Financial markets’ scenario for the euro zone is not credible

Financial markets’ scenario for the euro zone includes the following components: Very rapid fall in inflation; Real short- and long-term interest rates remaining near zero; Persistently weak euro. Given that fiscal policies are expansionary and are preventing household purchasing power from falling despite the sharp rise in commodity prices, this scenario is unrealistic. If real interest rates remain more or less zero and fiscal policy remains expansionary, the policy mix will remain stimulatory and there will be no recession or sharp rise in unemployment (especially as companies’ hiring difficulties are holding back their hiring plans). If there is no recession and if, moreover, the weak euro drives up import prices, there will be no rapid disinflation, especially given the purchasing power catch-up that will take place. Something is wrong in this scenario: Either inflation will subside much more slowly; Or interest rates will rise much more sharply.