Blog Post

The Weekender

Dear All, I’m writing these lines from Paris where European Social democratic parties held a big pow wow on Friday and Saturday. It was a very interesting opportunity to get a better sense of Hollande’s European plans. He is still well ahead in the polls for the second round but his advance is shrinking fast. Meanwhile I will focus on: 1.Hollande’s European strategy, 2.Some conjectures on global rebalancing

By: Date: March 19, 2012 Topic: European Macroeconomics & Governance

Dear All,

I’m writing these lines from Paris where European Social democratic parties held a big pow wow on Friday and Saturday. It was a very interesting opportunity to get a better sense of Hollande’s European plans. He is still well ahead in the polls for the second round but his advance is shrinking fast.

Meanwhile I will focus on:

  1. Hollande’s European strategy
  2. Some conjectures on global rebalancing

1. Hollande’s European strategy

Francois Hollande appears emboldened by a growing support for his call on a renegotiation of the fiscal compact. This is clearly visible amongst the social democratic parties in Europe but he also takes the Spanish and Dutch fiscal targets negotiations as well as the letter to the Council by David Cameron and others as a sign that he could even get support amongst conservative parties for a bolder agenda on growth.

He is probably right on substance but the confrontational renegotiation strategy could undermine his effort. I believe that he would be far more successful if he chose a rhetoric that proposes a complement to the fiscal compact rather than a substitute.

What he has called a Pact for Responsibility, Governance and Growth would revolve around:

  • Bigger investment by the European Investment (this will certainly require additional capital injection because there is a limit to the degree to which the EIB can grow its balance sheet and keep it AAA rating).
  • Reform and increase of the structural/cohesion funds, which have proven insufficient and ill-targeted.
  • Better use and broadening of the European Globalization Adjustment Fund, which assists workers affected by profound and disruptive economic changes in their countries.
  • Concrete steps towards Project Bonds, already proposed by the European Commission, a form of joint a severally guaranteed bonds to finance supranational projects and infrastructures.
  • The introduction of a proper Financial Transaction Tax to back of these initiatives.

But his European intentions are primarily focused on supporting the economy in the current downturn but few proposals have real far reaching or medium-term consequences. If one is prepared to use so much political capital to renegotiate a treaty, it might be as well be used to make substantial breakthrough which I believe should include:

a) Make steps towards a Banking Union and make the financial Sector more crisis-proof by the following:

  • Abolishing national guarantees of deposits and set up a supranational Guarantees of deposits for up to 100k euros across the euro area
  • Set up a supranational Banking resolution authority that would have the authority to resolve transnational banking failures through restructuring, merger and eventually bankruptcy. This requires limited financial contribution but an ex-ante commitment to abandon these decisions to a supranational institution

b) Make Steps Towards a budgetary Union (a word he not only managed to avoid in his 1 hour long speech but also one he suggested impossible by stressing that the Bundestag was Constitutionally sovereign over budget matters and so should be other parliaments)

  • Strengthen the pre-budget governance aspects (instead of the ex-post sanction) by strengthening the European semesters and forcing greater fiscal convergence.
  • Lay out a path and a timetable for the introduction of Eurobonds (starting with eurobills as a pilot project)

c) Resolve private sector imbalances and competitiveness through:

  • Press the ESRB to effectively address divergent growth in national monetary aggregates in order to limit future private sector imbalances and bubbles
  • Reinforce monitoring of national wages and social benefits negotiations so as to make sure that national reforms do not fuel internal imbalances (ex. Synchronizing VAT hike in Germany (2009) and France (2012) would have reduced ULC divergence over this period between the two countries).
  • Hollande (and whoever is the next president in fact) should show that he has a clear economic vision of where Europe needs to go and not only an immediate concern for managing the cycle in the best possible way. He would bolster his credibility and have more chance of success if he manages to articulate his short-term concerns with a medium term vision.

2. Some conjectures on global rebalancing

It is striking how the debate on global rebalancing has faded in the last year. It used to be the primary source of concern and debate at the G20 and has now fallen into the background. There are 2 reasons for that, one is that the European crisis has taken precedence; the other is that global imbalances that looked so deeply entrenched are receding generally faster than we thought. In fact, the Current Account deficit projections of the IMF for China for instance have been repeatedly off by a wide margin over the last few quarters.

Interestingly, there are a few reasons for this, which I think are a combination of cyclical and structural determinants. In the US, domestic demand is cyclically repressed by high unemployment and balance sheet adjustments but also structurally changing due to growing energy independence. In Japan, net trade will grow in deficit due to reconstruction efforts but will also structurally move to a deficit if Japan continues to replace nuclear energy by imported fossil fuels. In China, a relatively slow global recovery explains the poor performances of its exports but the economy is also structurally moving towards a more domestically driven growth.

In addition to this, financial globalization seems to be on the wane, which could challenge the financing of countries with extreme current account deficits. In addition, financial repression, renationalization of lending, limited cross border take-overs in the financial sector, macro-prudential policies or capital controls ought to restrict the growth in cross border financial.

These deep-seated changes could have two fundamental effects. On one hand, capital, which was flowing uphill from emerging economies to the US, could start to flow downhill as the US has less of a current account deficit to finance. This would be hugely important for emerging economies as financial flows to them would increase substantially — even to a point where it could be disruptive if the proper macro-prudential tools are not in place. For the world economy, this could also be very meaningful, as global savings would be put to work where they should have a better and more sustainable economic return.

In Europe, however, things were somewhat different. Financial flows were cascading downhill from the center (Germany, France…) to the periphery with some great success (CEE) and some bubbles (Greece, Spain, Ireland…). With the ongoing reversal, capital would start to flow uphill a mechanism we are observing now. If this phenomenon were to become more permanent in nature, it would undermine the idea of convergence (in terms of GDP per capita) and would substantially weaken the potential growth of Europe as a whole.

These are mere conjectures at this stage, but there are enough evidence to warn against a possible reversal of capital flows globally which could generally be beneficial for the world if well managed but the symmetric movement in Europe could largely undermine Europe’s growth potential.

Happy to have your thoughts as usual,

Best Regards,

Shahin Vallée


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article More on this topic
 

Opinion

Increasing the global supply of essential medical supplies: Time for Europe to step up its global leadership

Europe has already made a significant financial contribution to beating the pandemic, now it has the oppurtunity and moral responsibility to do more.

By: Anne Bucher and Guntram B. Wolff Topic: Global Economics & Governance Date: July 19, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global Economics & Governance, Testimonies Date: July 15, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More on this topic More by this author
 

Opinion

Could the RMB dislodge the dollar as a reserve currency?

The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 14, 2021
Read about event
 

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What should public spending look like?

What should we do about the increase in public spending due to COVID-19? Bruegel Director Guntram Wolff and Former Deputy Secretary-General of OECD Ludger Schuknecht discuss.

By: The Sound of Economics Topic: Global Economics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Load more posts