II Forum on the Global Economy

Summary:

The "II Forum on the Global Economy", organised by the Rafael del Pino Foundation and the Círculo de Empresarios, was held on 14 October 2021. The event was attended by Ignacio de la Torre, partner and chief economist of Arcano Partners; Silvia Iranzo, independent director of Indra and ICO; Emma Navarro, former vice-president of the EIB; Emilio Lamo de Espinosa, member of the Royal Academy of Moral and Political Sciences; Bart van Ark, Managing Director of the UK Productivity Institute; Martina Larkin, Senior Advisor to the President of the World Economic Forum and member of the European Institute for Innovation and Technology; Belén Romana, Director of Banco Santander, BME, SIX and Aviva; and Eric Chaney, Economic Advisor of the Institut Montaigne.

The event began with a round table on how to activate economic and social recovery. Ignacio de la Torre pointed out that we are continually subjected to media that are scaring us with all kinds of news about the pandemic. The latest one is that vaccines would stop working in the fourth month, which would be dramatic for the economy. But I don't understand that there are two efficacies in vaccines: an efficacy against contagion and an efficacy against hospitalisation and eventual death. It is true that vaccines cease to work against infection, but not that they cease to be effective against hospitalisation or death. Data from Israel indicate that, six months after vaccination, vaccine efficacy against hospitalisation ranges from 91% to 100%. It is very important to be clear about this because it is not the infections but the hospitalisations that make the economic difference. What marks an individual's decision to stop using, or a company's decision to stop investing, is the risk of hospitalisations leading to confinements, and this is going in the right direction. In previous waves, for every hundred infected, ten went to hospital and two died. Now, for every 100 infected, two end up in hospital and 0.3 die. That is why, little by little, the pandemic has less and less influence on the economy. We are not going to achieve herd immunity. It could have been achieved with the previous variant, not with the delta variant. Therefore, COVID is going to remain an endemic, just like AIDS or the flu, and little by little it will have a lower incidence, every year we will have a buster adapted to the mutation that has occurred that year and we will live with it as we live with the flu, but with an increasingly limited impact on the economy.

The world economy is set to grow by 6% this year and 5% next year, which means it will be the strongest economic growth since the Second World War. The bad news is that much stronger economic growth than many economists expected generates inflation risks, which is the main concern today. In June last year there was already such a risk as a result of monetary and fiscal stimulus that had only previously been seen during the Second World War, after which high inflations occurred. Inflation is already here, but it is not going to be at very dangerous levels, on a sustained basis. There are a number of cyclical factors that will cause inflation to start to ease next year and remain at levels of 2.51GDP3T in the US and close to 1.71GDP3T-1.81GDP3T in Europe. These are higher than previous levels, but reasonable for the new monetary policy. In the meantime, central banks are going to hold the yield curve in check, leading to many years of negative short-term and long-term rates.

Why is it that with a very hot labour market in the US there is no risk of 3% or 4% inflation? The main cost of a company is the cost of labour. The best indicator of wages in the US is the Atlanta Wage Tracker, whose latest figure is 3.8%. We tend to assume that if wages are going to rise by 3.8%, the price of goods and services will have to rise by the same percentage. But we have to subtract productivity growth and, at last, we are starting to get very good news on US productivity, with increases of more than 2%. So if wages rise by 3.81GDP3T and productivity rises by 2.21GDP3T, the tendency will be to raise prices by 1.61GDP3T. Therefore, with wages a little higher, a forward inflation level of 2.51TDP3T in the US is reasonable. If this is not the case and levels are higher, then the FED will have to act.

As far as shortages are concerned, there was an economic slowdown in the spring of 2020 and the economic situation was compared to that of the Great Depression. In that context, it is normal for many producers of goods to reduce their supply because otherwise they could lose a lot of money. Many supply curves are rigid, so you cannot withdraw a lot of ships, or a lot of capacity in production processes, and then bring it back quickly. This crisis is an exogenous crisis, coming from a pathogen; it is not an endogenous crisis where we have gone overboard with private debt. The moment the pathogen has disappeared, people have reacted by consuming much faster than many economists estimated. If demand increases with restricted supply, these tensions in supply chains start to emerge. The second implication is that during confinement, people tend to consume more goods than services, which puts pressure on the demand for goods and there is not enough supply. In the United States, considering a base of 100, which is consumption before COVID, they went on to consume 115 in goods and 93 in services. We are now at 110 in goods and 95 in services. Therefore, if normalisation continues, there will be less and less demand for goods and more and more demand for services, so this problem will be solved over the next year. There is no quick fix, but by the end of 2022 we will have a much more normal situation in terms of shortages.

