Columns, Op-Eds & Interviews

Most of the pieces posted here are from my monthly Project Syndicate column, which has been running since 2010. It is generally devoted to international and European economic topics. 

Europe’s green deal will need broad support to succeed

Politico Op-Ed (joint with Simone Tagliapietra and Georg Zachmann), 6 September 2023

The European Union turned green into its defining color with the European Green Deal, setting ambitious climate targets and unleashing a wave of legislation to get there.

But as decarbonization costs become more visible and changing political conditions constrain the politics of climate action, ensuring these achievements won’t fall short of commitments will be challenging. To this end, the EU must strengthen its climate and energy governance, and increase the financial resources allocated to supporting its goals.

It must be clear to all that what the EU has embarked on is no less than an industrial revolution. A revolution that — unlike those of the past — is set against a tight deadline. And even if its benefits will by far outweigh its costs, this transformation will still entail significant pain along the way — even in strict economic terms.

Some assets will lose value, some jobs will be destroyed, some regions will suffer. Competitiveness will be challenged, and the macroeconomic implications of the transition to carbon neutrality may well turn out to be temporarily negative.

Thus, this changeover can only succeed if it commands broad enough support, which requires equity considerations be put at the forefront of the policy agenda. No household should be required to undertake an investment it can’t afford. And this concern must be a priority for each and every member country, as well as the EU as a whole.

However, there is a crucial difference between climate and energy. Climate policy was born European, and initiatives taken at the EU level since 2019 — when the objective of reaching carbon neutrality in 2050 was adopted — have considerably strengthened this characteristic. Energy policy, meanwhile, remains fragmented, especially since the choice of energy mix is explicitly recognized as a national prerogative. So, as climate action largely rests on the transformation of energy systems, reaching the set targets requires coordinating policies without infringing on national energy sovereignty.

Thankfully, these problems were identified by the EU quite early on, and the bloc has acted to tackle them accordingly. Governance mechanisms have been strengthened, and financial means have been allocated to boost electricity interconnections, support the green transition in weaker member countries, buttress the transformation of fossil fuel-producing regions, bolster competitiveness and help job reallocation across sectors and occupations.

We are, nevertheless, concerned that these efforts may prove insufficient. Social and economic costs are becoming more apparent; political conditions are changing; and the wide consensus that European decarbonization ambition once commanded is now visibly eroding. Simply put, the green transition is getting divisive — and for the governments of member countries, the temptation to blame Brussels for its adverse implications is only growing.

Ultimately, what is at risk is the credibility of the green transition. And at some point, investors and companies may start wondering if the EU has enough resolve to carry through its ambitious plans.

That would be a disaster.

Thus, to safeguard the European Green Deal, the EU must strengthen its energy and climate governance system. And to do so, we propose five priorities for the upcoming EU institutional cycle:

To safeguard the European Green Deal, the EU must strengthen its energy and climate governance system | Kenzo Tribouillard/AFP via Getty Images

First, we suggest progressively bringing all emissions under the Emissions Trading System (ETS) and ensuring the effectiveness of EU climate policy. By 2030, ETS1 and ETS2 will cover three-fourths of all territorial emissions, and we suggest the creation of an ETS3 for the sectors not yet covered, as well as a gradual unification of the emission control mechanisms by 2040. This is an ambitious agenda, but it would help overcome the risk of member countries not delivering needed emission reductions in hard-to-abate sectors.

Then, the block should launch preparations for an EU Green Investment Plan, which would ensure that EU green grants remain at least at the current level of €50 billion per year (that’s 0.3 percent of EU GDP) after the Recovery and Resilience Fund is phased out. Making up for the annual shortfall would require new resources to the tune of at least €180 billion between 2024 and 2030, which is why we also propose to introduce provisions to the currently discussed EU economic governance reform, which would make it possible for countries where public debt exceeds 60 percent of GDP but public finances are sustainable to reduce debt at a lower pace — on the condition that additional emission-reducing investments are made.

Moreover, we must establish a European Energy Agency that would provide unbiased reference points for policy evaluation and the preparation of policy processes. The agency wouldn’t be entrusted with decision-making powers, but it would gather data, monitor developments that might require course corrections, maintain open modeling tools and prepare independent assessments of EU and member country policies.

We must also take energy and climate governance to heads of state and to the government level in order to increase policy coordination and political ownership. Energy sovereignty is part of the Treaty and can’t be put in question. However, more institutionalized coordination of national plans and discussions around contentious issues are needed. And for this, special European summits would be organized at least once a year by a group of EU energy and climate sherpas.

Finally, we need to make sure transmission network development and operation is driven by European cost minimization. Along these lines, an independent European network system operator would be able to ensure existing cross-border transmission is optimally used, and that key bottlenecks would be addressed with priority. This would allow all European companies to get access to a geographically and technologically diversified mix of low cost energy.

The EU can’t afford to have a grand climate and energy strategy yet remain in the dark when it comes to its implementation — it would endanger the whole decarbonization process, particularly in a less auspicious political climate. For this reason, developing a new EU climate and energy governance that is fit for its increased climate ambition and the renewed challenges Europe is facing should be a top priority for the upcoming institutional cycle.

A podcast and an interview with Janet Bush on war in Ukraine, inflation, and cooperation in a fractured world

France’s Constitution Will Be Tested


Project Syndicate column, 26 June 2022

It was regarded as a given. Whatever the result of France’s presidential election in April, voters would elect MPs from the same party as the winner in this month’s general election. But, by depriving President Emmanuel Macron’s centrist coalition of an absolute majority in the National Assembly, voters have departed from the usual script and presented France’s political system with a major challenge.


Although the constitution stipulates that “the government shall determine and conduct the policy of the nation,” French voters display scant interest in National Assembly elections.  Turnout was expected to be abysmally low, and so it was: No less than 70% of voters aged between 18 and 34 stayed away. So far, so predictable.


But the election’s unexpected outcome shows that even highly stable political systems can reach a breaking point. The presidential election revealed a country split into three blocs of roughly equal size: the far left, the not-so-radical center, and the far right. The far-left leader Jean-Luc Mélenchon was skillful enough to build an unlikely alliance and to campaign under the slogan “elect me prime minister.” And Macron did not miss an opportunity to show how distracted he was (to the extent that he failed to indicate how he would wish voters to choose between the far left and far right). Perhaps most important, French voters are deeply dissatisfied.


The big surprise in the National Assembly election came not from the left, but from the far right. Marine Le Pen, the standard-bearer of that camp, who lost to Macron in the presidential election runoff, hardly bothered to campaign. She had set herself the moderately optimistic goal of winning the 15 seats needed to form a parliamentary in the new assembly. In the event, she will have 89 of the 577 seats, up from just eight previously.


What has happened is a sort of French Brexit-lite that indicates the voters’ anger and follows many other expressions of popular resentment over the past decades. These include the 2018 Yellow Vest protests; former president François Hollande’s historically low approval ratings, which led him not to seek re-election in 2017 and paved the way for Macron’s surprise victory; the 2013-14 Red Caps revolt against a tax on road freight; voters’ rejection of a French-designed European constitution in 2005; and the Socialist Prime Minister Lionel Jospin’s failure to advance to the second round of the 2002 presidential election.


This latest outcome therefore cannot be ignored. France’s odd and almost unique political system, which combines the election of a monarch and a parliamentary majority, is being pushed to the limit. True, Mélenchon’s left-wing coalition may fall apart; its members have already started to argue over parliamentary positions. But the more lasting change probably lies in the more than tenfold increase in the number of far-right MPs. Some of them will be ineffective. But a large enough number will stay on, learn, and make their mark. With both the far left and the far right well represented in parliament, France’s political conversation has changed irreversibly.


The immediate implication is likely political paralysis in a large European country at a time when the continent is grappling with war, a looming energy crisis, high inflation, and the threat of a recession – not to speak of the climate emergency. Markets that were hoping for clear choices rather than procrastination are understandably nervous. The result does not bode well for economic reforms and public finances.


But the real issue facing France runs much deeper: How will the country’s political system cope with a hitherto unforeseen situation? However one looks at things, it is difficult to avoid the conclusion that France is heading for lasting political gridlock. The ambiguity at the root of the constitutional regime can no longer be papered over.


This ambiguity reflects the uncertain role of political parties. Back in 1958, when Charles de Gaulle established the Fifth Republic as a quasi-presidential regime on the shaky foundation of parliamentary predominance, parties were primarily meant to contribute to expressing political preferences.


But every constitutional change since then has brought France closer to a pure presidential system. The highlights include the election of the president by direct popular vote following a 1962 referendum; the experience in 1986 of so-called cohabitation, when a left-wing president governed with a prime minister from the right; the shortening of the president’s term in office from seven years to five in 2000; and the collapse of France’s traditional political parties on both the left and the right after 2017.


Because it amounts to electing a king, French voters love a presidential election. What happens in the subsequent parliamentary election does not much matter to them. But it does matter constitutionally, because the system is at core a parliamentary one. And political parties matter, unless the president has the power to dispense with them. As three previous periods of cohabitation have shown, the system works remarkably well if the president and the prime minister belong to different parties. The president can stick to his or her constitutional role of appointing the prime minister, deciding when to call elections, providing military leadership, and having a say in foreign affairs. All the rest is the task of the prime minister.


To this landscape we can add a political crisis that has led French voters to distance themselves from what they call “the system.” As in many other countries over the past 40 years, an ever-larger proportion of working- and middle-class voters have abstained from taking part in parliamentary elections. Step by step, they have gradually built an alternative system of their own. For years, this has been an issue for political sociologists. Now it has become a major challenge that no party appears able to tackle effectively.


In the short term, Macron’s ability to govern effectively is highly uncertain. But the far more worrying issue is that France’s political system has reached its constitutional limits.

The Eurozone’s unusual policy playbook

Project Syndicate column, 30 May 2022


The economic situation in Europe is truly disconcerting. Annual inflation in the eurozone has reached a record-high 7.4%, yet banks still lend to each other at negative rates. In April, year-on year inflation was a hair’s breadth shy of 20% in Estonia, but only 5.4% in Malta. Public debt as a share of GDP is at unprecedented levels, yet German bond yields remain significantly below their long-term average, and spreads, though rising, are still contained. Across the continent, leading economic indicators are conveying confusing messages.


Governments and central bankers have been caught off guard by the sudden transition from a deflationary to an inflationary environment. The same policymakers who in September warned that deflation was at least as threatening as inflation now claim that we have entered an era of structural inflation.


The European Central Bank speaks of “normalization,” as if repeating that mantra could convey some sense of control, temper inflation expectations, and calm the financial markets. But little is normal.


There are three reasons for this confusion. The first is that we have suddenly entered a new world. For at least the past 15 years, price stability and output stabilization had been nearly one and the same. There was nothing natural in this configuration, which the economists Olivier Blanchard and Jordi Galí dubbed “divine coincidence.” Rather, it resulted from a particular alignment of forces.


Because competition from low-wage labor (a consequence of globalization) acted as a powerful brake on price increases, inflation was subdued. Because the world’s marginal energy producer was no longer OPEC, but rather the United States (thanks to the shale-energy revolution), oil and gas prices were low, and supply seemed elastic. And because the commodity-price boom had ended with the global financial crisis, there was no inflationary pressure from that quarter, either.


All that ended at about the same time. US trade protection and Chinese development have weakened the deflationary effect of globalization. A commitment to greening the energy system has lowered fossil-fuel investment, but so far there has not been commensurate offsetting investment in renewables. Finally, the war in Ukraine has triggered a further increase in energy costs and a sudden surge in food prices. Nobody knows whether these changes will prove temporary or permanent. If the US, Europe, and China simultaneously fall into recession, as Ken Rogoff has predicted, today’s high inflation will suddenly abate. But if they do not, it may well persist.


The second reason for Europe’s policy confusion is that the energy price shock exacerbates economic differences within the eurozone. Things would already be complicated even if the eurozone were a homogeneous economic area with one fiscal policy. But domestic energy accounts for 10% of the price index in Estonia, compared to just 4% in Portugal. Moreover, reliance on natural gas (the price of which has quadrupled) is very uneven across countries.


Whatever officials may proclaim, member states have a common energy policy on paper only. Each country has its own priorities, and Europe’s energy system is in fact fragmented. Tellingly, Spain and Portugal announced in March their (temporary) withdrawal from the EU grid.


This divergence calls for relying on tax and subsidy measures that help tame inflation differentials and avoid the buildup of inflation expectations. Accordingly, high-inflation Estonia and Latvia should aggressively tighten fiscal policy, although their debt position is extremely sound. By contrast, France and Portugal, where inflation is lower, should avoid tightening, although the state of their public finances would call for consolidation. This runs contrary to the usual playbook, according to which the task of controlling inflation rests with the central bank while the budgetary stance should primarily depend on the extent of fiscal sustainability risks.


The third reason why European policymakers are disoriented is specific to the war: Russia’s energy exports account for a large share of its revenues. Policy measures introduced by European governments to support households, such as subsidies or tax rebates, in fact indirectly finance the Kremlin’s war effort. So, policymakers should consider a third objective besides income support and inflation control: the effect of domestic decisions on Russian export revenues.


As I argued in a recent paper with Blanchard, this applies especially to natural gas, because oil is a global commodity. Governments should explore ways to alleviate the financial burden of gas purchases while preserving incentives to reduce consumption.


All of this suggests a radical departure from the standard policy prescription. Fiscal policy should help mitigate the de-anchoring of inflation expectations, relative fiscal efforts should be a function of relative inflation, and government support schemes should be designed in such a way that they avoid subsidizing Russia’s war.


For such a policy mix to be implemented in today’s highly uncertain environment, governments must be confident that they can take risks. Since the ECB launched quantitative easing in 2015, and even more since it initiated the pandemic emergency purchase program (PEPP) in March 2020 in response to the COVID-19 shock, eurozone governments have been protected by the central bank’s de facto control of sovereign bond spreads.


True, the ECB never committed to any specific target, but it said what was needed to convince markets that speculation-driven crises would be avoided. Now that the ECB has indicated that it will stop net bond purchases, the question is whether markets will feel confident that, provided debts remain sustainable, interest-rate spreads will be contained.


Since 2008, the eurozone has faced a financial crisis, a sovereign-debt crisis, and a public-health crisis. Now, with energy prices surging, it should brace for another trial: an adverse and deeply asymmetric supply shock.

Macron’s Post-Election Dilemma


Project Syndicate column, 26 April 2022


French President Emmanuel Macron, re-elected with 58% of the vote, received 85% of Parisians’ votes and three-quarters of those of Seine Saint-Denis, a working-class district at the outskirts of the capital where 30% of the population is foreign-born. But in the Somme district, where Macron was raised, his far-right challenger, Marine Le Pen, was ahead, and in the Pas-de-Calais, where Macron has a home, she got 58%. In this deeply divided country, there seems to be no better predictor of the vote than distance to metropolitan centers.


Occupational and educational (rather than income) cleavages matter too. Two-thirds of French workers went for Le Pen and three-quarters of its managers for Macron, according to polling by Ipsos, while three-quarters of university graduates went for Macron, against one quarter for Le Pen.


Sociological determinants are compounded by location. France is fast becoming a country where people cluster near their peers. Between 2008 and 2018, the share of managers and high-skill workers in cities like Paris, Bordeaux, or Lyon has increased by four or five percentage points, while lower-middle-class and working-class residents moved out.


At a deeper, individual level, satisfaction with one’s life was a key determinant of the vote. Some 80% of those dissatisfied with their life voted for Le Pen. As documented by Yann Algan of HEC Business School and his colleagues, social trust or the lack of it significantly influence voters’ choices.


These findings seem terribly familiar. As in the United States, how much you studied and where you live seems to determine for whom you vote, and support for far-right candidates is becoming entrenched among working-class voters.


But to stop here would be too simple, because the biggest shock in this election was not the Macron-Le Pen run-off, which was expected, but the devastation of the traditional parties that occurred in the first round. Whereas their candidates jointly gained 56% of the votes in 2012, they received only 6.5% of it ten years later. Among major European countries, only Italy has experienced such an overhaul of the political landscape in recent years.


The winners were Macron and Le Pen, but also Jean-Luc Mélenchon, a former socialist minister who reinvented himself as the standard-bearer of the radical left and missed qualifying for the second round by a hair’s breadth. The veteran politician, a sort of French Bernie Sanders, carried the urban youth vote, with most of those who could have voted for the Greens or the Socialist Party regarding him as the only chance to make a difference.


Mélenchon’s voters helped secure Macron’s victory, as 42% of them are estimated to have voted for him in the second round (41% abstained and 17% voted for Le Pen). But instead of preparing to form a coalition, like in a system with proportional representation, where competing parties must find common ground to govern, France’s rival parties are already gearing up for the parliamentary election in June.


In his victory speech, Macron pledged to consider the views of all those who voted for him, to listen more, and to govern differently than he did in the past five years. The issue is what this may mean in practice. If he wants to govern from a broader base than the 28% he got in the first round, he must take into account the preferences of those whose first choice was Mélenchon.


An explicit alliance is evidently not in the cards, but even a de facto coalition of wills is hard to imagine. Macron and Mélenchon are programmatic near-opposites. Whereas Macron campaigned on raising the retirement age, Mélenchon promised to lower it. Macron wants to lower business taxes, while Mélenchon wants to raise them. And while Macron was planning €50 billion ($53.6 billion, or 2% of current GDP) in new public expenditure programs, Mélenchon called for an increase five times larger.


The one topic where they might find common ground is the green transition, as Macron has explicitly endorsed Mélenchon’s concept of “ecological planning” and has pledged to put the prime minister directly in charge. But even here, Macron wants to launch a new generation of nuclear reactors, while Mélenchon favors going 100% renewable.


In this regard, France is not unlike the US, where traditional Democrats and Sandersupporters find it impossible to agree on anything substantial, with their disputes laying the ground for a crushing defeat in this November’s mid-term elections. But an enduring triangular fight between left, center, and far right means that at some point Le Pen, or her political heir, may find a way to enter the Élysée.


The question for Macron is how to give his second-round voters valid reasons to believe that he has listened to them. The one thing he cannot and should not do is to stop carrying out the economic reforms he thinks will put France on track for an economic resurgence. Education cannot wait, the employment / population ratio is still nine percentage points lower than in Germany and an aging society cannot leave pension reform unattended.


But there is a potential for an opening on three related issues. First, managing the green transition is a relatively new and encompassing endeavor, and although it is not an easy field, positions are less set in stone than they are on taxation and social-welfare reform. Second, Macron must make good on his recognition of the need to change his vertical approach to governance. It takes two to tango, but social dialogue and participative democracy are worth a try. Lastly, Macron’s signature take on social issues has been that equality of opportunity matters more than redistribution. A more balanced approach, with greater attention to distributional issues, would better assuage the voters who re-elected him.


Crunch Time for Europe’s Economic Sanctions


Project Syndicate column, March 2022


In 2003, the conservative US pundit Robert Kagan famously wrote that Europe “is turning away from power; it is moving beyond power in a self-contained world of laws and rules.” After Russia invaded Ukraine in late February, the European Union decided that it was time to prove Kagan wrong. The EU has mobilized economic power, at least, against Russia’s military aggression, and deployed an array of monetary, financial, trade, and investment sanctions.


Europe’s swift and muscular reaction has rightly been hailed. The shock effect of freezing much of Russia’s foreign-exchange reserves was spectacular. But as the war continues, will the sanctions remain effective? And if their impact weakens, as seems likely, will the Union be able to step them up in a meaningful way?


A worrying sign is that after the EU’s decision on March 15 to ban imports of steel and exports of luxury goods to Russia, there were no further announcements at the leaders’ meeting on March 24. Europe will not force Vladimir Putin to back down by depriving Russian oligarchs of the latest Ferraris and Louis Vuitton handbags.


EU leaders cannot evade the question of possible further sanctions. On March 7, a few days after Russia’s reserves were frozen, 100 rubles were worth just $0.72, down from $1.30 in early February. But by March 27, their value had recovered to $0.99. As Robin Brooks of the Institute of International Finance has emphasized, Russia is accumulating massive current-account surpluses and is thus en route to rebuilding both its reserves and its import capacity.


Banning Russia’s central bank from accessing its reserves was costless for the EU. But virtually any additional steps – reducing imports of oil and gas, banning a wider range of exports, or telling European firms to withdraw from Russia – would entail an economic cost for Europe.


That is why the EU is dithering. Policymakers are discussing an energy embargo, or a tax on Russian oil and a gradual reduction of gas imports. But German Chancellor Olaf Scholz remains opposed, warning that abruptly cutting Russian energy imports would plunge Germany and Europe into recession.


How large would the cost of tightening the screw on Russia be? The war in Ukraine has already darkened the economic outlook. The OECD recently estimated that, assuming prices of energy and commodities remain elevated, eurozone growth will be reduced by about 1.5 percentage points, and inflation will rise by two percentage points. Other assessments are more benign, but only because they start from less adverse assumptions.


These negative adjustments look big, but two caveats apply. Until the war began, growth in 2022-23 was expected to be buoyant; lowering a 4% growth forecast by two percentage points is not the same as cutting a 1% forecast by that amount. And the OECD rightly observes that government policies – such as targeted fiscal support to the worst-hit low-income households – can help cushion the shock and reduce the growth shortfall.


The more difficult question is how much it would cost Europe to reduce and ultimately eliminate its dependence on Russian energy – or, equivalently, to withstand a Russian export ban. The data are frightening: In 2019, the EU imported 47% of its coal, 41% of its gas, and 27% of its oil from Russia. And while coal and oil are global commodities, implying that one supplier can largely be substituted by another, gas flows depend on the infrastructure of pipelines and liquefied natural gas terminals.


Currently, Russia can hardly export its gas elsewhere than westward, whereas the EU’s greater substitution capacities put it in a stronger position than its adversary. But shifting away from Russian gas will not be painless. Both protagonists are thus playing a game of chicken.


On March 23, Putin announced that Russia would accept payments only in rubles for gas deliveries to “unfriendly countries,” including all EU members. This is probably first and foremost a ploy to force the EU to violate its own ban on transacting with the Russian central bank. But it is also a way for Putin to signal that Russia stands ready to stop exporting gas to Europe and to dispense with the corresponding revenues.


Is the EU ready to call Putin’s bluff? Past experience, such as the sudden closure of nuclear plants after the 2011 Fukushima disaster, suggests that the economic system can adapt quickly to disruptions. In the case of Germany, a widely cited paper by Rüdiger Bachmann and others puts the overall cost of an abrupt stop to Russian energy imports at between 0.5% and 3% of GDP. Results for the EU as a whole would appear to be similar, but the impact on countries like Lithuania and Bulgaria would be much greater.


Today’s uncertainty understandably makes European policymakers nervous. But an energy embargo is now within the range of possibilities for the immediate future. Because the West has invested its entire credibility in the effectiveness of economic sanctions against Russia, irresolution can quickly become a fatal weakness. The EU has little time left to prepare.


The concern is that, instead of drawing up contingency plans for adapting the European energy system, developing new collective energy-security mechanisms, and supporting the worst-affected member states, European governments started by rushing to clinch individual supply deals with Middle East producers. The lack of common purpose was striking. It is to be hoped that the agreement reached on 25 March to organize joint gas purchases will trigger a change in attitude.   


Europe’s leaders should make it clear to the public that they cannot defeat an adversary ready to endure a 20% drop in national income if Europeans are not willing to risk a 2% decline in their own. But the same leaders who recently dared to lock down their fellow citizens to combat COVID-19 are now unwilling to tell them to drive a little slower to conserve fuel.

Europe’s economic conflict with Russia is entering a hazardous new phase. The risk of failing is too big to be taken. 

Will the Climate Agenda Unravel?


Project Syndicate column, February 2022


PARIS – In a recent survey, 52% of French citizens cited their purchasing power as a major concern. Only 29% mentioned the environment, putting this issue roughly on a par with the health system (30%) and immigration (28%). Given this background, it is no surprise that the transition to a climate-neutral economy does not feature prominently in the current French presidential election campaign.


As war in Ukraine has started, the French may – for once – discuss foreign affairs and security in the run-up to the vote. But, despite widespread worries about climate change, more immediate economic concerns risk relegating climate policy to the fringes of the political debate.


Yet, France, along with the rest of the European Union, has committed to nearly halving its greenhouse-gas emissions by 2030 – a threefold increase in the speed of emissions reduction compared to the last decade. Whether France meets this extraordinarily demanding target will depend on actions taken on the winning presidential candidate’s watch. Even approaching the goal will require an accelerated transformation affecting all sectors and every aspect of economic and social life.


In a properly functioning democracy, therefore, immediate climate action would be at the top of the campaign agenda. But the presidential candidates (on the left) who emphasize the issue trail in the polls by a wide margin, while those on the right prefer to shun it, or even advocate halting the installation of wind turbines on the grounds that they blight the landscape. The only significant discussion focuses on the relative shares of nuclear and renewables in 2050: an important choice for sure, but not one that will determine if France meets its 2030 target.


Not every EU member state is so indifferent. For example, climate action featured prominently in the campaign preceding Germany’s September 2021 general election, and the resulting coalition agreement devotes 40 pages to it.


But in most countries, the surge in energy prices since last autumn and the resulting rise in inflation have elicited public anger and have diverted policymakers’ attention from longer-term concerns. Governments everywhere have rushed to introduce various patches in the hope of stemming the rise in the price level. According to a survey by Bruegel, many in the EU have reduced energy taxes or levies, thus de facto lowering the price of carbon at a time when they should be contemplating increasing it.


This situation raises three questions. First, what explains the current shortsightedness on climate? Second, how should governments react? Third, is there a way to keep democratic debates focused on choices that will define the future?


Today’s shortsightedness may appear puzzling, if only because the best protection against high energy prices would be to reduce reliance on fossil fuels. It is tempting to attribute the prevailing myopia to the growing dominance of social media and the erosion of established political institutions such as political parties.


But there are economic reasons, too. Since the 2008 global financial crisis, many European households have experienced a train of hardships. Although their income has generally been protected from the fallout of the COVID-19 shock, their standard of living has barely increased since the onslaught of the financial crisis. With the rise in energy prices, those struggling to make ends meet have suffered a further blow to their purchasing power. And better-off households whose financial wealth consists of savings accounts have seen the return on their assets tumble because of ultra-low interest rates. With inflation surging, they now fear an erosion of their savings’ real value.


Energy-price instability is probably here to stay – and may increase. Even abstracting from geopolitical turmoil, the transition from brown to green energy is unlikely to be smooth. The reallocation of capital from fossil fuels to renewables will be a messy process that will entail phases of energy shortages as well as periods of excess supply.


Governments should therefore prepare for these scenarios. Specifically, they should be clear about their climate goals, endorse and announce a gradual increase in the (explicit or implicit) price of carbon, and provide substantial investment support to those who cannot afford the capital cost of insulating their house or buying a new car. No one should be shielded from the change in the relative price of energy, but no one should be deprived of the means to adapt.


It is also the governments’ role to insure vulnerable households against energy-price increases. They should do it through means-tested schemes that target the lower end of the income distribution, but do not insulate all consumers. Again, such insurance must not weaken incentives to invest in housing renovation or new equipment. Because investment support and insurance against price fluctuations should help households to see through the fog of instability, policymakers must clearly explain the two goals and ensure that the corresponding instruments are distinct.


The third question is a more difficult one. A society’s ability to identify longer-term challenges and concentrate its efforts on solving them depends on several conditions. Honesty (about the challenges, and the cost of addressing them), clarity (about policy choices), transparency (about the implications of policies), and fairness (in the distribution of the corresponding burden) are indispensable. But they are not sufficient.


Climate action will take hold and galvanize voters only if hope replaces fear. Citizens (in Europe, at least) do not need to be lectured about climate threats anymore, but instead need to be told convincingly, “Yes, we can.” They must stop seeing themselves as victims of climate change or of the fight against it, become actors in the coming transformation, and find a role in building a better future.


This is a tall order in post-truth societies where trust in institutions is at low ebb. But whoever succeeds in building such momentum will reap a commensurate political reward.

European Inflation Is Not American Inflation


Project Syndicate column, January 2022


Eurozone consumer prices increased by 5% year on year in December, while the number of Google searches for “inflation” has recently risen threefold in Germany and tenfold in France. So, at first glance, it is difficult to avoid the impression that Europe – like the United States, where annual price growth has hit 7% – will have a tough time taming the inflation dragon.


Having dismissed concerns about rising prices for too long on the grounds that the main risk was deflation, the European Central Bank, like the US Federal Reserve, is now on the defensive. Critics accuse the ECB of being dangerously behind the inflation curve, and of having neglected its overriding mandate: to ensure price stability. Some claim that, after years of adventurous quantitative easing, the day of reckoning has arrived.


