At DG ECFIN's Annual Research Conference held on 15 November, about 100 participants from research and policy-making circles discussed the theme: "Economic hallenges of the 2020s".
- Friday 15 November 2019, 10:00 (CET)
- Friday 15 November 2019, 10:00 (CET)
- Charlemagne BuildingBelgium
Commissioner-designate Gentiloni calls for ‘new approach’ to tackle economic slowdown, future challenges
Europe faces many challenges and policymakers need to take a new approach to tackle the economic slowdown and ensure that Europe can be more than a mere spectator on the world stage, European Commissioner-designate, Paolo Gentiloni, said at the ECFIN Annual Research Conference.
‘Given the global uncertainty and slowdown, a new approach is needed,’ said Gentiloni. ‘There is no shortage of challenges here in Europe or in the rest of the world,’ he said, citing examples such as the transformative investments needed to address climate change and fair taxation in the digital age.
The complexity of the challenges facing Europe mean that ‘it is important our work is based on the most advanced understanding of economics,’ the EU’s future Economy Commissioner said. ‘Our purpose today is to help bridge the gap between what academics and researchers can tell about the challenges of our time and what policy makers can do about it,’ he told the conference.
Economic theory, however, may not necessarily have the answers to our political problems, Gentiloni warned the gathering of influential economists and Commission officials.
The coming investiture of the new Commission was a good time to reflect on the EU’s priorities and Europe’s position on the world stage was a key issue, he said.
‘We live in uncertain times. Looking forward to the next five years, I think our position is clear. We need a stronger European Union, one that is sufficiently strong to avoid the role of spectator in the possible new cold war that is designing its profile in the world.’
Europe has the potential to be a strong global player thanks to its social model, environmental leadership, ‘and the potential upgrading of our geopolitical role as a champion of free and fair trade and multilateralism,’ he said.
‘But this future is challenged even within our union,’ said Gentiloni, who argued that the “backward looking anti-EU sentiment in our union has strong economic roots.”
The incoming Commissioner praised the accomplishments of the Juncker Commission and DG ECFIN over the last few years but said Europe still needs ‘need more growth and more quality in growth.’
Europe also ‘needs to reflect on how to best adapt’ its economic and fiscal surveillance framework, said Gentiloni, who stressed the importance of winning over citizens and stakeholders.
The emphasis on consensus may be ‘one of the great complexities in European policymaking’ but it may also be its ‘noblesse’ he argued, adding that it was becoming increasingly challenging and important to reach a consensus across political lines and especially across countries on many issues concerning Europe’s economic and monetary union.
The future of capitalism: Sir Paul Collier on society’s rifts and anxieties
Capitalism is the only system we know that can deliver rising prosperity but it cannot be left on autopilot since it periodically derails, said Sir Paul Collier. We are living through such a period of derailment now and policymakers need to step in to adjust the widening rifts in our society between metropolitan and rural communities, advanced and poor countries, and high and low skilled workers.
In his Distinguished Lecture to ECFIN’s Annual Research Conference, Sir Paul Collier did not shy away from the fundamental questions: how can we re-calibrate capitalism so it benefits all? While adjustment is needed, for Collier there is no doubt that capitalism has to be our future: ‘It is the only system we know that can deliver rising prosperity’. But capitalism cannot be left on autopilot, since it periodically derails. According to Collier, there have been three such: the devastating health conditions (‘killing fields’) in industrialising British cities in the 1840s; the Great Depression in the 1930s; and the recent financial crisis, whose origins can be traced to the 1980s. Whereas responses to the anxieties caused by the first two derailments were eventually found, not enough is being done to address the current situation, he said.
Collier identified three major rifts: a widening gap between thriving metropolitan centres and left-behind rural areas; wealthy versus poor countries; and a growing divide between those with college education and those who are manually skilled. The main driver of these rifts is an interlinkage of globalisation, cluster effects, and increasing complexity, as the price for higher productivity.
‘The concept of ethical capitalism is often considered an oxymoron, but history shows it need not be,’ said Collier. Capitalism, he said, can be characterised by long-term collaboration based on mutual trust, not just by competition. While Milton Friedman’s oversimplification of Adam Smith’s ‘invisible hand’ depicts profit as the sole purpose of businesses, in the past, businesses recognised the responsibilities they had to their communities; and citizens, their reciprocal obligations to one another. Hence, there used to be a dense web of reciprocal obligations. Today, however, most obligations have moved up to the State (and away from businesses and citizens), while rights moved down to the individual. Rebuilding this web of mutual obligations could be an important step towards narrowing the rift between societies’ winners and losers.