The implications of this scenario are as follows. One, if we are going to have negative interest rates for a few years, which is a policy that helps governments to deleverage public debt, which is how the debt of the Second World War was paid off, savings may suffer, whether in current accounts or in sovereign bonds. Some of those trillions invested in bonds have to migrate to other assets. The most obvious is to go into real estate. That is why we are seeing house prices rising to extremely high levels, especially in the United States, the United Kingdom and Germany. In the medium term, that can lead to financial instability.

The second consequence is that when crises come and they are very intense, it is more because of private debt than public debt. Now we are concerned about public debt, but we are more concerned about private debt, which, when it reaches levels of 1.8 or 1.9 times GDP, ends badly. The country with the worst situation is China; it is at 2.1 times and has reached a turning point in terms of the real estate market. China builds eleven houses for every thousand inhabitants when the norm is three. So if that market corrects, the situation has a lot of implications for the world because China is half of the world's demand for raw materials. In the future, China may grow at 3% or 4%, with the risk of experiencing a recession. This has many consequences for Latin America and the Asean countries.

The final consideration is that, in the end, monetary policy tries to help demand to recover, to generate the level of employment that existed before the crisis, but this has a second consequence: it reduces unemployment and income inequality, but increases wealth inequality, because those who have an asset see the price of that asset rise more. In the medium term we will be left with a paradigm of a society with more wealth inequality and less income inequality, which may generate a certain amount of social instability.

Silvia Iranzo explained that the first thing that caused the confinement was the total stoppage of international trade because the dock workers were confined and there was no one to unload the ships. Although there has been a certain de-escalation, we are seeing the after-effects of social distancing, the fact that it is often impossible to maintain ships, the need for quarantine, etc. The pandemic has greatly affected international trade, just as it has affected tourism, much more than other sectors. The most important indicator is that international trade fell by 5% in 2020, which is more than the fall in world GDP, which fell by 3.1%. Foreign trade, in this sense, is a vulnerable sector in the face of a phenomenon such as the pandemic.

In 2021 there has been a rebound. The WTO is talking about growth figures for this year of 10.8% when previously it was talking about 10%. In other words, the forecast for the whole year has been revised upwards. For next year it forecasts growth of 4.7%. In these figures there is a rebound effect, what is known as the base effect, because when in one period the variable is much lower then, in order to catch out, you have to grow a lot. This is like a marathon, where everyone is running and someone gets injured, has to stop, and if they want to regain their position in the pack they will have to run much faster. This is, in a way, what has happened with trade.

What we are seeing at the moment in trade in goods is that, going forward, we are going to recover the trend that we were already on in 2019 and in previous years. That trend was towards greater deglobalisation. That is, trade is not growing like GDP since the Great Recession of 2008.

In this sense, international trade is not likely to be the engine of growth in the world economy. In Spain, for example, there is an exception. In 2020 and 2021 international trade is indeed being the engine of growth. The foreign sector is making a positive contribution to GDP growth, the trade deficit is decreasing, etc. But, at the global level, it does not seem that international trade is going to be the engine.

However, this is subject to an enormous degree of uncertainty. The uncertainty stems, first, from when the major ports will be uncongested. In China, the Pearl River Delta remains congested. The same is true in the United States in Los Angeles and Long Beach. This is due to the spectacular increase in demand in a short time and supply has not been able to respond, but is gradually adjusting to it. There are huge uncertainties surrounding the pandemic. There is a total lack of knowledge, still considerable, about whether there will be new variants, how the economy will respond, whether we will have new confinements. Then there are other sources of uncertainty, for example production bottlenecks. These bottlenecks, for example, in microchips for automobiles, are affecting foreign trade. In Spain, for example, vehicle production has fallen by 10% because of these bottlenecks. In other words, international trade could grow more if we unblock the ports, if we address the bottlenecks resulting from the shortage of microchips.

Then there is another problem, namely rising prices. Energy prices, especially because it is a commodity that cuts across the entire world economy. If prices rise too much, companies cannot be profitable. There are, for example, Spanish companies that have had to close production because of this, such as Sidenor or Fertiberia, and these companies will not be able to export many times. Therefore, we have to undo all these supply-side problems and we will see what happens.

