Ten years on: Facing a new economic crisis?
Summary:
On 14 November 2019, the Rafael del Pino Foundation organised the conference entitled "Ten years later: facing a new economic crisis?", given by Juergen Donges, professor emeritus at the University of Cologne. Donges recalled that, ten years ago, the global financial system was on the verge of collapse. At that time, governments and central banks reacted with a whole raft of measures, not all of them very sensible. The aim was to restore the confidence of economic agents in the market economy system. This worked. Gradually the situation stabilised and we entered an unexpectedly long phase of economic expansion. Ten years later we are once again in a situation where the spectre of a new recession is beginning to resurface, at least according to the view of many economic gurus announcing it. Why is there this pessimism? It is because we have a somewhat unusual situation in the form of an accumulation of adverse external shocks, which are generating uncertainty. It all starts with the trade war between the United States and China, which is also an exchange war. This destabilises the international trading system. Then there is the issue of Brexit, which is an absolute failure of British parliamentarianism, but which is a problem for countries with close ties to Britain. Then there is Italy, which is the biggest risk to the stability of the eurozone, where the problem lies with the political class, which does not respect budgetary discipline, the rules of the banking union, etc. In other words, they do the opposite of what is needed for a eurozone country to function. There is also the whole discussion about climate change, because we have decided to have a 16-year-old girl telling the world what to do. We haven't quite decided where we are going in terms of environmental policy, whether to intervene or to rely on the market to solve the problem. Because companies don't know which line will prevail, they are reluctant to invest. Then there is the EU's migration policy. We are unable to design and implement a common migration policy, which is not good news for European integration. There is also populism. All this means that companies cannot anchor expectations of economic growth. So there is no investment, no growth. That is why international organisations have lowered their economic forecasts. The star in this slowdown is the euro zone, because it is the one that most clearly shows its lack of dynamism. There is hardly any economic growth, although next year there will be a little more due to the fact that 2020 is a leap year and, moreover, many public holidays fall on a Sunday. That will give us one or two tenths of a percentage point more growth, but it does not mean that we have overcome the problem. The origin of the slowdown lies in the industrial sector. Industry used to be the engine of growth, but now it is acting as a brake, while the engines are services and domestic consumption. Part of the problem is due to the automotive sector, because of new regulations, especially for diesel vehicles. There are also some positive things, for example the labour market. The unemployment rate will continue to fall, as will the long-term unemployment rate. Despite this, the idea of job destruction is coming back as a result of digitalisation, thinking that there will no longer be a need for people to work. This, however, is not the case. In this debate we are confusing the jobs that disappear due to technological change because they are not profitable, but others appear, which will require other skills, because the aim of technological change is to generate value and this is done by creating jobs. Moreover, inflation is very low. It has to be in order for the relative price system to work and for there not to be a hidden tax on wealth. But it is still low despite the fact that employment is being created, despite the fact that there are countries with full employment, which would have to increase the price level. However, this is not happening thanks, on the one hand, to the fact that we live in a world of globalised competition in which there is no room to raise prices. On the other hand, digitalisation is moderating inflation because companies that apply new technological advances improve their productivity and, in doing so, can reduce costs. In addition, there is absolute price transparency, which allows many people to know prices and buy the cheapest product for the same qualities. Companies know this too, so they are careful about prices. In the euro zone we are moving at two speeds. France and Spain are in the lead, while Germany and Italy are in retreat. But in Spain, indicators are worsening. In fact, forecasts for Spain are being downgraded. And current economic policy approaches based on public intervention, higher public spending and taxes, elimination of reforms that were carried out in the past, are going to put the Spanish economy to the test. What is happening in Germany is that industry is doing badly, mainly because of the slowdown in world trade and the escalation of protectionism, the problems of the automobile industry related to the new European regulation on toxic gas emissions because it did not adapt to it and, finally, because there is a significant lack of skilled labour. This shortage reflects, on the one hand, full employment and, on the other hand, the introduction of the early retirement scheme at 63, which has encouraged early retirement. Against this background, the macroeconomic policy reaction is the usual one, i.e. to say that something must be done because recession is something no politician wants. Now, while recession is cyclical, it can also be beneficial because it cleans up markets by removing inefficient firms that hold back resources needed by other firms. When the zombie companies disappear, new companies, new entrepreneurs, emerge thanks to the recession. But for that to happen we need to have an efficient financial market and we need to complete the European capital union. This, however, is not in the interest of economic policy makers. They are interested in taking action. The European Central Bank has already done this by lowering interest rates to zero in the midst of an economic expansion, and it wants to continue to do so. The question is whether it will do any good, because the eurozone could be in a liquidity trap. What there is not in the eurozone is a restriction of financing, neither for companies nor for households. What we do have are unwanted side effects: income inequality, falling bank profitability and savings capacity, budgetary indiscipline, etc., plus the risks of bubbles in financial and real estate assets. We are doing what the Bank of Japan has been doing since the 1990s, without having emerged from stagnation. The question is whether we are heading towards the 'Japanisation' of the eurozone. Moreover, it should be remembered that the crisis that erupted ten years ago was preceded by a large monetary expansion by the Federal Reserve, which was the origin of the crisis. We must also ask ourselves whether a central bank has the right tools to deal with the uncertainties related to Brexit, trade wars, etc. And the answer is no. Nor does the ECB have the capacity to compensate for the lack of structural reforms in the eurozone. Then we have a new aspect, which is the call for the ECB's policy to be "greener", that is, for the ECB to buy nothing but "green" bonds, which is absurd because a central bank is not there to make environmental policy. In fiscal policy, we are in the same situation. We have to spend more because we have to support domestic demand, when it is domestic demand that is supporting growth. That is why fiscal stimulus makes no sense. Others say, the followers of the new monetary theory, that there is too much propensity to save - they do not see the European demographic reality - and they say that the state should compensate for this propensity to save with public spending. It is thought that the state can control the business cycle through debt, and that central banks are there to finance that debt. The problem is that a government's fiscal policy measures are always too late. Also, fiscal multipliers are very low in a globalised economy because a government cannot decree that consumers use their income to buy domestic goods. Finally, there are automatic stabilisers in budgets that automatically stabilise demand. When there is a slowdown, the government collects less in taxes and spends more on unemployment benefits, thus generating the deficit and the expansionary policy. This is billions of euros at the government's disposal without it having to do anything. Finally, a fundamental issue is the low growth potential. Potential growth is running at 1.2% per year in Europe, and trending downwards, while in the US it is at 2%. If this continues, when the economic trend changes, the economy will not grow much because there is not much growth potential. To solve this problem we need to focus on the supply side of the economy. What we need to raise the growth potential is knowledge. This means having objective conditions for business investment and innovation activities, that is moderate taxation in internationally comparative terms because otherwise capital will go elsewhere. We also need a robust financial system. We also need public administration to support entrepreneurial activity, to be agile. The second thing we need is investment in human capital. We need a demanding education system, as well as a vocational training system. This is important because most of the euro area does not have natural resources and therefore we have to replace it with other resources, namely human capital. The third thing we need is to reform public spending, eliminating unjustified subsidies and public aid. The fourth and final focus is on competition in the markets, which is the biggest incentive for people and companies to improve. If we were to do all this, we would pave the way for Europe not to be left behind in this digitalisation process, because it is lagging behind countries such as the United States, China or Korea. We are living in times of a change of economic cycle, but we are not facing a new economic crisis.
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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 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.
