The roots of risk: how economic imbalances are poisoning politics

By on 12/09/2019
Carlos Martínez Mongay, Deputy Director General in the European Commission's Directorate General for Economic and Financial Affairs, opened the event with an assessment of the economic outlook

Gathering in Paris for the 2019 Global Government Finance Summit, finance department leaders from 10 countries debated the political risks threatening economic growth – and their roots in rising inequality, local decline, trade tensions and rapid migration. Matt Ross reports

“Governments and finance ministries have always had to face new challenges, but in the modern world these are faster moving and more globalised than ever before,” said Kevin Sorkin. “And many of the solutions demand partnerships with other nations and stronger relationships between the public, private and social sectors. So the Global Government Finance Summit exists to help you as leaders of finance ministries to learn from and build links with your peers overseas, identifying the tools and innovations that can help you overcome the challenges you face.”

Sorkin, the Director of Global Government Forum, was welcoming delegates from 10 countries on four continents to the 2019 Summit, held in Paris during the summer. The European Commission was also represented at the event, which was hosted by France’s Ministry of Economy and Finance and supported by knowledge partners EY and Swiss Re. And after the evening dinner Carlos Martínez Mongay, Deputy Director General in the Directorate General for Economic and Financial Affairs, gave the Commission’s assessment of the economic outlook.

As manufactured goods trade shrank around the world, he said, the EU had an “unpleasant surprise” during 2018 – with growth slowing rapidly: the Commission’s summer forecasts put GDP growth across the union at 1.2% this year, and 1.5% next. Some aspects of the Eurozone’s economy are in reasonably good shape, he explained: tight labour markets are likely to drive up wages – boosting real disposable income and thus consumption – while inflation “shall continue to remain subdued, rising only gradually.” And member states’ budget deficits have fallen to a 20-year low, averaging less than 1%.

Political risks threaten growth

But he warned that the “downside risks remain, and seem to be materialising,” citing US protectionism, a slowdown in the emerging economies, Brexit, and “political uncertainty within some member states.” In particular, Martínez Mongay highlighted the political risks facing both nations and international bodies – and Michel Houdebine, Chief Economist at France’s Ministry of Economy and Finance, wholeheartedly agreed.

Michel Houdebine, Chief Economist at France’s Ministry of Economy and Finance: “The international community missed things that led to increased inequality, and that’s one of the factors behind this political instability.”

“It’s quite obvious that political risk is a key factor at the moment,” said Houdebine; and some of these risks, he argued, have been heightened by the disruptive effects of globalisation. As production moves to lower-cost locations around the world, he pointed out, consumers everywhere may benefit from lower prices and greater competition – but traditional manufacturing areas in the western world have lost out. “You have losers,” he said; and “the process of reallocating someone from one sector to another takes a very long time” – leaving some areas facing decades of decline. Low productivity growth in many western industries has also fed through into slower economic growth, he added, exacerbating the problem.

So individual countries can see robust GDP growth, even while some of their regions grow poorer and angrier. Similarly, while global inequality is in decline, income inequality is rising within nations. And he pointed to problems in markets’ operation: “The signs that there’s a lack of competition are increasing,” said Houdebine. “You see an increase in profits, notably in the United States.”

Global Government Finance Summit 2019 attendees

Inequality poisons politics

France’s income inequalities remain at the lower end of the scale, he added, and the country has been pushing for global action on the issue. But many countries have been slow in reacting to rising inequality: “The international community missed things that led to increased inequality, and that’s one of the factors behind this political instability,” he said.

The political and economic risks emerging around the world, warned Martínez Mongay, could interact in ways which exacerbate their impact. For example, he said, a US-China trade war could further drag down the world economy, triggering “a global shift in business sentiment, and therefore – taking into account the high leverage of both financial and non-financial companies – lead to a rapid tightening of global financial conditions, with knock-on effects for the emerging markets with financial vulnerabilities.”

Brexit presents another major set of political and economic risks. In the aftermath of the June 2016 referendum, Martínez Mongay recalled, most analysts foresaw a 15% depreciation in Sterling and sharp falls in investor confidence and business investment. These predictions proved accurate, although strong global and EU growth during 2017 have helped to keep the UK’s economy moving forward.

Analysts – including the European Commission – also wrongly anticipated that UK consumer confidence would take a knock, Martínez Mongay said; but while consumption held up for some years, “that shock has been materialising recently, if slowly.” Recent data “would suggest that Brexit uncertainty is denting both investor and consumer confidence,” he added.