To address the rift between booming cities and provincial areas, as well as between the low-skilled and high-skilled, Collier argued that it isn’t sufficient to transfer consumption, but that people need to contribute to society through productive jobs – and those must be brought to the regions where people belong, to avoid severing family bonds. ‘What needs to be transferred is productivity, not consumption’, he said. But they do not necessarily have to be jobs that require university degrees; instead, vocational training should be strengthened. Underlying his many concrete proposals, Collier advocated a new commitment to do ‘whatever it takes’. Most of all, Europe needs pragmatism, not ideology, to overcome its divergences and the derailments of capitalism, he said.
Market structure and income distribution: a comparison between the US and the EU
Markets have become more concentrated over the last 20 years in both the US and the EU but the nature, degree and causes of concentration in the two regions are quite different. Professor Thomas Philippon, Professor of Finance at New York University Stern School of Business and author of the recent and widely well-received book ‘The Great Reversal,’ presented his analysis.
Over the past two decades, there has been a dramatic increase in concentration in US markets. ‘While there is not much disagreement about the fact in itself, there is much disagreement about its interpretation’, said Philippon.
There are two types of concentration said Philippon: ‘good’ and ‘bad.’ Market concentration can be ‘good’ if it is driven by price competition, intangible investment, and increasing productivity; but tends to be ‘bad’ if it is the result of barriers to entry, excessive profit margins, lower investment, higher prices and lower productivity growth.
Philippon’s analysis shows that although there are some examples good concentration in US markets, such as in the retail sector, most of the increase in concentration has been bad. Several hints point in this direction: a lower than predicted investment rate, a declining contribution of superstar firms to US productivity growth and increasing barriers to entry.
Is this increase in bad concentration in the US driven by technological change or policies? To understand this, Philippon believes the natural place to look is Europe, as some policies are different but many technologies are the same.
Industry concentration is also increasing in Europe, though it is less pronounced than in the US and has evolved differently. ‘What is striking is that in the US, the concentration is mostly driven by policies’ he said, adding that the EU has reinforced its deregulation and antitrust policies to boost competition, while the US, which started with healthier competition, is now drifting in the wrong direction.
A clear example is the comparison in prices of telecommunication services between France and the US. Prices were higher in France until 2011 but fell by 40% within two years and remain lower today. This was due to one single policy event - the granting of a fourth mobile phone operating license in France in 2011, which resulted in the new entrant, Free, driving prices down. Today, telecommunication costs are generally two to 2.5 times more expensive in the US than in Europe.
Philippon showed how this shift is due to policies. Corporate lobbying and campaign contributions, have increased by a factor of three or four and appear to play a major role in influencing US regulators, he said. Antitrust enforcement appears to have weakened and barriers to entry seem to have risen, he argued.
In terms of the aggregate costs of monopolisation in the US, Philippon estimates that US GDP would increase by almost $1 trillion if its economy returned to the competition levels that prevailed around 2000. He also added that “the flip side of this argument is that thanks to the better policies that we had in Europe over the past 20 years, we can take advantage of these benefits”.
Chiara Criscuolo, Head of Productivity and Business Dynamics at the OECD, agreed with Phillippon that different factors explain these market concentration trends, which are not mutually exclusive. ‘Winner-take-all’ dynamics, especially in ICT-intense services, are often accompanied by the rise of superstar firms. It is therefore vital to understand how industrial policies and structural reforms can support innovation through investment in intangibles and digital intensity to bring productivity to laggards, focusing on skills, science and finance. Criscuolo also emphasised the need to make intellectual property policies more transparent to fix the breakdown of knowledge diffusion.
There is increasing evidence that local financial conditions are an important factor in explaining market power dynamics in advanced economies. As pointed out by Carlo Altomonte, Associate Professor of Economics at Bocconi University, the rise of intangible assets in Europe may have forced firms to keep high markups in order to finance or cover higher ‘fixed’ costs related to intangible assets.
Firms can also use external financing to purchase intangibles and therefore differences in access to finance across countries may have an effect on how firms respond to business cycles.
‘The superstar phenomenon in the US context is, to a certain extent, happening in Europe in the most robotised manufacturing industries (e.g. car manufacturing) where new technologies play a role’, said Jens Suedekum, Professor of Economics at the Düsseldorf Institute for Competition Economics. The superstar pattern of these industries is reflected by an increase in productivity/markups and a decline in labour share.