Both the Fed and the ECB can certainly be blamed for not having spotted the current price surge early enough. But that is no reason to lump together the US and the eurozone. Contrary to the widespread belief that inflation is back for good on both sides of the Atlantic, the outlook for the US is fundamentally worse, for three reasons.


First, under former President Donald Trump and his successor, Joe Biden, the US tackled the fallout from the COVID-19 shock with a massive fiscal stimulus. From March 2020 to September 2021, money transferred to households and businesses in the US through exceptional tax cuts, top-ups to unemployment benefits, debt forgiveness, and other schemes amounted to a whopping $2.5 trillion, or more than 11% of pre-crisis GDP.


True, part of this money substituted for the lack of strong, built-in shock absorbers of the sort that have long been common in Europe. Extra unemployment benefits, for example, were made necessary by the limited generosity and short duration of the standard payments. But the US fiscal response amounted to overkill – and, as Larry Summers and Olivier Blanchard pointed out a year ago, too much fiscal support was bound to generate a massive imbalance. Given the historically low level of unemployment before the COVID-19 crisis, there was no hope that potential output could match the extra demand generated by policy.


Europe, meanwhile, was paradoxically more generous and thriftier at the same time. When French President Emmanuel Macron announced in March 2020 the launch of a massive furlough scheme whereby the government would pick up the wage bill of employees idled by the pandemic, he said loud and clear that the state would fulfil its responsibility to protect, “whatever the cost.” Not everyone in Europe said the same, but virtually all governments adopted the same position. For a while, there was no budget constraint anymore, and the ECB stood by to help governments do their job.


Citizens were understandably stunned. But the French furlough scheme, despite having at one point covered 40% of the workforce, eventually cost a mere 1.4% of GDP. As public health improved and people returned to work, furloughs quickly dwindled. All in all, the total fiscal cost of supporting households and firms remained around 3-4% of GDP. Europe, unlike the US, did not throw money at pandemic-induced economic problems indiscriminately. Household income was maintained, not increased. As a result, there was no massive excess demand.


The second factor is that furloughed workers in Europe retained their labor contracts and the associated employment security. True, temporary workers and those on fixed-term contracts paid a high price as a result of the COVID-19 crisis, and new entrants into the labor force also struggled. But, on the whole, European states acted like insurers and protected workers and employers from a devastating shock.


So, it should be no surprise that Europe’s pre-pandemic labor force remained largely intact once the worst was over. US policymakers, in contrast, are still wondering what caused 2.7 million workers to disappear during the crisis, and how to avert multiple bottlenecks in an economy where a demand overhang coexists with supply constraints.


In both Europe and the US, many are considering whether to change their job, employer, or sector, and many firms are struggling to hire. But this is not the same as withdrawal from the labor force. With hindsight, the European social model has proved more effective than its US counterpart in ensuring workers’ continued participation.


The final reason why inflation threats are more worrying in the US is that the Fed had explicitly committed itself to keeping its powder dry. Back in August 2020, Fed Chair Jerome Powell unveiled a new strategy whereby policymakers would aim to achieve prolonged above-target inflation after a period of below-target inflation, and would also seek to promote “maximum employment.” The quid pro quo for such a bold rethink should have been a responsible fiscal policy. But now that Congress and the president have made the opposite choice, the Fed finds itself forced to change course precipitously.


To be sure, the ECB also faces constraints. Everybody wonders whether Italy, with public debt that has jumped to 155% of GDP, will be able to place bonds with investors once the ECB starts unwinding its bond-purchase program. But at least the ECB hasn’t added a constraint of its own.


A decade ago, Europe’s response to the financial crisis was a disaster. But now, with a more effective social model and more targeted fiscal support, Europe has managed this crisis better than the US has. And while it certainly must address its own problems, neither the policy challenges nor the solutions are identical to those being discussed in Washington. As Laurence Boone, the OECD’s chief economist, recently told eurozone finance ministers, there is no reason to tighten fiscal policy in the eurozone, and at this stage no reason to attack surging, but still mainly energy-price-driven, inflation by raising interest rates aggressively.


Although inflation in many Western economies is at its highest level in decades, the story is not the same everywhere. As US inflation jitters increasingly permeate markets, European policymakers will need to remain composed and stay focused on the tasks at hand.


The Euro at 20

Project Syndicate column, 28 December 2021 


Twenty years ago, on January 1, 2002, citizens of 11 European countries began using new euro banknotes and coins. A larger-than-life project – emblematic of a time when European leaders were bold enough to step into the unknown – thus became a tangible reality.


This flawless transition crowned an endeavor that was imagined in the 1970s, designed in the 1980s, and negotiated in the 1990s. Expectations were high: the euro’s advocates hoped that it would deliver economic and financial integration, policy convergence, political amalgamation, and global influence.


Two decades on, it is difficult to avoid feeling disappointed about economic integration. Early assessments of the single currency’s trade impact found that it barely exceeded 2%. Recent research by the European Central Bank puts the effect at perhaps 5%. This is still small, and by itself not worth the effort. Two regions within Europe trade with each other on average six times less if they are not in the same country. Because of history, languages, networks, judicial systems, and reluctance to unify regulations, national borders still matter considerably.


The financial services story is more dramatic. In the first years, banks extended credit abroad, often recklessly, until the euro crisis a decade ago triggered a precipitous retreat behind national borders. Regulators, applying the famous aphorism that banks are global in life, but national in death, told them to stop sharing liquidity with non-national subsidiaries. Fragmentation ensued.


The bold decision to launch a European banking union in June 2012 was a response to this. But implementation has been only partial: whereas eurozone banks are now supervised by the ECB, insolvency cases de facto end up in national hands. Financial integration has recovered somewhat, but momentum is weak. Although pan-European banks would be able to diversify risk on a broader scale, national governments are still reluctant to relinquish privileged relationships with “their” banking systems.


Policy convergence toward the best performers was meant to result from self-discipline, as well as from fiscal policy rules and the creation of coordination processes. But having given up monetary-policy autonomy, many governments rejected further requirements from Brussels. For ten years credit growth and inflation rates diverged, with few apart from then-ECB President Jean-Claude Trichet worrying much. When the euro crisis eventually erupted, it put northern and southern EU member countries squarely at odds with each other.


Convergence has improved since. Under duress, competitiveness gaps have narrowed. The ECB has helped quell eurozone exit speculation, ensuring that borrowers in all member states have access to similarly priced credit. The response to the COVID-19 shock was remarkably cooperative, with the support of the European Commission and the ECB. And the recovery program launched in summer 2020 broke with long-standing taboos.


There is now a debate as to how much more reform Europe’s macroeconomic policy system needs. Some claim that current arrangements would work fine if governments played by the rules. But as I recently argued, jointly with a group of economists and lawyers, today’s changed environment means that policy priorities cannot focus merely on fostering discipline in every member state.


Instead, high debt ratios, low interest rates, the likelihood of recurring turbulence, and secular challenges like climate change call for coordinating monetary and fiscal policies, reforming fiscal rules, and making provisions for jointly tackling shocks. Encouragingly, Italian Prime Minister Mario Draghi and French President Emmanuel Macron endorsed such reforms in a recent commentary.


Political agglomeration, a longstanding European goal, was expected to follow monetary union. Hans Tietmeyer, the late German central banker, liked to quote Nicolas Oresme, a medieval philosopher who said that money belongs to the community rather than to the prince. The euro’s supporters hoped, somewhat confusedly, that a common currency would create a sense of community.


This did not happen directly. During the 1991-92 negotiations on the Maastricht Treaty, governments were supposed to discuss political union alongside monetary union. But many countries, starting with France, rejected federal blueprints. Citizens initially treated euro banknotes as a technicality, not as a sign of belonging. Moreover, the new, mainly Central and Eastern European member states that joined the EU in the mid-2000s did not share the post-national ethos of the Union’s founding fathers. The euro crisis confirmed that solidarity remained in short supply.


But the euro may still engender a sense of community indirectly. Although fear, not love, has so far prevented countries from leaving it, in some ways the result is the same. Far-right populist politicians such as Marine Le Pen in France and Matteo Salvini in Italy have toned down their criticism of the euro. No major politician wants to bet against it anymore.


Global influence was perhaps the most elusive of the euro’s four goals. Policymakers consciously put it on the back burner for two decades, and rightly so: it would have been premature to advertise an untested currency as an alternative to the dollar.


With the passing of time, however, the euro’s internationalization has gained in importance. Europe’s technological lead is long past, and its relative economic might is diminishing fast, but few countries, if any, can provide a stable global currency. China does not offer the required legal safety and transparency, Japan is too inward-looking, Switzerland and the United Kingdom are too small. At a time when geopolitical tensions are rising, China is promoting a Sino-centric model of international relations, and US multilateral engagement is in doubt, the euro’s international status is no trivial achievement.


Politicians sometimes make long-term investments. With hindsight, the euro was one of them. While its founders’ predictions were often wide of the mark, it was arguably a wise bet. After all, the eurozone now has 19 members, and candidates are waiting at the door.

The End of the COVID Consensus

Project Syndicate column, 29 November 2021


Crises pose demanding tests for governments. In 2008, most were found wanting when financial mayhem engulfed the developed world. And within a few years, most of their leaders had been voted out of office as public anger reached its peak. So far, governments have responded much better to the economic fallout of the COVID-19 shock. But will electorates reward them, or will popular fury once again consume democratic systems? Our political future will depend on how voters assess national leaders’ performance.


First, rewind to September 15, 2008, when the US investment bank Lehman Brothers filed for bankruptcy. Financial chaos ensued, and the economy fell into recession. Governments scrambled to limit further damage. Their initial economic response was skillful, but to no avail politically: they were accused of bailing out the greedy bankers they had previously failed to supervise.


Then came major mistakes. In Europe, they started with a remarkably incompetent response to the sudden stop of capital inflows to Greece, Ireland and Portugal, which transformed minor troubles into a near-disaster for the eurozone. Then came a premature fiscal consolidation that derailed the recovery. Europe suffered a double-dip recession, unemployment soared, and support for governments dwindled. They had been successively found asleep at the wheel, complacent and clueless.


The result was that, between spring 2008 and the low point of autumn 2013, the legitimacy of economic and political elites suffered massively. Trust in the European Union declined by 20 percentage points. Support for fringe parties climbed, while some mainstream parties were wiped out.


Fast-forward to 2021, and the contrast is striking. Despite initial mishaps with face masks and COVID-19 tests, governments overall have not lost their publics’ trust. Voters generally credit them for having responded swiftly to the health crisis, and even more so on the economic front. Life-saving lockdowns, income-preserving furlough schemes, the tacit but often flawless coordination between governments and central banks, and effective vaccination campaigns have elicited significant public support.


Despite renewed fear, hardships, and inequality, a majority of people globally are now satisfied with the pandemic response. Trust in the EU is back to pre-financial-crisis levels. These findings are reassuring, because they suggest that governments are punished for bad policies and rewarded for good ones. For all the sound and fury of political debate, it seems that what political scientists call output legitimacy is alive and well.


But there are caveats. The first is that in all 13 advanced economies surveyed in both 2020 and 2021 by the Pew Research Center, citizens – including no less than 83% of Dutch and 77% of German respondents – say that the pandemic has made their society more divided.


The polarization between pro- and anti-vaccine camps is traumatic, because it makes people feel like strangers to each other when solidarity should prevail. The fact that these dividing lines often coincide with partisan political identification, as in the United States, and to some degree in Germany, is deeply disturbing, because it indicates an inability to agree on scientific evidence. Recent violent clashes in the Netherlands are a reminder that such divisions can quickly turn sour. Equally troubling is that in France, trust in scientists has declined significantly.


The second caveat is that economic policy controversies have resurfaced. There was initially a robust consensus about what to do. In Europe, agreement to suspend the fiscal and state-aid rules was reached without much debate, while the European Central Bank’s decision to launch a dedicated asset-purchase program was swift and neat.


Moreover, France and Germany agreed in May 2020 to propose an unprecedented fiscal initiative whereby the EU would issue bonds to finance transfers to its most affected, most vulnerable, and least affluent member countries. A process that normally would have taken months and ended in failure instead took only a few weeks and produced an agreement.


But this harmony is ending. Inflation is in the spotlight. Middle-class households in northern Europe are increasingly concerned that the ECB is putting their savings at risk, and the popular German tabloid Bild has called the bank’s French president, Christine Lagarde, “Madame Inflation.”


The ECB remains confident that inflationary pressures will abate in the course of 2022. There are good arguments for this view, but many in Germany worry – and sometimes panic – about their country’s current 4.5% annual inflation rate. Moreover, Bundesbank President Jens Weidmann recently warned that “it could well be that inflation rates will not fall below [the ECB’s 2%] target over the medium term.”


If the current inflationary burst proves temporary, it will make up for past shortfalls in inflation relative to the ECB’s target and help correct remaining competitiveness imbalances between northern and southern Europe, where prices are rising more slowly. But if inflationary overruns persist, the pandemic policy consensus will fall apart and anger toward the euro will resurface in the north.


On the fiscal front, too, the pandemic consensus is being eroded amid growing differences between those warning against premature consolidation and those worried by rising public debt. This is a perfectly legitimate discussion to have. But, again, the question is whether policy debates will end up fueling polarizing disputes, precisely at a time when Europe must find agreement on the reform of its fiscal pact.


The legacy of a common trauma, persistent fear, and sharpened divisions within societies make the current phase perilously delicate economically and politically. If mismanaged, it may reopen old wounds and shatter policymakers’ newly acquired legitimacy.


In crises, as in military conflicts, victory must never be declared too soon. After all, winning battles means little if one ends up on the losing side of the war.

The path to climate credibility 

Project Syndicate column, 29 October 2021

On October 25, the electric-vehicle producer Tesla’s market capitalization reached $1 trillion – more than the combined value of the next ten global car manufacturers. Even after discounting for exuberance, this is a strong indicator of how the threat of climate change is triggering a transformation of capitalism. To be sure, polluters still abound, and greenwashing is pervasive. But it would be a mistake to dismiss the changeover underway.


Governments, however, are not on track to deliver on their promise in the 2015 Paris climate agreement to limit global warming to “well below” 2° Celsius relative to pre-industrial levels. According to the International Energy Agency, meeting the national pledges made so far within the framework of the Paris accord would lead to an increase in global temperature of 2.1°C. Moreover, actual policies fall short of even these insufficient pledges: under the IEA’s “stated policies scenario,” global warming would reach 2.6°C.


Add to this the fact that – as the Energy Transitions Commission has documented – most governments have committed to achieving net-zero emissions only by 2050 or 2060, and plan to postpone major mitigation efforts until after 2030, and the emerging picture is one of massive credibility failure.


The root of the problem is well known. The Paris agreement was based on the realistic judgment that governments could not agree on a precisely defined allocation of climate-change mitigation efforts. This conclusion had emerged from the collapse of the 1997 Kyoto Protocol (which involved such an allocation but left out emerging economies, including China) and the failure of the 2009 United Nations Climate Change Conference in Copenhagen (where an attempt to muster a global Kyoto-type agreement ended in dispute).


So, the world tried a different approach: experts would assess the climate efforts needed, governments would formulate pledges, and civil society would scrutinize them. No one expected the initial pledges to be sufficient. But the hope was that peer pressure, the weight of public opinion, and relentless warnings by the scientific community would gradually put policies on the right track.


Economists were skeptical. Christian Gollier and Jean Tirole of the Toulouse School of Economics warned early on that the strategy was “doomed to fail.” And William Nordhaus of Yale showed that voluntary climate coalitions are vulnerable to free-riding and prone to instability.


The Paris agreement nonetheless achieved something that simple economic models could not reflect: the beginning of a change in business attitudes. Notably, the Paris accord encouraged investors and managers to ponder the risk of being left with stranded assets or an obsolete business model. Mark Carney, then-governor of the Bank of England, added that regulators would hold financial institutions accountable for hidden climate risks. Such considerations generated private-sector momentum toward decarbonization.


But green capitalism can prosper only if governments eventually keep their climate promises. Most investments in renewable energy, energy-efficient buildings, or zero-emission vehicles require carbon pricing, tight regulation, or both. Forward-looking investors may well bet on the eventual enactment of such measures, but only up to a point, and not without consequences.


An insufficiently credible decarbonization policy implies both higher overall costs (because it leads investors to hedge by combining brown and green investments) and recurrent imbalances between demand and supply. Balancing an accelerated transition away from fossil fuels is challenging in any scenario, but even more so if future policies are uncertain. The current rise in energy prices might therefore presage rougher times ahead.


The lack of climate-policy credibility partly reflects domestic political considerations, because governments simultaneously promise a green future and the continuation of the status quo. US President Joe Biden lacks a congressional majority in favor of penalizing fossil-fuel use, Chinese President Xi Jinping is afraid of jeopardizing his country’s energy-hungry economic growth, and French President Emmanuel Macron knows from experience that middle-class households are hostile to carbon taxation.


Such concerns are understandable. But if investors conclude that governments are not serious about achieving global climate goals, they will spend less on green initiatives, and the Paris agreement’s core mechanism will collapse.


One solution would be for governments to tie their own hands by giving the mandate to set the carbon price to an independent institution, in the same way that they previously delegated responsibility for controlling inflation to central banks. Alternatively, governments could commit to paying a penalty if they fail to adhere to a given future path for the price of carbon (for example, by issuing certificates whose value would depend on the difference between the announced and actual prices). The question, however, is whether institutional or financial engineering could solve a deeply political problem.


Moreover, governments will deliver on climate goals only if a critical mass of countries remains on track to do so. Even more than domestic politics, this is at the core of the current credibility deficit. Nordhaus has therefore proposed that a group of like-minded countries form a “climate club” and apply a tariff on imports from trade partners that are not contributing to the collective effort. Today, for example, this would mean punishing Brazil for President Jair Bolsonaro’s irresponsible climate policies.


The idea makes perfect economic sense, and the outgoing German government took it up in a softer form in a recent paper. The difficulty is that although a mechanism to offset the trade implications of differential carbon pricing should be compatible with World Trade Organization rules, an outright penalty would be in conflict with them.


The European Union’s decision to push ahead with its European Green Deal is a stepping-stone. Provided the EU sets aside sufficient resources to compensate vulnerable households, the program’s common character will help member states solve their own climate credibility problems. In time, the EU will probably form a climate club of sorts with selected trade partners and push for ambitious goals. The question is who the other members will be. As things stand, both the United States and China fall short of the ambition required for such an alliance. That makes this a narrow path to climate credibility. But it is the only one.

Economia y geopolitica

Interview El Confidencial, por Lucas Proto Martinez Royo, 14 de octubre 2021

PREGUNTA: Usted ha manifestado que durante siete décadas, las relaciones económicas internacionales se vieron moldeadas casi exclusivamente por sus propias reglas. ¿Cómo logró la economía reinar durante tanto tiempo?

RESPUESTA: Lo que vimos después de la Segunda Guerra Mundial fue que la integración económica empezó a ser considerada como esencial para preservar la paz y para el empoderamiento de Occidente de cara a su confrontación con el bloque soviético. Los estrategas que concibieron la arquitectura del sistema de posguerra veían las medidas tomadas tras la Primera Guerra Mundial como un fracaso absoluto y consideraban que factores como la rivalidad económica o el proteccionismo de la Gran Depresión fueron claves a la hora de agravar las tensiones internacionales. Consideraban que eran necesarias herramientas que crearan prosperidad y, a la vez, fortalecieran la alianza occidental, algo que un informe del Consejo de Seguridad Nacional de 1950 definió como un "entorno mundial en el que el sistema estadounidense puede sobrevivir y florecer". No se buscaba que Estados Unidos tuviera una ventaja económica estructural, sino establecer un tablero en el que pudiera demostrar que su sistema era superior, provocando así que otros países lo adoptaran. Fue todo un éxito.

Desde luego, fue un proyecto en el que las consideraciones geopolíticas nunca estuvieron ausentes, con la Guerra Fría como telón de fondo. Pero también significó que Estados Unidos no tenía un interés prioritario en utilizar las relaciones económicas como arma. Todo lo contrario. Su objetivo era el de crear prosperidad y que esto fuera lo que, eventualmente, le otorgara una victoria geopolítica. Y eso fue exactamente lo que pasó. El colapso de la Unión Soviética no fue una victoria militar estadounidense, sino una esencialmente económica.

P: La narrativa predominante es que la ‘Guerra de las Galaxias’ de Ronald Reagan, una iniciativa militar, fue la que dio la puntilla a la URSS

R: Cuando Reagan lanzó la Organización de la Iniciativa de Defensa Estratégica (denominada en su momento como 'Guerra de las Galaxias'), lo hizo apoyándose en la fuerza económica de Estados Unidos. Fue una iniciativa que requería de considerables recursos adicionales y del lado soviético la economía estaba en estancamiento, por lo que conseguir esos recursos necesarios para competir con su rival resultaba extremadamente difícil. Esto fue lo que forzó a Mijaíl Gorvachov a lanzar sus reformas económicas. Esto puede verse claramente en los escritos de Abel Aganbegián, jefe de asesores económicos del líder soviético, quien indicaba en la época que “nuestro sistema económico no es eficiente, así que tenemos que reformarlo”. De ahí surgió la Perestroika, y todos sabemos lo que pasó después.

P: ¿Y por qué considera que la geopolítica ha vuelto a imponerse a la economía?

R: Aunque había una serie de normas que Estados Unidos nunca llegó a cumplir del todo (siempre tenía un estatus especial) en general no utilizó su poder económico principalmente para extraer beneficios del resto del mundo. Le bastaba con que el sistema imperante basado en las normas continuara su curso. Ese es el mundo en el que vivíamos a lo largo de la Guerra Fría. Más adelante, durante la fase de globalización, la visión general fue continuista. Se pensaba que China jugaría con las mismas normas que todos. Que atraída por las fuerzas globalizadoras, crearía prosperidad y, con ello, haría una transformación política hacia el sistema occidental.

Lo que pasó es que el personal de política exterior estadounidense empezó a darse cuenta de que esto no estaba funcionando. Que el sistema económico no lograría, por sí mismo, conversiones geopolíticas. Por un lado, China está sorteando las reglas del juego económico mientras se beneficia de él; por el otro, está esquivando cualquier transformación política. Este aparato exterior, tanto en la administración de Donald Trump como en la de Joe Biden, concluyó que aquello que durante tanto tiempo había funcionado ya no sirve, que Estados Unidos necesita jugar de forma distinta a la de antes.

P: Esta integración económica forma parte del ADN de la Unión Europea. Ursula von der Leyen ha prometido liderar una “Comisión Europea geopolítica”, pero ¿puede Bruselas sortear las aguas de este nuevo sistema?

R: Es un cambio de cultura política. La UE fue una parte integral de este proyecto sistémico liderado por Estados Unidos y fue creada en gran medida gracias a él. Por ello, desarrolló una visión del mundo basada en las normas muy alejada de los planteamientos realistas y geopolíticos. El mandato de la ley es la fundación de la UE: existen reglas y deben ser obedecidas. Por ello, Bruselas estaba en perfecta sintonía con el orden internacional imperante basado en las normas, uno al que contribuyó y en el que contaba con un considerable liderazgo.

Pero hoy en día existe un entendimiento de que el mundo ya no va en esa dirección, de que está siendo transformado por un nuevo concepto estadounidense de las relaciones internacionales que está mucho más cerca de uno propio del siglo XIX. El realismo ha vuelto y está forzando a la Unión Europea a adaptarse, y creo que Ursula von der Leyen, Charles Michel o Josep Borrell lo comprenden bien. Pero una cosa es el reconocimiento intelectual de un fenómeno y otra muy diferente es adaptarse a él, especialmente con culturas de política exterior tan diferentes entre los países miembros. Es una tarea muy complicada, una que creo que sí se está llevando a cabo, aunque de forma relativamente lenta comparada con la rapidez con la que el mundo ha cambiado.

P: La reciente crisis energética que atraviesa Europa ha avivado el discurso geopolítico, con múltiples señalamientos hacia Rusia y críticas por la dependencia que gran parte de la UE tiene de su gas.

R: Las relaciones con Rusia suponen un buen ejemplo de las diferentes perspectivas que conviven dentro de la UE. Las diferencias al respecto entre países como Polonia o Estonia con Alemania o Italia son enormes, no tienen nada que ver la una con la otra. El proceso de formar una visión geopolítica común con respecto a Rusia es y será todo un desafío.

P: La guerra comercial con China llegó con Donald Trump para quedarse. ¿Es este su mayor legado internacional?

R: El cambio de mentalidad se produjo en gran medida durante el mandato de Barack Obama. Los miembros de su administración, durante su etapa final, ya se mostraban escépticos respecto al potencial de la integración económica y criticaban a la Organización Mundial del Trabajo (OMT) y a China.

Lo que Trump hizo fue cambiar la estrategia. La estrategia de la administración Obama contra China fue la de establecer vínculos económicos para intentar mejorar la posición relativa de Estados Unidos, como el Acuerdo Transpacífico de Cooperación Económica (TTP). Fue una forma de decirle a Pekín “hemos formado estas megaalianzas en las que no estás incluido, y si quieres estarlo debes cambiar”. Trump abandonó ese tratado y esa estrategia comercial, y la actual administración Biden no hace nada al respecto, porque no cuenta con estrategia alguna. Ese tipo de tratados son muy polémicos domésticamente, especialmente entre la clase trabajadora. Biden, por lo tanto, básicamente ha aceptado la visión de Trump, y ese es su legado.

P: La política doméstica estadounidense parece limitar cada vez más su acción exterior. ¿Cuánto pesa la opinión pública para la administración Biden?

R: Creo que la administración Biden está realmente obsesionada con el imperativo político de recuperar la clase trabajadora. Busca revertir a toda costa la transformación de la base de apoyo del Partido Demócrata y la huida de lo que considera como su electorado hacia el Partido Republicano. En este sentido, la agenda política doméstica es dominante y la política comercial no pesa lo suficiente.

Es difícil que su estrategia funcione. Porque si uno lee todo lo que Biden ha propuesto, como la baja parental, la baja laboral, la educación gratuita u otras medidas que favorecen el estado de bienestar, se trata de una agenda muy europea. Aquí tenemos todo eso y más, ¿y acaso eso ha servido para calmar el giro de la clase trabajadora hacia la derecha? No. La sensación de insatisfacción es muy parecida aquí a la que se produce en Estados Unidos.

P: En un ensayo reciente, usted evoca el concepto de “asimetrías en la economía global” y defiende su importancia para explicar las crecientes tensiones geopolíticas. ¿Qué son estas asimetrías y cuál es su peso?

R: En los años 90, el ascenso de varios países asiáticos y una reducción relativa de la desigualdad de ingresos entre naciones hizo que predominara la sensación de que el campo de juego internacional había sido nivelado. Esta perspectiva puede resumirse en la frase que da título al libro de Thomas Friedman: “La tierra es plana”, es decir, todo el mundo tiene el mismo acceso a la tecnología y, por lo tanto, todas las diferencias entre naciones se reducirán eventualmente. Era una visión que estaba muy extendida durante la época marcada por la globalización.

Pero esta visión ignoraba las asimetrías estructurales del sistema. Las cadenas globales de valor, las redes financieras, el sistema de divisas… todos ellos cuentan con centros neurálgicos. No vivimos en una tierra plana, sino en una tierra con importantes picos y asimetrías. El control de los nodos de estas redes puede llevar a lo que Henry Farrell y Abraham L. Newman han denominado como “el arma de la interdependencia”: el hecho de que la interdependencia entre países crea posiciones de poder y que éstas pueden ser utilizadas para lograr objetivos geopolíticos. Un ejemplo de ellos es la imposición de sanciones estadounidenses contra Irán durante la administración Trump. A pesar de que la Unión Europea seguía siendo parte del acuerdo nuclear, compañías europeas que estaban comerciando con la república islámica dejaron de hacerlo inmediatamente después de que las sanciones de EEUU fueron anunciadas, porque dependían demasiado del mercado estadounidense.

P: En este mundo asimétrico, ¿parte la UE con cierta ventaja o debe comenzar desde cero?

R: La UE ciertamente no parte de cero, tiene mucha fuerza. Durante décadas, ha sido capaz de imponer sus preferencias y estándares en el mundo. Ante todo, es muy poderosa por el tamaño de su mercado, el mayor del mundo. Ningún productor del planeta que se precie puede permitirse el ignorar el mercado europeo. Bruselas ha demostrado esta fuerza, por ejemplo, en las políticas de competencia. Resulta extraordinario que la UE haya conseguido bloquear la fusión de compañías estadounidenses o la imposición de considerables multas en su contra.

