By Pedro Sousa
* The second in a series of three articles
Where is the leadership?
The global economy and, in fact, the world is not in good shape. The transition from a unipolar world order to multipolar disorder has created a vacuum of global governance. Shocks related to terrorism, geopolitical conflicts, political discord, or refugee flows, are part of the unfortunate challenges that some countries and regions are facing. These have spillover effects on global economic activity. Russia illegally annexed Crimea and has deliberated destabilized a neighbouring sovereign country, Ukraine, in an attempt to revive its old empire. China has deployed military force in man-made islands in the South China Sea, one of the world’s busiest sea-lanes for commerce, to redraw the strategic map of Asia. Parts of the Middle East have collapsed into chaos and civil war, making millions into refugees. Western democracies are under pressure from nationalism, populism, and protectionism, threatening the historic progress achieved since the end of the Second World War. Inwardness and isolationism increasingly resonates with sections of their populations. There is a real possibility that soon we will debate global economic policy with the likes of President Donald Trump or Marine Le Pen. Lack of strong visionary leadership is responsible for the erosion of the rules-based order and for the failure to bring about global macroeconomic coordination.
Two crucial mistakes by politicians were deregulation of the financial sector that led to the financial crisis and austerity measures which made the effects of the crisis worse. Centrist politics failed to defend the interests of the middle class and working people, instead allowing financial markets to take control of the situation. Political elites have not kept in tune with the feelings and beliefs of average voters. History tells us extremism always rises during recessions. Strong leadership and effective communication is needed to steer the boat through troubled waters.
The vote for Brexit is an unfortunate example of the disconnect between the intellectual elite and the population at large. This caused pollsters, analysts and journalists to overlook the momentum behind the Leave vote. Mistrust of experts was one driver of the outcome. British leaders, especially Conservative Party leaders, have long chosen not to make the case for EU membership, and decision to hold a referendum on it to appease the right of that party was a terrible mistake. David Cameron failed to show leadership and vision and, unfortunately, his last-ditch attempt to defend the UK’s EU membership was unsuccessful. EU membership should had never been reduced to a “yes/no” question before a population who were not well-informed enough on the issues in the run up to the vote. It provided the opportunity for people to protest in the wrong place and at the wrong time. And post-referendum metrics have shown this was a protest vote against a system that has failed most people and benefitted only a few. Exiting the EU will not solve the UK’s socio-economic problems. It will only feed the dreaded race to the bottom. Brexit might be a huge step back in history, signaling that lessons from the past have been forgotten.
The risk of political contagion is such that the EU needs to send a strong and clear message that its institutions will revamp and its member states unite. As Pier Carlo Padoan, the Minister of Economy and Finances of Italy, stated earlier in June: “Deep dissatisfaction over immigration, security and slow economic growth could combine for a further push toward disintegration of the EU bloc. Italy has been pushing for more EU action to encourage economic growth.” One would hope that other European leaders would heed this warning. But it does not look like it. In a recent show of unity following the vote for Brexit, Italian Prime Minister Matteo Renzi, French President Francois Hollande and German Chancellor Angela Merkel met at a summit of the big three EU economies. But Merkel and her government refused to listen to yet another wake up call. Hollande and Renzi are pushing for increased EU investment, fiscal stimulus and harmonisation, and greater flexibility on EU deficit rules. Merkel is against those policies and deeper EU integration. Yet all three leaders face challenges from Eurosceptic or populist parties at home. Elections will take place next year in France and in Germany, and a risky referendum on constitutional reform is scheduled for later this year in Italy. Some voters are tired of the status quo, inaction, political correctness, and therefore want to see a change at the top, leaving major social democratic parties struggling to adjust. These voters see their enemies as globalisation, free trade, offshoring, free movement of people, market-oriented policies, supranational authorities, and even technological change.
The current form of globalisation of capital, trade, and migration flows has had adverse effects. For liberalisation and globalisation to be done in a sustainable way that is beneficial for everyone, the winners must compensate the losers and give the losers a chance to become winners. Brexiteers and Trump’s message that many workers have suffered from free trade has struck a chord, partly because it is true. Large portions of the population have not seen their prospects improve. In several advanced economies, unemployment is high, quality jobs are lacking, and real wages are falling. In particular, young workers tend to have insecure jobs that pay low wages with little or no benefits. Workers’ bargaining power has weakened. Voters saw the banking sector being bailed out with billions of their taxpayer money. Austerity has jeopardized public services upon which so many middle and low-income workers depend. Additionally, recent trade agreements are little more than geo-economic battlefronts negotiated in secret with corporate interests placed at the forefront, neglecting ordinary citizens and the working class. Unless current leaders produce effective policy responses to the current economic realities and act collectively, the populist rejection of free trade, combined with hostility towards migrant workers and refugees, will prove dire for everyone. The global economy needs visionary and competent leaders.
This crisis in leadership is most evident in Europe. The Eurozone has been badly mismanaged by its leaders. Without removing the responsibility of Greek policymakers for what has happened in Greece – allowing the idea of Grexit to float was a profound negative signal from Eurozone leaders at a time when everyone was watching. The Eurozone revealed its structural weaknesses and Eurosceptic parties seized their moment. As financial markets slid toward disaster, Germany did not adequately defend the Eurozone.
