Do not let the real economy down!
The autumn 2008 report from the European Trade Union Confederation (ETUC) on the economic situation sounds the alarm regarding the real economy. The economy will continue to decline over next year and unemployment will rise further. With inflation expected to start falling rapidly, policy should be extremely careful in avoiding to get trapped into a Japanese-style deflation. ETUC therefore calls for a different policy mix: both fiscal and monetary policies need to turn expansionary; robust investment programmes need to be set up to modernise the economy and this is to be accompanied by deep interest rate cuts.
European governments and central banks are trying to save the financial economy by directly supporting banking activity and cutting interest rates. This is necessary and welcome. However, the real economy also urgently needs saving. Economic activity, aggregate demand and jobs require immediate support. In the absence of such support, the downturn in the real economy will:
destroy much of the capital that was given to save the banks;
push inflation rapidly down, thereby raising the risk that inflation becomes negative and the economy finds itself in a deflation trap.
ETUC warns European policymakers to avoid the policy mistakes Japan has made:
monetary policy must win the race against deflation. Interest rates need to be cut fast and deep before inflation would turn to zero;
downwards wage flexibility needs to be avoided; if not, the deflationary process gets a major boost;
precarious work, thus weakening workers’ bargaining position, is another accelerator for deflation;
pro-cyclical tightening of fiscal policy is to be avoided and a rise in public liability, thereby offsetting the decline in private indebtedness, is to be accepted.
ETUC calls for another approach in macroeconomic policymaking. Both fiscal and monetary policymaking need to turn expansionary. We need a quickly implemented fiscal expansion, through investment spending, to ease the blows that economic activity would suffer otherwise in 2009. Monetary policy needs to assist fiscal policy by engaging in deep interest rate cuts, thereby providing cheaper finance for governments. To implement this, a European Investment Fund, mopping up excess savings from the rest of the world and channelling these savings into investments in Europe, is to be set up.
Says John Monks, ETUC General Secretary: ‘Europe faces the danger of a triple D-scenario: Debt reduction leading to depression, leading to deflation, and from there back to excessive debt and deleveraging. We need leadership from the Commission, the Council and the central banks to avoid this scenario at all cost’.
Further information:
See the ETUC Autumn 2008 report, entitled Do not let the economy down!, on the economic situation in Europe.
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