El Wall Street Journal describió hace unos años a la UE (y no de forma positiva) como “el regulador del mundo”. La UE, por lo tanto, no carece de dientes. Somos muy débiles en algunos aspectos, pero muy fuertes en otros. El problema está tanto en la falta de cerebro como en la de músculo. 

The Geopolitical Conquest of Economics


Project Syndicate column, 30 September 2021


From the Huawei affair to the AUKUS spat and beyond, a new reality is shaking up the global economy: the takeover, usually hostile, of international economics by geopolitics. This process is probably only just beginning, and the challenge now is learning how to live with it.


Of course, economics and geopolitics have never been completely separate domains. The post-World War II liberal economic order was designed by economists, but on the basis of a master plan conceived by foreign-policy strategists. Postwar US policymakers knew what they wanted: what a 1950 National Security Council report called a “world environment in which the American system can survive and flourish.” From their perspective, the free world’s prosperity was the (ultimately successful) conduit to containing and possibly defeating Soviet communism, and the liberal order was the conduit to that prosperity.


But although the ultimate objective was geopolitical, international economic relations were shaped for 70 years by their own rules. On occasion, concrete decisions were certainly skewed by geopolitics: for the United States, providing International Monetary Fund financial assistance to Mexico was never equivalent to providing it to Indonesia. The principles governing trade or exchange-rate policy, however, were strictly economic.


The end of the Cold War temporarily put economists on top. For three decades afterward, finance ministers and central bankers thought they were running the world. As Jake Sullivan (now the national security adviser to US President Joe Biden) and Jennifer Harris pointed out in 2020, management of globalization had been deferred to “a small community of experts.” Again, there was an underlying geopolitical aim: in the same way that economic openness had contributed to the Soviet Union’s collapse, it was expected to bring about China’s convergence toward the Western model. But for the rest, interference remained limited.


The rise of China and its growing rivalry with the US brought this era to an end. With the failure of convergence through economic integration, geopolitics has returned to the fore. Biden’s focus on the Chinese challenge and his decision not to dismantle the trade restrictions put in place by his predecessor, Donald Trump, confirm that the US has entered a new era in which foreign policy has taken over from economics.


In China, there was no need for such a takeover. Although the country’s leaders routinely pay lip service to multilateralism, both its historical tradition and governance philosophy emphasize political control of domestic and especially foreign economic relations. The transnational Belt and Road Initiative embodies this model: as Georgetown University’s Anna Gelpern and co-authors recently documented, Chinese loan contracts to finance infrastructure in developing countries are opaque, involve political conditionality, and explicitly rule out debt restructuring through multilateral procedures.


Even in Europe, where belief in the primacy of economics was most entrenched, things have begun to change. “The beating heart of the globalist project is in Brussels,” US populist agitateur Steve Bannon declared contemptuously in 2018. This was in fact true: the primacy of common rules over state discretion is in Europe’s DNA. But the European Union also is waking up to the new reality. Already in 2019, European Commission President Ursula von der Leyen spoke of leading a “geopolitical commission.”


The question is what this renewed geopolitical focus actually implies. Most foreign-policy experts envision international relations as a power game. Their implicit models often assume that one country’s gain is another’s loss. Economists, on the other hand, are more interested in promoting the gains that cross-border transactions or joint action yield to all parties. Their benchmark concept of international economic relations envisions independent actors voluntarily entering into mutually beneficial arrangements.


In a 2019 article, Sullivan and Kurt Campbell (who now directs Asia policy at Biden’s National Security Council) outlined a plan for “competition without catastrophe” between the US and China. Their scheme combined across-the-board trade reciprocity with China, the formation of a club of deeply integrated market democracies (access to which would be conditional on economic alignment), and a policy sequencing in which competition with China would be the default option, with cooperation conditional on Beijing’s good behavior. They also rejected any linkage between US concessions and cooperation in the management of global commons such as climate.


This would be a clear strategy, but the Biden administration has not yet indicated whether it intends to pursue it. US middle-class economic woes and the resulting enduring domestic reluctance to open up trade contradict geopolitical aims and make America’s intentions hard to read. Foreign-policy types may have prevailed over economists, but domestic politics reigns supreme, and clear-mindedness is not what is guiding action.


China, meanwhile, has flatly refused to carve out climate cooperation from the wider US-Chinese discussion, and recently wrong-footed the US by applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a regional trade pact that President Barack Obama designed to isolate China but that Trump chose to quit. Instead of being isolated, China is trying to outmaneuver the US.


Paradoxically, Europe is getting closer to defining its stance. It still believes in global rules, and gives priority to persuading partners to negotiate and enforce them, but it stands ready to act on its own. “Open strategic autonomy”, its new buzzword, seemed to be an oxymoron. But the EU now seems to know what it means: in the words of senior EU trade official Sabine Weyand, “work with others wherever we can, and work autonomously wherever we must.” In a more geopolitical world, this may well become Europe’s credo.

Climate vs. Capitalism?


Project Syndicate column, 30 August 2021


The latest report from the Intergovernmental Panel on Climate Change leaves no doubt: global warming will continue until at least 2050, even if greenhouse-gas emissions are drastically reduced in the coming decades. If they are cut too slowly, the kinds of heat waves, droughts, heavy rains, and flooding experienced this summer will become more frequent. More catastrophic outcomes, such as abrupt, irreversible changes in oceanic circulation, cannot be ruled out.


Fortunately, the public is increasingly convinced of the urgency of the problem. A recent United Nations poll indicates that nearly two-thirds of people across 50 countries regard climate change as an emergency. The question, then, is what climate action should entail. How will it affect incomes, jobs, and living conditions? Most citizens simply don’t know, because they are being offered very contrasting perspectives on the future.


On one hand, techno-optimists are confident that new, green innovations can go a long way toward solving the problem. Their vision of the future is simple: we will be driving electric cars instead of petrol cars, traveling on high-speed trains instead of taking planes, and inhabiting carbon-neutral houses. The rich may have to give up holidaying on other continents, but everyone else’s lifestyle will essentially be preserved.


Growth skeptics, on the other hand, depict the transition to carbon neutrality as a fundamental change that will end decades of consumer-driven economic expansion. We will enter a new “post-growth,” or even “de-growth,” era. Quality will be substituted for quantity, and social interaction for material consumption.


Both camps share the goal of curtailing emissions. But while techno-optimists trust green capitalism to drive an economic transformation, skeptics suggest that growth is a destructive addiction, curable only by reining in wasteful private conduct. The fight against climate change, in their view, is a fight against capitalism itself.


Economists tend to side with the techno-optimists. Back in 2009, MIT’s Daron Acemoglu, the College de France’s Philippe Aghion, and their co-authors observed that technical progress had been massively biased toward brown (carbon-intensive) technologies. They pointed out that government subsidies, regulations, and carbon pricing would direct innovation toward cleaner technologies, making green growth increasingly efficient. These predictions have been vindicated by the collapse of the cost of renewable energy. Adair Turner, the chair of the Energy Transitions Commission, notes that for many developing countries, green energy is quickly becoming cheaper than fossil-fuel energy. The same applies to electric batteries.


The reason is that capitalism has begun to turn green, with an increasing number of companies investing in being part of a cleaner future. Tesla is now valued fourteen times more than General Motors, despite having sold fourteen times fewer cars in 2020. Still, brown capitalism lingers, fighting for survival. As when agrarian and manufacturing interests fought each other in the nineteenth century, today’s defining battle is not between climate activists and capitalism, but rather between two strands of capitalism.


That is good news. But two caveats are in order. First, even if technology comes to the consumer society’s rescue, people will need to change their lifestyles. Because many energy-intensive suburban dwellings are unlikely to pass the carbon-neutrality test, they could end up as stranded assets. That will be a problem for the households whose main asset is their current home equity. Similarly, the deep transformation of meat-intensive diets will disrupt millennia-old agricultural and food traditions.


Growth skeptics therefore have a point when they say that technology is no magic bullet. While it is nonsense to think that de-growth will solve the climate problem, it does make sense psychologically to warn people that behavioral changes will be needed.


The second caveat is that even if green technologies turn out to be less costly than traditional ones, the transition costs will be substantial. Having procrastinated for so long, we are now confronted with a sudden, abrupt changeover. Put simply, a significant share of the existing capital stock – buildings, machines, vehicles – will need to be discarded and replaced before it reaches the end of its economic life. Whether this phase-out is triggered by carbon pricing or by tighter emission regulations is immaterial. Either way, greater investment will be needed to maintain the same level of output.


Economists call sudden obsolescence of capital stock a negative supply shock, because its main economic effect is to reduce potential output (at least temporarily). The expression was coined in the 1970s to make sense of the sudden rise in oil prices. A back-of-the-envelope calculation suggests that the shock awaiting us in the coming decade will be roughly the same order of magnitude.


The combination of reduced potential output and greater investment – amounting to 2% of GDP, according to several estimates – implies that consumer welfare will take a hit. More precisely, it will be diminished in the short term and improved in the long term, as when a country undertakes a military build-up to preserve its security. Also, jobs will be lost in traditional carbon-intensive sectors; but other jobs will be created in carbon-neutral industries. Again, this will involve significant transition costs: foundry workers will not instantaneously be transformed into building-insulation experts.


Political leaders should be honest about what is coming. President Biden is being a bit misleading when he speaks of “an opportunity to create millions of good-paying, middle-class union jobs” as is European Commission President Ursula von der Leyen when she suggests that the European Green Deal is Europe’s “new growth strategy”. Both are right to speak of a bright future, but wrong to overlook the fact that certain jobs will be destroyed and prosperity diminished along the way. 


Citizens are conscious of the urgency of climate action, yet they remain uncertain of its implications. What they need is clarity, not starry-eyed promises. The best way to convince people to embrace decarbonization efforts is not by minimizing the challenges ahead, but by describing them accurately and explaining how they will be addressed.

Mario Draghi’s Second “Whatever It Takes” 


Project Syndicate column, 30 July 2021


To be the prime minister of Italy is to hold one of the worst jobs on earth. To paraphrase the English philosopher Thomas Hobbes, life in this post is usually nasty, brutish, and short. Very short, in fact: Since Angela Merkel became chancellor of Germany in 2005, she has had eight different Italian counterparts.


Unsurprisingly, Italian leaders achieve little under such conditions. By the time the COVID-19 crisis hit, German GDP per capita had grown by 20% since Merkel took office, while Italy’s had declined by 4% during the same period. 


Although it is unclear how long current Prime Minister Mario Draghi, a former president of the European Central Bank, will remain in office, the odds are that he will be true to tradition. Speculation in Rome is that he might run for president – a position with influence, but not power – in 2022 or 2023. But, as Draghi’s ambitious economic recovery plan makes clear, the expected shortness of his tenure is not preventing him from being bold. 


From 2021 to 2026, Italy is set to receive €69 billion ($81 billion), or close to 4% of GDP, in grants from the European Union to finance green, digital, and infrastructure investments. This alone is significantly more, as a share of GDP, than the 2.6 per cent European countries got under the post-World War II US Marshall Plan. But Draghi has decided to double down by bundling this grant with another €13 billion of EU subsidies and more than €150 billion in loans, also mostly from the EU, so that the whole program amounts to a whopping €235 billion. Some 70% of it will be allocated to new projects. Spain, by contrast, also will receive about €69 billion in EU grants, but does not plan to spend a penny more.


Draghi’s choice may look strange at first sight. EU loans are only marginally cheaper than Italy’s own cost of borrowing, so why should the government pre-commit to drawing on them so massively? The answer is that he wants Italy to change tack, and has thus announced a shock-and-awe strategy that aims to end his country’s two-decades-long stagnation.


By acting so forcefully, Draghi hopes to shift expectations and thereby the behavior of employers, workers, and consumers. In 2012 he famously changed the fate of the eurozone by saying that the ECB would do “whatever it takes” to preserve the euro. The massive multi-year plan amounts to another “whatever it takes”. It is intended to signal that the government is determined to ensure a sustained recovery and put the economy on a lasting growth trajectory.


This is the exact opposite of the traditionally cautious fiscal approach that prevails in the EU, where governments have repeatedly acted as if the bigger risk were to do too much and jeopardize macroeconomic stability. Draghi’s strategy is much closer to that of US President Joe Biden, who also clearly considers that the greater risk is to do too little. Draghi is certainly not the first European leader to think in this way in recent times, but he is the first to act accordingly. It probably took his credibility as a central banker to convince the EU of the merit of his approach.


Yet, the conditions for success are demanding. The first is that the Italian government spend the money efficiently rather than in a politically expedient way. The problem with EU grants is that they tend to be allocated in such a way that every ministry gets its little bit. Draghi seems to have avoided this trap by setting just a few priorities and handing oversight of the plan’s implementation to the Treasury. Where he is taking a risk is by allocating 40% of the total package to Italy’s south, a backward and clientelistic region where public investments have regularly disappointed.


The second condition is that investment be buttressed by complementary reforms. The EU has been adamant that member states benefiting from grants must embrace difficult measures and implement the European Commission’s “country-specific recommendations.” Negotiations have been long, detailed, and occasionally tense. The Commission has been getting deep into the weeds, asking governments to amend details of legislation. But Draghi has successfully stuck to a handful of objectives such as reforming the judiciary, strengthening competition, and modernizing public administration. Right or wrong, the reforms are his choice.


The third crucial factor is that financial markets buy into the package. Italy’s public debt, as a share of GDP, is the second highest in the EU, after Greece, and Draghi’s plan will only add to it. His bet is that investors prefer to lend more to a government that invests to raise a country’s potential growth than to remain stuck with the debt of a fiscally cautious one that presides over a moribund economy.


Data suggest that Draghi is right. Italy’s debt predicament, stems not from fiscal laxity but from a lack of growth. And markets so far seem convinced; the interest spread between ten-year Italian and German bonds has narrowed to about 100 basis points from 150 before the COVID-19 pandemic hit.


Only time will tell if Draghi’s strategy delivers. Italy’s dismal recent economic record is only partly due to a lack of momentum. At a deeper level, it is rooted in adverse demographic trends, poor educational attainment, and an enduring duality between a cluster of innovative, world-class exporters and myriad second-rate, low-productivity small firms. Draghi’s plan will address some, but not all, of these failings. The big question is whether it will be sufficient to raise productivity.


Ultimately, however, Draghi’s main weakness is political. He is the only reason why an unwieldy governing coalition has so far not damaged the recovery plan through political infighting. But the coalition could unravel at any time.


If Draghi succeeds, he will change the European conversation, so that neighborly solidarity and fiscal risk-taking are seen as good investments. If he fails, the EU’s recovery plan will be remembered as a waste of money, and fiscal conservatism will regain the upper hand. Italy’s latest prime minister is playing for high stakes indeed.


The end of globalisation as we know it

Project Syndicate column, 28 June 2021

For most people, globalization has for decades been another name for across-the-board liberalization. Starting mainly in the 1980s, governments allowed goods, services, capital and data to move across borders, with few controls. Market capitalism triumphed, and its economic rules applied worldwide. As the title of Branko Milanovic’s latest book correctly states, capitalism was finally alone.


True, there were other aspects of globalization that bore little relation to market capitalism. The globalization of science and information broadened access to knowledge in unprecedented ways. Through increasingly international civic action, climate campaigners and human-rights defenders coordinated their initiatives as never before. Meanwhile, governance advocates argued early on that only the globalization of policies could balance the forward march of markets.


But these other sides of globalization never measured up to the economic dimension. The globalization of policies was especially disappointing, with the 2008 financial crisis epitomizing how governance had failed.


This phase of globalization is now ending, for two reasons. The first is the sheer magnitude of the challenges that the international community must tackle, of which global public health and the climate crisis are only the most prominent. The case for joint responsibility for the global commons is indisputable. Achievements here have been meager so far, but global governance has won the battle of ideas.


The second reason is political. Country after country has witnessed a rebellion of the left-behind, from Brexit to the election of Donald Trump as US president to the French “yellow vest” protests. Each community has expressed unhappiness in its own way, but the common threads are unmistakable. As Raghuram Rajan has put it, the world has become a “nirvana for the upper middle class” (and of course the wealthy), “where only the children of the successful succeed.” Those left out increasingly end up in the nativist camp, which offers a sense of belonging. This calls into question the political sustainability of globalization.


The tension between the unprecedented need for global collective action and a growing aspiration to rebuild political communities behind national borders is a defining challenge for today’s policymakers. And it is currently unclear whether they can resolve this contradiction.


In a wide-ranging recent paper, Pascal Canfin, chair of the European Parliament’s Committee on the Environment, makes the case for what he calls “the progressive age of globalization.” Canfin argues that the fiscal and monetary activism endorsed by nearly all advanced economies in response to the pandemic, the growing alignment of their climate action plans, and the recent G7 agreement on taxing multinational firms all indicate that the globalization of governance is becoming a reality. Similarly, the greening of global finance is a step toward “responsible capitalism.”


One may question the scale of the victories that Canfin lists, but he is right that advocates of global governance have recently seized the initiative and made enough progress to regain credibility. Progressive globalization is not a pipe dream anymore; it is becoming a political project.


But although the globalization of governance may appease the left, it will hardly alleviate the woes of those who have lost good jobs and whose skills are being devalued. Workers who feel threatened and find protectionist solutions attractive expect more concrete responses.


In a recent book, Martin Sandbu of the Financial Times outlines an agenda for restoring economic belonging while keeping borders open. His idea, in a nutshell, is that each country should be free to regulate its domestic market according to its own preferences, provided it does not discriminate against foreigners. The European Union, for example, may ban chlorine-washed chicken (it does, actually), not because it is produced in the United States but because the EU does not trust the product.


Similarly, any country should be able to ban timber resulting from deforestation, or credits provided by undercapitalized banks, provided the same rules apply to domestic and foreign firms. Transactions would remain free, but national standards would apply across the board.


This is a sound principle. But while application to products is straightforward and is actually in place, doing the same for processes is notoriously difficult. A given good or service ultimately incorporates all the standards in force along its value chain. True, multinationals nowadays are compelled to trace and end reliance on any child labor among their direct or indirect suppliers. But it would be challenging to proceed in the same way with regard to working conditions, union rights, local environmental damage, or access to subsidized credit.


Moreover, attempting to do this would stir up fierce opposition among developing countries, whose leaders argue that subjecting them to advanced-economy standards is the surest way to make them uncompetitive. Previous attempts to include social clauses in international trade deals failed in the early 2000s.


A major test will come in July, when the EU is set to announce its plans for a mechanism that will require importers of carbon-intensive products to buy corresponding credits on the EU’s market for emission permits. As long as decarbonization does not proceed everywhere at the same pace, the economic case for such a border-adjustment system is impeccable: the EU wants to prevent producers from evading its emission limits by moving elsewhere. But it is bound to be controversial. The US has already indicated its concerns about the idea, China is wary, and developing countries are sharpening their arguments against it.


The upcoming negotiations on the issue will be hugely important. At stake is not just whether and how the EU can move ahead with its decarbonization plans. The more fundamental question is whether the world can find a way out of the tension between scattered national and regional preferences and the increasingly urgent need for collective action. Climate has become the testing ground for it.


The outcome will eventually indicate whether the dual agendas of rebuilding economic belonging and managing the global commons can be reconciled. It will take time to learn the answer. The old globalization is dying, but the new one has yet to be born. 

Is Bidenomics more than catch-up?

Project Syndicate Column, 31 May 2021


“Let’s think big,” exhorted US Secretary of the Treasury Janet Yellen in May. “Let’s build something that lasts for generations.”


Such is the transformative rhetoric behind President Joe Biden’s economic-policy agenda. But what, exactly, will be built, and how will America be transformed? The answer is bound to be as much political as economic, because Biden has set out to respond to the anger that led many workers to vote for his predecessor, Donald Trump.


In recent weeks, much of the US policy debate has focused on the size of the Biden administration’s $1.9 trillion American Rescue Plan, with critics arguing that it represents excessive stimulus in an economy already on the mend from the recession and whose pre-pandemic state was very close to full employment. The rescue plan, however, is merely the first plank of a three-part domestic agenda that includes the $2.3 trillion American Jobs Plan and the $1.8 trillion American Families Plan, both of which aim to bring about more comprehensive long-term change.


But for all of its headline-generating spending figures, the Biden administration is largely playing catch-up. After all, the jobs plan is designed to make up for years of neglect by repairing some 10,000 small bridges and ensuring clean drinking water for all Americans. Such investments are indispensable, but they are not the kind of thing that elicits envy in other advanced economies. Likewise, 36% of US households have fixed broadband access, compared to 45% in France, so policies to expand internet access, while commendable, are not exactly pathbreaking.


The same applies to the families plan. Even if enacted in full, it will merely tackle glaring gaps in the US social model, by introducing or modestly expanding programs that Europeans have already had for decades. These include paid parental leave, affordable childcare, free preschool, and universal tuition-free post-secondary education for two years (though not at elite universities). And if the planned rise in the US federal minimum wage will certainly help workers, it should be kept in mind that its current level is 40% below the German one.


Evidently, the US is also catching up on climate policies. The Biden administration’s recent commitment to achieve carbon neutrality by 2050 matches that of the European Union, and its 2030 decarbonization target is somewhat less ambitious than what is now under discussion in Europe.


Moreover, such reforms are unlikely to suffice to address the Democrats’ political problem. Their challenge is that as white voters without a college degree still make up 41% of the electorate, a fragile alliance of black voters and educated elites remains at the mercy of a shift in the citizens’ sentiment. Even assuming that new voting laws in many Republican-led states do not overly suppress black turnout, this alliance will still not command a strong enough majority in the right places to ensure safe Democratic victory in the Electoral College in 2024.


The Democrats’ imperative is to recapture the votes of the white working class that voted for Trump in 2016 and again in 2020. But since Bill Clinton’s presidency in the 1990s, they have offered left-behind workers only two solutions: education and social benefits. As The Atlantic’s Ronald Brownstein recounts, Clinton’s mantra was that, “What you learn is what you earn.” He and Barack Obama strongly believed that more and better education was the best way to deal with the labor-market upheavals brought about by digitalization and globalization. (Europeans mostly shared this philosophy, though they placed a greater emphasis on social transfers.)


But workers do not agree. They do not want to live on welfare, but nor do they want to be sent back to school. Rather, they want to keep the good jobs that have long provided them with incomes and a sense of pride. Trump won in 2016 because he understood this sentiment and exploited it to win the working-class vote in key swing states.


And it’s not just America. Everywhere one looks, the left has lost the working-class vote. In the United Kingdom, Prime Minister Boris Johnson has conquered Labour’s “Red Wall”; in France, far-right leader Marine Le Pen has emerged as the candidate of choice for a growing share of workers; and in Germany, the Social Democrats seem likely to be crushed in the September elections. As Amory Gethin, Clara Martínez-Toledano, and Thomas Piketty show in a fascinating comparative paper, the traditional cleavages that structured post-war politics have collapsed across Western democracies.


Biden clearly understands this political shift. Last month, in his first address to a joint session of Congress, he made a point of noting that nearly 90% of the jobs created by his infrastructure plan will not require a college degree. But how can his administration actually deliver good jobs?


A first step is to keep the economy in a high-pressure state, as Trump did. There is ample evidence to show that this overwhelmingly benefits those on the margin of the labor market. Discouraged unemployed workers can find a job, and wage gains accrue disproportionately to those at the bottom. This is why the Biden administration is seeking to engineer an excess of demand, despite the risk of reviving inflation.


Investments in infrastructure and the green transition could also help win back construction workers, at least in the years to come. And the Biden administration will likely call trade and industrial policies to the rescue. While publicizing its many sharp breaks with the Trump administration in most policy areas, it has been notably quiet on this issue. Most of Trump’s tariffs remain in place. Biden visibly wants to avoid accusations that he is sacrificing US manufacturing jobs in the name of globalization or economic openness.


Will these initiatives be enough? They could perhaps be sufficient for winning the midterms and the next presidential election. But the Biden administration is not offering yet a structural response to technological disruptions and the erosion of the advanced economies’ comparative advantage. To “build something that lasts for generations,” Team Biden will need to come up with more.

Europe Needs a New Fiscal Framework


Project Syndicate Column, 29 April 2021


In the mid-1980s, only six countries had fiscal rules. In 2015, when the International Monetary Fund last counted, 96 did. Most had provisions limiting public debt, budget deficits, or both, and some had additional rules on public expenditures.


This circumscription of fiscal discretion was partly a response to traumatic experiences such as Latin America’s “lost decade” following the debt crises of the 1980s; the painful adjustment suffered by countries caught off-guard by rising interest rates in the early 1990s; and the European sovereign-debt crisis of 2010-12. But the adoption of fiscal rules also owed something to growing distrust of fiscal activism.


In 2000, John B. Taylor of Stanford University captured the spirit of the time when he wrote that it is “best to let fiscal policy have its main countercyclical impact through the automatic stabilizers” – in other words, to put it on the automatic pilot. The consensus then was that monetary policy is a nimbler and more effective policy tool, because the key decisions are made by an independent central bank and implemented with the stroke of a pen.


Nowhere are fiscal rules as detailed and prescriptive as in the European Union, whose budgetary rulebook is nearly 100 pages. There are good reasons for this. Because euro members share a currency, they cannot inflate away their individual debt burdens. As Paul De Grauwe of the London School of Economics has observed, they are in a position similar to countries who borrow in a foreign currency. Yet excessive public debt results in pressure on partner countries to come to the rescue to avoid severe financial fallout from debt restructuring or, worse, an exit from the currency union. This is what happened with Greece in the 2010s. So there is a real motive for preventing fiscal irresponsibility.


But there are also bad reasons for having codified budgetary behavior so extensively. Germany is traditionally wary of stabilization policy (though not in response to the 2008 financial crisis or the pandemic), and smaller northern European countries are even more fiscally gun shy. In addition, member states lack mutual trust. As a result, they have piled up a tangle of rules so complex that people in Brussels joke that only one person in the whole European Commission actually understands it all.


But times have changed. For 12 years now, interest rates have been pinned near zero, making a mockery of claims touting monetary policy’s effectiveness. Instead of protecting the central bank from fiscal vagaries, the priority in such an environment is to ensure that monetary and fiscal policy function in tandem. Breaking a taboo, Isabel Schnabel, a member of the European Central Bank’s Executive Board, has stressed that today’s situation requires unconventional monetary policies and unconventional fiscal policies, which should complement one another to protect the economy from large downturns. As outlined in a recent Geneva Report, the long-forgotten concept of a policy mix is back in fashion.


In parallel, concerns about sovereign solvency have greatly diminished. As former IMF chief economist Olivier Blanchard notes, there is no such thing as an unsustainable debt as long as the interest rate remains below the growth rate. In many countries, this has now been the case for a decade; and even in the United States, where bond rates have recently increased, the margin remains wide.


Recognizing the implications of these debt dynamics, the US President Joe Biden’s administration has lost no time pursuing its fiscal agenda. Whereas the post-2008 US stimulus was too timid, the recently adopted $1.9 trillion fiscal package, coming on top of other trillions of spending already enacted under Donald Trump last year, amounts to massive overkill.


The question now is what Europe will do. In March 2020, it wisely availed itself of an escape clause in its fiscal rulebook, allowing member states “to temporarily depart from the normal budgetary requirements.” This exception will likely remain in place for 2022 but, pandemic permitting, will end in 2023. In the meantime, the debate will focus on whether the rules should be reformed before they are reinstated, and – more fundamentally – whether fiscal initiatives should be regarded as a problem or as a solution.


The case for comprehensive reform was strong before the pandemic and has now become overwhelming. The current rules were built for a world that no longer exists. They are opaque, excessively constraining, and reliant on numerical targets that do not make sense in a low-interest-rate environment. Moreover, they are no longer credible. With a debt-to-GDP ratio approaching 160% this year, Italy can scarcely be expected to hit the EU’s debt-to-GDP limit of 60%.


Make no mistake: in a monetary union, fiscal responsibility is crucial. The question is not whether member states should be given high standards to meet, but how this should be done. Reformers want to retain the commitment to fiscal discipline but change the yardstick for assessing actual behavior. Others, worried that this commitment would not survive a renegotiation, prefer to tinker on the margin. But sticking to an obsolete commandment out of fear of being unable to define a better one is a formula for undermining trust in the rules altogether.


If there is any silver lining to the COVID-19 crisis, it is that we have been forced to rethink rules that have survived on inertia. Short of the radical reform advocated by some, it is possible to design a fiscal framework that creates more space for fiscal discretion but preserves the essential commitment to responsibility. The first step is to accept that all countries cannot be expected to achieve the same goal. The second is to acknowledge that fiscal discipline must be based on principles and buttressed by well-designed institutions, rather than by rigid numerical targets.


