The World Economy
Abstract
43 The World Economy SAGE Publications, Inc.1993DOI: 10.1177/002795019314500106 R. Barrell R. Anderton G.M. Caporale J.W. in't Veld The short-term outlook The deepening recession in Europe during the first half of 1993 has resulted in increasing pressure on the stability of exchange rates. The Exchange Rate Mechanism went through a crisis in late-July/early-August., and very wide fluctuation bands were adopted on the 2nd of August. Table 1 presents our forecast for output and inflation, which helps put the turmoil on the exchanges in context. Output is expected to fall in Germany and France in 1993, but the causes and consequences differ considerably. The recession in the former country may just take output back to a little below capacity whereas in France there has been a good deal of spare capacity for some time. We are expecting the West German economy to contract by around 2 per cent this year, the largest fall since the war. This is in part a reflection of the slow growth in activity elsewhere, but it is mainly driven by domestic events. German unification in 1990 was accompanied by a loosening of fiscal policy and a sharp increase in investment spending. Both factors increased demand