Slowdown amidst profound structural changes: How can policy respond?
Summary:
On 9 May 2019, the Rafael del Pino Foundation hosted a lecture by Juergen B. Donges, Professor Emeritus at the University of Cologne. Donges, professor emeritus at the University of Cologne, entitled "Slowdown amidst profound structural changes: how can policy respond?" According to Donges, we have reached the end of the expansionary cycle and have entered a path of economic slowdown. This is taking place in an environment in which our production structures are undergoing rapid transformation, especially as a result of digitalisation. This has very important implications for economic policy, but the Spanish government is still not aware of this. The forecasts of international organisations and the various national institutions, which were made in the autumn, have been significantly revised downwards. We have two scenarios that are more adverse than initially perceived. On the one hand, we have the moderation of global activity, especially in China and the large emerging economies. All this is accompanied by a rise in oil prices, which is something that is not normal. This is due to Trump's sanctions against Iran, which is causing a cut in oil supply that the other OPEC countries do not want to compensate for. On the other hand, we have a huge uncertainty with the confused Brexit process. The British parliament is unable to define what it wants. We also have the uncertain future of Italy and the EU's trade tensions with the US. In addition, we have a ticking time bomb, which is the huge level of public indebtedness in the global economy. We are at 235% of GDP. This is not sustainable over time, because interest has to be paid, the debt has to be amortised, it has to be refinanced. Governments, however, have not yet taken note of this problem. GDP growth in the Eurozone could moderate this year to 11GDP3Q3 or even lower. We are in a marked slowdown. What is reassuring is that the activity we have is coming from domestic demand, thanks to the good tone of the labour market and the wage increases seen in the euro countries. It is also supported by low interest rates and falling unemployment. The slowdown affects the four large eurozone countries. Spain still registers a remarkable growth rate, around 2.4%, but it is more due to inertia than to the performance of positive factors because all of them are worsening: savings, consumption, investments, the current account, employment in the private sector, labour productivity, ... Everything is going in a negative direction, to which we must add an economic and fiscal policy that is going in the wrong direction. These are not the times to increase public employment. It is nonsense to revalue pensions with the CPI. And it is even more absurd to announce tax increases. This is going to take its toll. France, with 1.3%, remains as it was. Italy is on the road to stagnation and is in an excessive debt trap. Most worrying is the cooling of German economic activity, which is more pronounced than expected. There are three causes of the German slowdown: the decline in exports; the German car industry, which did not adapt to EU carbon dioxide emission standards; and the lack of skilled labour, a consequence of the demographic problem and of allowing early retirement at 63. However, we are not heading for a recession in Germany or in the eurozone, because we have robust domestic demand. The fundamental problem is how fast an economy can grow. This depends on the growth potential of an economy. This potential in the Eurozone has become a problem because it is growing very moderately, in the order of 1.2% or 1.3% per year and with a downward trend. In the United States, on the other hand, potential growth is increasing in the order of 2% per year and trending upwards. In other words, we are not in a Keynesian scenario, in the sense that there is a lack of demand, but a supply-side problem in our economy. Politicians, however, act as if we are in a Keynesian scenario. They all talk about the need for fiscal stimulus, but if there is no productive capacity in companies, this stimulus does not increase economic activity. Moreover, these fiscal policies need time to kick in and they usually come just when they are no longer needed. The other problem is that we are in an open, globalised economy. Expansionary fiscal policy, in this context, does not work because it generates demand in the rest of the world and creates more deficits at home. As far as monetary policy is concerned, it has no room for manoeuvre because the ECB cannot lower interest rates that are already at 0%. We are caught in a Japanese-style liquidity trap. The ECB wants to keep interest rates low, give substantial injections of liquidity, etc., but there is a fundamental problem. This increased supply of credit does not automatically translate into increased demand for credit from households and businesses. Nor is the negative interest rate option viable unless cash is eliminated, because then depositors cannot escape. In other words, there is no room for monetary policy action. The more fundamental issue is that of the underlying supply-side problems that are weighing down the economy. On the one hand, in all euro area countries we have bottlenecks in vital economic infrastructures, especially those related to digitalisation, but also in other infrastructures, due to the reduction in public spending on infrastructure to make budgetary adjustments. This has reduced growth potential. Labour productivity is too low despite technological progress, because we lack adequate education and vocational training systems, especially in digital skills. Finally, we have the problem of demographic contraction. To solve this we would have to do three things. One is to increase the participation rate of women in the labour force. We also need to delay the effective retirement age. And, finally, manage immigration with efficiency criteria in terms of professional qualifications. Without changes in the productive structure, there can be no sustained economic growth because, on the one hand, we have changes brought about by technological advances, but also by changes in demand as our welfare increases. Added to this are changes because, in times of globalisation, new suppliers are appearing. The process of digitalisation will accentuate this. Whenever there have been changes in the productive system, there have always been apocalyptic forecasts about growth, employment, etc., but this has never been the case. If societies have adapted to these structural changes, everything has been better. The fundamental factor is research and development, R&D. Today, technology is created within societies, by basic research in universities, by applied research in companies and by training of human capital. This is what produces new technology. For this to work, we must have open markets, not protectionism. If we want to take advantage of the technological dividend, we will have to have economic freedom. It is entrepreneurs who bring added value to society and they will do so the fewer restrictions they have. What are the restrictions we have in the European Union? The first is that we do not have a venture capital market, nothing comparable to the United States. Nor do we have a European Capital Union. The second is the public administration, an entity that complicates things for us. It still does not take advantage of the potential of digitalisation to streamline processes. In these processes of change, some benefit and others are disadvantaged, but we have to explain what is happening and why. People with professional qualifications that correspond to the changing needs of the labour market benefit. We need flexible labour markets here, because we don't know what the new professions are. That is why we need to be able to adapt. The people who suffer are those with low or obsolete qualifications, or young people who neither study, nor work, nor receive vocational training. But if young people do not want to be trained, there is no qualified workforce. That is why it is so important for the state to implement active employment policies, to have a quality education system and an active labour market policy. What doesn't work are populist solutions, such as the minimum wage or regulations that make it difficult to dismiss people. The problem with the minimum wage is that you cannot decree how many people companies employ on that minimum wage. Companies compare the wage with productivity, and if it doesn't match, the worker is fired and replaced by a machine. This is one of the consequences of raising wages too high for people with low productivity. And if you try to regulate the labour market too much, companies can react by relocating production. If we do not want such processes, then we must be very careful not to make labour artificially expensive. In the face of such profound structural changes, the position in Europe is to create great national champions from the state spheres. This is the official policy of the German federal government and of Mr Macron with his French government, knowing that this has never worked. It does not work because the state, or the officials, do not know what is needed in the future. All that results is a waste of public resources. It is much smarter to use the decentralised mechanism of knowledge generation and dissemination, i.e. the market. This is how Silicon Valley works. Its big companies are not the product of the state, but of the private creativity of individuals. What we need are far-reaching policies. It implies far-reaching structural reforms, within a framework of a culture of research, innovation, education. Also, a monetary policy that restores the role of interest rates. Also, the sustainability of public finances through the rationalisation of expenditure, the elimination of superfluous expenditure, an efficient tax system with priority given to indirect taxes and no new technological taxes. The current slowdown could then be temporary. Be that as it may, if sustainable growth dynamics are to be generated, it is inexorable that companies and the workforce adapt quickly to the new technological environment. This requires education and economic policies that support these adaptation processes.
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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.