The EU has not shied away from pursuing taboo-free responses to the current crisis. By embarking on a comprehensive reform of its fiscal framework, it would signal that it is strong enough to rethink economic policy for post-pandemic conditions. It should launch the discussion now, with a view to agreeing on a blueprint within a year.


The Post-Vaccine Risk Phase


Project Syndicate column, joint with Olivier Blanchard, 31 March 2021


For all the drama over sluggish COVID-19 vaccine rollouts and export restrictions, there is little doubt that the vast majority of people in the US and Europe will have been vaccinated by summer. Death tolls will differ according to each country’s policy record, but the public-health situation will have become largely the same for Americans, Europeans, and Britons.


But there is considerable uncertainty about how much of pre-pandemic social life will return, and how long it will last. Some constraints doubtless will remain in place. The recovery in travel, for example, will be slow and uneven, and there will probably be “travel bubbles” – a scenario already anticipated in Australia and New Zealand, where the virus has been nearly eliminated. The European Union, for its part, will likely accommodate the summer travel season by introducing quarantine-free border crossing for those with vaccine passports. But restrictions on long-distance travel will remain.


Disparities in the pace and scope of the resumption of social activities will most likely coincide with income gaps. While some emerging markets will have reached high vaccination rates (Chile, Morocco, and Turkey are already ahead of the EU), most of the developing world will not have contained the virus. Accordingly, border controls between the vaccinated rich world and the unvaccinated poor world will probably tighten, especially if new variants continue to emerge. The adverse fallout will be felt most directly by migrant workers, but there will be broader consequences, such as a contraction of long-distance tourism, which will severely undercut some economies.


Moreover, globalization will be affected. Although barely any person-to-person contact is required to ship a container hallway around the world, the same cannot be said for managing production networks or finding new clients. The evidence suggests that measures altering the movement of people (such as new visa rules or the opening of new travel routes) do indeed affect trade in goods. Lasting obstacles to passenger travel would ultimately reduce international trade and investment, productivity, and growth overall.


More important, a full (if gradual) return to normal life will be possible only if vaccines remain effective. So far, they seem to be succeeding brilliantly. But the emergence of vaccine-resistant variants would force governments to keep severe restrictions in place, possibly with recurrent lockdowns. Some experts, such as Monica De Bolle of the Peterson Institute for International Economics, regard this scenario as likely. But even if it is only a tail risk, it is one that demands our attention.


Surprisingly little is known about the trade-off between public health and economic activity in the context of the coronavirus pandemic. Scoreboards based on GDP growth rates and death tolls may generate plenty of commentary, but they are grossly misleading. Italy experienced sharp losses of life as well as GDP last year not because its policy response was inefficient, but because it was the first European country to be hit, and thus had to respond to the unanticipated shock with economically costly measures.


To gauge how countries have managed this trade-off – and how they might continue to do so if the pandemic persists – we have compared the week-by-week evolution of infections with economic activity, as measured by the OECD GDP Tracker. Before the British variant (B.1.1.7) emerged, COVID-19’s contagiousness, as measured by its “reproduction rate” (R), was about three, meaning that one infected person could be expected to contaminate three others. The aim of confinement measures was thus to reduce R to below one, at which point viral incidence would be diminishing rather than growing.


In the spring of 2020, several European countries managed to reduce R from three to about 0.7 within the course of a few weeks. Here, the corresponding reduction in economic activity varied from around 15% in Germany (where the first wave was mild) to nearly 30% in France, where construction stopped altogether and one-quarter of private-sector employees were placed on furlough. The treatment was effective, but it came at an extremely high economic cost.


By contrast, when Europe braced for another lockdown episode in the fall, the economic cost of public-health measures was much lower. R was brought down to about the same level (0.8), but the economic cost was 2-3 times lower, and the effect was remarkably uniform across countries.


The reason is that governments had learned from the first wave. The second-wave response was less stringent but better targeted. Masks and protective equipment were more widely available, and companies had learned to adapt to the restrictions. Some of these adaptations have proved lasting: electronic payments have received a significant boost; e-commerce is booming; and companies in affected sectors managed to do business or even thrive. In France, where restaurants are closed and hotels are facing severe restrictions, one out of four nonetheless reported that activity had recovered by more than half in February (and 10% said it had returned to normal).


As for the future, the recurring emergence of variants would make further adaptations more likely. But if these variants are more contagious, the costs will rise. Companies that have been kept on life support by liquidity injections and tax deferrals won’t survive, and workers still on furlough (4.5 million British workers in January) will either lose their skills or their jobs. Major efforts will be needed to help them change occupations.


The longer the pandemic lasts, the more severe the damage will be, and the higher the costs. A truly global vaccination rollout therefore remains vital. In the meantime, governments must prepare for the risk of periodic outbreaks by devising new policies to contain their social, economic, and fiscal costs.

Central Banking’s Brave New World


Project syndicate column, 22 February 2021


PARIS – Twenty years ago, central bankers were proudly narrow-minded and conservative. They made a virtue of caring more about inflation than about the average citizen, and took great pains to be obsessively repetitive. As future Bank of England (BOE) Governor Mervyn King said in 2000, their ambition was to be boring.


The 2008 financial crisis abruptly dashed that objective. Ever since, central bankers have been busy developing new policy instruments to fight fires and ward off emerging threats. Nonetheless, many secretly dreamed of returning to the good old days of cautious conservatism (with financial stability taken seriously).


But recent announcements by the US Federal Reserve and the European Central Bank suggest that there is no going back. Central bankers are now keen to take on responsibility for policy objectives they previously shied away from – in particular, tackling inequality and climate change.


Start with inequality. If there was a red line in the delineation of responsibilities between elected and unelected officials, it was that distributional, give-and-take choices belonged solely to the former.

Yet, the Fed has announced that it will now pay attention to “shortfalls” of employment from its maximum level, instead of “deviations,” as previously. According to Chair Jerome Powell, the main reason for this change is the realization that a tight labor market benefits low-income communities and ethnic minorities. Only when the aggregate unemployment rate is very low do those on the fringes of the labor market benefit from significantly better access to jobs and higher wages.


Policymakers have long known that a high-pressure economy benefits the unskilled and minorities, and the Fed is special in having a dual congressionally assigned mandate of achieving both price stability and full employment. What is new is that instead of defining its own tasks in purely macroeconomic terms, the Fed has now indicated a willingness to take part in a collective anti-poverty effort.


The reason, the Fed says, is that listening to citizens has convinced it of the heterogeneity of the US labor market and the benefits of testing the downward limits of unemployment. But in yesterday’s world, the Fed was proud to be insulated from politics and therefore not to listen to citizens.


The ECB has not completed its policy review yet. But it is unlikely to draw the same conclusions. Whereas the Fed can regard higher inflation in Colorado as an acceptable price to pay for a tight labor market in Mississippi, the ECB cannot operate the same way. European countries have limited appetite for such solidarity. Instead, what European central bankers are increasingly considering is support for climate action.


The ECB is not entering new territory here. In a landmark 2015 speech, then-BOE Governor Mark Carney emphasized the financial-stability risks arising from climate change and the responsibility they imposed on regulators. This insight made climate risks a topic of concern for financial-system supervisors.


But today’s eurozone central bankers are going further. ECB President Christine Lagarde has said she intends to “explore every avenue available in order to combat climate change,” while fellow board member Isabel Schnabel has alluded to excluding brown bonds from monetary-policy operations. And Banque de France Governor François Villeroy de Galhau has suggested applying a carbon-related haircut to assets accepted as collateral.


Favoring green assets would imply a departure from the market neutrality that ensures maximum monetary-policy effectiveness. It would also cross another red line by turning the ECB into the implementer of a policy for which it has no other mandate besides the general clause that, subject to maintaining price stability, the central bank supports the policies of the EU.


To orthodox critics, this is anathema. The Hoover Institution’s John Cochrane (who is no climate-change denier) accuses the ECB of engaging in self-defined mission creep. Bundesbank President Jens Weidmann is notably unenthusiastic. And the Fed itself is much more cautious than its European counterpart regarding climate action.


It is no accident that both the Fed and the ECB are venturing into new terrain. With inflation having vanished, at least temporarily, neither institution wants to be the high priest of a forgotten deity. Their quasi-parallel moves are indicative of the tectonic shifts currently affecting civil societies, and illustrate the desire of independent policy institutions to remain attuned to social preferences in order to retain their legitimacy.


But these moves entail risks. The Fed is now caught in a bind between its own commitment to testing the lower limits of unemployment and the disregard of President Joe Biden’s administration for the dangers of providing too much economic stimulus. It may have tied its hands at the wrong moment.


As for the ECB, the financial-stability justification for greening its policies is only partially convincing. Green bubbles are a threat, too. And there is also financial-stability risk in extending credit to firms that invest in decarbonized technology on the assumption that governments will set the carbon price high enough to make these investments profitable in the future. Governments often fall short of fulfilling their promises.


This is not to say that central banks should do nothing. Inequality and the climate emergency are immense challenges that policy institutions cannot overlook. But explicitly amending the central banks’ missions would be preferable to letting monetary policymakers decide how their tasks should evolve.


This especially applies to the ECB, which has an extremely narrow price-stability mandate under the EU Treaty (the Fed, in addressing inequality, arguably remains within its mandate). Because EU treaties are so difficult to amend, the ECB is right to explore and experiment. But decisions about what aims the institution serves should ultimately rest with its principals – the member states.


A Global Pandemic Alarm Bell


Project Syndicate column, 25 January 2021

Seen from Europe, Asia, or even North America, Manaus, the capital of the Brazilian state of Amazonas, is as remote as can be. Yet the 501.Y.V3 variant of the coronavirus recently detected there has already been identified as a global threat, because its emergence in a city where two-thirds of the population was already infected in the spring of 2020 suggests that acquired immunity does not protect against it.


Scientists speculate whether 501.Y.V3 may also thwart some of the existing vaccines. Even if the RNA-based vaccines can be quickly modified, the risk of ineffectiveness just when mass vaccination is being rolled out is extremely scary.


Viruses, of course, mutate all the time. While many mutations are innocuous, dangerous ones regularly appear. The larger the population that is infected at any time, the higher the probability that a hazardous variant, or possibly a new strain, will appear. Each person is a potential lab for these mutations. With some 600,000 new coronavirus infections identified daily, there are currently several million such labs in operation around the world. So it is a certainty that more mutations will occur.


This threat confronts the international community with a stark choice: either design and implement a comprehensive global strategy, or seal borders and let countries fight it out with the virus one by one. There is no effective middle way. The prevailing combination of vaccine nationalism and half-open borders is a losing strategy.


Already, the South African and Manaus variants have been found in Germany. In an open world where rich countries would attempt to protect their populations while poorer countries could not, contamination would repeatedly cross borders and defeat the most sophisticated health policies.


On paper, the choice between acting globally and closing borders is a no-brainer. The total population of countries categorized by the World Bank as low-income and lower-middle income is about four billion. Assuming a $10 unit price, vaccinating 75% of this population would cost $30 billion, a mere two-hundredth of the crisis-induced fiscal loss already incurred by advanced economies. Even from a narrow economic standpoint, and even if ten times more expensive, investment by rich countries in curbing the pandemic in poor countries would be hugely profitable. The alternative of closing borders altogether to contain contamination would send a terrible signal and destroy prosperity on a massive scale.


Conscious of the challenge, rich countries actually support a program of this sort, though on a much smaller scale. The COVAX initiative, launched in April 2020 by the World Health Organization, the European Commission, and France, is meant to help participating states jointly negotiate procurement with vaccine producers, and to donate to poor countries enough free doses to vaccinate 20% of their population. Although this is insufficient to control the virus’s spread, it would be good enough to protect the elderly and health workers, and it would represent a significant stepping stone to further action.


By the end of 2020, however, COVAX had raised $2.4 billion and pre-ordered enough doses to vaccinate a billion people in 2021, but it was still at pains to raise the additional $5 billion needed to finance its rather unambitious program. Under President Donald Trump, the US had refused to provide support. Moreover, vaccine manufacturers favor more profitable rich-country markets, where governments are willing to pay a premium to accelerate the supply of doses.


Unsurprisingly, WHO chief Tedros Ghebreyesus recently warned that the world was “on the brink of a catastrophic moral failure.” But alongside the moral failure, what is puzzling is the collective action failure this behavior represents. Self-interest, not just a sense of duty, dictates that rich countries should do more. Why aren’t they?


The first reason is short-sightedness. At home, too, governments are not doing enough. In Europe, investment in vaccine research and development has fallen short of the $18 billion the US has devoted to Operation Warp Speed. Oddly, the European Union’s €390 billion ($473 billion) Recovery and Resilience Facility does not include joint funding for vaccine research.


The second reason is the traditional temptation to free-ride on others’ efforts. Rich-country governments have strong incentives to protect their citizens, but support to poor states is vulnerable to free-riding as each player’s interest is to let others pay for the common good. With China shirking its responsibilities and the US under Donald Trump announcing withdrawal from the WHO at the very moment joint action was called for, international leadership has been dramatically absent since spring.


The third reason is messy governance. The global health field is complex, scattered, and characterized by institutional overlap. Because the WHO is widely regarded as an ineffective and politicized institution, initiatives have developed on the side, with private donors such as the Gates Foundation, governments, and public agencies cooperating ad hoc to develop a flurry of initiatives. The resulting funding map defies imagination. This was fine as long as tackling emerging challenges required limited mobilization and resources, but the pandemic calls for acting on an entirely different scale.


Can the world change tack? Fortunately, US President Joe Biden’s administration has already announced its intention to join COVAX. Until recently, it was assumed that the repair of international trade and renewed engagement in climate action would be its first external priorities. Events may well turn the coordination of pandemic efforts into a litmus test of Biden’s global leadership. But if US commitment is clearly needed, much broader joint action is called for to prevent a moral, medical, and economic disaster.

The EU That Can’t Say No

Project Syndicate column, 29 December 2020 

Back in July, the announcement of the European Union’s new €750 billion ($914 billion) recovery fund, dubbed Next Generation EU, was widely (and rightly) regarded as revolutionary. Never before had the EU borrowed to finance transfers and cheap loans to help member states recover from a major economic shock. By breaking longstanding taboos, the initiative may even pave the way to a fiscal union.


But the EU cannot achieve its aims, unless soft money comes with hard standards. Money from heaven can be both a blessing and a curse. If spent well, it can end political stalemates and trigger economic revivals. But if distributed indiscriminately, it encourages state capture and pork-barrel politics. The recovery funds should uphold the EU’s values and serve well-defined goals.


For its commendable ambition not to be subverted, the EU must be able to say no to member states. No when elected autocrats openly trample on European principles while using EU money to harden their grip on power. And no if governments’ proposed spending programs fail the effectiveness test. Unfortunately, this looks unlikely to happen.


Start with the controversy over the EU’s rule-of-law conditionality. According to Article 2 of its Treaty, the EU is founded on “human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities.” Unfortunately, the Union lacks the legal means to punish member states that scorn these values. Under Article 7 the voting rights of a state found in breach of them may be suspended, but this requires unanimity among all the other member states. An alliance between Hungary and Poland, both of which have been in infringement of the EU standards, has thus been able to block the mechanism.


The recovery fund initially seemed to provide a conduit to upholding respect for the rule of law (which, according to the EU, means that “all public powers act within the constraints set out by law, in accordance with the values of democracy and fundamental rights, and under the control of independent and impartial courts”). In July, EU leaders underlined the “importance of respect of the rule of law” and agreed on a “regime of conditionality” for the recovery funds. But the details remained undefined.


A furious battle ensued. The European Parliament fought hard to strengthen the EU’s hand, Poland and Hungary fought hard to weaken it, and “frugal” northern member states were eager to display vigilance against wasteful spending. The final compromise, agreed in December, is that conditionality will apply, but only if there is a direct causal link between rule-of-law breaches and negative consequences for the EU’s financial interests. And even then, there are many hurdles in the way of imposing punishment.


The upshot is that an autocratic leader of an EU member state will still be able to dismiss judges, silence the press, jail opponents, and oppress minorities as long as this does not directly jeopardize the bloc’s financial interests. The Union will not punish honest dictators but only corrupt dictators, possibly. This outcome was perhaps predictable, given that the recovery fund required unanimous support, but it is truly disappointing.


The second issue concerns effectiveness. For EU funds to trigger more than a short-term economic boost, they must be matched with domestic policy measures to maximize their impact. Green initiatives, for example, make no sense if governments continue to provide fossil-fuel subsidies and digital investments are of little value without education to improve digital literacy and skills.


Much is at stake. If buttressed by well-chosen reforms, EU money can help prevent a widening of the income gap between northern and southern Europe, and accelerate Eastern Europe’s catch-up. But if spent simply to please domestic constituencies, its most lasting effect will be to fuel northern European anger.


Conscious of the challenge, the Commission intends to promote investment-and-reform bundles. The problem, however, is that conditioning grants and loans evokes the humiliating “Troika” programs implemented ten years ago in Greece and other southern European countries. No head of government can tolerate being suspected of abiding by the diktats of faceless Brussels bureaucrats.


In Italy especially, the issue has become political dynamite: any suspicion that Prime Minister Giuseppe Conte was acting under instruction from the EU would immediately be exploited by his far-right opponent, Matteo Salvini. That is why initial discussions about the recovery package were so hard to conclude: Conte understandably rejected anything that would have made him look like an EU poodle.


There is a (narrow) way out of the dilemma: Brussels should not impose policies of its own choice, but grants should come with a contract whereby money is intended to serve certain goals, and the EU checks that the conditions to achieve them are in place. The EU should exercise restraint while retaining the power to reject an investment and reform plan it finds unlikely to deliver on the agreed targets.


What is being put in place goes in the right direction, but risks ending up in a fairly bureaucratic box-ticking exercise with little influence on actual policies: if procedure turns out to have precedence over substance, it will be hard for the EU to object to a plan. Actually, member states will have few incentives to alter their preferred course of action, because the money to which they will be entitled does not depend on their behavior. Provided they tick the boxes, stellar performers won’t get a penny more, and laggards won’t get a penny less.


The EU is strong when it can say no, as with competition policy. Without that power, it will struggle to make a difference. The lesson for Commission President Ursula von der Leyen is a simple one: short of effective instruments to buttress her agenda, she must be willing to tell the truth to member states, and trigger political confrontations if necessary. A risky course perhaps, but preferable to irrelevance.

Interview Corriere della Sera sur le plan de relance européen, 30 novembre 

Una cosa è certa: «È stato rotto il tabù dell’indebitamento dell’Unione e dei trasferimenti. Questo cambierà profondamente il sistema europeo ma a una condizione: che il sostegno europeo sia efficace, così da  poter dire tra qualche  che con questo piano è stata raddrizzata l’economia europea e di Paesi come l’Italia».  Per Jean Pisani-Ferry, professore allo  European University Institute e senior fellow al think tank Bruegel (ha anche coordinato il programma economico di Emmanuel Macron durante la campagna presidenziale), bisogna dare priorità alle riforme che permetteranno ai fondi Ue di  trasformare in modo reale l’economia: «Non penso — ha aggiunto — che le Raccomandazioni Paese della Commissione Ue siano molto utili, bisogna ragionare sulle priorità di oggi».

Qual è ora il rischio più grande per la ripresa economica europea?

«La gestione molto delicata dell’emergenza sanitaria. Stiamo gestendo meglio la seconda ondata dal punto di vista economico, ma le  imprese e  le attività colpite sono le stesse già colpite  durante la prima ondata e sono già indebolite. Bisogna trovare il buon equilibrio tra aperture e rischio sanitario. Poi evitare di prendere decisioni premature in materia di bilancio: bisogna continuare a portare avanti una politica espansiva in maniera forte fino all’assorbimento completo dello choc. Nel lungo termine c’è un rischio che aumenti la frammentazione europea».

In un paper per  Bruegel ha scritto  che l’Ue non dovrebbe cercare di imporre agli Stati membri, attraverso la condizionalità del Recovery Plan, il suo programma di riforme. Cosa intende?

«Stiamo parlando di un piano ingente, molto più grande del Piano Marshall. È chiaro che non si possono distribuire dei soldi senza condizioni.  Ci sono due approcci possibili. Il primo dice: ecco l’elenco di riforme che dovete fare in base alle liste passate di priorità. Ma questa non è una buona idea perché le priorità di oggi non sono quelle di ieri.  Poi c’è un approccio che parte dalle priorità della Commissione — la transizione ecologica e digitale — e da quelle degli Stati  per raddrizzare l’economia. Bisogna ragionare su riforme che permettano ai fondi di raggiungere l’effetto massimo. Ad esempio se perseguo la trasformazione ecologica non posso continuare a sovvenzionare le fonti fossili. Questo vale per tanti settori: il mercato del lavoro, la digitalizzazione, il sistema educativo, la concorrenza. In breve, non si deve dire agli Stati  “Prima  riformate le pensioni”, bensì “fate settore per settore ciò che consentirà ai fondi di raggiungere gli obiettivi”».

Ungheria e Polonia contestano la condizionalità legata allo Stato di diritto. Il Parlamento Ue ha detto che non ha intenzione di indietreggiare. Quale può essere una exit strategy?

«Il compromesso raggiunto tra Consiglio e Parlamento Ue va già incontro a Polonia e Ungheria perché il meccanismo sullo Stato di diritto prevede sanzioni in caso si verifichino due condizioni: infrazioni limitate del principio dello Stato di diritto, che colpiscono direttamente gli interessi finanziari dell’Ue. Il meccanismo non potrà essere usato per obbligare ad applicare i valori generali dell’Ue, ad esempio la protezione delle minoranze o la libertà di stampa. Questo accordo è già una concessione importante, Ungheria e Polonia lo devono accettare».

Il regolamento sulla Recovery and Resilience Facility è ancora in fase d negoziato. Ci sono degli aspetti controversi che è necessario chiarire?

«Bisogna evitare che si crei un procedimento formale senza contenuto. Bisogna mettere l’accento su tre cose: la chiarezza delle priorità, la rapidità di esecuzione e la dimensione pan-europea, che è stata dimenticata nella trattativa di luglio. I progetti con una dimensione transfrontaliera vanno recuperati».

Il Recovery Fund come aiuterà l’Italia?

«L’Italia è beneficiaria netta, certo non come la Grecia o i Paesi dell’Europa Centrale. Questo piano offre l’occasione di investire nella trasformazione dell’economia, per la soluzione di problemi vecchi, come quello della scarsa produttività delle Pmi, che indebolisce il potenziale economico del Paese».

L’approccio top-down è il modo migliore per definire i piani nazionali?

«È indispensabile avere delle priorità definite a livello nazionale altrimenti si cade nella pura distribuzione. Gli investimenti devono avere degli effetti misurabili sul piano economico. È stato rotto il tabù dell’indebitamento dell’Unione e dei trasferimenti. Questo piano cambierà profondamente il sistema europeo se sarà efficace, se potremo dire tra qualche anno che con questo piano è stata raddrizzata l’economia europea e di Paesi come l’Italia. Allora si riuserà certamente il bilancio dell’Ue. Ma se non cambierà nulla la conclusione sarà che non vale la pensa usare questo bilancio».

Il sottosegretario alla presidenza del Consiglio, Riccardo Fraccaro, ha ipotizzato un’eventuale cancellazione del debito acquistato dalla Bce durante la pandemia. Il presidente del Parlamento Ue, David Sassoli, ha definito un’ «ipotesi di lavoro interessante» l’eventuale cancellazione dei debiti contratti dai governi per rispondere al Covid. Cosa ne pensa?

«L’idea che le banche centrali  possano annullare il debito degli Stati contratto durante il Covid è giuridicamente impossibile, è escluso dai trattati. È un’illusione economica, perché gli utili della Banca d’Italia  vanno allo Stato. Non è che impoverendo la Banca d’Italia si arricchirà lo Stato. Non è che impoverendola si arricchirà lo Stato. È un dibattito inappropriato che crea sfiducia in un momento in cui abbiamo bisogno che la Bce continui a sostenere l’azione degli Stati.  Ora si è un po’ più ottimisti grazie ai vaccini. La prossima estate i problemi principali saranno superati e l’indebitamento supplementare dei Paesi sarà limitato. Ma intanto la politica espansiva deve continuare finché serve».

Grading the Big Pandemic Test

Project Syndicate column, 27 November 2020

PARIS – From the moment the COVID-19 emerged as a global threat, it was clear that it would test every society’s strength, resilience, and response capabilities. Almost one year on, it is time to assess who passed the test, and who failed.                                                     

From a public-health standpoint, the answer is clear: East Asia – including Australia and New Zealand – passed the test with flying colors. As for the rest, Europe performed unevenly, the United States stumbled badly, and developing countries have struggled.

To be sure, luck played more than its part in explaining initially uneven performance. In Europe, Italy and Spain were hit extremely hard by the first wave, because the then-unknown coronavirus took root, unnoticed, until it erupted in full force. By contrast, Germany and Poland saw it coming and could take effective measures in time.

But while governments can ascribe unequal death tolls during the first wave to luck, the argument does not hold for the second wave. Policymakers cannot eschew responsibility for the uncontrolled spread of the pandemic in the US or its resurgence in Europe.

Two trade-offs dominate discussions on the policy response. The first one, between disease control and individual rights, is hard to avoid. Contact tracing and mandatory isolation are effective in combating the spread of the virus, but infringe on civil liberties. China clearly stands apart for its disregard of individual freedom, but individualistic Western societies would also find it hard to accept the intrusive tracing measures taken in South Korea or Singapore. Like it or not, there is a price to pay for the freedom and privacy we cherish.

The second trade-off is not between saving lives and saving the economy. Rather, it involves a choice between being stringent today and being forced to be stringent tomorrow. European societies went for strict lockdown measures in the spring, and then all but ended social distancing over the summer. By October, the only option left was to tighten the screws again. Australia made a different choice and increased (moderately) the stringency of its disease-containment measures throughout its winter season. It was able to relax these controls just when European countries had to strengthen theirs.

In a recent commentary, the French economists Philippe Aghion and Patrick Artus lambasted European countries’ stop-and-go approach and argued that they would have been better off keeping enough containment measures in place throughout the summer. Indeed, despite being much less severe than the first one, the second lockdown is hitting already fragile firms and households, thereby darkening the economic horizon. In hindsight, Europe might have avoided it by keeping its gyms and bars closed this summer.

The bottom line is that, whether out of principle or inconsistency, Western societies made their choice, and East Asia made a different one. And that for the second time in little more than a decade – the other instance being the global financial crisis – the West is trapped in a maelstrom while Asia sails on.

Regarding the economic response, the interesting contrast is the transatlantic one. The US approach under President Donald Trump has been to let companies fire staff (possibly with a rehire promise) but to engineer massive fiscal support through tax cuts and additional unemployment benefits. European states have instead relied on generalized government-financed furlough schemes that preserve employees’ income and status, while (outside of the United Kingdom at least) providing less outright budget support. As a result, the International Monetary Fund reckons that the 2020 US fiscal deficit will reach a post-war high of 19% of GDP, almost twice the eurozone average.

On the whole, therefore, the US under Donald Trump has deliberately put the economy first, opting for less public-health protection and fewer worker safeguards but more fiscal support. European countries have put public health and social protection first, coupling initially harsh confinement measures and open-ended support to preserve employment relationships, with little additional budgetary stimulus.

The output decline in the spring was inevitably much sharper in Europe than in the US (with the exception of Germany, where the lockdown was less stringent). But the increase in European unemployment was far more limited. Jason Furman of Harvard University estimates that what he calls the realistic US unemployment rate jumped from 3.6% before the crisis to 20% in April. In Europe, by contrast, up to one-quarter of the labor force was furloughed, but only gig and temporary workers, as well as new labor-market entrants, ended up in unemployment. For the vast majority, the social safety net worked much better than it did in America.

Remarkably, European output rebounded sharply when governments lifted the lockdowns, despite the relatively less generous fiscal support. Third-quarter GDP in Germany and France was about 95% of pre-crisis levels, exactly like in the US (it was lower in Spain, largely because of the collapse in tourism; data for Italy are not yet available). Any scars these economies might have suffered in the lockdown period did not rob them of their resilience.

Thus far, at least, Europe does not seem to be paying a price for its decision to put health above economics. And the US apparently is not benefiting from its larger fiscal stimulus, because consumers reacted to unprecedented uncertainty by hoarding cash at record rates. Between January and April 2020, the US personal saving rate skyrocketed from 7% to 33%, and it remains well above normal. Money injected into the economy helped the poor, but on the whole, it ended up increasing bank deposits rather than consumption and output.

Admittedly, the jury is still out, awaiting results of the second European lockdown. But amid the fog of the war against the pandemic, one thing is clear already: while Europe may wonder whether it was right not to emulate Australia’s full pandemic-containment drive, it has no reason to regret having rejected America’s misguided strategy.