Value chains are going to continue with a trend that they have had since before the pandemic. The process of fragmentation, offshoring and delocalisation that we were seeing until the financial crisis has stopped. We are de-globalising and what we are seeing, rather, is nearshoring, even inshoring. The pandemic has accentuated that. What we have seen in Covid goods, i.e. medical supplies in general, is that we cannot depend on a country like China, where most of the supplies were coming from. We are seeing a relocation and not the opposite. In any case, there is a redistribution of the previously existing relocation from China to other areas, for example, to Vietnam or Malaysia as a result of the fact that costs in China are rising a lot, there is much more legal uncertainty, for example, in the technology sector, and that has scared many companies.

The US has embraced multilateralism again, but less so in the WTO. Indeed, in February it had the opportunity to reappoint judges to the dispute settlement mechanism's appellate body and declined to make appointments. It is not yet clear. The European Union has proposed a new mechanism, but it has not yet taken off: there are still not enough countries and it lacks a bit of legitimacy in that sense. In this period, things have been done. We have seen the EU-China investment agreement, which was paralysed for rather political reasons, we have seen the RECEP in the Asian area of the ASEAN countries plus all the major exporters in that area - China, Japan, etc. - although it is going to take time to materialise in terms of all its objectives, but the United States is not there. Then we have seen the Airbus-Boeing agreement, which has removed for five years the tariffs that the United States and the European Union imposed on themselves. Finally, there is China's application to join the CPTTP, which is the re-foundation of the famous TTP. In other words, we have found that the US, which wanted to leave China out of the TTP, is no longer in the TTP and, instead, perhaps China could join. At the moment it is not obvious because two of the requirements are to reduce subsidies to public companies and for data to flow across borders. In this, China has a certain difficulty. It is curious how these elements of international trade either involve China directly, or China is a bit of an elephant in the room.

According to Emma Navarro, the economic policy response to the pandemic has been adequate. We were facing an unprecedented economic crisis and a forceful response was needed. In fact, there are studies, such as the IMF's, that show that without all these economic policy measures that have been put in place, the effect would have been much worse than what we have seen, that the fall in activity could have been three times greater. In terms of fiscal policy, almost all countries have implemented the same type of measures, but there have been differences in the intensity of the response, which has depended on the capacity of each country. The US has implemented stronger stimulus packages than Europe. The stimulus that has been implemented so far, excluding the plans that are now in the pipeline, which are of a different nature, amounts to around 28% of the US economy's GDP. The US has already recovered to pre-pandemic income levels and, although employment levels have not fully recovered, it has a market with ten million vacancies, the question has been raised as to whether the size of the stimulus plan might be excessive. In other countries there has been a consensus that such a response was necessary to mitigate the crisis and protect the productive fabric.

The challenge for fiscal policy is the very significant increase in countries' debt levels. Some economies have also increased their structural deficits. This is the case in many European economies. In the European case, moreover, fiscal policy still has a role to play next year in order to recover activity levels. Pre-pandemic GDP levels in Europe have not yet recovered. Fiscal policy will have to maintain its expansionary tone, but it must become more surgical, with temporary measures and not with increases in the structural deficit. Zombification of the economy must be avoided. The rules of the Stability Pact were suspended so that countries could implement anti-crisis measures, but they are expected to be implemented again in 2023. This will be an important constraint for governments and fiscal policy. Once the recovery takes hold, it will be necessary to reduce the levels of public debt and the structural deficits that have been created. Here low interest rates provide some relief. Negative real interest rates will help, but such high levels of public debt are an element of vulnerability, because we cannot rely on rates not rising and because this level of public debt implies very large refinancing obligations. In addition, there is a loss of economic policy response capacity, known as fiscal space, as a result of having such indebted economies.