On training and taxation

Asked how the EU and member states should respond to these threats, Houdebine called for a focus on “education, training, and mobility so people can move to find a job”, and argued for international action on inequality: “Inequalities in one country are a concern for others,” he said.

Martínez Mongay agreed: “There is more and more empirical evidence that high levels of inequality – in wealth as well as income – constrain growth; and further concentration in markets and higher mark-ups is the other side of this coin of this increase in inequality.” He called for an “inclusive multilateralism” in the pursuit of concerted action: as well as addressing inequality and strengthening market competition, he argued, this agenda “should also tackle the need for a fair system of taxation of multinationals, which implies appropriate allocation of taxing rights, putting a floor to tax competition, and limiting profit-shifting.”

As the session moved onto wider debate around the issues, one delegate pointed out that inequality had grown markedly in the US and UK during the 1980s – without creating such political instability. “The thing that I think has made it particularly toxic [during the 2010s] is the fact that average real wage growth has been so weak, associated with very low productivity growth,” they commented. “So that’s another key part of the recipe we need to look at.”

The Summit was held in a round table format, with delegates free to contribute at any point

The migration issue

Another delegate broadened the focus further – suggesting that many of the causes of public disillusion and anger can be traced back to domestic policies among member states. In the UK, they argued, “massive failures in housing policy, and the austerity undertaken by government in the wake of the financial crisis” have contributed to “the populism that we see today.”

The civil servant also pointed to some of the other pressures of globalisation. Even as manufacturing industries have fled some areas, they pointed out, large numbers of overseas immigrants have arrived; within the EU, they argued, there is “a shared responsibility [among EU members] for what some would see as a failure in the way migration was managed – or not managed.”

Although the delegate stressed that they support the ‘four freedoms’ – the free movement of goods, services, capital and people across the EU – they noted that the UK’s relatively high wages and low unemployment rates attracted huge numbers of migrants during the 2000s, “and that experience was traumatising for some [British] people in the sense that it created too much transformation in too short a period.” In the long run, they said, such immigration might boost the UK economy and benefit the vast majority of British residents, “but I don’t live in the long run. We know that in the very short term, if you put masses of people into the system without the ability to adjust the system fast enough, it does create pressure on jobs and wages and the rest of it.” 

Whither the EU?

For a third delegate, the EU needs to rediscover its sense of purpose and direction. “What I’m not seeing today is a clear vision and a positioning of the EU five or ten years from now,” they said. “I’m not seeing a positive strategy for Europe.”

The challenge to delivering that clear vision, of course, lies in the very political risks which lay at the centre of the evening’s discussion: the rise of anti-establishment, populist parties in many EU nations has made it harder to reach agreement on contentious topics such as immigration. And Torsten Arnswald, Head of the Fiscal Policy Division of Germany’s Federal Ministry of Finance, suggested that there’s plenty to get excited about in the existing EU model: the Single Market is, he pointed out, “the most open and the largest market economy in the world.”

Torsten Arnswald, Head of the Fiscal Policy Division of Germany’s Federal Ministry of Finance: “The common market is based on competition and cooperation, and requires fairness.”

The EU’s rules, he added, give member states enough flexibility to address their domestic policy challenges: following the major expansion of the EU in 2004, member states had the right to control immigration from new member states for up to seven years – and the UK decided not to do so. Ultimately, Arnswald argued, the success of the Single Market depends on its operation being fair – offering universal access to the four freedoms. “The common market is based on competition and cooperation, and requires fairness,” he said. “If people feel that they’re treated unfairly based on where they are, this competition and cooperation model will fail.”

That does not, however, mean that the Single Market functions perfectly: Arnswald called for more action to close tax loopholes, strengthen competition policies and open up markets, addressing inequality and economic decline. Growth models across the EU “have to be more inclusive. Because if they aren’t, these political systems run greater risks of derailing – and thus eventually coming up with economic problems,” he concluded. “And that’s exactly what we’re seeing.”

This is the first part of our report on the Global Government Finance Summit, which was hosted during June in Paris by France’s Ministry of Economy and Finance, and supported by knowledge partners EY and Swiss Re. Reports on the other sessions will follow soon.

About Matt Ross

Matt is a journalist and editor specialising in public services, policymaking, government and management. He was the editor of trade title Civil Service World from 2008 to 2014, serving an audience of senior UK officials; and the features editor of weekly news magazine Regeneration & Renewal between 2002 and 2008, covering urban regeneration, economic growth and community development. He has also been a motoring and travel journalist, and now combines his role as editorial director of Global Government Forum with writing for other publications including The Guardian and Planning magazine.

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