At the 16th DG ECFIN1 Annual Research Conference held on 15 November 2019, about 100 participants from research and policymaking circles discussed the theme of “Economic challenges of the 2020s”. Commissioner designate Paolo Gentiloni opened the conference, addressing the many challenges Europe faces and calling for new approaches to be taken to tackling the economic slowdown. He linked these needed efforts to the policy guidelines of the incoming Commission, including climate change, reviewing the EU’s surveillance framework, or taxation in the digital age. Gentiloni also stressed the importance of winning over stakeholders and citizens, acknowledging the increasing difficulty of reaching a consensus across countries and political lines on many issues concerning Europe’s economic and monetary union.
Bringing productivity to people and places
The growing divides alluded to by Gentiloni were analysed by Oxford Professor Sir Paul Collier in the Distinguished Lecture, in which he discussed major economic and social divergences. Given that these divergences are partially responsible for widespread discontent and a surge of populism in the EU, the question of how to design the social market economy transcends economics and links with the legitimacy and democratic accountability of the EU. Not shying away from these fundamental questions, Collier investigated how societies could recalibrate capitalism to bridge these divides and benefit all. Yet, while adjustment is needed, for Collier there is no doubt that capitalism has to be our future, given that it is the only system known to deliver rising prosperity. But capitalism should not be left on autopilot, Collier argued, since – as both current events and history show – capitalism periodically derails, causing rifts and anxieties in the population (Collier 2018).
Collier identified three such major rifts for today’s time: a widening gap between thriving metropolitan centres and left-behind rural areas, wealthy versus developing countries, and a growing divide between those with a college education and those who with manual skills. He sees the main driver of these rifts in an interlinkage of globalisation, cluster effects, and increasing complexity, as the price for higher productivity.
To Collier, capitalism is saliently characterised by long-term collaboration based on mutual trust, and not solely by competition. While Milton Friedman’s oversimplification of Adam Smith’s ‘invisible hand’ depicts profits as the sole purpose of businesses, in the past, businesses recognised the responsibilities they had to their communities, and citizens their reciprocal obligations to one another. Hence, there used to be a dense web of reciprocal obligations. Today, however, most obligations have moved up to the state (and away from businesses and citizens), while rights have moved down to the individual. Rebuilding this web of mutual obligations could be an important step towards narrowing the rift between societies’ winners and losers.
To address the rift between booming cities and provincial areas, as well as between the low-skilled and high-skilled, Collier argued that transferring consumption is not sufficient. Citizens need a sense of purpose by contributing to society through productive jobs – and those must be brought to the regions where people belong, to avoid severing family bonds. But they do not necessarily have to be jobs that require university degrees; instead, vocational training should be strengthened. Underlying the many concrete proposals he made, Collier advocated for a new commitment to do ‘whatever it takes’, since Europe needs pragmatism, not ideology.
Making markets work for all, not just the few
Contributing to the growing divide between ‘ordinary people’ and an ‘elite’, as discussed in the Distinguished Lecture, is the perception that the economy does not always work for all people. An important factor keeping the markets from functioning optimally are vested interests and the extraction of monopoly or oligopoly rents, which are detrimental to the interests of the many, often the poorest. The session on “Market structures and income distribution” investigated these and additional topics, with NYU Professor and key speaker Thomas Philippon presenting his findings on market concentration (Philippon 2019): if the US returned to the levels of competition that prevailed around 2000, GDP would increase by almost $1 trillion, benefitting mostly labour income.
Philippon’s analysis shows that although examples of unproblematic concentration are found in some US markets (e.g. in wholesale and retail), US industry today increasingly exhibits undesirable types of concentration. Several hints point in this direction: a lower than predicted investment rate, a declining contribution of ‘superstar firms’ to US productivity growth, and increasing barriers to entry. To understand whether increasing concentration in the US is driven by technological change or policies, Philippon compares it to Europe, where many technologies are the same but policies differ.