An important aspect in Europe has been the joint response. First, with a series of programmes by organisations such as the Commission, the EIB, the ESM, but above all through the Next Generation recovery funds. These funds have elements that are very important in view of the situation and the challenges that lie ahead. On the one hand, they are a cohesion instrument because their size is very significant, almost 750 billion, and they are aimed at the economies that are most affected by the crisis. This is very relevant in the current context because one of the risks of the pandemic is that it will increase economic differences, not only in terms of debt levels, which is a variable, but also in terms of income levels between countries. Moreover, although they are not an instrument of macroeconomic stabilisation, which is necessary in the euro area, these funds will give economies fiscal capacity. The other positive effect of the funds is their valuable combination of a focus on investments such as green transition or digitalisation, where we know that a lot of investment will be needed in the coming years, and, on the other hand, structural reforms that can increase the capacity for economic growth, which is one of Europe's weaknesses. By generating growth, this will help to correct the fiscal imbalance that has accumulated.

Monetary policy has also been very important because it has kept credit flowing and prevented financial crises. It has also been key to the success of fiscal policy, to finance spending programmes, because it has absorbed a significant part of the debt that governments have issued. Now what we see is that the withdrawal of stimulus, which in the United States seems to be coming soon according to the indications that the Federal Reserve is giving, may pose challenges for fiscal policy because, even if it is gradual and withdrawn slowly, so far governments have enjoyed significant support from monetary policy.

There are a series of phenomena that we are seeing, which are also a challenge for economic policy. For example, supply shocks, increases in commodity prices, what this means for economic activity, what fiscal policy can do, and other more structural phenomena, such as de-globalisation, which also require fiscal manoeuvrability.

Finally, Emilio Lamo de Espinosa stressed that, although the pandemic has caught us unawares, we were warned. The WHO, the think-tanks, the national security strategies of the countries, all incorporated the pandemic as an important risk, like climate change, emigration, etc. Without going any further, the 2017 Spanish national security strategy pointed out that, with tourism, with a high dependence on the service sector, the risk was greater than in other countries. But we did not listen to it. The result is that the pandemic arrived, which has been a tremendous stress test of everything, of all institutions, of all management mechanisms, of the internal governance of states, of the multilateral order of economies. A test from which, in general, almost all the institutions have come out of it with a fair, perhaps even a bad result, with some failures, with perhaps two exceptions. One is societies, where the reaction has been magnificent, and the other is science, which in eleven months produced a vaccine. Less than 40% of people in the world are vaccinated, and this is very important for some regions, for example Latin America where the situation is still dramatic at the moment.

Multilateral institutions had neither the capacity nor the strength to react. The United Nations, the G-20, the WHO did not do so. Nor did the European Union, although it is true that the EU does not have clear competences in this area. Schengen was blown out of the water, there was protectionism over medical equipment in the early stages of the pandemic.

In the absence of governance, societies have sought refuge in institutions where refuge is always found. When families have problems, they take refuge in households; when collectivities have problems, they take refuge in states. These are the two institutions that ultimately provide security. For months and months we have been confined to homes and receiving instructions from the states, with nothing in between. There has been a forced homeisation, facilitated by digitisation, and a very clear stateisation. In the end, the states had to take responsibility because there was no other institution that could do it.

This has meant a very powerful re-statisation, in political terms, states of emergency, exceptional measures without parliamentary controls. The British Parliament was open throughout the Second World War, despite the bombing. We closed it for a long period and we are going to see if it is constitutional. These are measures that clearly go beyond constitutional frameworks. Political measures, but also economic measures, because the need to deal with the pandemic has led to a renationalisation of the economy, exceptional measures, extraordinary public debt, strategic companies. This is likely to continue. In fact, a Freedom House report talks about confined democracy, how the pandemic had produced a confinement of democracies. In more than eighty-odd countries there has been a deterioration in the degree of democratic quality. Another report from one of the major institutions that monitors the quality of democracy in the world talks about autocracy going viral and talks about a word, autocracy, that had disappeared from political language. We therefore have a problem of state reinforcement.

In the geopolitical realm, there is a clear reorientation. There are no substantial changes here, but rather the acceleration of a geopolitical shift that has been decades in the making. That shift has much to do with the US-China relationship, but it is also a consequence of changes within both societies. China has problems and, as a consequence, projects much of the unrest outwards. Taiwan is a very important element in that policy. Not to mention the United States. When Trump won the election, we in the think-tanks wondered whether Trump was a blip in the political history of the United States, like Brexit, or something structural. Those of us who argued that it was a stumble were wrong. It was not a stumble; it is structural. Joe Biden has serious problems. The way to appeal to that population is to project those problems into protectionism and America First starts to become America Only. This is clear and there is a reorientation of US geopolitics.

