On this occasion, the deficit doubled within three years, while the exchange rate appreciated once again. That country was the United States and the references are to episodes when the deficit grew rapidly in the early 1980s and again at the turn of the 1990s. And some observers detect signs today of a similar replay beginning. To be fair, however, it should be noted that the dollar tended to remain as firm during the years of deficit reduction in the late 1990s as it had when the deficit was rising in the early 1980s, and that, on balance, there may not be a very clear long-term relationship in either direction between the US deficit and the dollar exchange rate. But at least the US experience warns us against presuming there to be an automatic negative causation flowing from the one to the other. The relationship between fiscal and monetary policies It may be worthwhile examining more generally certain aspects of the relationship between fiscal policy and monetary policy. The economy can be characterised as comprising any number of different sectors. At the highest level of aggregation the classification is usually the public sector, the corporate sector, the household sector and the overseas sector (the counterpart to the external balance of payments).
Nonetheless, euro area GDP is expected, at end-2022, to still be somewhat less than 4 pp below the level that would have been observed according to last year’s December projections (the latest before the COVID-19 outbreak). 7  Given the exceptional uncertainty over future pandemic-related developments, this baseline scenario has been accompanied by a more favourably defined alternative scenario. In it, euro area GDP would, at the end of the time horizon considered, be slightly higher than was envisaged in December 2019. Another, more adverse scenario was also laid down, in which the negative gap relative to the 2019 reference would be around 9 pp. Inflation fell in August to - 0.2%, and its core component, which excludes energy and food, stood at a very low level of 0.4%. The ECB’s projections point to a gradual recovery in the coming years. At the end of the projection horizon, inflation would stand at only 1.3%, some distance off our related target. Moreover, several factors tilt the risks to economic growth to the downside: uncertainty over how the pandemic will evolve; the possibility of a no-deal Brexit; and a potentially more adverse reaction by unemployment and in the dynamics of corporate start-ups and company failures once the support measures have run their course. In parallel, there has been a progressive appreciation by the euro in recent months. This introduces disinflationary pressures at a time when the euro area inflation outlook is, as I said, for a record low.