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Viewpoint: Chief Economist

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  • 01 June 2021
  • 5 min read

Key points

  • The economic rebound triggered by the European reopening could be spectacular given strong consumer confidence and high cumulated excess saving.
  • The ECB should look through it, but the debate on the post-PEPP stance has started in earnest. We take a good look at BdF Governor Villeroy de Galhau’s latest speech.
  • In the US, the debate on the appropriateness of Biden’s economic policy continues. This week we focus on Adam Posen’s critical view of his approach to trade.

Europe is re-opening. The summer of 2020 is probably going to be the point of reference to gauge the magnitude of the looming economic rebound. The “mechanical recovery” could be spectacular again this year (assuming no bad Covid news). Indeed, while there is less distance to cover from the winter recession, which has been shallower than during the first wave, key components of consumer confidence – intentions to make major purchases, labour market prospects – are better oriented today than in the summer of last year, while accumulated excess saving, mostly stored in the most liquid financial assets, is even larger than in Q3 2020.

Such sudden “liberation” of spending capacity – although it would not tell us much about the trajectory of the economy beyond 6 months – will probably draw even more attention to production bottlenecks and inflationary pressure. Still, we should refrain from being overly influenced by the American “overheating narrative” when looking at the European situation. We think a wide majority of the Governing Council – including most hawks – are convinced the risk of runaway inflation is close to zero on this side of the Atlantic. When they argue for “tapering” PEPP, they usually do it from the point of view of financial stability.  The latest messages from the ECB make it very unlikely that the central bank would announce any reduction in the quantum of purchases at the June 10th meeting, but the policy conversation is only starting. We think it is already focusing on the looming battle on the calibration of the ECB’s “ordinary QE” when PEPP is over. We take some time this week to dissect Banque de France Governor Villeroy de Galhau’s latest policy speech, since in our opinion it lays the ground for what is likely to be the “doves” line of argumentation in this respect.

Meanwhile, in the US the latest dataflow is not helping the Fed’s doves. In a context of mounting inflationary pressure, it is not surprising that the discission on the appropriateness of Biden’s economic policy continues to heat up. This week we take a good look at Adam Posen’s criticism of Biden’s stance on international trade. What we find quite telling of the current intellectual mood in the US is that even when a prominent economist criticizes an element of Biden’s economic policy on “orthodox grounds” – Summers’ concern about the current overheating or Posen’s defense of free trade – ultimately their recommendations go in the direction of more state intervention and higher taxation. The “Washington consensus” of the early 1990s is well and truly dead.

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