China has weathered the pandemic relatively well, but the US pivot to Asia, which began with Obama and Hillary Clinton, has suddenly jumped, partly as a consequence of the pandemic. Australia's relationship with China has also played a role. The fact is that what was latently brewing is now manifest. That is, the central geopolitical vector at the moment is the tension between an emerging power and a declining power. In other words, it is what in game theory is the agonising game of the plot of Thucydides, the Greek historian, when he spoke of the tensions between Athens and Sparta. When one declining power sees that another may overtake it, the temptation is strong to wage war against it in order to finish it off before it overtakes it. Empirical studies show that, on numerous occasions of Thucydides' trap throughout history, this has led to wars. The tension is there.

The United States is clearly reorienting itself, leaving Afghanistan practically without consulting its allies, and focusing on the Indo-Pacific, between Malacca and Taiwan, which is currently the core of tension between the two sides. American think tanks are beginning to talk specifically about whether China can win the war, which is already a cause for concern. There is talk of a new Cold War. In any case, the risk of identifying the other as the enemy is that it transforms the other into the enemy. In other words, Thucydides' trap may end up being a self-fulfilling prophecy, and this is very worrying. At the moment, Biden's China policy is very aggressive. The AUKUS agreement is clearly a warning to China, warning that it will be policing the China Sea with nuclear submarines, but it is also a big slap in the face to Europe, which is being slapped on the backside of France. What is being articulated at the moment, with Europe being left out, is what Churchill called the Anglo-sphere. The Anglo-sphere is the three of the AUKUS - the United States, the United Kingdom and Australia -, the four of the QUAD - the United States, Australia, Japan and India - and, finally, the five of the Five Eyes - the United States, the United Kingdom, Australia, New Zealand and Canada - who share espionage, technology, and so on. That is what is being articulated at the moment and Europe is completely left out.

The big concern at the moment is whether Europe has the capacity to act. The question is how Europe can regain strategic autonomy. It does not seem easy for Europe to have a common foreign and security policy. It is not about spending more. Europe spends three times as much as Russia, we have 1.5 million soldiers. Therefore, we have plenty of spending to spare. But we can see the return that Russia gets on the one-third of spending that we have in the European Union. It is not a question of spending more, but of spending better and of having the will to use that, because there is no point in having a large army if you are not able to send it to war because the soldiers cannot fight. This is the basic problem. It is not easy for Europe to learn to speak the language of power.

The big problem for the next thirty or forty years is to make room for China. China is not going to disappear. There are 1.3 billion of them, they are there, they are very active, they have technology, they have strength and we have to make room for them. We have to make them reasonably comfortable in the international order. At the moment, US policy does not seem to be moving in that direction.

The second roundtable was devoted to a reflection on structural maladjustments. Bart Van Ark emphasised that, during the pandemic, digital technology has been crucial in getting us out of it. Without it, we could not have done anything. In fact, productivity growth has not been as bad as GDP or employment growth. Coming out of this pandemic there is an opportunity to continue to use digital technology as a way to boost productivity. But if we don't get this right, digital technology could be a basis for inequality and we could even end up with fewer companies and businesses in the world.

During the pandemic we have seen a tremendous decline in GDP, in the order of 11%, and the same in the number of employees. Productivity, however, has remained more or less the same as before. The less efficient sectors of the economy, such as services, accommodation and leisure, have been closed. But the companies that have transformed themselves more, digitally, the ones that are better equipped for this crisis, have been less affected by this. They are the companies that have invested more in digital technology before the pandemic, companies that have had a more skilled and experienced workforce in digital procurement and sales.

When we moved to working from home, companies had a lot of systems in place so that this could be done faster. When people came home, they could access their systems, work faster with the skills and tools they needed. These companies were able to move faster to a digital sales model in a matter of months and were able to deal with some of the resilience issues we were having in the economy, such as supply chains.

This has not only been the case in the private sector. In the public sector, schools and universities, which had not done so much in the digital world, have been able to help students much better. Also in the service sector, which was very much affected by this.

We have seen changes in digital technology, for example telemedicine. Think of all the things that would not have happened if the pandemic had not happened. We have done things a bit faster than we would have done them. That is the positive aspect.

