The European economy is treading troubled waters.
It faces serious competitiveness problems due to higher energy costs, has been left behind in the field of innovation and technology, and is suffering from a crisis in its industrial model.
The outlook could even get worse if Donald Trump wins the elections, imposes protectionist measures and leaves Europe without assistance in Ukraine.
In this context full of bad omens, the EU has commissioned the former president of the ECB and former prime minister of Italy, Mario Draghi, to prepare a report on European competitiveness.
This is the question that now worries the authorities of the continent.
Draghi has already advanced some lines of his work, which will be published in June, to the EU finance ministers.
And he has developed his arguments in a speech that he made a few days ago in the United States before the association of business economists.
The speech is groundbreaking in that it reveals the agony of globalization as it has been understood in recent decades;
defends greater interventionism with aid to companies and a relaxation of competition rules;
foresees greater tolerance with inflation to finance, on the one hand, the green and technological transition and, on the other, to face the future
shocks
that are going to be generated in a world without the cushions of globalization and in which it will be more difficult to get out of crises by exporting.
Although they will improve productivity in the long term, green investments are generally made to replace energy sources and not to improve the performance of the economy.
These are some strokes of the diagnosis that Draghi draws.
Central banks, the Commission or Competition services cannot be separated from the objectives of European policy.
Even if they maintain their independence, they will have to join forces with governments to serve their purposes.
Underlying, therefore, is a certain idea that monetary policy will have to become more flexible so that fiscal policy can invest.
It will take a lot of money and a common fiscal capacity, warns Draghi.
In any case, it remains to be seen how the hawkish
countries react to this discourse
and how national interests then take precedence.
The solidarity of the pandemic may have been an exception, even though Draghi warns against it.
Expectations about globalization have not been met, Draghi maintains.
Although many people have been lifted out of poverty in emerging countries, the model had, in the opinion of the former president of the ECB, a fundamental weakness: to be sustained, it should have had rules and institutions that ensured compliance.
But the commitment of some of the largest countries has been ambiguous from the beginning and any state could decide that it was not interested in sticking to the rules.
For example, China never notified the World Trade Organization of subsidies from its regional and local governments.
Trade imbalances
Draghi recalls that globalization has led to trade imbalances.
In poor countries they tried to protect their developing industries.
Asia tried, after the 1997 crisis, to accumulate surpluses to have reserves and avoid new capital flight.
China has sought to become independent from Western technology and capital.
And to get out of the euro crisis, the accumulation of trade surpluses was also pursued.
“In this case through procyclical and wrong fiscal policies enshrined in our regulations that depressed domestic demand and labor costs,” underlines the former Italian prime minister.
In a situation where the EU's solidarity mechanisms were limited, Draghi concedes that it made sense to export.
But the problem was that even Germany did it.
These surpluses in turn created excess savings that were not matched by a greater demand for capital to invest.
The demand for money was low and contributed to very low interest rates.
Even so, through unconventional policies, buying debt, central banks managed to activate the economy and employment.
But the labor market situation did not improve at all.
The workers lost the ability to negotiate, says Draghi.
Between the early 1980s and the start of the financial crisis, in the G7 economies, exports and imports of goods increased nine percentage points, while the share of wages fell six.
To the extent that a part of the citizenry has been left behind in globalization with important political consequences: “Globalization not only failed to spread liberal values, [...] it has also weakened the countries that have been its greatest defenders and has fueled protectionist forces.
[...] The perception in the West is that citizens were playing a flawed game, one that offshored millions of jobs while governments and companies remained indifferent,” says Draghi.
And he adds that now there is a demand for a distribution of the benefits of globalization and a greater focus on economic security.
To achieve this, greater activism is expected from States, increasing protectionism and redistribution.
This trend has been reinforced by the pandemic and the war in Ukraine.
We have witnessed the resurgence of blocs of nations and a relocation of production seeking security of supply.
Dawn in the port of Algeciras.Alfredo Cáliz
At the same time, the urgency to respond to climate change has led to initiatives such as the
Inflation Reduction Act
approved by the United States or the European proposal for a border carbon adjustment mechanism.
Both prioritize climate goals despite distorting trade, Draghi emphasizes.
Future changes
And all this is going to change the economic scenario.
For 30 years, Draghi explains, globalization meant a continuous positive
shock
to supply, as more workers joined market economies.
But with China moving up the value chain, there will no longer be a global supplier of cheap, massive labor.
Consequently, there will be more
negative supply
shocks .
Not only because of geopolitical conflicts.
Also due to the need to restructure supply chains and decarbonize economies.
The
stock
of investments is going to be destroyed faster than it is replaced with new investments because these are to replace polluting energy sources and part of the supply that globalization provided, not to improve the economy in the short term, he says.
Although in the long term they will improve productivity, temporarily the aggregate supply will be reduced while resources are redirected from one activity to another.
In turn, fiscal policy will have to play a more important role to redistribute, make investments and stabilize activity in the face of
shocks
, as has already been seen in the energy crisis with the aid that has been given to the most affected groups. .
Above all because monetary policy takes time and is too generalized, recalls the former president of the ECB.
All of these factors will lead to an environment of lower growth while the transition is completed and in a context of higher inflation due to the costs of said transition and persistent fiscal deficits.
And this without being able to sustain large trade surpluses as before.
Consequently, global savings will fall, there will be less money in circulation and credit will become more expensive.
That is to say, the era of downward pressure on interest rates will end.
If low growth and debt at record levels persist, the sustainability of public finances will be affected while investment needs increase.
In Draghi's opinion, such a scenario requires a change in strategy.
It is necessary to advance investment spending, financial regulation that supports the relocation of resources and innovation, and a competition policy that facilitates state aid.
“Whether fiscal policy has enough room to meet its objectives will depend on how central banks react.
[...] Independence does not mean separation and authorities can join forces to increase policy space without compromising their mandates, we saw this during the pandemic: monetary, fiscal and banking supervisory authorities came together to limit the damage of the confinements,” he says.
But for this Draghi sets two conditions: one, that there be a credible path for public accounts combined with a focus on investments and preserving social values.
This must be accompanied by a European fiscal capacity, which issues its own debt and increases joint investment, alleviating pressures on national budgets.
Increasing supply capacity would lead to less inflation.
And as long as investment is made at the European level, there would be a more committed path of consolidation and this strategy would not be inflationary, he argues.
The second condition is that to the extent that authorities establish credible fiscal paths, central banks should be guided by inflation expectations and distinguish between permanent and temporary price increases.
It is the best way to ensure that central banks can contribute to the strategy without compromising their independence.
“We need space to invest in transitions and raise productivity,” concludes Draghi.
In short, the former president of the Eurobank demands a situation of exceptionality to stop the green transition and the technological delay.
His report will generate debate at a time when the French and Italian public accounts also present significant red numbers.
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