For Suedekum, this raises delicate policy issues, e.g. rising inequalities between workers, reduced competition and extreme concentration of asset ownership. In this sense, the policy debate should focus on how to spread the ownership of robots, digital technical and profit earnings. But Philippon partly disagreed, arguing that ‘car manufacturers in Europe still share the productivity gains pretty evenly, with the rest of the world, while the same cannot be said for Google and Facebook in the US.’
Finally, Paul Collier, Professor of Economics at the University of Oxford, asked in the Q&A if we can also talk of a ‘winners-keep-all’ phenomenon, in that superstar firms are more able to avoid taxation and do not invest what they gain. Philippon replied that this concerns multinational firms generally, not only in the tech sector. For him, the problem is that the group of superstar firms does not change over time and that concentration tends to last longer today in the US.
Future-proofing fiscal policies
The current EU fiscal framework was designed to mitigate the consequences of high debt but if interest rates are set to remain low for a long time, the balance between the external risks and benefits of debt have arguably changed. Are the EU’s fiscal rules still appropriate? And if not, how should we revisit them? Peterson Institute for International Economics Senior Fellow, Olivier Blanchard, presented his thought-provoking views on how the EU fiscal framework should consider demand externalities, public investment and a shift from rules to standards.
Blanchard began by arguing that interest rates are likely to remain low for a very long time and that the only rationale for a supranational fiscal framework is to mitigate the consequences of externalities arising from high debt and from demand spillovers across countries. He then demonstrated that low interest rates reduce the fiscal and welfare costs of debt and increase the demand spillover effects of fiscal policies. This has important implications for the EU’s fiscal framework, which is only designed to address the externalities associated with high debt, he argued.
The EU’s fiscal rules are therefore not well suited to the current environment and need a ‘thorough reassessment’, said the former IMF Chief Economist.
Golden rule accounting could help protect investment and a shift from ex-ante rules to standards that would be adjudicated ex-post, could be appropriate, he said.
Mr. Blanchard compared the EU’s fiscal framework to the cathedral of Seville, which has been rebuilt and expanded in a number of different architectural styles over the centuries. Should it be ‘preserved for future generations or confined to history books?’ asked Declan Costello, ECFIN Deputy-Director General. ‘This creates complexity and fuzziness of enforcement’, replied Mr. Blanchard. In a world of radical uncertainty, fiscal standards are therefore preferable to fiscal rules with specific targets. He suggested that Europe should mirror its success in enforcing such standards in the realm of antitrust, as NYU economist Thomas Philippon showed during the morning session, and that given the asymmetry of risks, ‘the prudent stance is to change, not to keep’.
Roel Beetsma, member of the European Fiscal Board and Professor at the University of Amsterdam, noted that Mr. Blanchard recognised that the vulnerability of high debt still requires the management of debt externalities, but agreed that this must not come at the expense of productive spending. He then argued that a central EU fiscal capacity is politically almost unfeasible, unless it is conditional on adherence to rules. ‘Should the European Court of Justice adjudicate fiscal standards?’ he asked, pointing out the delays and overload risks.
Professor Volker Wieland from the Institute for Monetary and Financial Stability in Frankfurt advised caution and called for simple rules that are robust across a range of worldviews, not optimal in just one model. He questioned whether a central EU fiscal capacity would be better at running fiscal policy and argued that low rates are in part a result of monetary policy forward guidance and quantitative easing, and are therefore a temporary state of affairs. ‘The risk of reversal is non-trivial from an historical perspective,’ he said. He dismissed the increased role of demand externalities, a result that Mr. Blanchard found surprising, and argued that ‘benign national fiscal policy is enough to mimic the behaviour of flexible exchange rates’.
Austrian Institute of Economic Research economist Margit Schratzenstaller’s intervention focused on the bigger picture. ‘Future-proofing fiscal policies is key to implementing current action plans to address increasing inequality, migration, and global warning’, she said. A reform of the rules is therefore imperative to close the €600 billion investment gap that the EU currently faces. A reformed EU budget should finance expenditure that yields more returns when engaged at the EU level, like R&D, and should be financed with innovative taxes that cannot be properly implemented at national level, like a financial transaction tax and an airline travel tax. Finally, ‘we desperately need a harmonization of tax policy’ she said, ‘to shift the burden away from labour taxation towards profit taxation, through for instance a minimum corporate tax’.
The EU’s role in a changing global economy
The global economy is undergoing profound structural changes including a decline in trade and investment, slower growth in China, digitalisation, and climate change. How should Europe adapt? A panel of distinguished economists discussed their recommendations.