On the more worrying side, it seems that not everyone, not all people, not all workers, not all companies, not all places have benefited in the same way from this tremendous use of technology. The digital divide is nothing new, we already had it before the pandemic. What is worrying is that, after these eighteen months, this digital divide has become more pronounced. There are people who have not been able to work remotely, there are people who have had to return to their jobs, there are people who could work from home, but did not have access to the internet, or did not have spaces to work in. Learners could not have the appropriate equipment to be able to follow their training online. Small businesses have been affected by this shift to digital technologies. They have been quick learners, of course, and it is amazing how many changes they have made, but these changes have been tactical, not strategic. So the question is how much of these digital models that have been put in place are here to stay after the crisis.

What is worrying about the recovery is that it is K-shaped. There are some companies, some people, some regions that are at the top of the K and others that are at the bottom. So the gap has widened further. So we may end up in a worse situation.

We need to manage the recovery well to prevent inequality from rising. To do this, we must focus on productivity, but inclusive productivity. This means producing more, but in a different, more efficient way, so that productivity gains reach more people. We have to involve more people in the growth process, we have to make them more productive. We are living in a period where we have a lot of unemployed people and Spain is an example of that, or the United States, where there are seven million more unemployed people than before the crisis. But we also need people who are not only digital workers, but also truck drivers, people who work in warehouses. So we have to do a couple of things to be able to reduce these inequalities, to bring more people into the labour market and become more productive.

The first thing is to include more digital skills. Make people more flexible. Companies can do a lot in this respect to be able to change the world, job training. Training while working is very important and leaders need to take this into account. Workers can come up with new ideas and you have to know that if you have more diversity, including younger people, dealing with the gender gap and the racial gap, this will have a positive impact on productivity, bearing in mind that you have to train employees. If there is a fear that if you invest in the digital skills of your employees they might then go to the competition, you have to take into account that the competition is also in the same situation. So we all have to work together because it will allow us all to take advantage of it. The education system and the government can be part of the equation, providing vocational training and reaching out to people who don't have access to the internet, who lack the resources to invest in their own education.

The options we have for a way out of the pandemic are a recovery for everyone or a recovery only for some. Digital technology can help us a lot to make it a general recovery, but we are going to have to do a lot of work from a policy point of view, with the education system.

Martina Larkin pointed out that innovation plays a key role as a driver of productivity. Technology can improve the production of goods and services, but the key question is what kind of innovation we are talking about.

The IMF has said that R&D investment has fallen. There is a possible explanation for this and that is that the type of research matters. Innovation does not happen in a vacuum, it is based on basic research, so it is very important to understand that there is a difference between applied knowledge, applied research and basic research. Basic research is the fundamental source of many multiplied efforts. Innovation gives us the final product, but research is what gives us the multitude of options we have. For example, the vaccine was not developed in a silo, but is based on decades of basic research. Similarly, GPS technology is based on Einstein's theory of relativity.

It is essential to encourage much more basic research. There needs to be more investment in it, but there has been a reduction in both private and public investment. It is very difficult for business to reap the benefits of this research because, once this research is done, it can be in different concepts around the world and in different sectors. It is therefore not very clear to companies how they can internalise the benefits of these investments. This is where public policy comes in, to encourage more of this investment, to generate the right environment. Basic research can also be key to green growth or green technology. It has a fundamental role to play in the green economy.

When we look at the most innovative countries in the world, the top five are in Europe. In other words, Europe must be doing something right. But, at the same time, it has a very different role than the United States or China. There has to be a different strategy in Europe to be able to transform this research for companies that also generate value and wealth. The European Union has a new innovation strategy, where it wants to be a more sovereign Europe, to continue to be the one that sets the rules when, for example, facial recognition or many other things come along. Someone said that the United States has already lost the race for technological leadership. If so, then Europe has lost it even more, but there is still room to define frameworks for how these technologies operate. When we adopt these new green technologies, especially climate and environmental adaptation, this plays a very important role.

When it comes to companies, we have seen a period of immense transformation. This does not happen very often. There is a fundamental aspect of this crisis that affects, above all, the service sector, which has been more affected than the industrial sector. Much of that necessary transformation is going to take place through innovation, but also digitalisation and that digitalisation needs to be promoted. There is a lot more that companies can do in this respect. We can offer more value, but what is the role of the private sector in terms of providing more research? There is also the question of employment, not only how to generate more jobs, but that these jobs are good, well-paid jobs.

