June 8, 2008
President Nicholas Sarkozy is definitely on the right track when he criticized the European Central Bank for not recognizing that inflationary circumstances are not the same as those of thirty plus years ago. The rebuke he received for stating this fact from the head of the European commisssion was unwarranted and demonstrates how out of touch with reality European monetary and governmental officials are when considering what to do about the threat of higher oil prices destabilizing the European and global economy. The wage -price spiral of the 1970s is simply not possible today after close to thirty years of policy that has kept unemployment higher than that compatible with the natural rate of inflation. Globalization and trade liberalization has led to massive outsourcing to cheaper wage centres of production thereby making it virtually impossible for unions to raise the price of labour. In fact, the exact opposite has occurred and the head of the European commission ought to understand this.
Félicitations M. Sarkozy pour votre comprehension et intelligence. Vous avez raison. Le monde a changé beaucoup et la solution pour le menace des augmentations des prix pétroliers n'est pas l'augmentation du taux de intérêt.Une politique qui met l'accent sur plus de conservation, les sources de l'énergie alternatives, l'augmentation de l'offre de pétrole, plus de competition et plus de regulation du marché futur est meilleur.
Simply raising interest rates can only lead to stagflation and eventually as the resulting growth slow down crunches the economy sufficiently to lower oil prices, assuming that Chinese and Indian demand would also slow significantly, to a serious and deep slump. This can be avoided by resisting the siren call of the monetarists at the central banks.
President Sarkozy has made a good start. It is time for others to follow.
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