While industry concentration is also increasing in Europe, it is less pronounced than in the US and has evolved differently. Whereas the EU has reinforced its deregulation and antitrust policies to boost competition, the US – which started with healthier competition – is now drifting in the opposite direction, Philippon argued. As an example, he compared prices of telecommunication services between France and the US: they were higher in France than in the US until 2011, but fell by 40% within two years and still remain lower today (see Figure 1). This was due to a single policy event – the granting of a fourth license to the company Free in France in 2011, driving down prices. Today, telecommunication costs are generally 2 to 2.5 times higher in the US than in Europe. Philippon attributes this to corporate lobbying and campaign contributions, which played a major role in influencing US regulators and increased by a factor of 3 to 4, resulting in weakening antitrust enforcement and causing free entry to fail.
Figure 1 Price of communications in France relative to US
Chiara Criscuolo, Head of Productivity and Business Dynamics at the OECD, agreed with Philippon that different factors explain these market concentration trends, which are not mutually exclusive. ‘Winner-takes-all’ dynamics, especially in ICT-intense services, are often accompanied by the rise of ‘superstar’ firms. Criscuolo underscored the importance of understanding how industrial policies and structural reforms can support innovation through investment in intangibles and digital intensity to bring productivity to laggards, focusing on skills, science, and finance. She also emphasised the need to rethink how to design more transparent intellectual property policies to fix the breakdown of knowledge diffusion.
Carlo Altomonte, Professor at Bocconi University, pointed to increasing evidence that local financial conditions are an important factor in explaining market power dynamics in advanced economies. He argued that the rise of intangible assets in Europe might have forced firms to keep high mark-ups in order to finance or cover higher ‘fixed’ costs related to intangible assets. Firms might use external finance to purchase these intangibles, and therefore differences in the access to finance across countries might have an effect on how firms respond to business cycles.
Jens Suedekum, Professor at the Düsseldorf Institute for Competition Economics, presented evidence for the superstar phenomenon in Europe in the most robotised manufacturing industries (e.g. in car manufacturing), reflected by an increase in productivity/mark-ups and a decline in the labour share (Suedekum and Woessner 2019). For Suedekum, this raises delicate policy issues, such as rising inequalities between workers, reduction of competition, and extreme concentration of asset ownership. In this sense, the policy debate should focus on how to spread the ownership of robots, digital technology and profit earnings. But Philippon partly disagreed, arguing that car manufacturers in Europe share the productivity gains relatively evenly, while the same does not hold for firms such as Google and Facebook in the US.
Future-proofing fiscal policies
Fiscal policies operating in the Musgrave+ dimensions of sustainability, stabilisation, allocation and distribution will play an essential role in addressing the old and new economic challenges. Some of the discussed divides could be alleviated by public investment, for which there may be additional space given the persistently low interest rate environment. Olivier Blanchard, Senior Fellow at PIIE and former IMF Chief Economist, presented his views in the keynote speech on how to future-proof fiscal policies and revise EU’s fiscal framework, to facilitate tackling the societal and economic challenges Europe faces (Blanchard et al. 2019).
First, Blanchard argued that interest rates will likely be ‘low for long’ (see Figure 2), and that such an environment both reduces the fiscal and welfare costs of debt and increases fiscal spillovers in a monetary union (Blanchard 2019a). Moreover, according to Blanchard, the rationale for a supra-national fiscal framework is to mitigate the consequences of two externalities: those arising from high debt, and those arising from demand spillovers across countries. These considerations yield important implications for the EU’s fiscal framework, which is only designed to address the externalities associated with high debt, he argued.
Figure 2 Low for long: Signals from yield curves
He made three proposals for a revised fiscal framework: rebalancing the two externalities, ideally through a central fiscal capacity, while taking into account the changed trade-off between debt and demand; introducing Golden Rule accounting to help protect investment; and shifting from ex-ante rules to standards that are adjudicated ex post. He argued for standards instead of specific rules, since standards would be better suited to a world of radical uncertainty.
Roel Beetsma, member of the European Fiscal Board and Professor at the University of Amsterdam, noted that Blanchard recognised that the vulnerability associated with high debt still requires the management of debt externalities, and agreed that this must not come at the expense of productive spending (Beetsma et al. 2018). He argued that a central EU fiscal capacity would be politically almost infeasible unless it were conditional on adherence to rules. He was sceptical of the European Court of Justice adjudicating fiscal standards, pointing to likely delays and overload risks.