Innovation can do a lot, but the business environment has to build on these public policies. The business sector needs to be investing more and jobs need to be created. There are many new opportunities in many fields, but these jobs need to be more inclusive. We have to be more flexible in the future, talking to different people in different ways, so that we can take advantage of new developments like a greener economy or digitalisation in those areas where we think the future is and where we want to see more growth.

Belén Romana recalled that, in 1970, Friedman defined the company as a body that has to dedicate itself exclusively to maximising the wealth of its shareholders. In 2019, a not very suspicious body, the US Entrepreneurs' Circle, refined the definition of the company. It is a much more multifactorial definition. It speaks not only of shareholders, but also of customers, the environment, of course employees, and society as a whole. This attempt at a new definition has been going on for some time. There has already been talk of consumer capitalism, which means that companies must be dedicated to maximising the welfare of their customers. Another possibility is that companies have to focus on maximising their positive role on the environment in a broad sense, not only the physical environment, but also the social and governmental environment.

We are now in that. We are in a society that is concerned about a phenomenon that is not only global warming, but also excess waste. Developed countries generate a volume of waste that cannot be replicated in the rest of the world without leading to total collapse. The seas of plastic have to do with the waste policy of Western countries, which have been generated when we were sending everything to China and China has said it can't take any more.

With the debate still open, there is a general feeling in society that we need to start doing things differently. Business has a key role to play, as for almost everything else.

How is this going to affect the framework? It will affect financing, regulation, corporate governance and business models.

One of the serious problems we have when we talk about sustainability is that we don't know what it is because there is no single universally accepted measure. We have to measure many things that are very difficult to measure and, in addition, everyone is generating their own way of measuring. We have to measure the environmental part, which is the one that is relatively more developed. But the social part is very complicated to measure, the impact on society is very complicated to measure. We are, then, in a multiplicity of factors, many of them difficult to measure, and, furthermore, without a single criterion, where there is a geopolitical race to see how we define this. It is the same as when defining how to measure financial flows: it does not occur to anyone in their company to measure financial flows as they see fit, both the profit and loss account and the balance sheet, but there are commonly accepted measures that allow for comparison. Even when these measures are not perfect, there is a way of translating them. So this, which is very clear from the point of view of financial flows, means that we are going to have to have a comparable way of measuring non-financial flows, with all the implications that this has.

Right now, there is a whole tangle of institutions proposing ways to measure. There is the European Commission with a taxonomy and a definition of 'green label'. There is the World Economic Forum trying to create a set of homogeneous guidelines. There is SASDI, the TCFT. In other words, there is a whole tangle of institutions that are trying to intervene in this battle, which is crucial. If you know anything about accounting, you know that a different IFRS can significantly change the financial aspect of a company. So this is going to be the same thing. So this is geopolitical and the United States and China have said that they are going to define it according to what is in their interest.

This is already having an effect on the financial markets and therefore on the financial structure of a company, from any point of view. If you look at equity, asset managers are being very active in terms of making resilient investment packages. The biggest investor in the world, who is called Black Rock, Larry Fink, has been saying for a couple of years that he takes this very seriously and that he also wants companies to report their effects in terms of ES, for the board to define a strategy and to know who to look to if it doesn't work. This is Larry Fink's letter to investors this year. Then, from the equity issuers' point of view, they already have investors, some big investors, saying that this is an element that they are going to take into account, which changes the relative price.

But it is not only equity. There are also the fixed income markets. The fastest growing fixed income market in the world is the green bond market. For example, the European Union is financing a large part of the Next Generation Funds with green bonds. Many countries have said where to sign up, I'm in. The bond market is also being directly affected by these criteria, but also bank funding, for several reasons. Next year, the ECB is going to do a stress testing exercise in relation to climate change. This year, the PRA, which is the UK solvency authority, is doing a stress test on financial institutions, not only on banks but also on insurance companies. Therefore, banks are going to have to answer the question of what is the impact on their value chain, not only on their pure activity, but on their entire value chain, which includes credit risk. This includes, therefore, those who are financed by bank financing. From a financial point of view, therefore, it doesn't matter which tranche of financing you look at because it is being affected.

From a corporate governance point of view, if there is one thing that has skyrocketed, due to social media, it is political activism, which is also affecting companies. For example, Exxon Mobile lost two board seats to an activist hedge fund. Chevron, at its AGM, its shareholders voted in favour of a proposal, not from the board but from one of the shareholders present, to pursue a policy of cutting carbon emissions. Shell has been the subject of a Dutch court decision because it had made a pledge to cut carbon emissions by 2050. There was an activist who thought 2050 was a long time, took it to a judge and the judge said that was indeed a long time, and set 2030. In other words, a Dutch court has told Shell 2030. So, from the companies' point of view this is very serious.