Globalisation needs rebuilding, not just repair

Project Syndicate column, 29 October 2020

A second term for US President Donald Trump would complete the demolition of the post-war international economic system. Trump’s aggressive unilateralism, chaotic trade initiatives, loathing of multilateral cooperation, and disregard for the very idea of a global commons would overpower the resilience of the web of rules and institutions that underpin globalization. But would a victory for Joe Biden lead to a repair of the global system – and, if so, of what kind? This is a much harder question to answer.

There will be no lack of eagerness to wipe out Trump’s legacy, either in the United States or internationally. But an attempt merely to restore the pre-Trump status quo would fail to address major challenges, some of which contributed to Trump’s election in 2016. As Adam Posen of the Peterson Institute has pointed out, the task ahead is one of rebuilding, rather than repair. It should start with a clear identification of the problems that the international system must tackle.

The first priority should be to move toward a commons-oriented system. The preservation of global public goods such as a stable climate or biodiversity was understandably ignored by the architects of the post-war international economic order, and (less understandably) was still a secondary priority in the system’s post-Cold War partial renewal. Policymakers focused on visible linkages through trade and capital flows, rather than on the invisible ties that bind us to a common destiny, which helps to explain why the rules and institutions governing the latter are still much weaker.

Biden’s intention to rejoin unconditionally the 2015 Paris climate agreement is to be welcomed, but it will not by itself turn the accord into an ambitious, enforceable program. The large number of players and the strong temptation to let others shoulder the burden make preserving the global commons notoriously hard. Even in the area of health, solutions to date do not measure up to the challenge.

Climate action is critical. Absent an elusive global consensus, efforts will have to rely on a coalition whose members converge on hard targets and on border-adjustment mechanisms applicable to trade with third countries. Implementation will be fraught with difficulties. Success will require agreeing on which trade measures are acceptable and which are just covert protectionism. That is a high bar to reach. Having already indicated its intention to introduce a border adjustment, the European Union is on the front line here. This is a major responsibility. 

The second priority is to make the global economic system as rivalry-proof as possible. Regardless of who wins the US presidential election on November 3, great-power competition between the US and China will continue to dominate international relations. But the Cold War analogy is misleading, because today’s protagonists are major economic partners. Whereas the Soviet Union’s share of US imports never exceeded a fraction of a percentage point, China currently accounts for 18%. Die-hard US advocates of decoupling wrongly picture further Chinese development as a national security threat and want to end this interdependence in an attempt to stop China’s growth. As the Peterson Institute’s Nicholas Lardy has argued, however, a general decoupling from China would be a “high-cost, low-benefit policy.”

The question, then, is how to recognize the reality of geopolitical tensions while containing their impact on global economic relations. The relevant comparison is not with the Cold War, but with the pre-1914 rivalry between Britain and Germany in the context of the first major period of globalization. Contemporary claims that economic ties made war unthinkable were proved wrong. But as long as states refrain from fighting a real war, a strong multilateral regime can help repress their temptation to wage it through other means.

Europe is the biggest of all bystanders. It risks suffering collateral damage from the fight between the two global giants, both of which have started bullying it. But the EU is not toothless. It should stand up for the rules-based international economic order and lead the fight against its weaponization. As the European Council on Foreign Relations argued in a recent report, the bloc should start by equipping itself against economic coercion.

The third priority is to make the global economic system more protective of workers and citizens. Already prevailing doubts about globalization have grown as a result of the US-China trade conflict, rising inequality, and the realization that in a situation of acute stress such as the pandemic, advanced economies could struggle to procure simple equipment. Citizens and workers want an economic system that better protects them. Governments have taken note, and want to show that they care. The question is how. 

The primary response should be domestic: from education and training to place-based revitalization and redistribution, there is much that governments can do, but neglected in the heyday of free-market globalization. Now is the time for new policies.

But experience has shown that few national governments can carve out a complete response without a supportive global environment. Individual countries cannot curb global corporate tax avoidance and aggressive regulatory competition by themselves. Policymakers globally should acknowledge that the sustainability of economic openness depends on whether its benefits are distributed in a fair way. And, as Harvard’s Dani Rodrik has long argued, the global system should both promote openness and allow room for national adaptation.

Each of the three goals – taking care of global public goods, containing the weaponization of economic relations, and making the system fairer – is challenging. Combining all of them will be daunting. Never in history were rival power centers compelled to cooperate in addressing common threats of a comparable magnitude. It is not hard to imagine how policymakers might use the commendable goals of avoiding carbon leakage or buttressing what Europe now calls “strategic autonomy” as pretexts for outright protectionism. Moreover, how will the world avoid a global economic breakup if China is simultaneously seen as a national-security threat, a reckless polluter, and a destroyer of social rights? Such challenges will severely test leaders in the years ahead.

Europe’s recovery gamble 

Project Syndicate column, 25 September 2020

To help their pandemic-hit economies recover, European Union leaders agreed in July to borrow €750 billion ($880 billion) to finance €390 billion in grants and €360 billion in loans to the bloc’s member states. The program, called Next Generation EU, was rightly hailed as a major breakthrough: never before had the EU borrowed to finance expenditures, let alone transfers to member states. 

But the program and its Recovery and Resilience Facility, which will disburse most of the funds, amount to a high-risk gamble. If the plan succeeds, it will surely pave the way to further initiatives, and perhaps ultimately to a fiscal union alongside the monetary union established two decades ago. But if the fails to deliver on stated goals, if political interests prevail over economic necessity, federal aspirations will be dashed for a generation.

The first question regards the size of the program. Although €390 billion in grants may look like a large sum of money, it actually amounts to less than 3% of EU GDP, to be spent over several years.

Jason Furman, a former chairman of US President Barack Obama’s Council of Economic Advisers, reckons that the US government’s fiscal response to the 2008 global financial crisis amounted to $1.6 trillion, or about 10% of GDP. That was 3-4 times more, in response to a much milder shock.

On the whole, therefore, individual countries remain in charge of warding off the pandemic blow. 

Actually, the fiscal support already committed by leading EU member states represents 7-12% of national GDP – and significantly more is in the pipeline.

Nonetheless, the EU grants could make a big difference for some countries still reeling from the euro crisis. Transfers net of expected repayments should be worth 4% of GDP for Spain, 5% for Portugal, and 8% for Greece, according to ECB calculations. This is more than the 2.6% of GDP aid the US granted to Europe under the Marshall plan. If invested shrewdly, such amounts could change the recipient countries’ economic fate.

The next question concerns speed. In the spring of this year, EU economies entered free fall. They have now recovered from their troughs, but are still operating at about 5% below capacity. Given the new wave of infections, and rising unemployment, the immediate issue is whether these economies’ growth momentum will endure or weaken.

Should Europe’s recovery falter, a vicious circle of precautionary savings and worsening expectations could ensue, possibly leading to a double-dip recession. The appropriate strategy is therefore to make budgetary support contingent on the pace of the recovery. Money should be available now and disbursed quickly in case of need.

But make no mistake: the EU support package will come only later. Before its money can start to be spent, the bloc must agree on priorities, procedures, and conditions, which inevitably takes time. Less than 10% of the money expected be paid out in 2021, and 15% in 2022, according to the ECB. As matters stand, therefore, responsibility for sustaining the recovery remains with the EU’s member states. Even in 2022, it will be too early to pass the baton to the EU and wind down national stimulus packages. The temptation of early fiscal consolidation must be resisted.

Rather than seeking to engineer a Keynesian cyclical demand boost, the goal of Next Generation EU is in fact structural: to chart a new economic development path. The scheme aims to increase economic resilience, support the transition to a carbon-free economy, accelerate digitalization, and mitigate the social and regional fallout from the pandemic crisis. Which brings us to the third question: not how quickly EU money will reach southern Europe, but whether it will help tackle long-standing curses such as low productivity, structural unemployment, inequality, and reliance on carbon-intensive technologies.

The EU is clear on this point, and the European Commission recently set out the type of investment and reform plans member states are expected to devise in order to access the money. Although national governments will have the initiative of drawing up plans, they will have to return to the drawing board if the EU deems the projects too vague or soft to be effective. This could prove politically explosive in countries such as Italy, whose prime minister, Giuseppe Conte, fought for days and nights at the July summit against northern EU members’ efforts to condition financial support on pre-defined reforms.

The proposed compromise is sensible but fragile. Member states’ plans will be rated against their stated goals and overall objectives such as growth, job creation, and resilience, while disbursement will be conditional on recipient countries achieving agreed milestones and targets. This arrangement involves neither political conditionality (“first reform your pensions, then we can talk”) nor rubber-stamping (“here’s the money, please tell us what you do with it”). Rather, it is meant to be a contract whereby money is intended to serve certain goals, and the EU checks that the conditions to achieve them are in place.

But heated controversies are to be expected if the Commission does its job, rejects ineffective plans, and delays disbursements when milestones and targets are not met. The risk is that the process ends up in a bureaucratic squabble that the public cannot decipher but provides ammunition to populists.

To avoid falling into this trap, the EU will have to strike the right balance between intrusiveness and indulgence. It should select for each recipient a few targets and criteria that are specific, clear, and nearly indisputable; and it should be ready to fight for these yardsticks. It will also need to scrutinize the allocation of funds, and quickly raise a red flag in case of embezzlement. As Bruegel’s Guntram Wolff has pointed out, evidence of corruption would be lethal for Europe’s grand ambitions.

Thomas Edison famously said that genius is 1% inspiration and 99% perspiration. Inspiration was behind the July decision. Now, Europe should start sweating. For the good cause.

Trump's international economic legacy

Project Syndicate column, 27 August 2020

It would be foolish to start celebrating the end of US President Donald Trump’s administration, but it is not too soon to ponder the impact he will have left on the international economic system if his Democratic challenger, Joe Biden, wins November’s election. In some areas, a one-term Trump presidency would most likely leave an insignificant mark, which Biden could easily erase. But in several others, the last four years may well come to be seen as a watershed. Moreover, the long shadow of Trump’s international behavior will weigh on his eventual successor.

On climate change, Trump’s dismal legacy would be quickly wiped out. Biden has pledged to rejoin the 2015 Paris climate agreement “on day one” of his administration, achieve climate neutrality by 2050, and lead a global coalition against the climate threat. If this happens, Trump’s noisy denial of scientific evidence will be remembered as a minor blip.

In a surprisingly large number of domains, Trump has done little or has behaved too erratically to leave an imprint. Global financial regulation has not changed fundamentally during his term, and his administration has flip-flopped regarding the fight against tax havens. The International Monetary Fund and the World Bank have carried on working more or less smoothly, and Trump’s furious tweeting did not prevent the US Federal Reserve from continuing to act responsibly, including by providing dollar liquidity to key international partners during the COVID-19 crisis. True, Trump has repeatedly spoiled international summits, leaving his fellow leaders flummoxed. But such behavior has been more embarrassing than consequential.

In contrast, Trump will be remembered for his trade initiatives. Although it has always been difficult to determine the real aims of an administration beset by infighting, three key goals now stand out: reshoring of manufacturing, an overhaul of the World Trade Organization, and economic decoupling from China. Each objective is likely to outlast Trump’s tenure, at least in part.

Reshoring looked like a costly fantasy four years ago, and it still is in many respects. As my Peterson Institute colleague Chad Bown has documented, Trump’s chaotic trade war with the world has often hurt US economic interests. But reshoring as a policy objective has gained new life after the pandemic exposed the vulnerability entailed by depending exclusively on global sourcing. Biden has endorsed the idea, and “economic sovereignty” – whatever that means – is now everywhere the new mantra.

US Trade Representative Robert Lighthizer claims that a “reset” of the WTO has been a high priority for the administration. If so, it has made some headway. The other G7 countries now share the long-standing US dissatisfaction with the WTO’s leniency toward China’s government subsidies and weak intellectual-property protection. There is also a recognition that some US grievances against WTO dispute-settlement procedures (and in particular the so-called Appellate Body) are valid. But whether the battle ends with a reset or a decomposition of the multilateral trading system remains to be seen. 

The major watershed is US-China relations. Although bilateral tensions were apparent before Trump’s election in 2016, nobody spoke of a “decoupling” of two countries that had become tightly integrated economically and financially. Four years later, decoupling has begun on several fronts, from technology to trade and investment. Nowadays, US Republicans and Democrats alike view bilateral economic ties through a geopolitical lens. 

It is not clear whether Trump merely precipitated a rupture that was already in the making. He is not responsible for President Xi Jinping’s authoritarian assertiveness, and he did not devise the Belt and Road Initiative, China’s massive transnational infrastructure and credit program. But it was Trump who ditched Barack Obama’s carefully balanced China strategy in favor of a brutally adversarial stance that left no scope for events to take a different course. Whatever the cause of decoupling, there won’t be a return to the status quo.

A Biden administration would also not find it easy to reach the candidate’s aim of restoring ties with US allies, like-minded democracies, and partners around the world. Until Trump’s presidency, much of the world had become accustomed to regarding the US as the main architect of the international economic system. As Adam Posen, also of the Peterson Institute, has argued, the US was a sort of chair for life of a global club whose rules it had largely conceived but still had to abide by. The US could collect dues but was also bound by duties, and had to forge a consensus on amendments to the rules.

Trump’s trademark has been to reject this approach and treat all other countries as competitors, rivals or enemies, his overriding objective being to maximize the rent that the US can extract from its still-dominant economic position. “America First” epitomizes his explicit promotion of a narrow definition of the national interest.

Even if the US under Biden were willing to make again credible international commitments, its outlook may change lastingly. The former Trump adviser Nadia Schadlow recently argued that Trump’s tenure will be remembered as the moment when the world pivoted away from a unipolar paradigm to one of great-power competition.

It is by no means obvious that if Biden wins, he will be able to restore the trust of America’s international partners. For all its aberrations, Trump’s presidency may indicate a deeper US reaction to the shift in global economic power, and reflect the American public’s rejection of the foreign responsibilities their country endorsed for three-quarters of a century. The old belief among US allies and economic partners that Americans will “ultimately do the right thing,” as Winston Churchill reputedly said, may be gone.

Anyhow, Trump’s peculiar behavior has made it easy for America’s allies to postpone hard choices. That seems particularly true of Europe. A Biden-led US might seem like a familiar partner to most European leaders. But if it asked them to take sides in the confrontation with China, Europe would no longer be able to put off its own moment of decision.

The Challenges of the Post-Pandemic Agenda

Project Syndicate column, 27 July 2020 

There is a growing possibility that the COVID-19 crisis will mark the end of the growth model born four decades ago with the Reagan-Thatcher revolution, China’s embrace of capitalism, and the demise of the Soviet Union. The pandemic has highlighted the vulnerability of human societies and fortified support for urgent climate action. And it has strengthened governments’ hand, eroded already-shaky support for globalization, and triggered a reappraisal of the social value of mundane tasks. The small government, free-market template suddenly looks terribly outdated.

History suggests that transitions between phases of capitalist development can be harsh and uncertain. The postwar growth model took shape only after the Marshall Plan catalyzed its emergence. And the transition from the stagflationary 1970s to the market-dominated growth model took a decade. The years ahead will most likely be tough ones.

The challenge is not only one of uncertainty. It is also that the emergence of a new coherence usually requires something or someone to give way. In the late 1940s, European rent-seekers gave way to the forces of modernization. And in the 1980s, organized labor gave way to financial capitalism. The same will be true this time, because the coherence among the emerging priorities are all but obvious.

Start with climate change. Although the transition to carbon neutrality is probably the only way to preserve our wellbeing, it is bound to unsettle the lifestyle of households accustomed to driving SUVs or reliant on outdated heating systems.

A stark reminder of the social consequences of carbon taxes was recently provided by the French Yellow Vests uprising. While these taxes were ill-designed and regressive, the problem runs deeper: as the green transition entails replacing “brown” capital with “green” capital, it will require additional investment – conservatively estimated to be 1% of GDP per year in the coming decades – in more efficient industrial systems, buildings, and vehicles. Keeping public consumption and net exports constant, this will translate into a decline in private consumption of 1% of GDP – or roughly a 2% decline in level.

Next comes less reliance on global markets for essential supplies. Although China’s participation in the global economy has been disruptive for workers, it has benefited consumers massively. As Robert Feenstra of the University of California, Davis and his colleagues have shown, China’s entry into the World Trade Organization in 2001 lowered US manufacturing prices by 1% per year – a 0.3% gain in purchasing power. Using a different methodology, Lionel Fontagné and Charlotte Emlinger of CEPII (Paris) have found that by 2010, imports from low-wage countries had made the median French household 8% richer. By now, the boon to consumers could have reached 10% in Europe and the US.

How much would higher economic autonomy cost? Let us assume that it would imply giving up one-fourth of an 8% gain from globalization. This would cut real consumption by another 2%.

But there is more: projections by the International Monetary Fund and the OECD indicate that by 2021, the GDP share of public debt in advanced economies will have increased by at least 20 percentage points. In a zero-interest-rate environment, most countries can afford this; but after the pandemic is over, governments will have to start reducing their debt ratios, in order to create the fiscal space they will need to confront the potential recurrence of disruptive shocks. Assume, conservatively again, that half of the increase is reversed over ten years through taxes on households. This would imply another 1%-of-GDP cut in income and, other things being equal, another 2% consumption drop. In total, this would lower annual consumption growth over the decade by 0.6%.

Real income, however, is not expected to increase by much more. As a comprehensive World Bank study recently emphasized, annual productivity gains – the engine of economic growth – have stalled globally since the 2008 financial crisis, with annual increases below 1% per year in advanced economies. Stagnant productivity, if it continues, will, along with demographic aging, leave no room for increasing individual household consumption over a ten-year period.

The public-health crisis, however, has triggered a renewed awareness of the importance of the mundane tasks many workers perform. In most advanced societies, it is believed – at least for now – that the income of these workers should better reflect their contribution to the common good. It would be odd to tell them that the best they can hope for in the coming decade is to keep their income constant.

So, who and what will give in? Implicitly or explicitly, this debate will probably dominate policy discussions in the years to come. For sure, the likes of US President Donald Trump will claim that sovereignty and consumption growth take precedence over climate preservation and the debt. Those who think differently will have to find a way out of what looks like an incoherent set of objectives.

To that end, efficiency will have to be given high priority. This implies fostering productivity, rather than dreaming of de-growth; emphasizing an economic approach to the green transition, rather than wasting resources in ill-chosen decarbonization investments; and defining precisely what economic security entails, rather than aiming at a reshoring of production for which developed countries have no comparative advantage.

By itself, however, efficiency will not suffice to overcome the challenges that have emerged. The new aims - the preservation of public goods, economic security, and inclusion – will need to take center stage, relegating shareholder value to the second rank. And instead of regarding growth as the ultimate solution to inequality, advanced economies will need to tackle distributional issues head on. It is to be hoped that they will be spared the convulsions that often accompany structural and policy changes of such magnitude.

The Pandemic Response, Act II

Project Syndicate column, 29 June 2020 

Twelve years ago, governments in the world’s major economies responded swiftly and effectively to the financial crisis. Banks that were teetering were nationalized. Monetary policy went overdrive. Massive fiscal support was provided. Global coordination was intense.

But big mistakes were made, with consequences that emerged only gradually. Failure to punish those responsible for the financial meltdown paved the way to the populist surge of recent years. And Europe’s economy stumbled repeatedly, because banking woes were denied for too long and fiscal support was withdrawn too early. The results were deep socioeconomic and political scars that remained very visible when the pandemic arrived. Will the same pattern be avoided? As Act II of the pandemic crisis has begun, this is a key question.  

Wide disparity in the pandemic’s effect on countries is already apparent. The differences are bewildering: the United Kingdom has recorded 650 deaths per million inhabitants, while South Korea’s death rate per million is just five. Likewise, death tolls within the EU are a hundred times larger in the worst affected countries than in the best sheltered ones.

These gaps partly reflect sheer luck: while the virus spread under the radar in Italy, northeastern European countries saw it coming and could prepare. But they also stem from the uneven effectiveness of public-health policies. In this regard, the eventual ranking will likely put East Asia far ahead of anyone else, Germany ahead of the rest of Europe, the United States at the bottom of the developed countries’ league, and Brazil and India well behind some less developed countries. Anger against states that failed to protect their people is bound to be a major factor shaping future political developments.

Strict lockdowns have proved effective but economically costly: the stringency of administrative measures turns out to be a very good predictor of output losses in the first half of the year. But nuances also matter. Because its response proved more decentralized and adaptable, Germany was able to minimize the economic cost of containing the virus. Its response strategy displayed the bright side of federalism (the US embodies the dark side).

Fiscal responses have been remarkably homogenous across Europe: governments implemented credit guarantee schemes that helped firms access liquidity, and job retention schemes whereby the state assumed the payroll cost of furloughed employees. This proved quick and effective: businesses survived, employment relationships were preserved, and household income was protected.

In the US, by contrast, employees were laid off en masse, and unemployment skyrocketed. Despite their generosity, the premium added to unemployment benefits, the tax breaks for households, and the grants for small firms that re-hire after the lockdown did not prevent hardship. Overall, comparison with France shows that the cost of mitigating the pandemic’s economic fallout was 50% higher, and the disruption far larger, in the US. Kudos therefore to the European welfare state.

Where the pandemic recedes, the focus is increasingly on the pace and strength of economic recovery. The OECD and the International Monetary Fund note that Italy, Spain, France and the UK have been hit particularly hard. Their economies are rebounding, but how much of the lost output will they recover? After the global financial crisis, it took Spain eight years to return to pre-crisis per capita GDP, and it has yet to happen in Italy and Greece. The risk now is a further weakening of southern Europe.

To avoid lasting damage, the first priority is to continue supporting the recovery for as long as necessary. The risk of excess public debt is very real but the risk of economic contraction is even more serious – also from a fiscal standpoint. Deficits nowadays are costless in the short run (though potentially costly in the long run, which is why public finances must be managed responsibly). There is still fiscal space. It must be used wisely, but it should be used. Governments should continue playing the role of buyers of last resort.

Demand-side policies alone won’t do the job, though. A second priority is to prevent a wave of bankruptcies. Many businesses have been hit severely. Even when discharged of their payroll costs, they still had fixed costs to shoulder. Liquidity provision has been a helpful treatment, but not a cure.

Solutions must therefore be found for viable but heavily indebted companies. So many of them will be in a dire situation that normal legal proceedings threaten to overwhelm court systems.

To avoid this scenario, governments should establish mechanisms for large-scale debt restructuring. Tax deferrals and guarantee schemes have made governments creditors to a large number of small businesses. In a paper with Olivier Blanchard of the Peterson Institute and Thomas Philippon of New York University, we propose to let private creditors – primarily banks – know that governments will support decisions to restructure the debt of a viable company and that they will take part in the resulting rescheduling or forgiveness of existing claims. Because governments value the positive impact of businesses’ survival on all sorts of stakeholders, they should even let it be known that it will add a “continuation premium” to whatever private creditors do. This could save a lot of jobs.

Governments should also help address the consequences of productivity shortfalls. Health standards seriously affect the profitability of some sectors. A restaurant, for example, will now typically serve fewer customers with about the same number of employees; a gym nowadays must devote extra staff to cleaning and hygiene. This makes them temporarily less profitable, to the point that they may close or decide to lay off employees. To limit the impact of productivity shortfalls, Blanchard, Philippon and I propose temporary wage subsidies. Again, this may save jobs at a time when a major unemployment spike risks making job reallocation ineffective.

The worst of the pandemic is over, at least in Europe, and the news is likely to remain good in the coming weeks. By providing insurance to employees and firms, governments have done their job so far. But this was just the first step. It is imperative that they maintain economic support for as long as necessary and take new initiatives to contain lasting damages.

The Uncertain Pandemic Consensus

Project Syndicate column, 29 May 2020 

What is the COVID-19 crisis teaching us about the role of the state? And what lasting lessons will our societies draw from it? It is still very early to be asking these questions, but they cannot be avoided. Postponing their discussion would simply leave the field open for those peddling old obsessions whose time has long gone (if it ever came).

The starting point should be that, Brazilian President Jair Bolsonaro and US President Donald Trump notwithstanding, a new pandemic consensus has been forged on the battlefield. It can be summarized in four propositions.

First, the social value of professions, tasks, and behaviors – the price that should guide policy decisions and individual choices – often differs from their market value by a wide margin. Sometime around the end of March, much of the world realized that the work of a nurse or a care assistant was worth more – at least at that moment – than the pay they ordinarily receive.

This disconnect is nothing new, but it had been forgotten. By putting the spotlight on the sector where markets perform the worst – health care – the coronavirus pandemic inevitably prompted a welcome reassessment of the relative roles of markets and the state.

Second, only governments can insure against catastrophic risk. Again, it has been known for a long time that the state is the insurer of last resort. But what had previously remained relatively abstract suddenly looked became obvious to all. In a situation of generalized stress, only governments (with the help of central banks) can protect citizens, prevent bankruptcies, and limit social fragmentation. Markets are good at tackling mutually offsetting risks, but only the state can tackle tail risks.

Third, globalization fosters efficiency, but it is the state that must provide resilience. A strong belief until recently was that individual countries could always rely on deep and liquid global markets to access whichever goods they needed. But then came the shocking realization that these markets could be disrupted by a sudden surge in demand for face masks and respirators, and that China alone accounted for 60% of global exports of protective medical equipment. Little wonder, then, that “health sovereignty” was the first item in the recently announced Franco-German recovery plan for Europe.

Lastly, obstacles to state intervention can be overcome in the event of a once-in-a-century shock. As the crisis took hold in March, the European Union quickly decided to relax its rules limiting state aid to private companies and to activate an escape clause exempting member states from the fiscal strictures of the Stability and Growth Pact. These two decisions allowed EU member states to offer massive financial support for to workers and private businesses through job-retention schemes, as well as credit guarantees, loans, equity support, and grants.

The question now is which parts of this consensus will survive the acute phase of the crisis. After the 2008 global financial crisis, many argued that unfettered capitalism was doomed. As then-French President Nicolas Sarkozy said in Davos in 2010, “This crisis is a crisis of globalization. It is our vision of the world which, at a given moment in time, proved defective. So it is our vision of the world we must correct.” But although banking regulation was tightened following the financial meltdown, reforms of capitalism failed to live up to such grand ambitions 

But the COVID-19 shock is much greater, and the pre-existing social tensions are deeper than they were in 2008. The current crisis should thus provide fertile ground for re-evaluating the role and unique responsibilities of the state.

This process should lead to a policy shift that puts markets in their proper place: as essential, rather than dominant, social institutions. To paraphrase the economic historian Karl Polanyi, markets ought to be embedded in social relations rather than vice versa. The current climate emergency and, more generally, the growing weight of non-market interactions – what economists call externalities – only add strength to this view.

By the same token, the COVID-19 trauma should serve as a reminder that governments must retain spare capacity so that they can play their full role in an emergency. It is no accident that deep-pockets Germany has responded to the current crisis so forcefully, whereas Italy and (even more so) Greece have more limited firepower. And although central-bank support can help to loosen the limits on government borrowing – especially in the current low-interest-rate environment – it does not remove them altogether.

But today’s traumatized polities, vulnerable to passions and prone to suspicion, may want to go further. True, governments are much less to blame for COVID-19 than they were for the financial crisis, which was a catastrophe of their own making. But grievances abound nonetheless, and will only grow as the pandemic’s dramatic economic and social consequences unfold.

In this context, angry citizens will be tempted to believe that there must have been hidden reasons for yesterday’s allegedly inescapable disciplines. And they may conclude that because everything that was previously deemed impossible suddenly became possible, governments should stop abiding by seemingly imaginary constraints.

Many now wonder, for example, why hospitals were subjected to tight budget restrictions, only to have these be lifted in response to the pandemic; Why did governments kept insist for so long that they had to reduce the public-debt ratio, only to start throwing money at every problem when the need arose; And many will also ask why policymakers touted economic openness as a vital national interest until sovereignty became the new mantra.

These are legitimate questions. The pandemic has shattered many policy taboos, so the answer can’t be “that There Is No Alternative.” (TINA is another casualty of this crisis and no one should mourn its passing). But the reality principle remains. What our societies need is an open, facts-based debate on the guiding principles and the options ahead. But it is uncertain that they are currently capable of having it. The battle between a new policy philosophy and a new guise of populism will define our future.

Karslruhe: The message in the ruling

English version of op-ed in El País, 10 May 2020

From its pretence to establish itself as a custodian of the custodians to the narrowness of its perspective on central bank policy and the parochial assessment of the distributional consequences of monetary decisions, there is much to criticize in the ruling by the German Constitutional Court on the asset purchase programme initiated by the ECB in 2015. But it can hardly be blamed for raising an important question. 

Europe’s central bank was born with the precisely defined mandate of preserving price stability. Over the years, however, the ECB was given new missions, as for banking supervision, or it took on new roles, as when Mario Draghi famously said that it would do “whatever it takes” to prevent a break-up of the euro. Until the 5th of May everything suggested that the coronavirus crisis would end up having been a further reason for expanding its mission. 

For European leaders unable to agree to create a budget or a meaningful solidarity fund for the euro area, it was expedient to let the ECB contain interest rate spreads and mutualise risk through its balance sheet. Having relaxed quantitative benchmarks, the central bank was able to expand its government bonds portfolio and change its composition. It thereby created fiscal space for Italy at a time when Rome desperately needed it to fight off the health crisis and its economic consequences. Until the bombshell came. 

It has been a longstanding view of German constitutional judges that whilst monetary policy decisions are delegated to an independent institution, actions that have a fiscal character must remain the exclusive prerogative of elected parliaments. 

The distinction is a subtle but an important one when assessing bond purchases by the ECB: when it uses them to lower interest rates across the board, it fulfils its monetary policy mission; same also when it prevents nervous markets from triggering self-fulfilling debt crises; but things would be different if it were to pile up bonds issued by specific governments to contain the rise in bond spreads triggered by heightened solvency fears. 

This is an old controversy. It erupted already in 2010 when the ECB started buying Greek debt. It was given a temporary solution with the launch of the (never activated) OMT programme in 2012. And it came back after Christine Lagarde said on 12 March that the ECB was “not here to close spreads” – before retracting precipitously in the following hours. 

There are very good arguments to support the relaxation of ECB self-imposed limits to asset purchases decided on 18 March. These limits were largely arbitrary. But the Karlsruhe ruling has made the ECB lose some of its magic. What the German judges are telling European leaders in their lopsided way is that decisions for which they ought to take ownership should not be delegated to an unelected body. 

This is an uncomfortable truth. But time has come for EU and its member states to face it.  

Building a Post-Pandemic World Will Not Be Easy

Project Syndicate column, 30 April 2020 

Die-hard green militants regard it as obvious: the COVID-19 crisis only strengthens the urgent need for climate action. But die-hard industrialists are equally convinced: there should be no higher priority than to repair a ravaged economy, postponing stricter environmental regulations if necessary. The battle has started. Its outcome will define the post-pandemic world.

Both the public-health crisis and the climate crisis highlight the limits of humanity’s power over nature. Both remind us that the Anthropocene epoch may end up badly. And both teach us that benign everyday behavior can result in catastrophic outcomes.

Defying linear reasoning, the pandemic and climate change both force us to adapt to situations where a little more leeway results in a lot more damage. As the climate economist Gernot Wagner has noted, the pandemic in a sense replicates climate change at warp speed. This may explain why public opinion overwhelmingly considers global warming as serious a threat as COVID-19 and wants governments to emphasize climate action in the recovery.

The pandemic has also provided a crash course on the collective implications of individual behavior. Each of us has been compelled to recognize that our responsibilities vis-à-vis the community are more profound cannot be fulfilled merely by paying taxes and making a few donations. This “pay and forget” attitude is clearly inappropriate in a public-health crisis – and in a climate crisis.

Moreover, the last few weeks have highlighted the narrowness of the state-versus-markets perspective on the challenge we face. As the economists Samuel Bowles and Wendy Carlin have argued, the solution will not come from some combination of government decrees and market incentives. Communities whose members behave responsibly and gratefully toward one another are an indispensable part of the response. Even though the fundamental contribution of social capital and norms is not recorded in national accounts, we acknowledge it every time we applaud health-care and other essential workers. And, again, this applies to climate change as well. 

But while we must recognize these strong commonalities, we must also not overlook the obstacles to a transformation of our economic model created by the COVID-19 crisis. If anything, impediments to climate action are going to be even more formidable in the times ahead than they were a few weeks back.

For starters, climate action is inherently global, whereas the fight against a pandemic has a much more local character. To burn a ton of carbon has exactly the same effect on Earth’s temperature wherever it is burned – which is why fighting climate change requires global agreements.

The same does not apply to the pandemic. Prudent individual behavior benefits relatives more than neighbors, neighbors more than residents of the same city, and compatriots more than foreigners.

Climate protection and public-health protection thus tap fundamentally different impulses. One leads us to regard ourselves as responsible citizens of the world, the other takes us back to our local roots and the (often imaginary) shelter provided by national borders 

For example, some 84% of French citizens nowadays support keeping the country’s borders closed to foreigners. It is by no means certain that after the COVID-19 trauma, people will display more readiness to change their behavior for the benefit of mankind and future generations. This is a first source of tension.

The second, acute tension will emerge on the economic front. As the lockdown ends, policymakers will increasingly emphasize reviving economic growth and employment. The overriding priority of all governments will understandably be to minimize the socioeconomic scars left by the crisis by ensuring that every business that can restart will restart.

To the great dismay of those who would wish to rebuild rather than repair, this is an undisputable priority. In an emergency, credit guarantees and income support for furloughed workers can be provided only across the board, rather than conditioned on commitments regarding future behavior. As planes are stranded and passengers have vanished, no government is willing to condition financial support for airlines on fundamental changes by them. Today is for firefighters, not architects.

The right moment to influence the course of economic development will come later, when investment resumes and the horizon lengthens. Companies will presumably be willing to listen to the voice of those who helped them survive.

But a third tension will arise when people realize how much poorer the crisis has made them. Many firms will have failed and many workers will have lost their jobs. More resources will need to be devoted to strengthening health systems and industries, at the expense of current consumption. And public debt – also known as future taxes (or, alternatively, future inflation) – will have increased by 20-30 percentage points of GDP.

Poorer citizens will likely be more reluctant to bear the cost of replacing obsolete “brown” capital embedded in heating systems, cars, and machines with greener but costly capital, because this would destroy even more of the old jobs and leave even less income available for short-term consumption. If anything, the division between those who care about the end of the world and those who care about the end of the month will widen.

The green advocates are right: Once the immediate crisis repair is complete, the opportunity to build on heightened collective awareness to transform our economies and change our way of life should not be missed. But they should neither hide the magnitude of the obstacles on the way nor pretend that some new school of voodoo economics will circumvent trade-offs. It is only by recognizing the significance of the challenge that we will bolster our chances to succeed.

Will The Economic Strategy Work?

Project Syndicate column, 31 March 

With the COVID-19 crisis sending France into a halt, Insee, the French statistical institute, puts the drop in economic activity relative to normal at 35%. It reckons that the fall in household consumption is of a similar magnitude.

These numbers imply that each additional month of lockdown reduces annual GDP by three percentage points. And sectoral situations are obviously worse: business output is down 40%, manufacturing output down 50%, and some services sectors have come to a complete standstill. Ex-ante estimates for Germany and the United Kingdom are similar, and, if anything, corresponding numbers may be larger in economies with a smaller public sector.

Because even thriving companies can be killed in a matter of weeks by a shock of this magnitude, governments have reacted in a remarkably similar fashion. To prevent bankruptcies, they are extending liquidity lifelines to private businesses in the form of massive credit guarantees and the deferral of tax payments (many of which will never be collected). Germany, for example is rolling out €400 billion in public guarantees to make sure that its banks will roll over outstanding loans to businesses. Overall, eurozone fiscal liquidity schemes for business and employees amount to 13% of GDP.

European countries are, moreover, making extensive use of mechanisms that temporarily transfer to the government the largest part of the wage bill of companies forced to stop or cut production. Workers retain their employment contract and, one way or another, most of their wage, but the company receives state support that covers nearly all of the costs. Unlike layoffs, which sever ties between a company and its workforce, such schemes make it possible to keep workers financially afloat until the company reopens for business. Such arrangements, where they already existed, were generally used to address sector-specific crises. Now, they have been massively extended.

Absent an extensive social insurance system to build on, the US stimulus package, adopted on March 26, has similar aims, but a different structure. The federal government will send checks to low- and middle-income taxpayers, extend grants to small businesses conditional on them keeping their workers, increase the duration of unemployment insurance and broaden eligibility, and pay $600 per week to laid-off and furloughed workers. This is, in spirit, a very European package. But stark differences remain: from March 14 to March 21, U.S. weekly jobless claims soared by an unprecedented amount, 280,000 to 3.2 million. No European country has experienced such an abrupt business response to the shock. 

Whether the strategy will be effective is hard to assess. Whatever the size of the shield that is being extended to protect businesses and workers, devastation is certain. Many companies were caught off guard by the crisis, loaded with debt and now devoid of prospects. Liquidity helps them but it won’t save them from the threat of insolvency. The collapsing stock markets have reduced the value of collateral, leaving borrowers more fragile and putting leveraged investors in great danger. Banks are piling up bad debt once again.

Moreover, many gig workers, temporary employees, and new entrants on the labor market, have been left without an income, while the bureaucratic plumbing of the new unemployment insurance schemes is an operational nightmare. So there will be many, many casualties. But overall, the approach being taken is probably the best possible. 

Is it a sustainable strategy? It is easy to do the fiscal numbers. Assuming that the business sector accounts for 80% of the economy, that its output is down by 40%, and that government action aims at covering 80% of the corresponding income loss, budgetary support should amount to 0.8 x 0.4 x 0.8 = 25% of pre-crisis output, or a bit more than 2% of annual GDP per month. Three months of complete or partial lockdown, followed by only a gradual recovery, could add some ten percentage points of GDP to the budget deficit.

That is a very big number, but in current conditions, governments can afford to go deeply into debt. Interest rates were at historically low levels before the crisis hit, for reasons that were mostly structural and will therefore remain. Moreover, central banks are everywhere backstopping their governments and will avoid self-fulfilling debt crises. In these conditions, large deficits can be tolerated, at least in the short run.

The economic sustainability of the strategy is more in question. It is worth keeping a business on life support for a few weeks, because to let it go bust would be a loss not only to its shareholders and workers, but to society at large. Firm-specific skills, know-how, and intangible capital would be lost for good. So governments have been right not to hesitate. But will that still be true after six months? Or nine? A firm that has remained idle for too long is likely to become riddled with debt, and it may have lost its economic value. It must be admitted that the conservation strategy is predicated on a relatively short crisis. It is right for the time being, but it may have to be adapted in the light of events. 

The hardest issue may be how to manage the exit from the lockdown after the public-health threat has been contained and economic policy takes center stage again. Some have started speaking of a stimulus plan, but supply may well remain constrained for some months, while pent-up household demand for goods and services could be considerable. 

As after a war, shortages are likely to arise, in some sectors at least. And it is very hard to predict whether aggregate demand will be excessive, owing to accumulated savings and repressed consumption, or depressed, because of fear, financial losses, debt, and the collapse of international trade. Managing the economy will be a very hard balancing act. As the Chinese saying puts it, policymakers will need to cross the river by feeling the stones.   

A radical way out of the EU budget maze

Project Syndicate column, 25 February 2020

In 2003, I co-authored a report on the future of the European Union – the Sapir report – in which we observed that the expenditures, revenues, and procedures of the EU budget were all inconsistent with the Union’s objectives. We therefore advocated a radical restructuring of what had become a “historical relic.” Seventeen years later, little has changed.

Two years ago, when negotiations on the budget for 2021-2027 started, I pointed out that the outcome would reveal what the EU is really up to, but that after high-drama bluffing, bullying, blackmail, and betrayal, such negotiations usually result in minimal changes. And here we are: we have had bluffing, bullying, blackmail, and betrayal, not least on the occasion of the inconclusive EU summit of February 20-21, and Europe appears to be headed for minimal changes.

Such an outcome would be dreadful. True, the EU’s budget is not what usually defines it. Europe’s integration has proceeded by establishing a legal system, common institutions, a single market and currency, and joint policies for competition, trade, and climate, rather than through joint spending programs. The lion’s share of its budget goes to transfers to poorer regions and farmers, which may or may not be useful but do not characterize what today’s Europe is about. It is therefore tempting to treat the EU’s budgetary discussion as a fairly inconsequential distributional game: Europe’s pork barrel.

But that would be wrong. Europe’s defining issue is no longer integration through trade and mobility, or even the strengthening of the euro. As I argued in a recent report with Clemens Fuest of CESifo Munich, the EU’s role is increasingly the provision of public goods at European rather than national level, in accordance with its values and priorities. Concretely, the defining issue for the EU is whether to act forcefully in fields like climate-change mitigation, digital sovereignty, research and development in transformative projects, development cooperation, migration policy, foreign policy and defense. In such fields, the question is not whether Spain will gain more than Poland, or whether Dutch citizens will end up paying more the French, but whether there is added value in joint policies. 

As matters stand, however, the EU is starting from an absurdly distorted approach to public goods. Some member states are interested only in what is in it for them, while others consider only what it may cost them, and still others care only about collateral damage to their cherished policies. What Europe loses in the process is an opportunity to get serious about its stated priorities and to confront the urgency of joint action.

A fundamental principle of public economics is that efficiency and distribution issues should be separated to the extent possible. Whether a policy delivers value and how its benefits are distributed are both important issues, but they must be distinguished. Separation can never be absolute, because the provision of public goods has distributional consequences: an increase in defense spending, for example, benefits weapons-producing regions. But this only reinforces the point: no one wants security policy to be decided by the arms lobby.

The EU budget negotiation mechanism should be designed to give member states an incentive to aim both at collective efficiency and cross-country equity, but not to make one the hostage of the other. At present however, Poland fights for the regional development funds and France for the Common Agricultural Policy, regardless of these programs’ intrinsic value, because they benefit from them. By the same token, the frugal four (Austria, Denmark, the Netherlands, and Sweden) have committed to resisting any meaningful increase in the budget, irrespective of what is done with the money. The result is deadlock.

The way out of the impasse is to choose a negotiation procedure that addresses efficiency and distribution separately. To the great dismay of devoted federalists, who (rightly) claim that the very notion of net budgetary balance is economic nonsense, negotiations nonetheless end up deciding how much each member state will pay and receive over the seven-year period covered by the budget. If contributions are too high or benefits too low, a “rebate” is agreed on, which ensures that the net balance is at the desired level. But since no one is very proud of this sort of murky horse-trading, it is left for the last, late-night or early morning discussion. As shown by Zsolt Darvas of Bruegel, the result is muddled and its complexity defies imagination.

To break the deadlock, Charles Michel, the president of the European Council, should propose to turn the table and start afresh with the setting of each country’s net balance. It would be agreed that Poland, because it is poorer, would receive €X billion more each year than what it is paying into the budget; Germany, because it is richer, would pay Y billion more; and so on. With properly defined net balances set in stone, no state would have an interest to fight for a policy whose only value is that it benefits from it, because any additional net benefit (or cost) would be automatically offset through a lump-sum transfer. This would shift attention to the policies’ intrinsic value rather than their distributional effects.

True, the debate over the overall size of the EU budget would remain. There would still be a row between partisans of higher spending and advocates of frugality. But this is a necessary debate that should not be eschewed. Those who think that there is value in European public goods would have to convince their partners – and also pay their fair share. The difference, not a minor one, is that they would argue on the basis of added value and efficiency, not direct pecuniary interests.

After another failed negotiation, Michel tweeted on February 21 that, “as my grandmother used to say, in order to succeed you have to try.” European leaders would be wise to follow his grandmother’s advice.

Explaining the triumph of Trump's economic recklessness

Project Syndicate column, 28 January 2020

Since he was elected US president, Donald Trump has done almost everything standard economic wisdom regards as heresy. He has erected trade barriers and stoked uncertainty with threats of further tariffs. He has blackmailed private businesses. He has eased prudential standards for banks. He has time and again attacked the Federal Reserve for policy not to his liking. He increased the budget deficit even as the economy was nearing full capacity. On a policymaker’s Don’t Do list, Trump ticks many more boxes than any other post-war US president.

And yet the US economy’s longest expansion on record continues. Inflation is low and stable. Unemployment is at a 50-year trough. The unemployment rate for African-Americans is the lowest ever recorded. People who had left the labor market are returning and finding jobs. And wages at the bottom of the distribution are now rising at 4% per year, notably faster than average. On a voter’s economic wish list, Trump ticks more boxes than most of his predecessors.

The political question everybody is speculating about is whether this economic performance will win Trump a second term. But the equally important (and related) economic question is whether it will teach governments worldwide that reckless initiatives beat analysis-based economic policies. If it does, expertise will be ridiculed and international policy institutions will lose whatever credibility they still have. Independent central banks may well become chapels of a forgotten cult. Populists of all guises will feel emboldened.

Some, like Joseph Stiglitz, regard Trump’s achievements as an illusion. It is true that the picture is not entirely rosy. If anything, the trade deficit has increased. Distressed areas have not recovered. Inequality is still appalling. But this is no reason to overlook the positives. Assessment, rather than denial, is needed to shed light on what is happening.

The Trump administration’s economic policy is a strange cocktail: one part populist trade protectionism and industrial interventionism; one part classic Republican tax cuts skewed to the rich and industry-friendly deregulation; and one part Keynesian fiscal and monetary stimulus. The question that must be addressed is what in the economic outcomes can be attributed to each of these ingredients. 

Trump’s populist agenda is very much geared toward America’s industrial heartland. Trade protection is supposed to make US manufacturing competitive again, at least on the domestic market, while companies are being instructed to invest at home rather than abroad. Yet the share of manufacturing in GDP is still two percentage points below its level prior to the 2008 financial crisis, and 900,000 manufacturing jobs have been lost.

True, Trump continues pushing. The US-China “phase one” trade agreement commits the Chinese to a near-doubling of imports of US manufactured goods by 2021. But as Chad Bown of the Peterson Institute for International Economics has pointed out, the target is unrealistic. And there is no evidence of a Trump-engineered industrial revival.

The main aim of this administration’s tax policy is to spur growth by cutting the statutory corporate rate from 35% to 21%, while broadening the tax base. It is complemented by what Trump describes as the most ambitious deregulation campaign in history but, by his own admission, anti-red tape measures started kicking in only recently, so they cannot account for the economic results.

In a careful collaborative analysis, Harvard’s Robert Barro, a Republican-inclined economist, and Jason Furman, also of Harvard and a chair of President Barack Obama’s Council of Economic Advisers, provide a numerical assessment of the impact of the corporate tax reform. Their conclusion is that lowering the cost of capital is a long-run positive, but that its immediate impact on GDP growth is less than 0.15 percentage point per year: a minor contribution to current economic performance. At any rate, relatively weak investment growth suggests that lower corporate taxes are not driving the expansion.

What we are left with, then, is the Keynesian explanation: fiscal and monetary support are the main factors behind the length and the strength of the expansion. On the fiscal side, the combination of tax cuts and spending increases may have boosted GDP some 2% since 2017. On the monetary side, the Federal Reserve changed course in 2019 and reversed some of the interest-rate hikes it had put in place earlier to stem inflationary risks. Finally, multiple increases in state and local minimum wages have brought the effective minimum wage to some $12 per hour (66 per cent higher than the federal minimum, unchanged under Trump), lifting low incomes and making the late expansion more inclusive.

So, the main reason for persistent growth and record employment in the United States is neither trade policy and industrial interventions, nor corporate tax cuts and deregulation. They have been driven by the demand stimulus. There was nothing certain about this result. In its summer 2017 assessment of the US, the International Monetary Fund estimated that the economy was close to full employment, supported monetary tightening and warned against rising public debt. 

Whatever the motivation, to stimulate an economy in which unemployment was already below 5% was an experiment. It needed trust in the benefits of a “high-pressure economy” where tight labor markets attract people left behind and help create new capacity. It supposed a certain indifference to fiscal deficits. And it required risk-taking on the part of the Fed, which was accused of bowing to political pressure but actually fulfilled its mandate by testing the limits of the expansion. The experiment has worked – at least so far.

Overall, the lesson from Trump’s apparent economic success is not that recklessness and economic nationalism should guide policies. It is that in a low-inflation, low-interest-rate environment, the room for expansionary policies is larger than usually thought; that such an environment calls for bold policymaking, rather than the usual coyness; and that policy can spur economic inclusiveness.

Of course, however, voters’ ability to assign causes to outcomes is limited. So, unfortunately, this may not be the lesson they will learn.

Europe’s New Green Identity

Project Syndicate column, 30 December 2019

 PARIS – Most countries’ flags are multicolor. Together with red-flagged China, the blue-flagged European Union is one of the few monochrome entities. Not anymore, apparently: the EU’s new defining project colors it green. At a meeting in mid-December, the leaders of all EU countries except one (Poland, not the United Kingdom) officially endorsed the goal of achieving climate neutrality – zero net emissions of greenhouse gases – by 2050.

European Commission President Ursula von der Leyen wants to go further. Next March, she plans to introduce a “climate law” to ensure that all European policies are geared toward the climate neutrality objective. She wants member states to agree next summer to cut emissions by about 40% between 2017 and 2030. She also proposes to allocate half of the European Investment Bank’s funding and a quarter of the EU budget to climate-related objectives, and to devote €100 billion ($111 billion) to supporting regions and sectors most affected by decarbonization. If non-EU countries drag their feet, she intends to propose a carbon tariff.

Grand plans for a distant future rightly elicit skepticism. For leaders facing reelection every four or five years, a 2050 objective is hardly binding. A battle is to be expected: opposition by fossil fuel-producing member states, energy-intensive sectors, trade-sensitive industries, and car-dependent households will be fierce. The EU has already invested so much of its political capital into the green transition, however, that a failure to deliver would severely damage its legitimacy. The Green Deal is not just one of many EU projects. It is its new defining mission.

Let us therefore assume that the EU commits to von der Leyen’s plan. Will it work?

Relative to what other big emitters have agreed to do, the proposed EU target is commendably ambitious. Yet it falls short of what would is needed to safeguard the world’s climate. To prevent the rise in temperature from exceeding the safe threshold of 1.5º Celsius, global future cumulative emissions must be limited to about seven times the current level. At prevailing emission levels (which are still rising), humanity’s total carbon budget will be exhausted in seven years.

The additional carbon budget the EU is setting itself with its super-ambitious plan amounts to roughly 15 years of current-level emissions (somewhat less if efforts are front-loaded). Given that developing countries should be allocated a proportionally larger budget than advanced economies, global emissions would remain far too high even if all countries suddenly emulated the EU. The sad truth is that the 1.5º target is already out of reach, and the EU’s laudable plan is a bare minimum.

Is the plan real? That is hard to say at this early stage, but it is already clear that the full range of required policy tools cannot be mobilized at the EU level alone. The Union decides on allowances for energy-intensive industries and car-emission standards, but as regards the member states’ energy mix, housing standards, taxes, and public investment, it cannot rule directly. Much will depend on national ownership of the common targets, which currently is unequal, to say the least: CO2 emissions are taxed at €112 per ton in Sweden and €45 in France, but they are tax-exempt in Germany and Italy. Designing and enforcing a common EU strategy will be a difficult fight.

Frustrated climate advocates often put their faith in financial instruments. Having lost the battle for tough regulation and dissuasive taxation, their hope is that green finance will do the job. It is true that an increasing number of investors shy away from “brown” assets, either by choice or because of regulators’ warning that oil fields and coal plants may lose much of their value and end up as “stranded” assets. And it is true that favorable regulatory treatment of climate-friendly investment, de-risking through financial engineering, and credit subsidies can spur green capital formation. Even central bankers are actively debating what to do to for the climate.

But such techniques are rather inefficient. Financial dissuasion may help curb dirty investments, and a panoply of incentives may help promote clean ones, but at a high economic cost. As long as the climate policy is not fully credible, each ton of greenhouse gas saved will entail more output losses than if tomorrow’s carbon price were predictable. And as purchase subsidies for cleaner vehicles have shown, support for green technologies, if not coupled with carbon taxation, may well end up prompting higher energy consumption. To be sure, decarbonization cannot rely on first-best policies alone. But experience has shown that it is fairly easy to burn through lots of money with little to show for it. And public support for mitigating climate change is not such that price is not an issue.

At the end of the day, success will largely depend on whether the greening of the economy helps create jobs and prosperity. The European Commission claims that the Green Deal is Europe’s “new growth strategy.” This will enrage supporters of “de-growth.” But the Commission is right to emphasize that decarbonization and growth must go hand in hand. The transition to carbon neutrality will destroy wealth, cause job losses in energy-intensive sectors, and require lifestyle changes. It will elicit sufficient support to overcome opposition only if it generates economic dynamism.

The Commission claims that its plan will spur €260 billion of additional investment annually. The details can be discussed, but as a rough estimate of what is needed, the figure seems reasonable. But this investment will only materialize on the basis of a sustained, all-encompassing, and credible implementation of what is still a blueprint.

Five-hundred years ago, conquistador Hernán Cortes landed in Veracruz, Mexico. To make sure that his meagre troops understood that victory was the only option, he immediately ordered them to burn their ships. This is exactly what the European Union has done by announcing in great fanfare its new Green Deal. 

Europe can take a bigger role in providing public goods

Financial Times Op-ed, 3 December 2019

Now that the EU has a newly elected Parliament and a new Commission, what should be its agenda for the future?

Traditionally, its focus has been on economic integration, for example through the single market, the euro or banking union. There are a series of common policies but overall the EU budget is small and still mostly spent on agricultural subsidies and transfers to poorer regions. 

Nearly 70 years after the creation of the Coal and Steel Community, however, this emphasis is odd. European integration delivers benefits, but it is not a sufficient answer to the kind of challenges Europe faces today.

Times are changing: the race for new technologies intensifies; Europe can no longer rely on the US for its defence; rivalry between the US and China is reshaping international relations; national migration policies fail to cope with pressure; there is need to change gear on decarbonisation. Such challenges require a new division of labour between European and national levels.

The response should be not “more Europe”, but to select fields where there is a potential to provide European public goods. The EU should take a bigger role in policy areas where it delivers more value than member states acting individually can. This is the case where economies of scale are important or where the outcomes of policies in one country strongly affect others.

One area where the EU already has key competences but should do more is international economic relations. It is time to end official indifference to the use of the euro beyond our borders, and to make it attractive globally through the granting of swap lines to partner central banks and the introduction of a common safe asset. In investment policy, when security is at stake, the EU should have the power to block foreign investment by qualified majority.

To mitigate climate change, there is great potential for joint action. Without waiting for a European carbon tax system, the EU should be able to set, by qualified majority voting, binding limits for carbon prices. This would allow it to comply with its international obligations at the lowest possible cost.

Cyberattacks ignore national borders. The EU needs to pool its resources to protect and preserve its digital infrastructure. A high-level group should be mandated to propose a strategy for safeguarding Europe’s digital sovereignty.

Technological leadership requires investment in research. A European Darpa should focus exclusively on pathbreaking projects, and be able to terminate unsuccessful projects abruptly.

Refugees come to Europe, not to a particular member state. A solution to the migration crisis should include a common border protection system, a common legal framework for asylum, common principles for allocating people granted asylum, and policies for resettling those to whom immigration has been denied. Eventually, the Schengen area and the common migration policy area should coincide.

Development co-operation and financial assistance to third countries is another policy area with strong spillovers and size advantages. Chinese inroads into Europe have made the case for a united stance and a European development bank stronger. Europe should also get its act together on foreign policy and external representation as well as military procurement and defence. 

The case for a European foreign policy is strong, but there are deep policy divergences between members. Efforts to strengthen European soft power, savings-oriented back-office cooperation, and regular European foreign policy “white books” would be practical steps. On defence, efforts should be made towards common procurement, shared infrastructure, common arms export policies and joint initiatives.

Achieving all this will not be easy. First, it requires funding. A new focus on European public goods should not result in an increase of the overall tax burden for EU citizens, but shift resources to the European level.

There is an ongoing debate about new financing instruments for the EU budget. But the provision of these public goods would be delayed if it were to be linked to a reform of EU finances. For the time being, new public goods should be funded through higher gross national income-based resources.

Second, acting at the EU level is only possible if the preferences of the member states are not too different. In areas where they differ significantly, some countries will move first and others may or may not follow. Germany and France should take bilateral initiatives where necessary, always inviting other countries to join in.

Third, critics will complain that more European public goods provision will undermine national sovereignty. But this view is often just complacency in disguise. In the policy areas discussed, the choice is not between national and European sovereignty. It is between European sovereignty and none at all.

The writer is a senior fellow at Bruegel and a professor at Sciences Po. This piece is based on a report to ministers Le Maire and Scholz prepared jointly with Clemens Fuest, president of the Ifo Institute for Economic Research.

The UK and the EU Should Prevent Mutual Assured Damage

Project Syndicate column, 1 December 2019

PARIS – Nothing can be taken for granted in the United Kingdom these days, but it is now very likely that 2020 will be the year when Brexit finally happens. A majority of UK citizens will probably be relieved to bring this seemingly endless agony to a close, while most European leaders will likely be glad not to have to argue over another postponement. But questions will remain.

To the question of “Who lost Britain?”, the answer must be, first and foremost, Britain itself. Whatever mistakes the European Union’s other 27 members may have made, they cannot be held responsible for the extraordinary behavior of the UK’s three equally amateurish governments of the last five years.

Yet, there are deeper lessons to be drawn from what happened in Britain. The first, as Wolfgang Münchau pointed out in the Financial Times, is that the battle in the UK over EU membership was lost long before it was fought. Since the 1990s, leading pundits and media outlets have routinely portrayed the EU as a stifling bureaucracy obsessed with expanding its own power; few senior politicians have dared to confront such prejudices. 

Unfortunately, similar trends are currently visible in other core EU countries. In France, 56% of citizens – as many as in the UK – tend “not to trust” the EU. Working-class voters are especially negative. Confidence in the EU is stronger in Germany, but the European Central Bank’s policies are under attack. For years, opinion was bombarded with horror stories about hidden transfers to the South. Germany’s best-selling tabloid Bild now claims that German savers lost €120 billion ($132 billion) during the tenure of former ECB President Mario Draghi (or “Count Draghila,” as the editors called him). Many politicians, like their British counterparts before them, find it easier to pander to such perceptions than to oppose them. This is paving the way for future backlashes.

At the same time, the EU should not exonerate itself from a bit of soul-searching. When the UK’s then-prime minister, David Cameron, sought a temporary limit on immigrants from Central and Eastern Europe, it might have been advisable to work out a solution with him. And after the EU started Brexit negotiations with Cameron’s successor, Theresa May, it might have been wise to respond to her calls for a “bespoke” arrangement for the UK. Since the June 2016 Brexit referendum, the EU-27 have been surprisingly united, remarkably consistent, and astoundingly bereft of a strategy. Their stance has been motivated not so much by a desire to limit mutual damage, but rather by the fear that any softening in negotiations with London could lead to further fragmentation. Their apparent strength concealed internal weakness.

Bygones are bygones. The EU’s priorities now should be to keep mutually beneficial cooperation alive and to avert the danger of the UK pursuing an aggressive regulatory competition strategy. 

Joint defense initiatives involving the UK and continental partners will most likely survive, cooperation within the multilateral system will almost certainly continue, and ad hoc projects will probably flourish. But the big casualty of Brexit risks being economic integration with the European single market. 

A screw is a screw, and a bolt is a bolt. But the UK no longer produces screws and bolts. It is a major exporter of banking, insurance, accounting, communication, and professional services, half of which go to the EU. Moreover, most of these services are regulated. 

If the Brexiteers’ “take back control” slogan means anything, it implies substituting UK laws for EU legislation. On the day after Brexit, Britain’s regulatory regime will be identical to that of its EU trading partners, because the UK’s 2018 Repeal Bill copy-pasted all EU laws into domestic legislation. But as the UK Parliament gradually amends these laws, and the EU introduces new laws of its own, the two legal systems will start diverging. The question is: how far can they diverge without endangering economic linkages and destroying prosperity. 

There are two possibilities. One is that the UK adopts laws that differ from those in the EU but are based on the same core principles. For example, there can be different ways to guarantee that insurance contracts offer the same degree of consumer protection, or to uphold bioethics standards. In that case, UK national laws would embody different approaches to regulation, and yet create only limited obstacles to trade in services.

The second possibility, however, is that the UK attempts to undercut EU legislation. In this scenario – often dubbed “Singapore-upon-Thames” – Britain would impose less stringent standards for financial stability, be softer on data protection and, or perhaps relax its labor laws, in the hope of attracting more investors and selling cheaper services. Such a move would rightly be regarded as uncooperative by the UK’s European partners, and would result in the EU cutting off market access for British services exporters (most of which currently supply their continental clients directly from their UK base). 

Which route will Britain follow? Ideally, it would agree with the EU on common principles and credibly commit to sticking to them. But because some of the most adamant Brexit supporters openly dream of completing the Thatcher revolution and turning the UK into a low-regulation paradise, the EU is understandably wary. There is a serious risk of a negative spiral of aggressive British deregulation and forceful EU tightening, with damaging consequences for services trade.

The EU should not ask the UK to copy slavishly its legislation. But it should be clear that aggressive regulatory competition is unacceptable and present the UK government with a black-and-white choice: either it agrees to commit to common principles and exercise regulatory self-restraint in order to maintain good access to the European market, or it refuses – and exposes British firms to a severe, across-the-board curb on their ability to export to Europe.

Assuming Brexit happens, future historians will probably remember 2020 as the year when an enfeebled and vulnerable Europe chose to make itself feebler and more vulnerable. The task for its leaders now is to avoid making matters even worse.

The Great Wealth Tax Debate

Project Syndicate column, 31 October 2019

WASHINGTON, DC – In 1990, 12 advanced economies had a tax on household wealth. Now only four do, after French President Emmanuel Macron scrapped his country’s version in 2017. Yet, a fierce debate has erupted in the United States over the proposal by Senator Elizabeth Warren, a leading Democratic presidential candidate, to introduce a tax of 2% on the wealth of “ultra-millionaires” (and 3% on that of billionaires).

In a new book, economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, who have advised Warren, claim that her tax would tackle growing wealth concentration in the US and yield some $250 billion per year, or 1.2% of GDP. But critics such as Larry Summers, a former US Secretary of the Treasury under President Bill Clinton, and Greg Mankiw, who served as chief economist to President George W. Bush, argue that a wealth tax would yield little revenue, distort investor behavior, and fail to curb the billionaires’ power. The ongoing furious controversy over the wealth tax is bound to be a defining one for the Democrats. 

The starting point for this debate is fairly clear. As Lucas Chancel of the Paris School of Economics noted at a recent conference on combating inequality organized by the Peterson Institute, the increase in wealth concentration is unmistakable, at least in the US. According to Saez and Zucman, the top 1% of US households now own 40% of the country’s wealth, while the bottom 90% hold only one-quarter. Since 1980, the 1% and the 90% have traded places. 

Economists are generally reluctant to make normative judgments about wealth inequality, because theory does not provide them with a proper yardstick for doing so. If innovators become immensely rich, it is presumably because their innovation was immensely valuable – in which case their wealth is deserved – or because they have managed to turn their idea into a monopoly rent, which should be addressed via competition policy, not taxation. Although many economists advocate curbing Amazon’s growing monopoly power, for example, most do not propose taxing away the value of Jeff Bezos’s innovation.

Furthermore, wealth taxation itself gives rise to disputes. As Greg Mankiw suggests, consider two high-flying professionals with comparable incomes but different lifestyles. Why should the one who saves and invests be taxed more than the one who uses a private jet to go skiing? Surely, the saver contributes more to collective wellbeing; if anything, the tax burden should fall on the skier.

For that reason, many economists advocate a combination of a progressive income tax and an inheritance tax, rather than a tax on wealth. But there are two problems with this idea. The first is that many of the super-rich have little income. As Saez and Zucman point out, Warren Buffett and Mark Zuckerberg earn little more than they spend. Their wealth increases as a result of capital gains, not saved income. And because such gains are taxable only when the corresponding assets are sold, their annual increase in wealth essentially escapes taxation.

The second obstacle is that inheritance tax is politically toxic. Opinion polls consistently show that while economists love the idea, most voters hate it. Politicians understandably tend to steer clear of what most voters reject.

But if the income tax does not apply to capital gains and the estate tax does not redistribute wealth when someone dies, wealth inequality is bound to increase further. Some will say there is nothing wrong with that, provided capital is put to productive or collectively beneficial use. In Germany, for example, private companies are exempt from inheritance tax so that family-owned Mittelstand firms – which are essential to the country’s prosperity – can be transferred to the next generation.

However, a society of heirs in which a person’s lifetime labor income matters less than the capital they inherit from their parents is morally indefensible, unlikely to be politically sustainable, and may not be economically efficient. Heirs are often poor managers and poor investors.

True, a wealth tax does not come without difficulties. How, for example, should a start-up founder be taxed when their firm has a market value but is yet to generate any income? Should he or she pay the government in shares? And in Europe, which lacks a harmonized tax regime, how can national authorities cope when rich people can simply move to another country? Designing a fair and efficient wealth tax is bound to be more complicated than its proponents typically claim.

At least one thing is clear: the European wealth taxes of the past are not examples to follow. They kicked in at far too low a threshold – less than €1 million ($1.1 million) in the case of France’s impôt de solidarité sur la fortune – and were riddled with loopholes as a consequence. In the French case, a business owner was exempt as long as he or she did not sell the company. That led to successful serial start-up founders being taxed while sleepy entrepreneurs were not. And whereas a moderately wealthy French household’s financial portfolio could easily generate a negative after-tax return, the effective tax rate on the wealth of the country’s 100 richest individuals was a ridiculously low 0.02%.

As Saez and Zucman argue, a wealth tax should treat all assets equally and have a high enough threshold. Warren is proposing a 2% tax on wealth above $50 million. The equivalent threshold in Europe would probably be lower, but certainly not low enough to satisfy Thomas Piketty, who proposes in his latest book a 5% annual tax on wealth of $2 million. Whereas Warren wants to reform capitalism, Piketty would like to end it and eradicate private property as we know it.

Inequality is back at the forefront of economic policy debates, for good reason. A wealth tax is no panacea, not even an ideal response to growing inequality at the top. But absent a better alternative, it can serve as a reasonable second-best policy. At the very least, the idea does not deserve to be banished as a heresy.

How to Ward Off the Next Recession

Project Syndicate column, 30 September 2019

Despite confident official pronouncements, the deteriorating state of the global economy is now high on the international policy agenda. The OECD recently revised down its forecasts to 1.5% growth in the advanced G20 economies in 2020, compared to almost 2.5% in 2017. And its chief economist Laurence Boone warned of the risk of further deterioration – a coded way of indicating a growing threat of recession.

Structural shifts in the automobile industry, miserable productivity gains in advanced economies, shrinking spare capacity, and the build-up of financial fragilities would be sufficient causes for concern even in normal times. But there is more:  a combination of cracks in the global trading system and an unprecedented shortage of policy ammunition are adding to the worries. 

As the OECD emphasized, a good part of the slowdown can be attributed to the ongoing Sino-American trade dispute. Chad Bown of the Peterson Institute reckons that on the basis of announcements made, the average US tariff on imports from China will increase from 3% two years ago to 27% by the end of this year, while Chinese tariffs on US goods will rise from 8% to 25% over the same period. These are sharp enough increases to disrupt supply chains. Anxieties over a further escalation inevitably dent investment.

Moreover, President Trump’s erratic tariff policy is symptomatic of a broader reassessment of global production networks. Even if Trump is not re-elected in 2020, there are hardly any free traders left in America. The damage to the global trade regime from rising nationalism is likely to outlast him. Climate-related grievances against the unfettered search for lower production costs are bound to grow further.     

The other big concern is the lack of policy tools to counter a slowdown. In a normal recession, central banks cut interest rates aggressively to prop up demand. The US Federal Reserve, for example, lowered rates by five percentage points in each of the last three recessions. 

Today, however, the Fed only has about half its normal room to cut rates, while the European Central Bank has very little. Risk-free rates in the eurozone are already negative, even on 30-year bonds. And after the ECB recently loosened policy under outgoing President Mario Draghi, his successor Christine Lagarde will inherit a largely empty toolbox.

As Lagarde has said, “central banks are not the only game in town.” Both she and Draghi have called on eurozone governments to provide more fiscal stimulus. On paper, this looks feasible: whereas the US cyclically-adjusted budget deficit exceeds 6% of GDP, the average deficit in the eurozone remains below 1%. And the debt-to-GDP ratio in the eurozone, though high, is lower than in the US. Furthermore, as former International Monetary Fund chief economist Olivier Blanchard has emphasized, temporary deficits do not imply a lasting increase in the debt-to-GDP ratio when the interest rate is well below the growth rate, as it is now.

European finance ministers, however, did not even consider contingent fiscal plans at their most recent meeting in September. And Germany, which has room to act, still opposes relaxing its “black zero” requirement, according to which parliament must approve a balanced budget (and deficits are permissible only if growth undershoots expectations). While calls to lift this self-imposed constraint are growing louder, the separate “debt brake” enshrined in Germany’s constitution limits the cyclically adjusted federal deficit to 0.35% of GDP.

Eurozone governments thus have only limited room for fiscal maneuver, and may lack the political courage to enlarge it. Most likely, therefore, Europe will muddle through with some recession-induced fiscal easing but no aggressive response.

Yet, a decade after the Great Recession, Europe’s economy is still convalescing, and another period of prolonged hardship would cause serious, potentially dangerous economic and political damage. Policymakers should therefore explore alternative options. 

That brings us to the outlandish idea of equipping the ECB with new tools. In the late 1960s, Milton Friedman, the father of monetarism, imagined that a central bank could drop banknotes by helicopter – a metaphor that former Fed Chairman Ben Bernanke later used to explain how it could always do more to counter deflation.

To turn this thought experiment into a real policy option, the Eurosystem could extend perpetual, interest-free loans to banks in member countries, on the condition that they pass the money on to consumers under the same terms. Concretely, households would receive a €1,000 ($1,094) credit that they would never pay back – in effect, a transfer that would finance more consumption. Each member country’s central bank would either keep a fictional asset on its balance sheet or, more realistically, recoup the corresponding losses over time by reducing the annual dividend paid to its public shareholder.

Such an initiative would face considerable obstacles, however. The first is legal: would the ECB be acting within its mandate? Arguably, it would, provided such an operation were used to help achieve the ECB’s price stability objective. Eurozone inflation is currently too low, and a recession would aggravate this. The second problem is operational: some eurozone households have no bank account, while others have several; and should the same amount be extended households in Luxembourg and in Latvia, where income per head is four times lower? This may not matter from a macroeconomic standpoint, but it does in terms of equity. The final hurdle is political: the ECB would be accused of breaching the Chinese wall separating monetary and fiscal policy, because the operation would be equivalent to a state-administered transfer financed by money creation. Given the current acrimony over its monetary strategy, that might be one controversy too far. 

Time will tell if a deteriorating economic situation and the lack of alternative options justify entering unexplored territories. It is unlikely that Europe will have the guts for it. If it does, the path ahead will be perilously narrow and littered with obstacles. But the risk of acting might be ultimately safer than the risk of kicking the can down the road.      

Dousing the sovereignty wildfire

Project Syndicate column, 2 September 2019

On the eve of the recent G7 summit in Biarritz, French President Emmanuel Macron described the Amazon rainforest as “the lungs of our planet.” And because the rainforest’s preservation matters for the whole world, Macron added, Brazilian President Jair Bolsonaro cannot be allowed “to destroy everything.” In reply, Bolsonaro accused Macron of instrumentalizing “an internal Brazilian issue,” and said that for the G7 to discuss the matter without the countries of the Amazon region present was evidence of a “misplaced colonialist mindset.”

The row has since escalated further, with Macron now threatening to block the recently concluded trade deal between the European Union and Mercosur, unless Brazil – the largest member of the Latin American trade bloc – does more to protect the forest. 

The Macron-Bolsonaro dispute highlights the tension between two big recent trends: the increasing need for global collective action and the growing demand for national sovereignty. Further clashes between these two forces are inevitable, and whether or not they can be reconciled will determine the fate of our world.

Global commons are nothing new. International cooperation to fight contagious diseases and protect public health dates back to the early nineteenth century. But global collective action did not gain worldwide prominence until the turn of the millennium. The concept of “global public goods,” popularized by World Bank economists, was then applied to a broad range of issues, from climate preservation and biodiversity to financial stability and internet security.

In the post-Cold War context, internationalists believed that global solutions could be agreed upon and implemented to tackle global challenges. Binding global agreements, or international law, would be implemented and enforced with the help of strong international institutions. The future, it seemed, belonged to global governance.

This proved to be an illusion. The institutional architecture of globalization failed to develop as advocates of global governance had hoped. Although the World Trade Organization was established in 1995, no other significant global body has seen the light since then (and the WTO itself does not have much power beyond arbitrating disputes). Plans for global institutions to oversee investment, competition, or the environment were shelved. And even before US President Donald Trump started questioning multilateralism, regional arrangements started restructuring international trade and global financial safety nets.

Instead of the advent of global governance, the world is witnessing the rise of economic nationalism. As Monica de Bolle and Jeromin Zettelmeyer of the Peterson Institute found out in a systematic analysis of the platforms of 55 major political parties from G20 countries, emphasis on national sovereignty and rejection of multilateralism are widespread. When John Bolton, the current US national security adviser, wrote in 2000 that global governance was a threat to “Americanism”, many regarded the idea as a joke. But few are laughing now.

True, nationalism hasn’t won the war. Despite Brexit and the rise of far-right parties in Italy and other countries, the European Parliament election in May did not produce the feared populist landslide. Growing segments of public opinion simply want policymakers to address problems in the most effective way, including at European or global level if needed. 

Nowadays, however, international collective action cannot be based on further universal treaty-based obligations. The question, then, is which alternative mechanisms can address global challenges effectively while minimizing encroachments on national sovereignty.      

Some models are already at work internationally. On trade, for example, burgeoning “variable-geometry” groupings are tackling new issues related to “behind-the-border” regulations such as technical standards, and the blurring of the distinction between goods and services. Corporate giants’ global abuse of market power is being confronted by the extraterritorial rulings of national competition authorities. Likewise, the effective strengthening of bank capital ratios resulted not from any international law, but from the voluntary adoption of common, non-binding standards. And although the world is lagging on climate-change mitigation, the 2015 Paris climate agreement has prompted several countries to act, including by mobilizing regional and city governments, and triggering private investment in clean technologies.

But because not all global problems are alike, such mechanisms will provide a suitable template for collective action only in certain cases. When the various players are willing to act, a modicum of transparency and trust-building is sufficient to ensure cooperation. In other cases, however, the temptation to free-ride or abstain can be countered only by powerful incentives or even sanctions. 

That brings us back to the Amazon fires. The interests of Brazil and the international community are not aligned. For Brazil’s small farmers and big agri-food corporations, the economic value of the land matters considerably. But the rest of the world is mainly concerned with the rainforest’s ecological and biodiversity value. Time horizons also differ: unsurprisingly, the wealthy in the global North value the future more than the poor in the South do. Even if large segments of Brazilian society value the preservation of the rainforest, it is wishful thinking to believe that moral suasion and nudges alone will resolve differences between Brazil and its external partners.

In the case of the Amazon, the only hard instruments available are money and sanctions. Through transferring more than $1bn to the Amazon Fund since 2008, Norway already subsidizes the preservation of the environmental service that the rainforest provides to the world (it interrupted transfers in August in protest against Bolsonaro’s policies). Macron’s alternative is to coerce Brazil into valuing the environment by making trade deals and other international agreements conditional upon the country managing its natural resources in a sustainable way.

Both options are problematic. Payments open an enormous Pandora’s box and reaching a significant scale requires an agreement on who will actually bear the burden: the annual social value of carbon capture by the Amazon rainforest is hundreds of time bigger than the Norwegian transfers. Coercion also is tricky, because there is only an oblique logical relationship between deforestation and trade. But because there are no other options, solutions will probably have to involve some combination of the two. 

In time, the Macron-Bolsonaro spat may become a mere footnote. But other rows pitting global concerns against national sovereignty are sure to erupt, and the world needs to find the way to manage them.

The coming clash between climate and trade

Project Syndicate Column, 31 July 2019

The incoming president of the European Commission, Ursula von der Leyen, has laid out a highly ambitious climate agenda. In her first 100 days in office, she intends to propose a European Green Deal, as well as legislation that would commit the European Union to becoming carbon neutral by 2050. Her immediate priority will be to step up efforts to reduce the EU’s greenhouse-gas emissions, with the new, aggressive goal of halving them (relative to 1990 levels) by 2030. The issue now is how to make this huge transition politically and economically sustainable.

Von der Leyen’s program reflects growing concern over climate change among European citizens. Even before the continent’s recent heat wave, protests by high-school students and the surge in support for Green parties in the European Parliament election had been a wake-up call for politicians. Many now regard climate action not only as a responsibility to future generations, but also as a duty to today’s youth. And political parties fear that dithering could lose them support among huge numbers of voters under 40.

In truth, however, the EU (including the United Kingdom) is a minor contributor to climate change these days. Member states’ combined share of global CO2 emissions has declined from 99% two centuries ago to less than 10% today (in annual, not cumulative terms). And this figure could fall to 5% by 2030 if the EU meets von der Leyen’s emissions target by that date.

While the EU will undertake the painful task of cutting its annual emissions by 1.5 billion tons, in 2030 the rest of the world will likely have increased them by 8.5 billion tons. Average global temperatures will therefore continue to rise, possibly by 3°C or more by 2100. Whatever Europe does will not save the planet. 

How Europe deals with this frontrunner’s curse will be critical. The von der Leyen plan will inevitably cost jobs, curtail wealth, reduce incomes, and restrict economic opportunities, at least initially. Without an EU strategy for turning the moral imperative of climate action into a trump card, it won’t be tenable. A backlash will come, with ugly political consequences.

So what strategy might Europe adopt? One option is to bet on leading by example. By building an environmentally friendly development model, Europe and other climate pioneers would establish a path for others to take. And non-binding international agreements such as the 2015 Paris climate accord would help to monitor progress, thereby pushing laggard governments to act.But because climate preservation is a classic public good, climate coalitions are inherently unstable – and larger ones create even more incentive for members to defect and free-ride on others’ efforts. Leadership by example is thus unlikely to suffice.

Alternatively, Europe could build on its first-mover advantage to develop a competitive edge in new green technologies, products, and services. As Philippe Aghion and colleagues have argued, innovation can help tap the potential of such technologies and start changing the direction of economic development.

There are encouraging signs: the cost of solar panels has fallen faster than anticipated, and renewables are now more competitive than had been expected even ten years ago. Unfortunately, however, Europe has failed to convert climate action into industrial leadership. Most solar panels and electric batteries are produced in China, and the United States is its only serious competitor.

Europe’s remaining card is the size of its market, which still accounts for some 25% of world consumption. Because no global firm can afford to ignore it, the EU is a major regulatory power in areas such as consumer safety and privacy. Moreover, European standards often gain wider currency, because manufacturers and service providers that have adapted to demanding EU requirements tend to adhere to them in other markets, too.

The EU’s bet is that the combination of its own strong commitment to decarbonization and the much softer, but global, Paris climate agreement will lead firms to redirect research and investment toward green technologies. Even if other countries do not set ambitious targets, the argument goes, enough investment may be redirected to make green development more affordable for all countries.

Yet current progress in this regard is clearly insufficient to curb global emissions and keep the global increase in temperature this century well below 2°C above pre-industrial levels, as the Paris agreement stipulates. For example, global coal-powered capacity is still growing, because China and India are building plants faster than the US and Europe are dismantling them.

Europe is therefore short of tools that could make its transition to carbon neutrality economically and politically sustainable. In her first speech to the European Parliament, von der Leyen dropped a bomb: she promised to introduce a border tax aimed at preventing “carbon leakage,” or the relocation of carbon-intensive production to countries outside the EU. 

Such a tax will win applause from environmentalists, who (often wrongly) believe that trade is bad for the world’s climate. More important, the measure would both correct competitive distortions and deter those tempted to abstain from taking part in the global climate coalition. As long as there is no binding climate agreement, it does make economic sense.

Yet a carbon border tax won’t fly easily. Committed free traders (or what remains of them) will cry foul. Importers will protest. Developing countries and the US (unless it changes course) will portray the measure as protectionist aggression. And an already crumbling global trade system will suffer a new shock.

It is ironic that the new leaders of the EU, which has relentlessly championed open markets, will likely trigger a conflict between climate preservation and free trade. But this clash is unavoidable. How it is managed will determine both the fate of globalization and that of the climate.

Farewell, Flat World

Project Syndicate column, 1st July 2019

 Fifty years ago, the conventional wisdom was that rich countries dominated poor countries, and it was widely assumed that the former would continue to get richer and the latter poorer, at least in relative terms. Economists like Gunnar Myrdal in Sweden, Andre Gunder Frank in the United States, and François Perroux in France warned of rising inequality among countries, the development of underdevelopment, and economic domination. Trade and foreign investment were regarded with suspicion.

History proved the conventional wisdom wrong. The single most important economic development of the last 50 years has been the catch-up in income of a significant group of poor countries. As Richard Baldwin of the Geneva Graduate Institute discusses explains in his illuminating book The Great Convergence, the main engines of catch-up growth have been international trade and the dramatic fall in the cost of moving ideas – what he calls the “second unbundling” (of technology and production). It was Tom Friedman of the New York Times who best summarized the essence of this new phase. The playing field, he claimed in 2005, is being leveled: The World is Flat.

This rather egalitarian picture of international economic relations did not apply only to knowledge, trade, and investment flows. Twenty years ago, most academics regarded floating exchange rates as another flattener: each country, big or small, could go its own monetary way, provided its domestic policy institutions were sound. The characteristic asymmetry of fixed exchange-rate systems was gone. Even capital flows were considered – if briefly – to be potential equalizers. The International Monetary Fund in 1997 envisaged making their liberalization a goal for all.

In this world, the US could be viewed merely as a more advanced, bigger country. This was an exaggeration, to be sure. But US leaders themselves often tended to play down their country’s centrality and its correspondingly outsize responsibilities.

Things, however, have changed again: from intangible investments to digital networks to finance and exchange rates, there is a growing realization that transformations in the global economy have re-established centrality. The world that emerges from them does no longer looks flat anymore. It looks spiky.

One reason for this is that in an increasingly digitalized economy, where a growing part of services are provided at zero marginal cost, value creation and value appropriation concentrate in the innovation centers and where intangible investments are made. This leaves less and less for the production facilities where tangible goods are made.

Digital networks also contribute to asymmetry. A few years ago, it was often assumed that the Internet would become a global point-to-point network without a center. In fact, it has evolved into a much more hierarchical hub-and-spoke system, largely for technical reasons: the hub-and-spoke structure is simply more efficient. But as the political scientists Henry Farrell and Abraham Newman pointed out in a fascinating recent paper, a network structure provides considerable leverage to whoever controls its nodes.

The same hub-and-spoke structure can be found in many fields. Finance is perhaps the clearest case. The global financial crisis revealed the centrality of Wall Street: defaults in a remote corner of the US credit market could contaminate the entire European banking system. It also highlighted the international banks’ addiction to the dollar, and the degree to which they had grown dependent on access to dollar liquidity. The swap lines extended by the Federal Reserve to selected partner central banks to help them cope with the corresponding demand for dollars were a vividly illustrated the hierarchical nature of the international monetary system.

This new reading of international interdependence has two major consequences. The first is that scholars have begun reassessing international economics in the light of growing asymmetry. Hélène Rey of the London Business School has debunked the prevailing view that floating exchange rates provided insulation from the consequences of the US monetary cycle. She claims that countries can protect themselves from destabilizing capital inflows and outflows only by monitoring credit very closely or resorting to capital controls. 

In a similar vein, Gita Gopinath, now the IMF’s chief economist, has emphasized how dependent most countries were on the US dollar exchange rate. Whereas the standard approach would make, say, the won-real exchange rate a prime determinant of trade between South Korea and Brazil, the reality is that because this trade is largely invoiced in dollars, the dollar exchange rate of the two countries’ currencies matters more than their bilateral exchange rate. Again, this result highlights the centrality of US monetary policy for all countries, big and small.

In this context, the distribution of gains from openness and participation in the global economy is increasingly skewed. More countries wonder what’s in it for them in a game that results in uneven distributive outcomes and a loss of macroeconomic and financial autonomy. True, protectionism remains a dangerous lunacy. But the case for openness has become harder to make.

The second major consequence of an un-flattened world is geopolitical: a more asymmetric global economic system undermines multilateralism and leads to a battle for control of the nodes of international networks. Farrell and Newman tellingly speak of “weaponized interdependence”: the mutation of efficient economic structures into power-enhancing ones. 

US President Donald Trump’s ruthless use of the centrality of his country’s financial system and the dollar to force economic partners to abide by his unilateral sanctions on Iran has forced the world to recognize the political price of asymmetric economic interdependence. In response, China (and perhaps Europe) will fight to establish their own networks and secure control of their nodes. Again, multilateralism could be the victim of this battle. 

A new world is emerging, in which it will be much harder to separate economics from geopolitics. It’s not the world according to Myrdal, Frank, and Perroux, and it’s Tom Friedman’s flat world, either. It’s the world according to Game of Thrones.   

Europe's citizens say they want a more political EU

 Project Syndicate column, 30 May 2019

The most significant result of the recent European Parliament election is neither that conservatives and social democrats lost seats to Liberals and Greens, nor that far-right nationalists gained less than anticipated. It is that citizens voted in much larger numbers than anyone expected.

From the first popular election of the European Parliament, in 1979, to the last one, in 2014, turnout inexorably declined, gradually falling from 63% to 43%. Five years ago, less than half of the eligible electorate turned out to vote in 20 out of the European Union’s 28 member states, thereby denting the parliament’s democratic legitimacy. Observers openly questioned the value of elections that did not elicit voters’ interest. The EU, it was said, belongs to diplomats and technocrats, not to citizens.

The 2019 election was a spectacular reversal of this trend. Turnout increased in 20 countries, reaching 51% on average, or eight percentage points higher than last time. True, in some countries, the election was held simultaneously with national polls, or it was used as a vehicle for domestic political messaging. But the break with the past was too sharp and too broad for such coincidences to add up to a convincing explanation.

Granular analysis of the election results will tell us which categories of voters turned up in larger numbers, and why. In the meantime, the best explanation is that many citizens decided that enough was at stake this time to cast their ballots. As Emmanuel Rivière of Kantar, a research consultancy, has shown, motivations certainly varied: for some, it was climate change; for others, it was migration, terrorism, or Europe’s ability to remain relevant in a world of Great Power rivalry. Because they regarded the EU as a real player in these matters, voters chose to express their preferences and to send to parliament representatives who could defend their views and interests.

Something important was also at stake when the previous elections were held, in 2014. The eurozone had hardly exited its longest recession in decades, and it was still mired in austerity. But policy choices back then were largely in the hands of national governments. Whether reforms were needed, and whether bailouts were appropriate, largely split the electorate along national lines. It was a matter for negotiation between German Chancellor Angela Merkel and her counterparts, not a transnational matter that citizens would want to decide upon according to political preferences.

Climate change is different. Young people’s Fridays for Future movement has spread across borders, demanding radical change in policy and lifestyle. The same holds for migration. Those who oppose it may want to retreat behind national borders, but they know perfectly well that as far as immigration is concerned, the members of the EU’s passport-free Schengen area are in fact deeply interdependent.

If turnout followed interest in the election, the question now is what the new European Parliament can deliver. In a standard democracy, an election typically leads to the formation of a new majority and to corresponding policy changes. In the EU, however, parliament is only one player in the determination of policy, alongside the European Commission (appointed by member states) and the European Council (composed of national heads of state or government). This setup implies that there is only a weak link between elections results and policy priorities.

Furthermore, parliamentary coalitions are also characterized by inertia. By usual standards, the shift away from the center-right European People’s Party (EPP) and the center-left Socialists and Democrats (S&D), the two hitherto dominant parties, would be significant enough to trigger a change of majority: they lost 11 percentage points and 80 seats combined, to the benefit of the centrist Alliance of Liberals and Democrats (ALDE, which is in the process of merging with the Renaissance list sponsored by Emmanuel Macron), the Greens, and the right-wing nationalists (whose affiliation is still in flux). As no feasible alternative coalition commands a majority, however, it will merely imply a broadening of the current alliance, to include ALDE or both it and the Greens. The EPP and the S&D will remain the dominant players, ensuring political continuity.

Because it is not a federation, the EU cannot be run by a purely political government. But the rise of pan-European debates and the emergence of pan-European preferences that cut across national lines imply that it cannot be run by a politically deaf institution, either. Shortly after his appointment as president of the Commission in 2014, Jean-Claude Juncker famously claimed that he wanted it to be a “strong and political team” that would work on the basis of a “political contract” with the parliament. Juncker was much criticized for what was regarded as a departure from neutrality vis-à-vis national governments of various colors, but he had a point: if voters regard European policy issues as a matter for political choice, the Commission cannot be a purely technocratic body.

What this election suggests is that a growing share of European voters sees things differently from national governments. Whereas citizens clearly used their votes to express policy preferences, very few governments are ready for a more political EU leadership. Divided as they are on the end goal of European integration and confronted with nationalist pressures at home, they remain hostile to giving the EU more authority or permitting the Commission to exercise its prerogatives in a more political way. In essence, most governments nowadays stand for the status quo.

In five years however, either the EU will have delivered on what citizens rightly regard as European common goods, or it will have lost relevance and legitimacy. How to respond to this demand while satisfying governments’ preference for stability and compromises between sovereign states is the contradiction the EU is confronted to. Whether it can resolve it will, in turn, determine whether citizens remain interested in European elections, or eventually give up and stay home.

When facts change, change the Pact

Project Syndicate column, 28 April 2019

The European Union’s Stability and Growth Pact, which sets fiscal rules for its member states, is like the emperor with no clothes. Almost everyone sees it has lost its attire, yet few recognise it openly. This disingenuous silence is bad economics and bad politics.

For starters, the pact’s rules are so hopelessly complex that almost no government minister, let alone member of parliament, can decipher them. There are now various reform proposals that aim to simplify things, including by a group of French and German economists to which I belong.

Most of these proposals would place less emphasis on estimating member states’ cyclically-adjusted budget deficits – a notoriously difficult calculation – and focus instead on monitoring growth in public spending. Concretely, each government would commit to expenditures consistent with the country’s economic growth outlook and expected tax receipts, and in line with a medium-term debt target. There would be less micromanagement by EU institutions, more room for national decision-making, and more responsibility for individual governments.

 Ministers have so far shown no appetite for such radical reform. But there is now a second reason to overhaul the EU’s fiscal framework: today’s economic conditions are very different from those when the pact was designed over two decades ago. “When facts change, I change my mind,” John Maynard Keynes famously said. And the facts have certainly changed.

The pact entered into force in 1997. At the time, the median public debt among the 11 EU countries that would initially adopt the euro was 60% of GDP, while the outlook was 3% for growth and 2% for inflation (numbers are rounded for the sake of simplicity). The risk-free long-term interest rate – at which most eurozone countries would soon borrow – was 5%. Stabilizing the debt ratio at its prevailing 60% level therefore required governments to keep their budget deficits below 3% of GDP – or, put another way, to maintain a primary budget balance (revenues minus spending excluding interest payments) of zero.

Such guidelines made sense. If growth faltered, revenue shrank, or markets started pricing in a default, there would be a real risk of debt spiraling out of control – as Europe’s sovereign-debt crisis of 2010-2012 later showed. The 3%-of-GDP deficit threshold that triggers the activation of a strengthened policy monitoring procedure was thus a rough but reasonably calibrated benchmark. Moreover, it was wise to aim for significantly lower deficits, in order to maintain a safety margin.

In 2019, the median debt for the same 11 countries is 70% of GDP, while the International Monetary Fund currently forecasts 1.5% growth and 2% inflation (debt is a bit lower and growth a bit higher if all eurozone members are included). True, projected growth is half the level it was in 1997. Nonetheless, stabilizing the debt ratio requires keeping budget deficits below 2.5% of GDP, which is remains close to the pact’s 3% limit.

The big change from two decades ago, however, is the collapse in interest rates. Investors were recently willing to buy ten-year German government bonds yielding essentially nothing. Taking inflation into account, the real cost of German debt is significantly negative – as it is, to a lesser degree, for France, Spain, and most other eurozone members. Even Italy, with debt exceeding 130% of GDP and dismal growth, was able to borrow at 2.6%, or 2.4 percentage points less than Germany in 1997.

 Under such conditions, a budget-deficit limit of 3% of GDP is in fact fairly lax. If long-term interest rates remain near zero for a few more years, governments will be able to run primary deficits greater than 2% of GDP without exceeding that limit. Many EU countries are likely to use this opportunity to finance current spending on the cheap. But should financial conditions change abruptly, they will be forced to adjust precipitately.

The European Commission insists that the 3% threshold is only an upper limit. Reforms to the pact in 2010 have tightened the screws. Eurozone countries are expected to keep their structural budget deficit (corrected for cyclical effects) close to zero, and those with a debt ratio exceeding 60% of GDP are mandated to reduce it.

However, the resulting constraints are too tight. The zero target for the structural deficit prevents governments from borrowing at today’s negative real interest rates to finance investments and reforms. And, as Olivier Blanchard of the Peterson Institute has forcefully argued, there is no compelling economic reason to cut debt when borrowing is costless.

The EU sits between a rock and a hard place. It should not let member states make a habit of financing recurring current expenditures with debt. But nor should it prevent them from taking advantage of persistently low interest rates to finance economically sound investments that will benefit future generations.

Europe should therefore reform its fiscal framework. Deficit hawks (especially in Germany) will no doubt protest, but prohibition without a rationale is unsustainable politically. Why would EU citizens accept to shun debt-financed public investments into environmental research, renewable energy, clean transportation systems, and other efforts to contain climate change, when financial conditions would make such investments collectively profitable?

The pact has for long been criticized for neglecting the distinction between investment and current spending. This is valid criticism, but to the extent investment is defined economically rather than in accounting terms. The EU should therefore agree on a set of goals – such as the transition to a low-carbon economy, broader access to employment, and output-enhancing economic reforms – that justify public spending temporarily in excess of the fiscal rule (unless, of course, the country is in a financially precarious state). Such an exemption should be conditional on long-term interest rates remaining exceptionally low. If rates were to rise, governments would have to trim and eventually discontinue these investments.

The need to revise the EU’s fiscal rules is strong. The main political parties competing in May’s European Parliament elections should recognize it and make the case openly. At a time when the EU’s very purpose is being questioned, taboo economics are the last thing Europe needs.

"America will wake up", 

Interview for Die Zeit on globalisation and international collective action in the age of Trump and Xi, 17 April 2019

DIE ZEIT: Mr. Pisani-Ferry, representatives of the International Monetary Fund (IMF) and the World Bank, and the finance ministers of the G20 nations met in Washington in mid-April. They want to take steps against the economic downturn and other global problems. But international cooperation has become unfashionable, the organizations are under pressure. 

Jean Pisani-Ferry: They are under attack by powerful politicians. A certain type of politician is on the rise right now - Donald Trump in the US, Bolsonaro in Brazil, and Xi Jinping in his own way, in China. These politicians have little appetite for international collective action and they do not trust the international institutions. They see them as instruments of some global elite and as constraints on their own power. 

ZEIT: And yet you declare yourself an optimist. You of all people - a Frenchman, a one-time adviser to Macron, a European economist. You believe the global order can be saved.

Pisani-Ferry: We Europeans tend to react very defensively to this issue. It’s like we’re always acting with the same paradigm in mind: Let's preserve what we’ve got. We won't get very far with that. But in this new world, we will still need to organize collective action in some other way.

ZEIT: Do you share the view that there is something wrong with the organizations as they are?

Pisani-Ferry: Twenty years ago, I was still convinced you could tame globalization by creating institutions to this end. I was interested in finding ways to liberalize international trade while respecting workers' rights and the environment. We Europeans always believed the world only had to do things the way we did them. After all, we like to give ourselves common rules, laws, and institutions.

ZEIT: But there were doubts about this even then, they didn’t just start with Donald Trump.

Pisani-Ferry: Yes, the idea began to fail at the end of the nineties already. Plans for an international investment agreement and global competition watchdog came undone. We weren’t able to establish a global environmental organization, even the more modest Kyoto climate agreement failed. Mass demonstrations against the global order filled the streets...

ZEIT: …demonstrations that weren’t being organized by right-wing nationalists at that time.

Pisani-Ferry: Indeed. But these ideas failed above all because of the skepticism of emerging and developing countries. In their view, the superpower USA and the other Western nations had built a system that served their own interests. And they had forced the developing countries to open up every conceivable market without offering adequate quid pro quos.

ZEIT: There's a lot to be said for that, even if it entails a paradox. Many politicians in emerging countries see the IMF, World Bank, and WTO as instruments of US imperialism. And President Trump wants to weaken these institutions, as he, of all people, reckons they limit his power.

Pisani-Ferry: And both sides are not completely wrong. The USA founded these institutions in the immediate aftermath of the Second World War – in part also as instruments of US power. At the same time, the USA agreed to play by the rules of these institutions. Even a country like Bangladesh could successfully sue the all-powerful USA before the WTO’s arbitration court.

ZEIT: And Trump and many other nationalists around the world won’t accept that anymore.

Pisani-Ferry: And if they succeed, we'll have a more brutal world with even greater imbalances of power. Because experience shows that when everyone sticks to the same rules, the weakest benefit the most - even if these rules were dictated by the most powerful players.

ZEIT: You are grappling with how common rules might come about despite all the pushback.

Pisani-Ferry: We have to do that! We have huge problems, which we can only solve by acting together. Climate change, above all, but think also about the threats to biodiversity. There are threats to financial stability, there is new trade protectionism, ongoing tensions relating to migration, and cyber-security risks. All of these problems have vast numbers of global interconnections. Nation states cannot do much about them when acting on their own. 

ZEIT: But how can we act jointly in a world without global treaties and institutions?

Pisani-Ferry: I suggest we pose this question anew for each problem, for each policy area.

ZEIT: Could you give an example?

Pisani-Ferry: Though challenges still remain, we have been able to successfully take joint action against the threat of a renewed financial crisis. The crucial question is how carefully countries supervise their banks. Governments have agreed standards for this – but they’re not really binding, something we would have wanted in the past!

ZEIT: What if someone doesn't stick to what has been agreed?

Pisani-Ferry: Then there’ll be no penalties. But we do have a quite transparent monitoring system. Everyone can see which countries are in compliance and which ones aren’t. And lo and behold, other than you might think, the standards are not simply being ignored.

ZEIT: Why not?

Pisani-Ferry: Primarily out of self-interest. Each country is looking out for its own financial system, and the rules help to create stability. In parallel there is also the problem of trust.  Every country wants to be sure that no other country is giving its banks unfair advantages, for example, through lax rules. That’s why transparency can have an effect all by itself - it creates trust. Another reason standards aren’t being ignored is that the financial sector has been heavily involved in formulating them. Bankers now see them as their own rules.

ZEIT: Transparency instead of coercion - that sounds interesting. But how many problems will we be able to deal with like this? Just think of the challenges posed by climate change.

Pisani-Ferry: This is the most difficult task of all. We tried to tackle climate change through a binding international agreement, the Kyoto Protocol, and we failed with that. The Paris Agreement, which was ratified in 2016, now follows a different paradigm. Each country now sets its own targets for how much it wants to contribute to climate protection.

ZEIT: But that will simply tempt countries to do as little as possible.

Pisani-Ferry: The results are really bad at the moment, worldwide CO₂ output is still rising. But the idea is one for the longer-term. The Paris Agreement also has this transparent monitoring system built into it. Everyone knows who is doing how much for climate protection. Over time, it will become more and more obvious that much more needs to be done. The pressure will grow for countries to increase their commitments to protect the climate.

ZEIT: You’re sure about that?

Pisani-Ferry: The first countries will soon begin to really feel the effects climate change. I expect the breakthrough will come when the US changes its position about protecting the climate. America will wake up because it will be badly hit by climate change. And knowing the US, it will probably impose a tax-penalty on all imports from countries not doing enough to limit CO₂ emissions. Other countries will follow suit. There will be a "Climate Club,” like the one Nobel Laureate William Nordhaus is already promoting. Whether these steps will be big and fast enough to limit the temperature rise to below two degrees is another question.

ZEIT: You mean the global crises will intensify and there will be renewed calls for joint action?

Pisani-Ferry: Yes, although I don't see us setting up new global institutions in the near future. That would be difficult. But we still have all those existing organizations! Depending on the problem, I imagine we’ll turn to the institution that seems most suited to providing a solution.

ZEIT: Could you give an example?

Pisani-Ferry: Take the OECD ...

ZEIT: ... a club of 36 rich countries, based in Paris.

Pisani-Ferry: The OECD was founded in 1948 to manage international co-operation during the reconstruction of Europe. But today it does completely different things. It assesses the quality of national education systems, it is developing a new measure of national economic strength as an alternative to GDP, and it is an important player in the fight against tax avoidance. 

ZEIT: Did it usurp these powers?

Pisani-Ferry: Not all by itself. The EU initially wanted to tackle the problem of tax avoidance by private individuals itself, but it was stuck. EU decisions in this area have to be taken unanimously, and representatives of tax havens had blocking minorities on the responsible committees. The US set things in motion and got governments participating in a G20 summit to ask the OECD to find a solution. The result was an agreement to abolish banking secrecy.

ZEIT: Do you have other examples?

Pisani-Ferry: Yes. A few years ago, the OECD was given a new task - the so-called BEPS initiative, which is supposed to find ways to curb tax avoidance by multinational companies. This will be a tough battle against powerful interests, including those German and French companies that shift their profits to tax havens. But the public is in favor of reform. People are fed up with having to pay taxes while some large corporations pay nothing.

ZEIT: So you have already given up on that old post-war ideal of an ordered global system with numerous institutions that regulate the coexistence of the countries of the world?

Pisani-Ferry: I’m worried about it, to be quite honest. The idea is illusory that we just have to endure Donald Trump to return to the old ways when he’s gone. But we won’t help ourselves now if we invoke a lament along the lines: We no longer have a global order, so there can be no systematic solutions and we can't do anything! The latter is simply not true.

Thomas Fischermann conducted the interview. 

Europe and the New Imperialism

Project Syndicate column, 1st  April 2019 

Imperialism, Lenin wrote a century ago, is defined by five key features: the concentration of production; the merging of financial and industrial capital; exports of capital; transnational cartels; and the territorial division of the world among capitalist powers. Until recently, only dyed-in-the-wool Bolsheviks still found that definition relevant. Not anymore: Lenin’s characterization looks increasingly accurate.

A few years back, globalization was assumed to dilute market power and stimulate competition. And it was hoped that greater economic interdependence would prevent international conflict. If there were early 20th century authors to refer to, they were Joseph Schumpeter, the economist who identified “creative destruction” as a driving force of progress, and the British statesman Norman Angell who argued that economic interdependence had made militarism obsolete. Yet we have entered a world of economic monopolies and geopolitical rivalry.

The first problem is epitomized by the US tech giants, but it is in fact widespread. According to the OECD, market concentration has increased across a range of sectors, in the US as well as in Europe; and China is creating ever-larger state-backed national champions. As for geopolitics, the US seems to have abandoned the hope that China’s integration into the global economy would lead to its political convergence with the established liberal Western order. As US Vice President Mike Pence crudely put it in an October 2018 speech, America now regards China as a strategic rival in a new age of “great power competition.”

Economic concentration and geopolitical rivalry are in fact not separable. Whereas the internet was once seen as an open, universal, and competitive domain, it is now being broken up into an archipelago of separate sub-systems, some of which are administered by governments. There are growing fears that the Chinese tech giant Huawei’s dominance in 5G hardware could be used for geopolitical gain. And the German industry association BDI is now warning that China has entered into “systemic competition with liberal market economies,” and “is pooling capacities for political and economic goals with high efficiency.”

But the US, too, is repositioning, particularly in the realm of trade and investment. Recently enacted legislation has authorized the Department of the Treasury to target “strategically motivated” (read: Chinese) foreign investment that could “pose a threat to US technological superiority and national security,” suggesting that the Trump administration intends to use investment screening to protect the US’s technological edge.

China is widely accused of mixing economics with politics, but this is equally true of the US. Consider the Trump administration’s use of the dollar – what many used to consider a global public good – and of its central role in global finance to impose secondary sanctions on foreign companies doing business with Iran. As a result, SWIFT, the EU-based financial messaging service, was forced to deny access to Iranian banks or risk losing its own access to the US financial system. Likewise, under pressure from Washington, the Bundesbank last year blocked a large cash transfer to Tehran from an Iranian deposit at an Iranian-owned bank in Hamburg. Clearly, the US no longer feels any need for self-restraint in its use of monetary and financial might.

For Europe, these developments amount to a major shock. Economically, the European Union is a bellwether of the post-war liberal order: as a champion of competitive markets, it has repeatedly forced powerful foreign companies to abide by its laws. But geopolitically, the EU has always tried to keep economics and international relations separate – and thus felt at home in a multilateral, rules-based system, where the sheer exercise of state power is necessarily restrained. Nationalism and imperialism are its worst nightmares.

Europe’s challenge now is to position itself in a new landscape where power matters more than rules and consumer welfare. The EU faces three big questions: whether to reorient its competition policy; how to combine economic and security objectives; and how to avoid becoming an economic hostage of US foreign-policy priorities. Answering these will require a redefinition of economic sovereignty.

Competition policy is a matter of fierce debate. Some want to amend EU antitrust rules to enable the emergence of European “champions.” But such proposals are questionable. True, Europe needs more industrial-policy initiatives in fields like artificial intelligence and electric batteries, where it is at risk of falling behind other global powers. True, regulators issuing judgments on mergers and state aid should consider the increasingly global scope of competition. And true, static assessments of market power should be supplemented with more dynamic approaches that value innovation. But none of this changes the fact that in a world of corporate giants, we will need even stronger competition policies to protect consumers.

Economic logic and security concerns are easily conflated. A decision to reject a merger or authorize an investment that benefits a politically motivated foreign competitor might make economic sense while raising eyebrows in foreign-policy circles. The solution is not to meddle with competition rules, but to give those in charge of security some say in the decision-making process,. To that end, in a forthcoming paper that I co-authored with foreign-policy experts and other economists, we propose that the EU High Representative for Foreign Affairs and Security be given the right to object on security grounds to the European Commission’s proposed mergers or investment decisions. EU member states already have such procedures in place, and so should the EU.

Finally, the EU must do more to develop its financial toolkit and promote international use of the euro. There should be no illusion that the euro will displace the dollar. But with the US signaling that it will use Wall Street and the greenback as foreign-policy instruments, Europe can no longer be a passive, neutral bystander. Through swap lines with partner central banks and other mechanisms, tit can make the euro more attractive to foreigners while also bolstering its own economic sovereignty.

The Case for Green Realism

Project Syndicate column, 27 February 2019 

The Green New Deal promoted by Alexandria Ocasio-Cortez, a fast-rising star in the US Congress, and others among her fellow Democrats, may trigger a welcome reset of the discussion on climate-change mitigation in the United States and beyond. Though not really new – European Greens have been pushing for such a “new deal” for a decade – her plan is ambitious and wide-ranging.

It may be too ambitious and wide-ranging. But, unlike economists’ favorite approach to climate change – set the right price for carbon and leave the rest to private decisions – the Green New Deal rightly encompasses the many dimensions of what must be a fundamental transformation of our economies and our societies if the climate challenge is to be met successfully.

The transition to a carbon-neutral economy is bound to be as revolutionary as the transition to the industrial age. Given the comprehensive nature of this transition, it cannot be summarized in one price. It must be a collective endeavor in which governments invest and every citizen finds his or her role. The optimistic, participatory ethos of the Green New Deal should be commended.

But let’s be clear: the green transition will not be a free lunch. There is no doubt that life and work will be far better if we succeed in containing climate change than if we fail, which is the rationale for undertaking the corresponding efforts. Yet that is not the question many citizens are asking. Their baseline expectation – unrealistic, but understandable – is a business-as-usual scenario in which they continue to consume and travel according to their current habits. They may accept eating a little less meat and using more efficient cars, provided their purchasing power does not change. And they may wish to change jobs, if the new one is better paid and less stressful. But there is little evidence that most citizens are ready for more.

Understandably, Green New Deal supporters tend to pander to these feelings. The Ocasio-Cortez proposal is vague enough to evade precise criticisms, but what is evident is that it does not put a finger on anything that may hurt. The same applies to many plans that promise a nicer life together with more and better jobs 

The truth is unfortunately quite different. The transition to a carbon-neutral economy is bound to make us worse off before it makes us better off, and the most vulnerable segments of society will be hit especially hard. Unless we acknowledge and address this reality, support for greening the economy will remain shallow and it may eventually wane.

The reason brings us back to the economists’ favorite instrument: prices. One way or another, we must start paying for something – carbon – that we have been consuming for free. And putting a price on carbon is bound to reduce overall consumption. 

The cause is not the tax, the proceeds of which can be redistributed to taxpayers, for example, on a per capita basis, as an impressive group of US economists has proposed. It is rather that putting a price on carbon inevitably will result in what economists call a negative supply shock. Some equipment will become unusable, and some technologies will no longer be profitable. Maximum production (what economists call potential GDP) will drop on impact. If the price hike is abrupt, a slump will follow, as occurred in 1974, when oil producers suddenly hiked prices. A corollary is that wealth drops as the value of fuel-inefficient houses, gluttonous cars, and oil companies’ shares declines.

The problem does not come from the use of a price instrument. It would be the same in a planned economy: carbon efficiency would also require old, inefficient equipment to be discarded and additional investment so that GDP becomes less carbon-intensive. With recent estimates putting the required additional investment at some 2% of GDP annually in 2040, a correspondingly smaller share of output will be available for household consumption.

Furthermore, the distributional effects of the green transition are unfortunately adverse. The poor and the suburban middle class spend more of their income on energy than the rich and the urban professionals do, and often lack the means to buy a new, efficient heating system or to insulate their house. And, because working-class jobs tend to be more carbon-intensive, factory workers and truck drivers will be hurt more than designers and bankers.

The problem our societies are facing is massive. It should not be hidden. The French government had to backtrack after the Yellow Vests revolted against a €55 ($63) per ton fuel tax, but a recent estimate of what its needed to decarbonize put the rate at €250 per ton in 2030. European countries, already agonizing over increasing their defense spending to 2% of GDP, as US President Donald Trump has demanded, now face the prospect of paying another 2% for the transition to a carbon-free economy. For decades, people have been given incentives to move from city centers to the suburbs, and now they are being told that their lifestyle has no future.

Fortunately, these effects can be softened. The full redistribution of carbon tax proceeds can alleviate the burden on the most vulnerable. In an environment of ultra-low interest rates, debt finance is a rational way to accelerate economic transformation while spreading the corresponding cost across generations. As the astonishing drop in the cost of solar panels suggests, the fostering of innovation and competition will help accelerate the emergence of clean, efficient technologies. And the earlier action is taken, and the more predictable the long-term outlook, the easier it will be to adapt, and the less adverse the impact on production and wealth will be. Abrupt changes devalue existing assets, while a smooth transition enables the right investments at the right time. 

That said, realism compels us to recognize that nothing can fully eliminate the hardship involved in the transition. To win, Green New Deal enthusiasts must be honest with citizens about what the coming transformation will entail, how its costs will be minimized and equitably shared, and what role they can play in it. Rather than to picture their scenario as rosy, they should show that it is feasible.  

Interview El Mundo, 2 September 2018

PREGUNTA.­ El año 2017 fue un momento muy tenso. Hubo elecciones muy tensas en Francia, Holanda, Alemania, el inicio de Brexit. Como no acabó tan mal, llegó la Euforia. ¿Dónde estamos realmente? 

RESPUESTA.­ Lo que estamos viviendo es algo que no se va a arreglar con una o dos elecciones. Estamos ante una redefinición fundamental sobre Europa y el futuro de la economía libre y las sociedades abiertas. Se ve por todas partes, no sólo en Europa, aunque aquí es muy acuciado. No hablamos de un mero ciclo electoral, por eso hace falta claridad al definir las posiciones. Esto va a seguir durante un tiempo, posiblemente un largo tiempo, con nosotros. La dimensión que más nos afecta es la de la discusión de qué es Europa y qué queremos que sea. Como economista diría que es un debate sobre los bienes públicos. En la UE todo empezó con la noción de paz y prosperidad como piedras angulares. 

P.­ Pero eso ya no basta. 

R.­ No, ya no basta. Con la paz ya no vamos a convencer no le digo a las nuevas jóvenes generaciones, sino tampoco a las actuales. No es suficiente decir que el objetivo de Europa es evitar la guerra entre Francia y Alemania. Porque gente dirá que muy bien, pero no es un tema de hoy. Sobre la idea de prosperidad, el resultado de estas décadas es aún más agridulce. 

P.­ Ahora se escuchan muchas otras preguntas. 

R.­ Exactamente, hay nuevas preguntas emergiendo. Una es el cambio en el contexto globalizado, algo que se ve muy bien con la actitud de Trump, con la asertividad china, y lo que llamamos the raise of the rest, el auge del resto del mundo, que hace 25 años representaban el 40% del PIB mundial y hoy son el 60%. La UE nació bajo la protección del paraguas estadounidense y fue forjada en un mundo donde el liderazgo norteamericano no era discutido. Las cosas han cambiado y el mensaje de Trump es que EEUU es cada vez más reacia a comportarse como el ancla del orden económico, político y de seguridad mundial. Está diciéndolo alto y claro, de una manera chocante, pero el mensaje estaba ahí ya con Obama. Por tanto, no deberíamos asumir que las cosas volverán a la normalidad. Tenemos que cuidar de nuestros propios intereses y luchar por los valores en los que creemos. 

P.­ El migratorio e identitario va a ser el gran debate durante al menos una generación.