Every serious proposal to resolve the euro crisis since 2009 – haircuts for government bond holders, more realistic and flexible fiscal consolidation targets, jointly guaranteed eurobonds, a pan-European bailout fund, quantitative easing by the European Central Bank – has been opposed by Germany. Angela Merkel has promised to do whatever it takes to save the euro but has been fighting against anything that might actually work, claiming deference to German public opinion or national interests. The fact is that the German economy needs a mid-priced currency in order to continue benefitting from huge surpluses. A weaker currency has supported German prosperity. Angela Merkel not only needs the euro, but needs the weakest members to remain in the Eurozone. This is further explained in a 2011 article in Fortune that states, “an artificially low euro in Germany means an artificially high euro in weaker countries like Spain and Greece. That means those countries can afford to buy German goods. It’s therefore no wonder why German cars, white goods, electronics and machinery dominate the Eurozone”. Allowing this “twospeed” Europe to continue has caused a race to the bottom, where everyone would be worse off, effectively putting an end to a positive sum game European project of peace and prosperity – through austerity, recession and consequential “exits”. Even Germany has not got off the hook politically given the rise of far-right party AfD in recent years. This is lack of leadership. This is lack of vision. We need visionaries to set the agenda.
Fiscal austerity has achieved nothing; instead recession has deepened while in many European economies the debt-to-GDP ratio has risen. Sluggish economic growth has meanwhile undermined wage growth, weakened tax revenues, and made it impossible for governments to pay down their debts. Given this macroeconomic environment, an entire generation now find themselves ill-equipped to drive future growth. Leaders of major developed economies should be discussing fiscal stimulus, along the lines of Keynesian theory put into practice after the Second World War when the global economy was weak. Instead, pro-cyclical budgetary policies were adopted in the 2000s, with governments spending more while the economy boomed, only to then pursue fiscal tightening when the economy was at its weakest during and since the crisis.
The countries that can introduce fiscal stimulus are those where their debt deficit levels allow it, such as Germany. But Germany is ideologically opposed to this (as former Italian Prime Minister Mario Monti said in 2012, for the Germans “economics is a branch of moral philosophy”). The reality of global economy, of the Eurozone, the OECD, the IMF and many other players, urgently call for the German-imposed austerity to end. If Germany’s purely national interests rule its political structure, it will not be able to coexist comfortably with its European partners. Structural disunity is simply unsustainable. As Anatole Kaletsky wrote in 2012, Angela Merkel’s stated goal to create a “German Europe” will not happen: “the question is not whether Europe will agree to live under German leadership, but whether Germany will agree to live under EU leadership – or whether the other nations must form a united front against Germany to prevent the destruction of Europe”. New leaders must emerge both in Germany and across Europe to agree on a sustainable approach to save the euro: fiscal expansion, public investment in infrastructure, a banking union, Eurobonds, ECB quantitative easing, fiscal transfers and mutualisation of debts. Such policies would accelerate banking and fiscal union across the Eurozone, while having a Eurozone finance minister would enable for coordination of resources and macroeconomic policies to avoid greater imbalances arising among Eurozone members. The Eurozone has to have systemic effective instruments in order to tackle the financial, economic and migration crises it faces. None of these elements are easy to design or straightforward to implement. For instance, banking systems already differ substantially from country to country, so the design of banking rules has to take this into account.
The global economy and the wellbeing of its citizens need policymakers that strengthen rules-based order in a rapidly changing world. With public backlash against trade and globalisation increasing, leaders need to focus on ensuring the benefits of global trade and cooperation are shared broadly among their citizens. Economies must work for all. Currently they do not, and people are angry because of because of leaders’ inaction and inability to address this. Whereas before people could feel the benefits of globalization, ever since the global financial crisis, most citizens have lost massively due to a skewed version of globalization, while a small elite has acquired an incredible amount of wealth and is seen as abusing power to protect its own interests. Even some at the IMF now admit there are aspects of the neoliberal agenda that have not delivered as expected, admitting that increased inequality “hurts the level and sustainability of growth”, while “austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment.” Leaders failed to be swift, bold and decisive. Nothing destroys trust in government more than this.
The complex process of globalisation led to a rise in incomes and economic progress for some time, but in the past decade it has failed. Leaders have failed to build upon the gains of globalisation, to limit its costs, and make the case to a skeptical public. Despite the growing anti-globalisation movement, one could argue that the world has passed the point of no return and globalisation is a somewhat inevitable process, since multinational companies dominate the global economy. Nevertheless, by closing off markets and borders the world risks slowing the pace of growth and development. Inwardness and isolationism will make the world a more dangerous place. What leaders should and must do is guide globalisation towards growth that is more inclusive and improves the prospects of middle and lower wage earners. Ensuring an environment which allows the middle class to reap the full benefits that expanded opportunities and competition that globalization ushers in, while protecting those that lose out from the shocks of greater liberalisation. That means investment in education, a progressive tax policy that distributes wealth, compensating and retraining those who are in transitional unemployment as a result of globalisation, enabling universal low-cost access to basic services and infrastructure from healthcare to public transport, supporting entrepreneurship, boosting finance for investment in these services and infrastructure, and reducing state capture by large businesses. A positive global economic environment that creates peace and shared prosperity can only be achieved through collective action. As the IMF’s David Lipton says, “part of the political problem today is that national leaders cannot really solve domestic problems, nor fulfill the aspirations of their people, with domestic action.” He continues: “that is because their country’s prospects depend too heavily on global prospects.” Multilateralism needs to be defended and the global economy needs internationalists in charge, now more than ever.