The American Challenge

When the economy and the international financial system were close to collapsing two years ago, everything was much more simple. Governments and central banks knew what they had to do, and they took action: boost the budget, lower interest rates and purchase large assets. Interest rates in the United States dropped to zero at the end of 2008, and the Bank of England followed suit in the spring of 2009, along with the European Central Bank, which lowered its rates to 1 percent. Central banks specifically increased their balance sheets more than people wanted and reacted to their obligations — to the Greeks in the case of the European Central Bank, and to lenders in the case of the Federal Reserve.

In this situation, the Fed was by far the most aggressive, absorbing in one year, between spring 2009 and spring 2010, more than $1 billion in real estate titles! However, at the time of the balance sheet, the results are hardly convincing. The American economy is not picking itself up as hoped, unemployment remains elevated, and inflation continues. In other words, the ailing economy is reacting little to the monetary potion administered.

Hence, the temptation — now official from the American central bank — to take more drastic action. The idea is the following: for the Fed to buy large quantities of bonds in the hope of lowering long-term interest rates to encourage corporations and individuals to borrow. This strategy, dubbed “QE2,” as it is the second stage of the “quantitative easing” plan, boils down to printing dollars, lowering its value and creating inflation.

In the case of inflation, the battle is far from won. It’s what worries American financial authorities — the scenario of the Japanese deflation — and it’s the reason why the Fed will continue to print money. The fact that it lowers the value of the dollar is not its problem, just a welcome secondary effect.

But this American policy does not pose to us, Europeans, an unseen challenge. Do we need to follow the Fed in a strategy that we are not sure will work? Can we let the euro appreciate without reacting? Do we also need to encourage inflation to reduce the weight of our debts? Between the plans contemplated by the Fed and the orthodoxy advocated by the European Central Bank, the divergence in policy between the two largest central banks has never been so great. And yet, the dollar and the euro appear to be the designated victims of this discrepancy.