Comments by George Alogoskoufis at the Atlantic Council Panel on European Growth, Washington D.C. January 26, 2017
There is little doubt that the resurgence of economic nationalism in Europe, as elsewhere, has serious economic under-pinnings which cannot be ignored.
Those who believe in the benefits of a free and open European and world economic system must understand the roots of this resurgence if the resurgence is to be stopped before it spreads further.
Winners and Losers from Globalization and European Integration
There is little doubt that globalization and openness results in winners and losers. Europe could not be an exception to that. Although economists agree that an open trading system is beneficial overall, nobody can deny that the benefits accrue to specific economic and social classes, while other classes tend to be overall losers.
The restructuring of production towards sectors where each country has a comparative advantage benefits the owners of factors of production that are employed in these expanding sectors, to the detriment of the owners of factors of production that are employed in the shrinking sectors.
Migration may result in higher output and employment, in the rise of incomes for the owners of capital or for skilled workers and in benefits for consumers in host countries, but it also depresses the real wages and employment prospects of local unskilled workers.
The losses are real enough for those who suffer them. Although they are sometimes overblown in the political discourse, they cannot and should not be ignored.
In addition, the benefits to the majority of consumers or other winners from the globalization process are sometimes too diffuse to create a strong political constituency for an open trading and financial system and the free movement of people. Thus, the political debate is dominated by the grievances of the losers.
The Enemy “Without”
In addition, at a time of persistently low productivity growth, if not stagnation, such as the period that has followed the Great Recession of 2009, people attribute to globalization, free trade and migration, even events and outcomes that have little to do with them.
The general dissatisfaction with the state of the economy is channeled to the “enemy without”, i.e free international trade, open financial markets, European integration and migrants.
Thus, a political climate favourable to populism and nationalism emerges, and this is the stock in trade of many politicians in Europe, but also this side of the Atlantic too.
This is also the reason that populism and nationalism won the “Brexit” debate.
What is to be Done?
The redistribution of income to partly compensate the losers from the globalization and European integration process is the only credible and sustainable response to the resurgence of populism and economic nationalism.
In the European context, the forthcoming Brexit negotiations must be approached with extreme care. The objective should not be to punish the British electorate for voting for Brexit, or to obtain narrow benefits from displacing Britain in particular markets. The EU and the British government should focus on how to ensure that Britain remains as closely as possible tied to the single European market, although this seems increasingly difficult.
In addition, it is high time that the EU adopts a new ambitious agenda for redistributing income towards those workers and regions, even countries, that suffer most from the openness of European markets for goods and capital and the free movement of people.
The EU must become more of a transfer union in order to prevent the spread of the Brexit disease to other countries. Only by working together towards ameliorating the economic position of the losers can the European Union provide an effective and lasting response to the challenges ahead.
Europe needs new initiatives anyway, and a program of further economic integration, financed by gradually increasing the EU budget towards 3% of EU GDP, or even 5%, would be a worthwhile objective. It does not have to be only on public investment, but also some social policies such as an EU wide unemployment benefit system and other social programs.
President Trump and Free Trade
Protectionism is a major threat and can become economically nasty very soon. “America first” or “Britain first” or “Europe first” is the stock in trade of populists and nationalists who disregard the dangers of protectionism and retaliation from other nations.
We must do everything possible to protect and expand the freedoms of the international trading system, the “most favoured nation” clause and WTO rules.
Having said that, if the USA starts discriminating against firms located in the rest of the world, or firms using tools such as “off shoring” and “outsourcing”, the immediate result may be an increase in investment in the USA, both by US firms and multinationals. However, the longer term effects are likely to be negative, because this is a negative sum game. Other regions such as China and Europe are likely to retaliate to the detriment of the free trading system and global growth.
Short Term Solutions for Europe
The QE program of the ECB is reaching its limits, if it has not reached them already.
Europe is one of the few regions of the world with a potential for a short term fiscal expansion.
This is both because of high unemployment and a significant overall current account surplus. Given that the current account surplus is mainly due to Germany, this country is the one from where the fiscal expansion must originate.
Such a policy would be a locomotive policy that would drag the whole of the EU out of the current low growth trap, and would do much to provide a short term solution to Europe’s economic and political difficulties.
As I have already mentioned, the longer term solution would be to move Europe towards becoming more of a transfer union.