The panel on the EU’s role in a changing global economy focused on the future role of multilateralism, the reshuffling of economic centres of gravity, the global role of the euro, and the reforms needed to face these ongoing shifts. One common thread that emerged during the discussion was the sense that certain unfavourable economic and political trends, including the global retreat from multilateralism, were here to stay and that the EU needed to be prepared. This should be done by continuing to reform and deepen European integration and the EU should continue supporting the global multilateral institutions and their reform. In addition, strengthening the international role of the euro would bring many benefits and should be pursued. Finally, to deal with the current economic slowdown, Europe should rebalance its policy mix, which presently relies too heavily on monetary policy, and step up its use of fiscal policy. Fiscal policy should also be reshaped to increase public investment, which would help to underpin future growth.
Marco Buti initiated the panel discussion by noting that the previous ARC sessions had confirmed that Europe was facing serious challenges at a time of structural change in its economy and elevated uncertainty, which required supranational, rather than granular responses. He also stressed that there was a clear need to rethink the EU’s fiscal policy rules.
Laurence Boone (OECD) argued that the deterioration in the growth outlook was structural rather than cyclical in nature. Factors such as the substantial decline in trade and investment; the slowing of growth in China and the transition to a digital economy were structural changes, she said. Climate change was also a structural factor and was already having an impact, she argued. Restoring predictability in policymaking was crucial in the context of increasing trade and geopolitical tensions and elevated policy uncertainty, said Boone, who also agreed with Marco Buti on the need to rethink the EU’s fiscal policy. Europe also needed to increase investment but many governments seem already to have lost key skills in this area, she said.
Philip Lane (ECB) emphasised the structural shifts that have occurred in the global economy over the last decade. The share of advanced economies in global output has fallen gradually since 1996, while that of emerging economies has risen to impressive 40%, he noted. This shift in the global economic landscape was also visible in changes in the structure of current account imbalances, said Lane. Currently, the largest imbalance was that between the US and the EU. The latter’s large current account surplus made the EU particularly vulnerable to variations in external demand, he said.
Lane stressed that these structural shifts could not be addressed with monetary policy tools alone. He concurred with Laurence Boone that a greater resort to fiscal policy tools was necessary in the EU. He also noted that, given the sensitivity of the EU economy to international factors, more effort was needed to reform the global financial system. In this context, increasing the role of euro on international markets was an important objective.
Klaus Regling (ESM) argued that current trends such as ‘de-globalisation’, falling population and employment growth, rising debt and environmental exploitation, would not be easily arrested in the near future. A further challenge stemmed from growing inequality, which he expected to become a major issue in many countries. Another financial crisis was very likely at some point even if its timing would remain a surprise. Regling stressed that the most important policy response should be to strengthen multilateral cooperation, which was good for both economics and global peace. The EU should remain active in international fora and use and reform the existing multilateral organizations ( BIS, WTO, IMF etc.), he said. Regling felt that other regions were trying to emulate the success of European integration and that the EU needed to continue its integration process. The EU must keep developing the EMU and the capital and banking unions, build a fiscal capacity, introduce deposit insurance and a safe asset, and even construct a ‘European IMF’, said Regling.
Beatrice Weder Di Mauro (CEPR), likened the ongoing global political transition to a switch from the rules-based game of football to boxing, where size and power matter most. Following the analogy, she described the EU as an economic giant that punched below its weight. She argued that Europe needed to increase the international role of the euro to ensure its ability to act independently, as the impact of secondary US sanctions on Iran recently showed. She also supported Klaus Regling on the need for financial and fiscal reforms in the EU.
Kicking off the discussion, Marco Buti noted that there was demand for Europe outside the continent, as countries viewed the EU as a bastion of multilateralism. Paul Collier concurred and encouraged Europeans to find a common purpose and show leadership by example. Carlo Altomonte, Associated Professor of Economics at Bocconi University, however, worried that while there was agreement among the participants on what needed to be done, the politicians did not always seem to be on the same page.
Most discussants reiterated the benefits of a stronger euro and a need for a more substantial international role for the currency. In particular, Philip Lane saw a more global euro as an insurance against persistently elevated global financial risks. He reckoned that the global financial system was about to shift and that Europeans needed to anticipate it. Daniel Gros (Bruegel), however, was a lone sceptical voice, insisting that increasing the international role of the euro would also carry a price. He also wondered whether a hypothetical adoption of the euro by China would be to the EU’s advantage.