Launching discussions at this World Economy Conference was an acknowledgement by those in attendance that the recovery from the economic crisis of recent years has been particularly slow in historical terms, with the most recent figures confirming fears of a further possible slowdown. This global scenario was seen as a fortiori necessitating that growth be considered a top priority for Europe during Italy’s current 6-month-long presidency of the Council of the EU. The participants recalled that, for some time, the prevailing analysis had been that the fall in demand was the key problem. Then crisis befell various countries on Europe’s “periphery” and the idea gained ground that the main way out of these difficult straits was structural reform. It was at this point that the (partial) collapse of the banking sector took place, serving as a reminder to all that the crisis was primarily financial in nature.
It was stressed, however, that what continues to be lacking in the measures taken so far to deal with the crisis is the adoption of an unambiguous strategy in favor of growth and employment. An examination of the structural situation pre-crisis reveals that Europe already had a problem of slow growth at that time. It was hence felt that the best solution today lies – as it did back then – first and foremost with greater integration towards a single market, but also at a global level (by opening up markets). Secondly, it was viewed as entailing structural reforms, even if these are partly country-specific and by definition will bring tangible benefits primarily in the medium to long term.
A crucial issue singled out for consideration was that of investment, which it was noted has declined substantially in recent years. The consensus was that reviving investment is essentially a prerequisite for boosting the overall economic climate, and requires reactivating a virtuous cycle of trust to stimulate growth of both demand and supply.
In this regard, it was pointed out by several participants that investment always follows demand rather than preceding it. In other words, if the market is clearly not able to absorb supply, investors remain very cautious. This means that the global economy could sink into a situation of over-capacity and low growth, while government policies run into the so-called “liquidity trap”.
The distinction often drawn between creditor and debtor countries was regarded as being off the mark, since structural reforms are needed in all EU countries, irrespective of their different starting positions. In addition, the key factor for genuinely kick-starting growth was identified as productivity rather than competitiveness as such, making it a misstep to focus on achieving surplus targets (which in any case cannot be met by all major economies). Instead, full advantage should be taken of the potential for growth.
It was suggested that the priorities are quite clear from a specifically European perspective: investment in innovation, an industrial policy aimed at reviving manufacturing, a genuine commitment to the talks for a Transatlantic Trade and Investment Partnership with the United States, the creation of a single energy market (the urgent need for which was seen as clearly highlighted by a Russian-Ukrainian crisis that could at this point enable resistance to be overcome to real integration of the sector), together with increased efforts to reconcile the environmental agenda with growth objectives.
By the same taken, it was observed that from a global perspective, demographic trends – which a large economy like China drew great benefit from in the years when its growth was “taking off” – will place undeniable limits on structural growth in the coming years. The growth trajectories may up till now have been very different, but the degree of convergence worldwide is increasing. For instance, the Chinese model has so far been an “extensive” combination of factors of production, but it is now moving towards a more “intensive” model (with greater emphasis on innovation and capital) – that is, a model more akin to that of the advanced economies.
The participants observed that, overall, trends are starting to once again resemble what they were before the crisis, but with the important difference that even as emerging economies exhibit a more moderate rate of growth, their size has increased in the meantime such that their contribution is much greater than in the past. A further development labeled as good news is that feared energy constraints are proving to be less severe than expected and appear to be surmountable.
It was pointed out, however, that various imbalances remain, namely: a social income distribution imbalance, which is particularly dangerous in conditions of interdependence; an imbalance between trade surpluses and deficits, so that the German surplus is larger today than those of Japan and China have ever been; and a demographic imbalance, which has seen a shift of wealth from younger to older generations, thereby contributing to weakening global demand.
During the discussions, the subject of Africa as a new frontier of growth came in for extensive analysis. Statistics were cited confirming the African continent as the second-fastest growing region, displaying the most rapid growth after East Asia and characterized by the rise of a large middle class (expected, by 2020, to outstrip that in the US). The poor state of the continent’s infrastructure is holding back growth and competitiveness, although it was acknowledged that the role of the private sector in financing major projects (many of which are cross-border initiatives) is becoming more central. Yet while Africa does not lack sources of energy, investment is largely insufficient to exploit their potential.
Furthermore, it was recognized that, for better or for worse, the quality of governance has always been a decisive factor for the balanced growth prospects of African countries, though in recent years the situation has, overall, improved in this respect. Also highlighted was the decisive role that opposition parties and movements play in galvanizing and scrutinizing the actions of those in power.
Yet another aspect deemed key was the capacity to raise the level of innovation of African economies, which in turn is closely linked to education and vocational training. In this regard, the relationship between the public and private sectors was seen as clearly crucial.
While it was conceded that the climate for business on the African continent has already profoundly changed for the better, with many opportunities set to expand, this does not offer any guarantees as to the quality of such growth from an equality and income distribution standpoint. It was noted that Africa’s growth trajectory shares many similarities with that followed by East Asia over the past two decades.
Attention was drawn to the fact that sovereign wealth funds and private equity firms are looking to Africa with growing interest, not only with an eye to the traditional sectors of natural resources and energy, but also tourism, manufacturing and agriculture. It was felt that while this will require the banking system to make a qualitative leap, there are some positive signs emerging in this regard as well.
With the discussions at this point taking a historical bent, much was made by the participants of the historical error repeatedly made of succumbing to the temptation to play out a geopolitical game on the African continent, directly exploiting its resources primarily with the aim of drawing benefit from them in other regions of the world. The other recurring error pointed to was the chronic pessimism displayed vis-à-vis the future of the continent, often viewed as a source of risks and problems that can only be reduced or kept at bay.
The perceived paradox was that during this current phase of sustained growth, the risk of conflict could effectively increase, culminating in the polarization of various ethnic and religious groups.
The last topic raised for consideration at the Conference was that of the global energy market, with the starting point for the discussion being the widely-endorsed observation that this sector presents unique features compared to any other sector in contemporary economies.
In particular, it was judged difficult to assess the impact US shale gas is likely to have, given the uncertainty surrounding where exports from the United States will be directed. Many speculated that the main destination would be Asia (and not Europe, despite high expectations to that effect).
Europe was characterized as facing a contradictory situation: while energy demand on the continent is expected to remain stable over the next decade, European energy production is declining, which above all indicates that demand for Russian gas is set to rise, despite the geopolitical risks highlighted by the Ukrainian crisis. It was stressed that it will nevertheless be crucial to improve interconnections within Europe in order to facilitate the movement of gas, a proposal deemed technically feasible and not subject to any particular impediments, with the difficulties so far encountered described as primarily political in nature.
The structural limitations associated with renewable sources (especially their intermittent availability) were underlined as even further necessitating an integrated European system that can guarantee an efficient exchange of supplies to fill any supply gaps left by renewables. More generally, it was felt that the very existence of national rather than European operators in this subsector reduces the options available for structuring the market. As a result, even the degree of diversification that already exists cannot be fully exploited, while a number of new infrastructure projects draw their justification solely from the current fragmentation of the market, when they should instead be evaluated with broader horizons in mind. Nor – it was emphasized – is Europe’s over-capacity today benefiting consumers, since EU rules adopted in 2003 (during a period of insufficient supply) effectively protect producers, even now that the scenario has changed dramatically.
Lastly, the participants noted that, at a global level, other producers are entering the gas market on a massive scale, including China, Australia and Mozambique, a development that could change the world order to a far greater extent than the new role played by the United States is already doing.
