2023 will not be achieved. Inflation will generally rise longer than the ECB thinks. It may fall, but no analyst sees it falling below 2% in 2022 and 2023.”We must be very vigilant about the evolution of inflation,” said IMF director Kristalina Georgieva. For the second condition, unemployment must fall back to pre-crisis levels by early 2023. This decline will require growth to largely offset the increase in layoffs following the abolition of partial unemployment schemes introduced since the onset of the health crisis. For France, according to the OFCE, the unemployment rate should fall to 7.8% of the active population by the end of 2021 and then rise to 8% in 2022. This forecast is close to that of the Banque de France (8.2% in 2022). Could we get an interest rate hike in 2022?

The impact of growth on employment

The Banque de France expects GDP growth to rise to 6.3% in 2021, then to 3.7% in 2022 and 1.9% in 2023. This recovery of the French economy comes after a historic recession in 2020 8.2% of GDP. Given this recession, growth will average around 2% in 2022 and 2% in 2023. The economic growth rate only determines the absolute ceiling below which employment growth can evolve. According to several economists and institutes, including the OFCE, it is believed that from 1.5% of minimum growth, unemployment can start to fall. This 1.5% growth limit is not fixed. With the necessary budgets, the state can create many jobs for growth that will only be felt later. These budgets are massively invested in long-term projects such as climate change. With €30 billion in investment in advanced technologies, the France 2030 Plan is a very good start, but it falls short of the net zero CO2 emissions targets.

We must avoid raising the ECB’s key rate and avert the fiscal malaise† †In 1974-1975, the industrialized world is witnessing the deterioration of key economic indicators: inflation, decline in growth rates, unemployment. At the time, few economists understood that these indices announced that the industrialized countries would enter an economic crisis that would last more than twenty years. Larousse Encyclopedia. We need to transform society as a whole and move to a different economy.

Towards an eco-social economy to overcome crises and “the establishment of a real economic and social democracy, driving the great economic and financial feudalism from the management of the economyStéphane Hessel was outraged in 2010. It is time to end the liberal period that began in 1973 and reform the ECB to put it at the service of environmental and human development. The accepted definition of the eco-social economy is that creates a balance between an efficient economy, social solidarity and environmental protection based on citizen investment. When central banks reach their limits, Will governments now have no choice but to convince savers to lend their savings?

For post-Covid France with the return of inflation, the normalization of the economy and health must be accompanied by a change in the application of the convergence criteria. The call for family savings (6% to 10% of GDP over 10 years) for investment funds intended to finance nature, dependency, countryside, businesses, etc. will be the surest way to restore France’s macroeconomic equilibrium in the eurozone. Borrowing from households in a regulated framework such as the livret A is easy and should pay off against inflation. This is the safest way to reduce government debt. It also means avoiding precautionary savings and promoting growth. With a huge investment for a state without resorting to external borrowing, there is less money creation, less excess liquidity and a surge in the stock market. It is more growth without inflation and a return to an unemployment rate from before the oil shocks of the 1970s.

(1) Inflation is rising, growth is slowing down, unemployment should rise in 2022.

(2) The acceleration in inflation is temporary.