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«Europe. Economic and Monetary Union».

Topics for discussion

1. The EU: benefits of the single market and the single currency.

2. Four convergence criteria as means of bringing the European economies closer together.

3. Full economic and monetary union spells the end of a country’s right to determine its own economic policy.

4. The single currency may lead to regional conflict, not economic efficiency.

5. The creation of the euro will be the biggest change, in the world’s monetary arrangements.

UNIT V.                      Inflation.

Text A.

MURDER, THEY WROTE.

1. Дайте ответы на следующие 1. What is the effect of inflation

вопросы без предварительного         on economic growth ?

чтения текста :                           2. Do to-day’s low rates of inflation

                                                               in major economies defy pessimistic

                                                               forecasts of the recent years ?

2. Дайте ответы на следующие        1. What is the harmful cost of

вопросы после беглого просмотра         inflation ?

текста :                                                      2. Why has inflation proved so

                                                             benign in many countries ?

                                                        3. Is inflation burying premature ?

3. Прочитайте следующий текст и найдите ключевые слова и предложения:

MURDER, THEY WROTE.

Economists have spent a lot of ef­fort trying to measure the effect of in­flation on economic growth. Many gov­ernments would be grateful for clear evidence that it slows growth a lot: this would make it easier for them to justify the usually painful policies that are needed to bring inflation down. But the evidence, such as it is, is none too clear.

Theory points confidently to the view that inflation (especially the unantici­pated kind)hampers growth. It inevitably causes uncertainty about future prices; this in turn will affect decisions about spending, saving and investment, caus­ing resources to be misallocated. Inflation has other costs too. It may cause substan­tial redistributions of income and wealth - notably from savers to borrow­ers. And if it discourages saving in this way too, then investment and growth are likely to suffer all the more.

However over the past few years in­flation has turned out lower than most observers expected. The average inflation rate, of 2.2%, in the seven biggest industrial economies is at its lowest level for 30 years. Most people alive today have been brought up to believe that it is normal for prices to rise every year. Yet countries have experienced continuous inflation only since the end of the second world war ; before then, prices rose in some years, but fell in others, leaving the aver­age price level unchanged over long periods. Economists reckon that we are about to return to such a world.

The prediction is based on powerful structural changes in the world economy. Labour-saving technology, weaker trade unions, and stronger competition at home (thanks to privatisation and de­regulation) and abroad (imports from low-wage economies) have made it harder for workers to push up wages and for firms to raise prices.

Most economists would agree that technology and globalisation may well al­low economies to grow faster than in the past before inflation takes off. But there are claims which are much more  controversial than that. The argument is that these structural changes will make a resurrection of inflation almost impossible for the fore­seeable future.

Some economists reject the orthodox economic view that inflation is primarily a monetary phenomenon - ie,the result of too much money chasing too few goods. Crude monetarism - the no­tion that a rise in the money supply is automatically followed by a rise in prices - has long been discredited, in part because different measures of “money” behave differently. But,even if it is not the

sole yardstick, monetary growth still mat­ters. If lax monetary policies allow economies to grow too rapidly, inflation will eventually start to rise.

Indeed, it must be accepted that even in the new world of price stability, governments will still need some form of nominal anchor - a target for, say, inflation or the exchange rate - to keep inflationary pressures in check.

The death-of-inflation thesis is flawed in several other ways. For a start, rich countries’ imports from emerging econo­mies are supposed to constrain price rises. But these imports today are not much bigger as a share of rich nations’ gdp than they were in the late 1980s, when inflation last took off.

Another objection to the thesis is that competition from emerging economies should affect only relative prices, not overall inflation. It will hold down the prices of basic manufactured goods in rich countries. But with a given stock of money, these lower prices will increase the real money supply. This, in turn, will boost spending on other goods and ser­vices, raising their prices. Moreover, emerging economies will spend their ex­port earnings on imports from rich coun­tries, again pushing prices up. Likewise, foreign competition should swell.

Finally, there are two big differences between past eras of price stability and to­day. The gold standard, which was aban­doned in the 1930s, played a crucial role in keeping the value of money stable, by tying currencies to gold. Another big dif­ference with the past is that governments now provide extensive social safety nets, which put a floor under wages. This makes it hard to see how wages (and hence prices) will fall in reces­sions, as some predict.

Not quite a zero era

The least controversial, and  most useful is the analysis of how firms, workers, investors, pen­sioners and governments need to adapt their behaviour to zero inflation. Much of this is still valid even if inflation persists, albeit at lower levels than in the recent past.

For instance, in a period of low inflation, a home becomes simply a place to live, rather than a specu­lative investment. Workers can no longer expect annual pay rises. Companies and savers must also get used to lower nomi­nal annual returns on their investments. The snag is that people suffer from what economists call “money illusion”: price stability makes them feel worse off. In­deed, their very fondness for inflation will make it harder to kill off.

Financial markets, by contrast, hate inflation. And their behaviour does support the thesis: investors now swiftly penalise inflationary policies by charging governments higher interest rates on their debt. This should help keep policy-makers on their toes. They need to be alert. A big reason why inflation has re­mained subdued in most countries is that there is still considerable spare industrial capacity. The real test will come as eco­nomic recovery builds up steam.

Perhaps it would have been better if, instead of (prematurely) burying inflation, the economists had focused more on what governments can do to ensure that it remains low. One way of doing so would be to entrench price stability as the princi­pal formal goal of monetary policy. That could prove to be a particularly effective murder weapon.

VOCABULARY

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