Given the changes facing the European, and global, economic landscape in the wake of financial crisis, it is perhaps time to rethink some of the existing policies in order to ensure a future with stability and growth. On Wednesday, April 13 Pier Carlo Padoan, the Italian Minister of Economy and Finance, delivered a lecture on this topic titled “How can Europe contribute to global stability and economic growth?” Following the lecture was a panel discussion with Kemal Dervis, Vice President and Director, Global Economy and Development at The Brookings Institution, and Jan Svejnar, Director of the Center on Global Economic Governance and James T. Shotwell Professor of Global Political Economy at Columbia University. The event was organized by the Center on Global Economic Governance in collaboration with The Brookings Institution, Global Economy and Development Program as part of the Ambassador Donald and Vera Blinken Lecture Series on Global Governance.
Minister Padoan began by providing some perspective and context to frame his discussion of proposals to rethink economic policy in Europe. He noted that in 2009 many economists felt that, although the recession was severe, the economy would quickly bounce back as previous recessions had. This notion was incorrect, as there have been several dips since 2009, indicating that this was a balance sheet recession rather than a cyclical recession. Minister Padoan tied this to the present day situation in which many forecasters are revising down their numbers for the economy as the new fashionable concept is ‘secular stagnation’.
Minister Padoan then went on to talk about the role of policy making in Europe in light of the context he discussed. He noted that the job of policy making is to generate new expectations on fundamentals. In particular, policy making currently needs to address the issue of uncertainty as it is much deeper than once thought. He elaborated on four elements that add to uncertainty and make investment decisions more difficult to pursue: 1) A lack of clarity on the process of European integration; 2) Impediments to growth; 3) The state of Europe’s ‘financial integration’; and 4) Geopolitical risks.
After outlining some of these issues, Minister Padoan then discussed the two potential options for policy strategies that would help to improve clarity about fundamentals in Europe. The first is through markets. He noted that market behavior has been increasingly volatile as markets are looking for fundamentals that they cannot identify clearly and, therefore, taking steps to improve this will help the economy overall. The second is through citizens. Minister Padoan stated that European citizens are looking at Europe and increasingly seeing that unemployment is not going down while social security is being put under question and have come to see the project of integration as part of the problem. Policies would need to be implemented which address these issues for citizens across Europe.
Minister Padoan offered three guiding principles that he believes should be driving the design of policies at the European level. First, policy responses should be both national and European in that, instead of solving problems by identifying the responsibilities of individual countries, the solutions need to be put into context. Second, risk sharing and risk mitigation must go hand in hand, especially when considering issues related to monetary and banking union. Finally, fiscal policy and the structural policy that goes along with monetary policy needs to be put together in a more coordinated way.
Minister Padoan noted that economic surveillance policies and structural policies need to be addressed as well. In the case of economic surveillance policies, he pointed out that they are currently too asymmetric and need to be adjusted so that all countries are contributing. In terms of the structural policy agenda, he offered two elements to be considered. First, he would propose to have a European Finance Minister who would manage the aggregate fiscal stance of the European Union, as well as deal with European public goods and manage a European budget. Second, he would emphasize the importance of financial integration through banking union, capital markets union, and the Juncker Plan. Minister Padoan also discussed the paradox of European integration; specifically, a number of instruments and institutions have been introduced and endowed with resources, only to be left unused. He cited the example of the European Stability Mechanism, which has rigid rules that prevent it from being used by countries in need.
To close his lecture, Minister Padoan emphasized that the EU needs to accelerate the single market project through innovative options, such as an energy union or a digital union, as well as through improvements in labor market cooperation. He also discussed the importance of not only integrating within Europe, but also focusing on international global integration to boost growth. Finally, he said that at the core of all of his points is the insufficient mutual trust amongst countries which prevents positive outcomes.
Following the remarks by Minister Padoan, Jan Svejnar provided some reflections and comments. He noted the relevance of the Minister’s lecture given the decline in Europe’s share of the world’s GDP over the past two decades and the need to discuss how this has happened. He mentioned that potentially the less forceful nature in which Europe responded to the financial crisis in comparison to the US could provide some explanation for where some of the issues discussed by the Minister began. Professor Svejnar emphasized that the pieces are there to effectively handle the secular stagnation, but Europe needs to have the wherewithal to really move forward.
Then Kemal Dervis offered some insights as well, focusing on the interesting nature of the asymmetry of the adjustment in Europe in response to the crisis. He noted that the northern European countries have a large current account surplus and yet all the adjustment was put on the deficit countries, which can lead to deflationary issues, and is part of the root of the mistrust in Europe. Dervis also discussed the fundamental issue posed by Brexit, as it indicates how the postwar enthusiasm for an ‘ever closer union’ in Europe has faded. He noted that perhaps this issue will shed some light on the lack of clarity surrounding the relationship between the UK and the Eurozone, which is a contributing factor to the calls for Brexit.
Padoan concluded by responding to these comments and stated that ultimately the issues facing Europe are related to the phrase “We don’t like the rules, but we go by the rules”.
Samantha Weinberg , MPA '16