In conclusion, Eric Chaney said that we are reducing carbon dioxide emissions. Over the last twenty years they have gone down, however we measure them, whether it is carbon footprint, national emissions, by territory. They have been going down in most developed economies. Europe is still doing better than the United States. So we have done a good job, which is not enough, but we are on the right track.

The fundamental question is how we can do this to accelerate emission reductions at the lowest possible cost. The IPCC's sixth report makes this very clear. First, it confirms that the previous reports were right. Those reports tell us that, if we want to avoid a two-degree temperature rise, we have to achieve net zero by 2050. This is the science. If we don't, the consequences will be terrible.

An American economist said that what you have to do is a cost-benefit analysis, so that polluters pay the price for the damage they are imposing on the community. In the case of carbon dioxide it is a bit complicated because it is a negative global externality; you are not polluting your neighbour's river, you are polluting the atmosphere of the whole world. So you have to compute the future damage that a tonne emitted now does. But there is a lot of uncertainty about the possible future damage from carbon.

One solution is to have a global carbon price, but there are many countries, such as Brazil and India, that do not want to implement it. The second issue is how damages are computed. So the best solution is to say that, as far as we in Europe are concerned, we are going to reach zero emissions by 2050. To make sure of that, we are going to force companies to buy carbon dioxide emission allowances. These allowances are going to be calculated to fall to zero by 2050. So we should be at zero by then if all sectors are subject to this emissions allowance system.

At the moment, only large energy producers and large industries that produce a lot of carbon dioxide are being included in the scheme. But the European Commission's plan, which has been accepted by most countries, includes a second scheme for transport and real estate services, which will cover 80% of the economy.

This looks like a good solution. We know where we are going and thanks to this system we can do it at the lowest possible cost. If any company has the desire to emit and it is profitable for them, they can buy the allowances. But if another company has a proprietary technology that allows it to reduce its emissions, it sells the allowances.

There is a problem, however, and that is that this system introduces a new uncertainty, which is the price of carbon. Two years ago, a tonne of carbon dioxide was less than twenty euros; now it is sixty-five euros. For companies that do this, that have to make long-term investments over the next ten or twenty years, this makes it difficult to make decisions.

So what is the solution? You have to have a carbon price floor that sends a message to companies that a floor has been set. In order to have a floor you have to have an authority, which would be called the European Carbon Authority, chosen by an international jury so that there is no doubt about its competence. If we have a floor, the companies will know what the minimum price is in ten or twenty years' time. That is the best possible solution.

One issue that needs to be addressed is that of consumers. Even if companies have to buy carbon rights, the consumer ends up paying the price. This is hidden, people don't want to think about it. Whether we have a carbon tax, or a carbon allowance system, in the end consumers pay.

If we have a carbon system for the 80% of the economy, it has to be the same for imported goods. Therefore, there have to be carbon adjustment mechanisms at the borders.

All this is necessary in order to avoid having different carbon prices and to have a balanced situation for all participants. Carbon taxes generate protests, so the solution is to redistribute carbon taxes to the people. The only way to do this is the principle of subsidiarity, giving carbon taxes back to the people. The decisions have to be made by the countries, by their voters, by their national parliaments. The smart thing would be to focus on redistributing the carbon dividend to the lower income population, not to the people who consume energy. We are tempted to avoid an uprising of the yellow waistcoats, but in that case the incentive to reduce carbon emissions is lost.

To get there we need technology, which will be the result of basic research and applied research and investment. So part of the profits should be used to fund that research that we need because, today, we don't know what technologies we are going to have in twenty years' time to avoid emitting carbon. This technology may come from basic research, from discoveries ten years ago that nobody could have imagined.

We have to invest a lot of money in decarbonising the economy to avoid catastrophes. Because the EU is the biggest market for exporters, with the carbon adjustment there is an incentive for these countries to follow our example. In fact, the Chinese are starting to design their own carbon taxation system. If we get here we have to spend money, and to spend money we need growth, for which we need to increase productivity, promoting everything necessary, including science education, where Europe is a bit behind.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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