Keynote Lecture Juergen B. Donges

Summary:

On 8 May 2018, the Rafael del Pino Foundation hosted a lecture by Juergen B. Donges, Professor Emeritus at the University of Cologne, entitled "Economic Dynamics: Time for Rational Policies". Donges, professor emeritus at the University of Cologne, entitled "Economic dynamics: time for rational policies". According to Donges, this is a crucial year for the fate of the European Union. We are facing far-reaching institutional changes. Therefore, in 2018, decisions have to be taken for everything that will happen in 2019. Next year a new European Parliament has to be elected, a new European Commission has to be appointed, a new president, a new chief economist and a new advisor to the European Central Bank. A new EU president must also be elected. At the same time there is the need to approve the next multiannual financial framework 2012-2027 this year, and it must be approved unanimously. The problem begins with Brexit, because the EU's second largest funder after Germany is leaving the EU. This means that there is one less country and it would be logical that there would also be less spending, but what is being asked for, on the contrary, is more spending and therefore more contributions from the member states. There are two opposing positions here. Germany and France, on the one hand, say they are willing to increase their contribution from 1% of GDP. So does Spain. On the other hand, there is the group of small countries led by the Netherlands and Austria that have totally different ideas and ask for lower contributions. So we are going to face very tough negotiations and, in the meantime, European Commissioners and MEPs are not even asking themselves whether in a world of new technologies it is reasonable for the Common Agricultural Policy to remain the most important item in the European budget. 2018 is also the year of the window of opportunity for the EU to address all the issues on the table. Governments should also make use of this window of opportunity. Why? Because it is becoming the norm among governments that Brussels is where all problems are solved, but that is a fallacy because problems are national and have to be tackled with national policies, for example, in the case of unemployment. The temptation is great to blame everything on Brussels, but the danger is also great because the European Commission cannot do everything that is asked of it, either because of a lack of resources or competences, or because it cannot solve it. The consequence is that disenchantment will find its way into society and lead to the rise of populism. This window of opportunity comes at a good time because we are in a year of stronger than expected economic recovery, with very loose monetary policies and loose fiscal policies. We also have risks, but in 2018 they will not materialise yet. The pace of economic growth is very solid and fairly well synchronised across countries, with the exception of the UK, which is slowing down because of Brexit. On the other hand, countries with sovereign debt crises, including Spain, have recovered strongly, with their own adjustment efforts and structural reforms. Even so, the left is reluctant to acknowledge that structural reforms and the consolidation of public finances are necessary for an economy to recover. The bad thing about their message that everything is bad, jobs are precarious, etc. is that people believe it. The four big economies of the Eurozone are growing strongly, with Spain leading the way. In Germany there is an economic boom such as has not been seen since reunification, with a capacity utilisation rate of 88%, with a shortage of skilled labour, which will end up slowing down the pace of activity. The other three major economies are also growing above their potential output. The big challenge is to have policies that increase potential growth, rather than stimulate demand, through dynamic business investment, economy-wide technological progress, skilled people and targeted and selective immigration to complement the domestic labour supply. We also need higher labour force participation and longer working lives beyond the age of 65. These policies are supply-side oriented, the part of the economy where production decisions are made. They include moderate taxation, not creating new taxes; efficient regulation; public investment where it is really needed; limited public spending and reducing accumulated public debt. If we did this we would have healthy, sustainable budgets and no need for a European budget to counter cyclical shocks. Moreover, it should be borne in mind that the effectiveness of fiscal policies is very limited. The labour market is one of the more pleasant stories because job creation is significant and unemployment is falling. We still have notable differences between countries, but in all countries there is an upward trend in job creation. This is partly a reflection of the economic recovery, but it is also the result of structural reforms that have introduced more flexibility in the markets, to the extent that the elasticity of employment in relation to economic growth has increased. Unfortunately, what is being discussed in countries like Spain is to repeal the reforms. In Germany, we are even going back to regulating it, which is a mistake because in the age of digitalisation we need more flexibility, not less. The employment model of the future will no longer be the permanent contract, and those with good professional qualifications will do better. Those who know how to take advantage of new technologies will get good contracts with good salaries. In this sense, it is not appropriate to talk about a living wage because it raises the expectation that a person will be able to earn more than what he or she contributes to the company, which favours the substitution of labour for capital. Macron has understood this and is trying to deregulate the French labour market, which is opposed by highly politicised trade unions. The priority for this is education policies. The criterion is to have education policies that establish the basis for job creation. For this we need people who can handle mathematics, natural sciences and engineering. We also need a proper understanding of economics and that needs to be provided at school. Language skills are essential. What makes no sense at all is to repress the national language regionally. Continuing vocational education is also needed, because with technological change it can become obsolete. Governments must take the lead in ensuring that everything related to digitalisation can be exploited, for example, with sufficient bandwidth. In terms of inflation, 2018 has brought us one piece of good news and that is the disappearance of the risk of deflation. In the future, inflation will be low because of the competition brought about by globalisation, by the consequences of technological change, by competition from low-wage workers. That is why the ECB should change its monetary policy, because the current policy creates perverse incentives in financial and real estate markets, has an adverse impact on bank balance sheets and stimulates public indebtedness. The ECB played its role in the recession and did it well. It gave countries time with its debt purchase programmes and some, like Spain, have taken advantage of it and others, like Italy, have not. But monetary policy cannot replace structural reforms. To change monetary policy, the first thing to do is to pre-announce the path of what is going to be done, to clear uncertainties. The next step is to begin the gradual exit from extraordinary monetary policy, starting this year when the asset purchase programme expires in October. The third step is to start gradually raising interest rates from 2019 onwards. The last would be to unload the ECB's balance sheet of these assets. What we don't need is a European finance minister. No member state will give up its core competence, which is the approval of budgets. If structural reforms are done well, the economy will work. These reforms should be made by governments because they know better than any European institution the problems of their own country, its idiosyncrasies. If everyone does their homework, it is in the interest of the European Union as a whole.

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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