Forecasts by international and private organisations currently project euro area real GDP growth in the coming one to two years to be somewhat lower than this year’s more than 3%, but to remain at around 3%. The exchange rate of the euro has remained a cause for concern. The depreciation of the euro during 1999 and 2000 has added to upward pressures on consumer prices in the euro area. The exchange rate of the euro has now remained out of line with economic fundamentals for a prolonged period of time. The G7 expressed concern about the global repercussions of the current level of the euro exchange rate. In order to support the euro, concerted interventions by all G7 members, on the initiative of the ECB, took place on 22 September, and the Eurosystem intervened several times in November. Recent Harmonised Index of Consumer Prices (HICP) inflation rates have been higher than could have been expected only a few months ago. Current inflation reflects the unexpected sharp rise in oil prices 1  BIS Review 109/2000  in recent months. Notwithstanding a possible decline in oil prices, annual HICP inflation rates are likely to remain above 2% for some time to come. It needs to be recognised that current upward pressures on consumer prices can be alleviated most smoothly if economic agents see them for what they are, namely one-off or temporary price increases resulting from external factors.
For instance, if the long-term trend growth of the economy is overestimated, the output gap (in absolute terms) would as a consequence be overestimated too and so would the deflationary risks. Monetary and fiscal policies would then be considered, ceteris paribus, as excessively tight and there would be a bias towards excessive expansion, with a view to achieving an optimistic rate of growth. The borrowing capacity of countries, households and companies would also be overestimated if their potential growth were overestimated. Ex post, the miscalculation of growth potential would result in an excessive accumulation of debt, both public and private, a misalignment between the interest rate and its long-term “neutral” level, and insufficient savings. As shown by Kydland and Prescott in their work on time inconsistency of optimal policy, which was later applied to monetary policy by Barro and Gordon, policy-makers who aim at excessively “optimistic” growth will conduct an inconsistent policy which will generate instability. The solution to this problem, at least for monetary policy, is to set a rule or establish an independent central bank which is aware of such an inconsistency and has a sufficiently long horizon to avoid it. This assumes however that the independent policy-maker knows what the right, “not over-optimistic” long-term growth of the economy is. He or she also has to know what the right model of the world economy is. This brings me back to the question I raised at the start, i.e. the impact of globalisation on the long-term growth of advanced economies.