Professor Volker Wieland from the Institute for Monetary and Financial Stability in Frankfurt advised caution and called for simple rules that should be robust across a range of worldviews, not optimal in just one model (Feld et al. 2018). He questioned whether a central EU fiscal capacity would be better at running fiscal policy and argued that low rates are in part a result of monetary policy forward guidance and quantitative easing, and are therefore a temporary state of affairs. From a historical perspective, he argued, the risk of reversal is non-trivial. Referring to model simulations, Wieland dismissed the increased role of demand externalities, given their small magnitudes.
Austrian Institute of Economic Research economist Margit Schratzenstaller took a wider perspective, arguing that future-proofing fiscal policies is key to implementing current action plans to address increasing inequality, migration, and global warning. A reform of the rules would therefore be imperative to close the €600 billion investment gap that the EU currently faces. A reformed EU budget should finance expenditures that yield higher returns when engaged at the EU level (e.g. R&D) and should be financed with innovative taxes that cannot be properly implemented at the national level (e.g. a financial transaction tax or an airline travel tax). To shift the burden away from labour taxation towards profit taxation, she underscored the importance of harmonising tax policy.
Safeguarding Europe’s role in the global economy
The increasing global divergence of political and economic views was the backdrop for the panel on “Europe’s role in a changing global economy”, which focused on the reshuffling of economic centres of gravity, the future role of multilateralism, the global role of the euro, and the reforms needed to face these ongoing shifts. The panellists agreed that Europe’s relative weight in the global economy will inevitably decline, and consequently it will be nore important for Europe not to punch below its weight. It should defend the multilateral world order and refuse to engage in the zero-sum thinking increasingly prevalent in other nations. But in order to achieve these outward-facing objectives, it will be indispensable to have its internal affairs in order as well.
Given the likely permanent nature of certain unfavourable economic and political trends (European Commission 2019b), many panellists advocated preparing the EU by continuing to improve and deepen European integration, by supporting the global multilateral institutions and their reform, and by strengthening the international role of the euro. To deal with the current economic slowdown, Europe should rebalance its policy mix, which presently relies too heavily on monetary policy, and step up its use of fiscal policy. Fiscal policy should also be reshaped to increase public investment, which would help to underpin future growth.
Marco Buti, Director General at ECFIN, diagnosed Europe as facing serious challenges at a time of structural change in its economy and elevated uncertainty, which will require supranational – rather than purely national – responses. He also argued that there was a clear need to to reorient the policy mix via a more supportive euro area fiscal stance whilst preserving national differentiation – something with which Laurence Boone, Chief Economist at the OECD, agreed (Boone and Buti 2019). Boone also argued that the deterioration in the growth outlook is structural rather than cyclical in nature, since factors such as the substantial decline in trade and investment, the slowing of growth in China, and the transition to a digital economy are structural changes. Climate change is likewise a structural factor and is already having an impact, she argued. Restoring predictability in policymaking will be crucial in the context of increasing trade and geopolitical tensions, as well as elevated policy uncertainty.
Philip Lane, Member of the Executive Board of the ECB, emphasised the structural shifts that have occurred in the global economy over the last decade. The share of advanced economies in global output has fallen gradually since 1996, while that of emerging economies has risen to an impressive 40%, he noted. This shift in the global economic landscape was also visible in changes in the structure of current account imbalances, he argued. Currently, the largest imbalance is that between the US and the EU. The latter’s large current account surplus made the EU particularly vulnerable to variations in external demand.
