With the inauguration of Donald Trump as the 45th President of the United States today, it comes as little surprise that inequality, the rise of populism and dissatisfaction with the current status quo featured prominently as a theme at the World Economic Forum in Davos.
Christine Lagarde led a panel ‘Squeezed and angry: how to fix the middle-class crisis’ and opined when asked about there being little interest in the subject in 2013: ‘I don’t know why people didn’t listen, but certainly I got a strong backlash, in particular from economists saying that it was not really any of their business to worry about these things.’ But Brexit and a Trump Presidency, clear votes for change, have certainly started the debate. Now IMF research warning that unequal growth is not sustainable growth is looking somewhat vindicated.
Obviously, Europe remains a key focus with the Dutch, French and German elections this year amidst growing support for populist parties. The Italian Finance Minister, Pier Carlo Padoan, also featured on the ‘squeezed and angry’ panel commenting: ‘The problem in Europe is Europe’ and calling for a rethink of policies and solutions as dissatisfaction with the status quo and disillusionment about the future is causing middle classes to ‘say no to anything political leaders suggest’. Italy is a key example of some of the challenges facing Europe as support for the populist Five Star Movement has been growing, culminating in the rejection of constitutional reform in the December referendum and the then Prime Minister Renzi’s resignation. Italy, as a core founding member of the Europe, with second highest debt to GDP ratio (133%) in the Eurozone (after Greece), is clearly under pressure from the austerity driven approach for countries with excessive levels of debt. Growth is disappointing, productivity is weak, youth unemployment is high, the population is ageing, all compounded by a weak banking system beleaguered by non-performing loans.
On another Davos session on ‘Fixing Europe’s Disunion’ Pierre Moscovici, the European Commissioner, and Nobel laureate economist Joseph Stiglitz made some interesting points. Moscovici stated the obvious: ‘People suffer from too weak growth, too high unemployment and too much debt. There’s economic anger and cultural anger.’ Stiglitz noted ‘near stagnation’ has beset the Eurozone since the GFC citing the Euro of one of the reasons: ‘When you have a single currency it doesn’t have the flexibility for to enable weaker countries like Greece, Italy, Spain to adjust and the result of that is a real, real problems.’
Stiglitz’s recent book ‘The Euro: How a Common Currency Threatens the Future of Europe’ argues the current euro structure is ill-conceived, lacking the appropriate institutions to allow it to function effectively. The current structure tying all 19 members to one exchange rate, the ECB targeting inflation, set against strict ‘convergence criteria’ and trigger levels for budget adjustment (3% budget deficit and debt to GDP of 60%) left austerity and structural reform as the main adjustment levers in a downturn. The global financial crisis of 2008 provided such an asymmetric shock exposing this weakness. Fiscal policy, an important economic stabiliser, is underutilised under the current structure. Instead of bringing Europe closer together by promoting growth, employment and stability the current structure has allowed imbalances and inequality to build and set creditors against debtors.
On a more positive note and responding to Stiglitz, Moscovici stated: Brexit is a ‘wake-up call for us. We need to co-operate more because union is the best way to co-operate for our member states. Second, of course Europe will be there, and I can tell Joe Stiglitz, that hopefully, Euro will also be there. But we need to do what’s necessary for it to be capable of creating convergence between our economies.’ More specifically, he noted ‘We need more convergence, institutional tools, more policy tools such as a budget and a minister of finance for the EU’ and ‘Some countries in the EU must still limit their deficits, but others have huge surpluses, both external and fiscal, and they must be used for the common sake of the eurozone and our common growth.’
The Commission is due to publish a White Paper in March 2017, coinciding with the 60th Anniversary of the Treaty of Rome, which should contain proposals on the future direction of the Eurozone: For us policy must do more to encourage growth, employment and stability to deliver prosperity to more of its members if it is to thrive.