ABSTRACT
In this paper, I intend to focus on the macroeconomic issues that confront this continent, and view problems of other areas from this perspective. This is a Eurocentric perspectives it does make sense in terms of the preoccupations of this conference, insofar as the continuing failure of Western Europe to generate jobs is the most serious economic issue of this decade. An improved European growth performance, on the other hand, could make a major contribution to improved world prospects, whether by:
helping the United States to cope with its current deficit and to reduce its budget deficit without triggering a recession;
helping developing countries to resume satisfactory growth; or
making it possible for Japan to head off the worrisome wave of protectionism which is affecting its exports both to the United States and to the European Community.
Such a European recovery seems unlikely at the present time. From a European perspective, the main risks in mid-1987 are indeed on the negative side, in comparison with a recent period when Europe did poorly, in spite of an external environment that was on the whole quite favourable. The high dollar, that had opened up markets in the United States and reduced competition from US firms elsewhere, has been replaced by a realistically-priced currency which, if current efforts to stabilize it remain unsuccessful, could become substantially undervalued. 2The US boom, that in three months will be the longest period of sustained expansion in US history, has helped European exporters up to now, but at some point a recession will take place. With the current trade policy stance of Congress and a weakened US Presidency, a sudden recession could destroy the uneasy truce that has so far held back the danger of a trade war. There is also the vaguer risk that the decapitalization of US business in recent years, as a result of the take-over craze, could heighten the economy’s vulnerability to a downswing. It had been possible until quite recently to pretend not to see that major developing country debtors defaulted on their debts some years ago, but this is now too obvious to deny. This has implications for the balance sheets of the world banking system and, more importantly, cuts off for some time a useful channel for capital flows that has helped to sustain overall economic growth. Oil prices, that had dropped markedly, have now bottomed out, and in fact the shock of another price explosion is not to be excluded as a result either of a short-run disruption of supplies in the Gulf, or of the energy shortage which experts have long insisted will hit the world in the long run, because of the poor success of oil exploration in the last two decades.