Lane stressed that these structural shifts cannot be addressed with monetary policy tools alone. He concurred with Laurence Boone that a greater resort to fiscal policy tools is necessary in the EU. He also noted that, given the sensitivity of the EU economy to international factors, more effort is needed to reform the global financial system. In this context, increasing the role of the euro on international markets will continue to be an important objective, he argued
Klaus Regling, Managing Director of the European Stability Mechanism, argued that current trends such as ‘de-globalisation’, falling population and employment growth, rising debt, and environmental exploitation will not be easily overcome in the near future. A further challenge stems from growing inequality, which he expects to become a major issue in many countries. Another financial crisis is very likely at some point, even if its timing will remain a surprise, he claimed. Regling stressed that the most important policy response should be to strengthen multilateral cooperation, which would be good for both economics and global peace. The EU should remain active in international fora and use and reform the existing multilateral organizations (BIS, WTO, IMF, etc.). He felt that other regions are trying to emulate the success of European integration and that the EU needs to continue its integration process. The EU should keep developing the EMU and the capital and banking unions, build a fiscal capacity, introduce a deposit insurance and a safe asset, he argued.
Beatrice Weder Di Mauro, Professor at the Graduate Institute of International and Development Studies in Geneva, likened the ongoing global political transition to a switch from the rules-based game of football to boxing, where size and power matter most. Following the analogy, she described the EU as an economic giant punching below its weight. She argued that Europe will need to increase the international role of the euro to ensure its ability to act independently, as the impact of secondary US sanctions on Iran recently showed. She also concurred with Klaus Regling on the need for financial and fiscal reforms in the EU (Bénassy-Quéré et al. 2019).
A common thread that emerged at the conference was a sense of urgency to implement needed changes. A possibly protracted period of slow growth with low interest rates warrants a careful recalibration of the economic policy mix, with appropriate fiscal policies and an inclusive productivity agenda supporting the stabilisation role of monetary policies. The changing global economic and policy environment requires the EU to acknowledge and strengthen its role in the world. This crucially depends on delivering on the domestic agenda, as external strength reflects our internal cohesion. A window of opportunity is open to set the course for Europe for the next few years, with a new Commission incoming (Buti 2019). Still, sensitive trade-offs will involve difficult choices, in turn implying the need to re-build trust to deal with the creditor/debtor divide and to overcome ‘ultima ratio’ decision making. Zero-sum thinking risks putting a dangerous brake on necessary progress; rather, pragmatism and a coordinated effort are needed for steering the EU into the 2020s.
Authors’ note: All views expressed are summarised to the best of our understanding from the various conference participants’ contributions and should not be interpreted as the views of the European Commission. We gratefully acknowledge the contribution of the conference note-takers Maria Garonne, Jocelyn Boussard and Rafal Raciborski.
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Bénassy-Quéré, A, M K Brunnermeier, H Enderlein, E Farhi, M Fratzscher, C Fuest, P-O Gourinchas, P Martin, J Pisani-Ferry, H Rey, I Schnabel, N Véron, B Weder di Mauro and J Zettelmeyer (2019), “Euro area architecture: What reforms are still needed, and why”, VoxEU.org, 02 May.
Blanchard, O, A Leandro and J Zettelmeyer (2019), “Revisiting the EU fiscal framework in an era of low interest rates”, preliminary conference draft.
Blanchard, O (2019a), "Public debt and low interest rates", American Economic Review 109(4): 1197-1229.
Blanchard, O (2019b), “Revisiting the EU fiscal framework in an era of low interest rates”.
Boone, L and M Buti (2019), “Right here, right now: The quest for a more balanced policy mix”, VoxEU.org, 18 October.
Buti, M (2019), “Economic Policy Priorities for Europe: Looking Back, Looking Forward” Columbia University, 15 October.
Collier, P (2018), The Future of Capitalism: Facing the New Anxieties, Penguin UK, 2018.
European Commission (2019a), Annual Research Conference 2019 - Economic challenges of the 2020s.
European Commission (2019b), “Autumn 2019 European Economic Forecast”, European Economy Institutional Paper 115.
Feld, L, C Schmidt, I Schnabel and V Wieland (2018), “Refocusing the European fiscal framework”, VoxEU.org, 12 September.
Philippon, T (2019), The Great Reversal: How America Gave Up on Free Markets, Harvard University Press.
Suedekum, J and N Woessner (2019), “Robots and the Rise of European Superstar Firms”, DG ECFIN’s Fellowship Initiative 2018-2019, Discussion Paper 118.
 Directorate General for Economic and Financial Affairs. All presentations and video recordings of the sessions are available on the conference web page (European Commission 2019a).