Wednesday, January 2, 2008

Deciphering Jouyet

Alan Greenspan, former head of the Fed, was known in his day for "Greenspeak," the oracular language that emanated from the mouth of the all-seeing economic sibyl whose body had previously absorbed the effusions of the economy. Jean-Pierre Jouyet, one of France's oldest European hands and currently secretary of state for European affairs, bids fair to become the French Greenspan. His article in today's Le Monde, entitled "For a 'diplomacy of the euro,'" exemplifies Greenspeak à la française--la paroleverte, one might call it. Much wind whirls without disturbing so much as a blade of grass, but attentive readers are rewarded with this oracle near the end:

Our governments too often continue to view economic policy with the spectacles of small open economies whose first priority is to secure the external position of the national currency. That era is over. The nominal exchange rate of the euro vis-à-vis other major currencies is no longer as central an objective, given the size of the euro zone and its new global status.

The euro zone must also recognize that its considerable economic weight will enable it to influence global economic equilibria to the same extent as the United States, Japan, and China, provided it gives itself the means to do so. Just as there is a dollar diplomacy, so we must have a euro diplomacy.

As with Greenspeak, the implications of this delphic pronouncement are potentially many and varied. But I take the reference to seeing with "the spectacles of small open economies" to be first and foremost a challenge to the conventional wisdom of the post-Keynesian era, that fiscal deficits bring inflation and trade imbalances that eventually lead to devaluation. The discipline thus imposed on national economies has been a brake on the use of fiscal policy as economic stimulus. In contrast, the United States, for all its vaunted embrace of the free market, has been able to run huge budget and current-account deficits whenever it pleases, unconstrained by anything like the European Stability and Growth Pact. Jouyet appears to be saying that Europe is now in a position to do the same thing, to throw off the shackles of the SGP and use this new freedom to attack its persistent unemployment problem. Read against fellow Socialist's Eric Besson's insistence that a new social VAT is "inevitable" because of the SGP and the need for budget discipline (see previous post), Jouyet's declaration may signal a dissension on the fundamentals of economic policy within the government. If so, I would expect Sarkozy to favor Jouyet's side of the argument, which would give more tools to his voluntarist instincts. But the rest of Europe will have to be convinced first, starting with Germany, and that will take a more forthright statement of the position than Jouyet gives here.

No comments: