Columns, Op-Eds & Interviews

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.

R.­ Mire, no va a ser suficiente, sin duda algunos otros asuntos tienen importancia capital. Pero se proporcionaría la base, es algo con lo que empezar y debemos asegurarnos de que funcionan. No nos podemos permitir otra eurocrisis teniendo un sistema tan poco sólido. Necesitamos mecanismos de defensa más fuertes, a prueba de terremotos, de muchos tipos de terremotos. Un Fondo de Garantía de Depósitos, la reforma del Mede, una función de estabilización, todos elementos que no tenemos aún. Ha habido progresos, pero el mayor riesgo de la próxima crisis será el político.

P.­Hace unos años, Obama le dijo a Europa que despertara, que «los mejores carecen de convicciones y los peores están cargados de apasionada intensidad». Las pasiones iliberales están sin duda al alza.

R.­ No deberíamos llamarlos iliberales porque suena demasiado bien en algunas partes de Europa. Democracia iliberal es un oxímoron, porque la soberanía popular sin el Estado de Derecho y el imperio de la ley no es democrática. Me gusta más la definición de autócratas electos o autócratas votados, que es algo muy diferente de democracias iliberales. Lo prefiero porque estos líderes no parecen muy democráticos. No debe haber confusión: la democracia iliberal no es una democracia sin liberalismo económico, es soberanismo populista sin liberalismo político.

P.­ En 2015, con la crisis griega, los grandes líderes se tomaban la cuestión del dinero muy a pecho. Eso no pasa frente a la retórica antiinmigración o antiislámica de esos autócratas de los que habla. No hay contundencia de sus colegas, sino lo contrario.

R.­ Estoy de acuerdo. Cuando veo que el Partido Popular Europeo felicita y apoya a Orban por sus éxitos veo que hay algo roto en el funcionamiento del sistema de partidos europeo. Así son los realineamientos políticos de hoy y veremos más. Los partidos se han definido históricamente por una serie de líneas divisorias claras, pero eso es algo del pasado. Lo que no se ha fijado aún, pero quizás en las próximas elecciones se haga, es cuáles son las verdaderas líneas divisorias del presente.

P.­ Los líderes europeos han mantenido un discurso proeuropeo, pero bastante calculado, utilitario. Macron o Mattarella inciden más en los valores, la unidad, los símbolos.

R.­ Puedo responder pensando en Francia. Durante mucho tiempo estuvo claro que tanto la derecha como la izquierda estaban divididas sobre europea, con visiones no antieuropeas pero al menos escépticas. No querían crearse problemas y por eso no hablaban abiertamente de Europa, no a favor. Cuando Macron fue elegido lo hizo. Sin complejos. Sus votantes agradecieron que después de tanta timidez alguien hablara directamente de las cosas en las que ellos creen y se enfrentara a los críticos, que son mucho más claros. Europa no es perfecta, nadie dice que no haya cosas que criticar, cambiar, suprimir. Pero durante demasiado tiempo se han callado antes quienes decían que hay que terminar con la UE, volver al sistema de sólo naciones­estado y que sólo ellos nos pueden proteger. Igualmente, Europa ha sido demasiado indiferente a las consecuencias de algunas de las políticas por las que ha apostado o que ha impulsado.

P.­ Vemos movimientos de protesta o descontento en países ricos o algunas de las regiones más ricas, como Cataluña o Lombardía.

R.­ En cierto modo, el contexto en el que vivimos, la globalización, nos fuerza a repensar el papel de cada nivel de gobierno. Local, regional, nacional y supranacional. Las estructuras existentes son cada vez más frágiles y hay sudas sobre las relaciones entre los niveles. En cada país hay dimensiones históricas. La gente quiere más proximidad, pero al mismo tiempo quiere ser presentada, escuchada y activa.

P.­ Eso, en sí, no es muy nuevo

R.­No, pero era algo que antes surgía de dentro y ahora está surgiendo, se ve impulsado, desde fuera. Las últimas décadas hemos estado en un entorno exterior muy tranquilo. Con EEUU protegiendo, incluso en la Guerra Fría con todos sus matices. Tuvimos una ampliación al Este que fue un éxito, a pesar de los problemas. Compare lo que pasa ahora en Polonia y Hungría con Ucrania o la ex Yugoslavia. La transición fue magnifica. Pero ahora el entorno es muy diferente.

P.­ ¿Cómo ve el futuro? ¿Una UE más pequeña? ¿Más larga? ¿Que no haya UE?

R.­ Tenemos un problema de entorno, hay que buscar nueva forma de lidiar con los vecinos. No vamos a expandirnos significativamente en los próximos años, así que hace falta nueva una relación con los vecinos, incluyendo Reino Unido.

P.­ ¿Está preocupado, asustado, afectado por Europa?

R.­ Estoy preocupado. Estamos ante una de esas instancias en las que o eres capaz de redefinirte o puedes perder su importancia, tu relevancia en el mundo. Si la UE no es capaz de responder a las preguntas clave en seguridad, en economía, en la protección de los datos de los ciudadanos, en el clima, asuntos de relevancia...

P.­No le gustan los plazos, pero, ¿qué margen hay para actuar?

R.­Tiene que ser antes de las elecciones europea de 2019. Si no logramos nada importante antes, será un revés terrible.

Europe could miss its opportunity for political realignment

Project Syndicate column, September 2018

“There are two sides at the moment in Europe. One is led by Macron, who is supporting migration. The other one is supported by countries who want to protect their borders”. This is how Viktor Orbán, the Hungarian Prime Minister, described the European political landscape on the occasion of his end-August meeting with the Lega’s Matteo Salvini, the strong man in the Italian government. “If they want to see me as their main opponent, they are right” instantly replied the French president.

Both Orbán and Macron seem to think that the European Parliament election in 2019 will bring about a political realignment. But will it happen? Will the continent’s voters be presented with a choice between the closed and the open society? Or will the traditional divide between left and right obfuscate it? The answer to this question – which is central to the future of Europe and its citizens’ trust in democracy – is far from certain.

Europe’s political landscape offers a peculiar combination of idiosyncrasy and commonality. On one hand, it illustrates the maxim that “all politics is local”: parties are deeply rooted in national traditions and pan-European groupings are only loose, non-influential federations. On the other hand, political spillovers are strong, and waves of change regularly cross borders, reaching the entire continent.

European politics has long been structured by the left-right divide. From the first popular election to the European parliament, in 1979, until the latest one, in 2014, the Party of European Socialists (PES) on the left and the European Peoples’ Party (EPP) on the right jointly received between one-half and two-third of the vote (with the rest going to centrists, the Greens, the radical left, and, increasingly, a new breed of Euroskeptic parties). For 40 years, the two dominant players have governed Europe through a grand coalition of sorts.

In more than a handful of countries, however, this divide no longer structures the political scene. In Poland, Hungary, and most of Central Europe, the key confrontation is between illiberal nationalists and pro-European liberals. In France, the choice in 2017 was not between left and right, but between Emmanuel Macron, the champion of openness (whose campaign I advised), and Marine Le Pen, his exact opposite. And in Italy, both center-right and center-left forces have been marginalized by two new anti-system parties with roots in the far right and the far left.

Indeed, today’s most divisive issues – economic openness, Europe, and immigration – do not pit the center left and the center right against each other. Both camps have embraced globalization, although they may have different views about how to manage its consequences. Both have also been active, if reluctant, participants in European integration. And while their attitudes toward immigration differ, in Western Europe both have accepted it as a fact. Choosing between left and right does not enable citizens to uphold or reject the open economy and the open society. Both actually seem clueless when it comes to empowering disenfranchised working-class citizens, whereas the proponents of identity politics offer at least the guise of a response.

True, the left-right cleavage remains salient in many countries. It also structures the debate on domestic issues such as income distribution and the role of the state, as well as on some of tomorrow’s major challenges, such as global taxation or the future of work. But as British politics vividly illustrates, this does not apply to currently dominant issues: the Tories and Labour are the only protagonists, yet both agonize over the choice that really matters – how to manage Brexit.

For next year’s European Parliament election to bring greater clarity on the issues that matter for Europe, new camps would need to be formed. Despite cracks on both sides, they most likely won’t.

The left has largely split between a (much weakened) moderate wing and a radical, partly anti-European tendency. The question now is if the dikes that separate the latter from the nationalist right will be breached. The Italian governing coalition hints at such a scenario, while the increasingly anti-immigration stance of Sahra Wagenknecht of Die Linke (the Left) and fiercely anti-European diatribes by Jean-Luc Mélenchon of La France Insoumise (France Unbowed) suggest that some radical leftists would rather lose their souls than the working class. But the if the dikes are being undermined, they haven’t been breached.

On the right the EPP, the party of Angela Merkel, has refused to draw a red line and tell an increasingly nationalist, illiberal, anti-Muslim, and even anti-Semitic Viktor Orbán that he has crossed it. Unapologetically, Orbán now claims that he is the true heir of Helmut Kohl and represents the core of the EPP. In a speech in June, he set himself the task of renewing the party by taking it back to its Christian roots. As a result, the EPP will go to the election as an odd coalition comprising advocates of Europe and nationalists, liberals and illiberals, or supporters of diversity and proponents of Christian identity.

For the old structures to unravel, a strong voice for Europe and openness should emerge. There has been much speculation that Macron would play this role. But obstacles have appeared. Reforms at home and the strengthening of a domestic political base are more than enough to occupy a man who gained power without the support of a party. His efforts to secure a reform of the eurozone have been frustrated by the delayed formation of the German coalition and the loss of Italian as a partner. Moreover, the asylum battle that Merkel has courageously fought is being lost: two years after claiming that Germany was strong enough to open its borders, she suffered a severe electoral setback, followed by tensions within her coalition and retreat on the European front. This prevents the would-be champions of openness from speaking up with enough clarity on a defining issue. The key question now is whether Macron can still hope to disrupt European politics, or must acknowledge the dominance of the powers that be and settle on an alliance.

As things stand, the chances seem high that the May 2019 election end up in a series of obscure, highly tactical fights. This would be bad for democracy because at such a critical juncture, citizens deserve to be offered clear options on the issues that matter; and it would be bad for Europe, because this would further undermine its legitimacy at the very moment when it needs to redefine itself. The next nine months will decide if this grim scenario can still be prevented.

Is Europe America's Friend or Foe?

Project Syndicate Column, August 2018

Since Donald Trump became US president in January 2017, his conduct has been astonishingly erratic, but his policies have been more consistent than foreseen by most observers. Trump’s volatility has been disconcerting, but on the whole he has acted in accordance with promises made on the campaign trail and with views held long before anyone considered his election possible. Accordingly, a new cottage industry in rational theories of Trump’s seemingly irrational behavior has developed.

The latest challenge for this industry is to make sense of his stance towards Europe. At a rally on June 28, he said: “We love the countries of the European Union. But the European Union, of course, was set up to take advantage of the United States. And you know what, we can’t let that happen.” During his recent trip on the continent, he called the EU “a foe” and said it was “possibly as bad as China”. On Brexit, he declared that PM May should have “sued” the EU. Then came the truce, on 25 July: President Trump and Jean-Claude Juncker, the president of the European Commission, agreed to work jointly on an agenda of free trade and World Trade Organization reform.

So it seems we are friends again. Or perhaps just resting before the dispute resumes. But the deeper question remains: Why has Trump repeatedly attacked America’s oldest and most reliable ally? Why is it that he seems to despise the EU so strongly? Why should the US try to undermine Europe, rather than seeking closer cooperation to protect its strategic economic and geopolitical interests?

This is particularly striking given that China’s rapid emergence as a strategic rival is America’s main national security issue. Contrary to earlier hopes, China is converging with the West neither politically nor economically, because the role of the state and the ruling party in coordinating activities remains far greater. Geopolitically, China has been actively building clienteles, most visibly through its Belt and Road Initiative, and it intends to “foster a new type of international relations” that departs from the model promoted by the US in the twentieth century. Militarily, it has embarked on a significant build-up. It does not take a master strategist to realize that China, not Europe, is the number one challenge to US world supremacy.

Former President Barack Obama’s China strategy combined dialogue and pressure. He started building two mega-economic alliances that excluded China and Russia: the Trans-Pacific Partnership with 11 other Pacific Rim countries, and the Transatlantic Trade and Investment Partnership with the European Union. But Trump withdrew the US from the TPP and killed the TTIP before it was born. Then he opened a trade rift with the EU. And he has attacked both the EU and its member states, especially Germany.

Forget the negotiation style. On substance, there are three possible explanations to this stance. One is that it reflects Trump’s peculiar obsession with bilateral trade balances. According to this view, Trump regards Germany and Europe as equally threatening competitors as China. Nobody but him thinks this makes economic sense. And the only result he can expect from this strategy is to hurt and weaken the long-standing Atlantic partnership. But he has been complaining about Mercedes cars in the streets of New York City at least since the 1990s.

A second explanation is that Trump wants to prevent the EU from positioning itself as the third player in a trilateral game. If the US intends to turn the relationship with China into a bilateral power fight, there are good reasons for it to regard the EU as an obstacle. Because it is itself governed by law, the EU is bound to oppose a purely transactional approach to international relations. And a united Europe that commands access to the world’s largest market is not a trivial player. But after the EU has been undermined, if not disbanded, weak and divided European countries would have no choice but to rally behind the US.

Finally, a more political reading of Trump’s behavior is that he is seeking regime change in Europe. In fact, he has not disguised his belief that Europe is “losing its culture” because it has let immigration “change its fabric.” And Stephen Bannon, his former chief strategist, has announced that he will spend half of his time in Europe to help build an alliance of nationalist parties and win a majority in next May’s European Parliament elections.

A few weeks ago, only the first reading looked plausible. The other two could be dismissed as fantasies inspired by conspiracy theories. No US president ever presented the EU as a plot to weaken the US. Indeed, all of Trump’s postwar predecessors would have recoiled in horror at the idea of the EU’s dissolution. But the US president has gone too far for Europe to brush off the more dismal scenarios and settle for the comforting explanation.

For the EU, this is a pivotal moment. In the 1950s, it was launched beneath the US security umbrella and with America’s blessing. Since then, it has been built as a geopolitical experiment conducted under US protection and in the context of a US-led international system. For this reason, its external dimensions – economically, diplomatically, or regarding security – have always come second to its internal development.

What the recent crisis signifies is that this is no longer true. Europe must now define its strategic stance vis-à-vis a more distant, and possibly hostile US, and vis-à-vis rising powers that have no reason to be kind to it. It must stand for its values. And it must urgently decide what it intends to do for its security and defense, its neighborhood policy, and its border protection. This is an acid test.

Economically, the EU still has the potential to be a global player. The size of its market, the strength of its major companies, a unified trade policy, a common regulatory policy, a single competition authority, and a currency that is second only to the dollar only are major assets. It could – and should – use them to push for a revamping of international relations that addresses legitimate US grievances vis-à-vis China and legitimate Chinese concerns over its international role. Europe has played a leading role in fighting climate change; it could do the same for trade, investment, or finance.

Europe’s main problem is political, not economic. The challenge it is facing comes at a moment when it is divided between island and continent, North and South, and East and West. And the questions posed are fundamental ones: What defines a nation? Who is in charge of borders? Who guarantees security? Is the EU based on shared values or on the pure calculus of national interests?

If the EU fails to define itself for a world that is fundamentally different from that of ten years ago, it probably will not survive as a meaningful institution. If it does, however, it may regain the sense purpose and legitimacy in the eyes of citizens that years of economic and political setbacks have eroded.

Europe should avoid a no-deal Brexit

Joint op-ed with Norbert Röttgen, André Sapir, Paul Tucker and Guntram Wolff, 23 July 2018 (The Times, FAZ, Figaro, NRC Handelsblatt, Corriere della Sera, El Mundo)

In June 2016, British citizens voted to exit from the EU. During two years, negotiation on the terms of the divorce made progress, but not the equally important design of the future relationship. Over the same period, the shifts underway in the global geopolitical landscape have intensified, taking us towards a world in which regional relationships might matter more than ever.

Earlier this month, the UK government finally tabled a serious proposal for the country’s future relationship with the European Union.

The substance of the UK government White Paper is worth considering constructively. First, it sets out what the UK wants and what it does not want. Second, it aims to take into account political and legal constraints on both sides. Third, it is detailed enough to allow precise discussions. Finally, it recognises that both parties share a common interest in preserving strong economic and security ties.

On goods, the UK proposal can be thought of as a 21st century Free Trade Agreement where rules of origin are replaced by a new and sophisticated customs cooperation regime and common regulation for specific products. It is an idea worth exploring, though there are devilishly complex issues to negotiate. In particular, it must work well enough to avoid the reemergence of tensions in Ireland. Also, any innovative customs agreement will require strictness in implementation: the latest report by the EU anti-fraud office provides embarrassing evidence of UK-based fraud.

On services things are less clear. The White Paper is unequivocal that the UK won’t enjoy full access to the European single market but it aims at a "deep" relationship. What this means is up for discussion and the quid pro quos are not always clear. The White Paper includes principled but vague and non-committal statements about future regulation in the UK. Difficult negotiations lie ahead.

On labour mobility, the EU must decide whether to stick to the line that access to the single market, even for a limited set of products, is unacceptable in the absence of full labour mobility. The doctrine known as the inseparability of the four freedoms (for goods, services, capital and labour) is not based on solid legal or economic foundations but it has served as a basis for political agreement between the 27 and is embedded in treaties with third countries like Norway or Switzerland. Admittedly, any change to this doctrine would likely have implications for the EU’s relation with these two countries as well.

On governance, the White Paper is making some significant concessions. The proposed arrangement would involve political dialogue and technical comitology, without the UK having a formal vote, as well as recognition that UK courts would have to pay due regard to the case law of the European Court of Justice. Both will be hard to swallow for some in the UK, but something like them is inevitable if the UK is to have access to some elements of the single market: market integration requires regulatory consistency and the unavoidable truth is that the EU is, and will remain, a significantly more powerful regulator than the UK due to its relative size.

Because it is structured around goals rather than red lines, and because it is detailed and sophisticated, the White Paper puts the ball in the EU court. Until now, the EU has not produced anything similar. So far, the Commission has, understandably, kept a tough line. It did not want to start discussing the future relationship before the basic terms of the divorce had been settled, and it did not want to show its cards before the UK had said what it was ready to commit to. Indeed, it would have been foolish for the 27 to start making concessions when the possibility of a regulatory race to the bottom could not be ruled out and the UK was still discussing with itself.

The UK White Paper could be a game changer. But for this to happen, the UK will have to be able to bring its current internal dispute to a conclusion and pass a deal that commands the necessary parliamentary support. The EU, in turn, will need to take a long-term view and say what kind of relationship it wants to establish with its neighbour.

Europe (of which the UK will obviously remain part) is at crossroads. It faces much bigger economic, diplomatic and security challenges than most imagined even two years ago. Neither Mr. Putin nor Mr. Trump nor Mr. Xi have sympathy or benevolence towards us. Nor does Mr. Erdogan. So it’s no time for Europe to inflict wounds on itself.

What should the 27 stance be? We think that they should neither stick to rigid positions nor hide behind red lines. They should not pretend that only off-the-shelves solutions are available for building a relationship with Britain. Instead, they should seek and obtain:

  • Serious guarantees on the implementation and the enforcement of the proposed customs arrangement for goods;
  • Serious guarantees on a lasting overall regulatory approximation and convergence;
  • Clarity about the way ECJ judgments would be applied in matters pertaining to the functioning of integrated markets;
  • Safeguard clauses - including a say 10-year probation period that would make the future agreement reversible if the UK were to opt for regulatory competition.
  • A financial contribution to the EU budget commensurate with the depth of the relationship.

Negotiating such a deal is likely to be a difficult process that might well be impossible to achieve over the next few months. But agreeing on a direction should be possible by the autumn. And a two-year transition period until the end of 2020, during which the UK would stay in the single market and the customs union, would allow for negotiating a sensible relationship for the future that is in the geostrategic interests of everyone in this part of the world.

All authors write in a personal capacity. Jean Pisani-Ferry is Professor at European University Institute and Mercator senior fellow at Bruegel, Norbert Röttgen is Member of German Parliament, André Sapir is Professor at Université libre de Bruxelles and senior fellow at Bruegel, Paul Tucker is fellow at Harvard Kennedy School, Guntram Wolff is Director of Bruegel.

Can Multilateralism Adapt?

Project Syndicate Column, July 2018

Rewind to the late 1990s. After an eight-decade-long hiatus, the global economy was being reunified. Economic openness was the order of the day. Finance was being liberalized. The nascent Internet would soon give everyone on the planet equal access to information. To manage ever-growing interdependence, new international institutions were developed. The World Trade Organization was brought to life. A binding climate agreement, the Kyoto Protocol, had just been finalized.

The message was clear: globalization was not just about liberalizing flows of goods, services and capital but about establishing the rules and institutions required to steer markets, foster cooperation, and deliver global public goods.

Now fast-forward to 2018. Despite a decade of talks, the global trade negotiations launched in 2001 have gotten nowhere. The Internet has become fragmented and could break up further. Financial regionalism is on the rise. The global effort to combat climate change rests on a collection of non-binding agreements, from which the United States has withdrawn.

Yes, the WTO is still there, but it is increasingly ineffective. US President Donald Trump, who does not hide his contempt for multilateral rules, is attempting to block its dispute settlement system. The United States pretends against all evidence that imports of BMWs are a threat to national security. China is brutally ordered – outside any multilateral framework – to import more, export less, cut subsidies, refrain from purchasing US tech companies, and respect intellectual property rights. The very principles of multilateralism, a key pillar of global governance, seem to have become a relic from a distant past.

What happened? Trump, for sure. The 45th US president campaigned for the job like a bull in a China shop, vowing to destroy the edifice of international order built and maintained by all of his predecessors since Franklin Roosevelt. Since taking office, he has been true to his word, withdrawing from one international agreement after another and imposing import tariffs on friends and adversaries alike.

Still, let’s face it: today’s problems did not start with Trump. It was not Trump who, in 2009, killed the Copenhagen negotiation on a climate agreement. It was not Trump who is to blame for the failure of the Doha trade round. It was not Trump who told Asia to secede from the global financial safety net managed by the International Monetary Fund. Before Trump, problems were dealt with more politely. But they were there.

There is no shortage of explanations. An important one is that many participants in the international system are having second thoughts about globalization. A widespread perception in advanced countries is that the rents from technological innovation are being eroded precipitously. The US factory worker of yesterday owed his standard of living to these rents. But as the economist Richard Baldwin brilliantly shows in The Great Convergence, technology has become more accessible, production processes have been segmented, and many of the rents have gone.

A second explanation is that the US strategy toward Russia and China has failed. In the 1990s, Presidents George H.W. Bush and Bill Clinton thought that the international order would help transform Russia and China into “market democracies.” But neither Russia nor China have converged politically. As far as the economy is concerned, China is converging in terms of GDP and sophistication but its economic system remains apart. As Mark Wu of Harvard argued in a 2016 paper, although market forces play a strong role in its economy, coordination by the state (and control by the Communist Party) remains pervasive. China has invented its own economic rules.

Third, the US is unsure that a rules-based system offers the best framework to manage its rivalry with China. True, a multilateral system may help the incumbent hegemon and the rising power avoid falling into the so-called “Thucydides’ trap” of military confrontation. But the growing perception in the US is that multilateralism puts more constraints on its own behavior than on China’s.

Finally, global rules look increasingly outdated. Whereas some of their underlying principles – starting with the simple idea that issues are addressed multilaterally rather than bilaterally – are as strong as ever, others were conceived for a world that no longer exists. Established trade negotiation practices make little sense in a world of global value chains and sophisticated services. And categorizing countries by their development level is less and less helpful, given that some of them combine first-class global companies and pockets of economic backwardness. But inertia is considerable, if only because consensus is required to change the rules.

So what should be done? One option is to preserve the existing order to the extent possible. This was the approach adopted after Trump withdrew the US from the Paris climate agreement: the other signatories continue to abide by it. The advantages of this approach are that it contains the damages from one country’s peculiar behavior. But, to the extent that the US attitude is a symptom, the conservationist approach does not address the disease.

A second option is to use the crisis as an opportunity for reform. Initiative should come from the EU, China, and a few others – including, one hopes, the US at some point. It would require to salvage those aspects of the old multilateralism which remain useful but fuse them into new arrangements that are more flexible, more appropriate for a new world with different problems – and fair. This strategy would have the advantage of identifying and absorbing the lessons offered by the exhaustion of traditional arrangements and the burgeoning of new ones. But is there enough leadership and enough political will to go beyond empty, face-saving compromises? The downside risk is that failed reform could lead to a complete unraveling of the global system.

In the end, the solution is neither to cultivate the nostalgia of yesterday’s order nor to place hope in loose, ineffective forms of international cooperation. International collective action requires rules, because flexibility and goodwill alone cannot tackle hard problems. The narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions. For those who believe that such a path exists, there is no time to lose in finding it.

Mattarella's Line in the Sand

Project Syndicate Column, June 2018

A deep political crisis has erupted in Italy since President Sergio Mattarella’s refusal to appoint Paolo Savona, a declared Euroskeptic, as minister of economy and finance in the coalition government proposed by the leaders of the Five Star Movement (M5S) and the League, the two anti-system parties that emerged as winners of the March general election. Savona had openly advocated preparing a “plan B” for euro exit, and Mattarella argued that his appointment could have provoked precisely that outcome.

Mattarella’s decision immediately provoked a furor. M5S leader Luigi di Maio called for the president to be impeached (he later withdrew this request). The League’s Matteo Salvini called for new elections, which he said would be a referendum on the freedom or slavery of Italy. And in France, Marine Le Pen, the far-right leader who campaigned for the French presidency last year on a promise to leave the euro, denounced what she called a “coup d’État.”

This is not the first time that continued euro membership has become a major political issue. In Greece in 2015, it was implicitly at least part of the debate over the acceptance of the conditions for financial assistance. In France in 2017, Le Pen and Emmanuel Macron explicitly debated it during the presidential campaign. But this is the first time that the euro has been the direct source of a legal dispute over the appointment of a government.

Financial markets have responded with anxiety, triggering a sudden rise in government bond rates. But, first and foremost, the crisis raises an issue of interpretation. Does Mattarella’s decision mean that voters cannot call into question euro membership? What is the resulting scope for democratic choice? These are fundamental issues of far-reaching consequence for all European citizens.

Mattarella was explicit about his motivations. He did not object to Italians’ right to question euro membership, but he argued that this required an open debate, based on serious, in-depth analysis, whereas the issue had not been brought up in the electoral campaign. As Prime Minister-designate Giuseppe Conte and the party leaders behind him refused to propose any other candidate for the post, the president concluded that his constitutional duty was to refuse to endorse the appointment.

In doing so, Mattarella drew a line separating constitutional choices from political choices. His logic was that political choices can be made freely by a government that commands a parliamentary majority, and that the president has no right to question such choices. Constitutional choices, by contrast, require a different type of decision-making procedure – one that ensures that voters are adequately informed about the potential consequences of their decision. Absent such a debate, Mattarella reasoned, the president’s duty is to preserve the status quo and to prevent a consequential choice from being driven by self-fulfilling market expectations.

As a matter of principle, this distinction makes considerable sense. In virtually all democracies, constitutions protect fundamental human rights, define the nature of the political regime, and assign responsibilities to the various levels of government. These provisions cannot – fortunately – be changed by a simple majority vote in parliament. Constitutions can be amended, of course, but often only slowly, and always only by a super-majority or, in some countries, a referendum. This inertia guarantees citizens that their deep preferences will be upheld.

This raises two questions. First, which are the truly constitutional matters? In Europe, membership in the EU is part of many countries’ fundamental law. Exit cannot be decided by parliament through ordinary procedure. But the constitutional scope is broader: legally speaking, all provisions of the EU treaties fall within it. And this is where the trouble starts. It would obviously be absurd to object to a political debate over EU treaty provisions regarding, say, fisheries or telecoms. Or, even, the fiscal framework. Such provisions should belong to ordinary legislation (to define this distinction more clearly was one of the goals of the failed constitutional treaty of 2005). But instead of providing a precise delineation, the legal frontier between constitutional and ordinary provisions creates political confusion. Citizens can be forgiven for not having a clear idea of what belongs to which category.

Second, what type of decision procedure should apply to truly constitutional choices? Article 50 of the Treaty of Lisbon, as we have seen, enables the EU to decide how to manage the United Kingdom’s decision to leave. But most countries do not have an article in their own constitution that defines how to decide whether to terminate EU or euro membership. The UK’s reliance on a simple majority referendum to end a 55 years-old partnership was dubbed by Harvard’s Ken Rogoff “Russian roulette for republics,” because the bar was low and because the procedure did not include the checks and balances that such a consequential decision should have required.

As long as membership in the EU and the euro commanded wide consensus, these distinctions were a matter of interest only for legal experts. This is no longer the case, and the debate about them is unlikely to end soon. It is therefore the time to make the distinction between genuinely constitutional and non-constitutional European commitments an explicit part of the political order of our countries.

The Italian president’s dividing line is correct in principle: because the common currency is a fundamental social institution, because of the bonds with partner countries that it involves, and because of the major financial, economic, and geopolitical consequences of a potential exit, euro membership must belong to the constitutional realm. But Mattarella’s stance would have been more easily accepted had it been made explicit early on. The fact that his decision was announced on the occasion of a conflict between the presidency and the leaders of the parliamentary majority has given rise to a perilous conflict over legitimacy and has offered his opponents an opportunity to claim the moral high ground.

The vital task confronting Europe is to reconcile citizens’ right to make radical choices with the need to ensure that decisions leading to constitutional upheaval are subject to sufficient, and sufficiently informed public deliberation resulting in an unambiguous, and time-consistent expression of the people’s will. The EU and the euro must not be constitutional prisons; nor should they be subject to ill-considered decisions. Finding this balance requires procedures that command the required legitimacy.

The Upheaval Italy Needs

Project Syndicate column, May 2018

Two months after the Italian general election on March 4, amid continuing uncertainty about what kind of government will emerge, a strange complacency seems to have set in. Yet it would be foolish to believe that a country where anti-system parties won 55% of the popular vote will continue to behave as if nothing had happened. Those who were – and still are – regarded as Barbarians are not at the gate anymore. They are inside.

The populist Five Star Movement, which won a landslide in Southern Italy, has promised to increase spending on public investment and social transfers, while reversing the pension reform enacted a few years ago. The League party, which captured the North, also promises to dismantle the pension reform, as well to cut taxes, and has openly mooted the idea of leaving the euro. Both parties want to relax the European fiscal straightjacket, though in different ways. One of them at least is bound to be part of the governing coalition.

The economic consequences could be profound. With a 132% debt-to-GDP ratio, Italy’s public finances are precarious. Should markets start questioning their sustainability, the situation would quickly spiral out of control. Italy is far too big for the European Stability Mechanism to tackle a debt crisis there in the same way it did in Greece or Portugal. The European Central Bank would need to come to the rescue. The debt might even end up being restructured.

There is little doubt, therefore, that the European Union will insist on fiscal discipline. But the question is, what strategy should Italy adopt to tackle its fiscal problem? Contrary to conventional wisdom, Italy’s high public debt is not the result of runaway budget deficits – at least not of recent ones. With the exception of 2009, the primary balance (which excludes interest payments) has been in surplus for the last 20 years. No other eurozone country matches this performance.

The root of Italy’s public-finance problem is that it inherited excessively high debt from the 1980s and has not recorded significant economic growth for two decades. Real (inflation-adjusted) GDP in 2017 was at the same level as in 2003, and real GDP per capita was at the level of 1999. With a stagnant denominator, it is hard to reduce the debt-to-GDP ratio: the legacy of the past continues to weigh excessively on the present.

A thought experiment helps in understanding Italy’s problem. Had France followed the same policy as its southern neighbor since the launch of the euro in 1999 – that is, had it recorded, year after year, the same primary balances – its public debt today would be 45% of GDP, instead of 97%. The difference between the two countries is not that France has been wise and Italy profligate. Quite the contrary. The reason why France has a significantly lower debt today is that it inherited a better fiscal position and has been growing faster.

The lesson, therefore, is that Italy’s key priority should be to revive growth. But this cannot be accomplished by relaxing the brake on public spending. The bulk of Italy’s growth problem comes from the supply side, not the demand side. As documented in a recent paper produced by the Bank of Italy, the country’s productivity performance is truly dismal: over the last two decades, output per employee has decreased by 0.1% per year, compared to 0.6% growth in Spain, 0.7% in Germany, and 0.8% in France. Furthermore, the demographic outlook is frightening: the working-age population, currently at the same level as in the late 1980s, is set to decline by 0.5-1% annually in the years to come. The burden of repaying the debt will fall on a smaller labor force – even more so if the retirement age is lowered.

Boosting productivity is therefore imperative. On paper, the recipe for success looks straightforward: economic policy should aim at reducing the gap between larger companies, whose performance matches those of their German or French counterparts, and smaller firms, where productivity is half as high. Small companies everywhere are less productive than large firms – after all, growth is a selection process – but Italy’s peculiarity is that such companies are both much less efficient and much more numerous. For each innovative champion that sells cutting-edge products on the global market, there are many poorly managed companies with fewer than ten employees that produce only for the local market. It is this high degree of fragmentation that explains Italy’s poor aggregate performance.

Two Italian economists who teach in the United States, Bruno Pellegrino and Luigi Zingales, have investigated what explains this peculiar situation. Their conclusion is that neither sectoral developments nor credit constraints nor labor-market regulation can account for the observed productivity developments. Instead, they emphasize family management of the smaller firms and a tendency to select and reward people on the basis or loyalty rather than merit. As they put it, familyism and cronyism are the ultimate causes of the Italian disease.

These observations have direct implications for future discussions between the next Italian government and its European partners. The latter would be well advised to put the need for a growth and productivity policy, rather than simple adherence to fiscal targets, at the top of the agenda. And they should focus on the most critical reforms, rather than on a long wish list of standard recipes.

It is hard to gauge whether the Italian government that will emerge from the ongoing negotiations will be ready to respond. All political parties have clienteles to take care of, and the insurgents are no exception. They might well be reluctant to swallow the harsh medicine that Italy needs. But political ruptures sometime provide a unique opportunity for addressing seemingly intractable problems. The chance of such an outcome may be slim, but it should not be ignored. After its political upheaval, Italy now needs an economic one.