Competere nell’economia globale

1. Competere nell’economia globale Jean-Paul FitoussiProfessor, IEP ParisPresident, OFCEPrato, October 14th 2005

2. I - OutlookII – The long run: assessing European economic perfomancesIII – Macroeconomic policies & industrial strategyIV – The economic cost of a non-political Europe

3. Where are we? • Strong growth without inflation- The euro area lags behind

4. The increase in the prices of primary goodsseems to have had no « secondary rank » effects

5. Forecasts 2005/2006

6. Outlook These forecasts are grounded on the following assumptions:- A moderate slowdown of world growth due to the reduction of the US deficits - An accomodating monetary policy for the US, Japan and the euro area (the euro area still lagging behind) - A relative stability of the exchange rate of the dollar (since 2004 the dollar has depreciated by 10% vis-à-vis the currency of asiatic countries, and has recently depreciated vis-à-vis China) - An inflation rate under control - A widening of the short term interest rate differential between the US and the Euro area

7. Relative stability of the dollar?

8. The US current account deficit

9. Why one can assume a relative stability ? • The US current account deficit is huge (almost 6% of GDP). All economic agents are indebted and there is a continous pressure towards a depreciation of the dollar.But the asiatic banks are financing this deficit preventing interest rates from increasing. - The banks are loosing because of the low interest rate and the exchange rate risk - But the economies are winning because the exchange rate stability allows a strong export-led growth (in these countries internal demand is still too weak)This framework resemble the one of the golden thirty: - Asia play now the role that Europe played at that time - In short there is an implicit Bretton Woods system

10. The US current account deficit • Brutal depreciation of the dollar and increase of interest rates? • Slow appreciation of asiatic currency (already happening) and of the Yuan (to happen)? • The control of the US deficit imply the control of exchange rates, difficult coordination but until now successfull. Pressures and risks

11. Inflation • The risk of inflation is contained by productivity gains allowed by outsourcing, delocalisations, • restructurations and harsh competition. • All these factors mitigating inflation put a heavy burden on workers and lead to an increase in inequality and social unrest. Pressures and risks

12. Asiatic risks • Very rapid growth may lead to overinvestment, bad loans and inflation. • But on the medium to long run term growth should continue as shown by the exemple of the past asiatic crisis. Pressures and risks

13. II – The long run • If we look ahead, the most likely evolution would be the following:The share of Asia in the world GDP will importantly increaseThe share of the US wil increase in the OECD GDPThe share of the euro area will decrease at the world level, at the OECD level and at the European level

14. GDP trends 1990-2004 * Asia includes China, India, South Corea, Taiwan, Hong Kong, Singapour** Average growth 1990-2004

15. GDP Trends

16. Assessing European economic performances Can such evolutions be avoided ?The increase of the share of Asia is utterly normal, but the decrease of the share of the euro area is pathological. What are the reasons and how can it be avoided?

17. Assessing European economic performances Since the beginning of the 1980s, European Economic performance has been poor. The catch-up process vis-à-vis the US has come to a term in the mid-seventies.

18. 1950-2000/EU-15 & Japan, US = 100 GDP per capital at current market prices and PPS

19. Looking at the most recent period it seems that the gap between the US and the euro area has widened. Assessing European economic performances

20. Growth of real GDP ten years average

21. The inheritance of the 1990s:Monetary policy & strangulation

22. The inheritance of the 1990s:Monetary policy & strangulation

23. The inheritance of the 1990s:Monetary policy & strangulation

24. Apparently, the monetary policy of the ECB has been successfull And now ? The monetary policy of the ECB

25. But in actuality, it has been a policy of benign neglect vis-à-vis the exchange rate And now?

26. The result has been a tightening of monetary conditions in the euro area in a period of a slowdown of growth And now?

27. III – Macroeconomic policies & industrial strategy This monetary strategy seems all the more detrimental that the level and the evolution of the exchange rate impact on the industrial structure.One of the main determinant of industrial policy is the exchange rate, especially in sectors characterised by increasing returns.

28. De-industrialisation (in relative terms) in developped economies is a normal process brought about by three factors: - The expansion of the service sector - The increase in productivity of the industrial sector - The restructuration of the industrial sector towards theproduction of more sophisticated goods.

29. But a wrong exchange rate policy may speed-up the three processes imposing huge adjustment costs, slowing investment and increasing unemployment.The problem is all the more acute in the EU that harsh competition is coming both from inside (enlargement) and from outside (Asia)

30. The difficulty is compounded by the fact that Europe has no growth policy, and in particular no policy to react to the slowdown of internal demand.Fiscal policy is a case in point.

31. Reactivity of fiscal policy

32. The economic cost of the non-political Europe:The European economic government • The European contradiction lies in the following : no policy to sustain internal demand; so growth can only be export led; but appreciation of the euro. It is as if the EU did not draw the consequences of being a big country, and continues to behave as if it were a small economy, or a developing country. Why it is so ? - A federal economic government - The composition of the European economic government

33. The lack of a European polic-mix • Two different views : Substitutability Complementarity

34. Structural reasons for the lack of reactivity • Limited national sovereignty Lack of legitimacy for the European government, once discretionary action exceeding its mandate is required

35. Proposals for reform The stability and growth pactExclude investment from deficit figures (golden rule)

36. In the present context one component of growth policies appears as fundamental and urgent: Public Investment- It has both the short and long term features that are needed in EuropeShort run: Sustain aggregate demandLong run: Increase the stock of capital of the economy and hence productivity and employment

37. The one item I want to discuss is infrastructures (in particular network infrastructures) A recent study (Morrison and Schwartz, The American Economic Review, Dec 1996) shows that in the “golden decades” (1945-1970) the boost in productivity was associated with a huge amount of investment in infrastructuresEU productivity growth averaged more than 4% per year over that period, over half of it being due to infrastructure investment

38. This is hardly surprising:Infrastructures have the public good characteristics of being non rival and non excludableBy lowering transportation and production costs they serve as a powerful positive externality for the private sector.In addition, the enlargement requires attention to the connection between eastern and western EuropeSince at least 1990 the expenditure in infrastructures, in all of Europe, was largely insufficient

39. Proposals for reform The ECBAccountability : Political determination of the inflation objective and political determination of exchange rate policy

40. Proposals for reform Competition doctrinePolitical guidelines for competition doctrine, in order to allow the conduct of industrial policies.