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The New Global Economic Governance

Can Europe Help Win the Peace?

Marco Buti

Director-General, DG for Economic and Financial Affairs, European Commission

The Robert Triffin International Conference

6 June 2017

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Outline

1. Long-term trends in the global economy

2. Global economic governance in historical perspective

3. Impact of the financial crisis on global governance

4. G20: key achievements and challenges

5. A new development: G7, not quite like-minded

6. Challenges to multilateralism

7. Preconditions for the EU to count

8. Conclusions

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1. Long-term demographic developments

Source: World bank data

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

0,4

0,45

0,5

0

0,01

0,02

0,03

0,04

0,05

0,06

0,07

0,08

0,09

0,1

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

20

20

20

23

20

26

20

29

20

32

20

35

20

38

20

41

20

44

20

47

20

50

Population of EA19, US and BRICS as share of world population

EA19 (lhs) US (lhs) BRICS (rhs)

3

Source: OECD long-term baseline projections (June 2013). Notes: 1) Actual GDP data until 2012. From 2013 to 2015, GDP data from the OECD Economic Outlook. From 2016, GDP data from the OECD long-term baseline projections. 2) EA15 includes AT, BE, DE, ES, EE, FI, FR, EL, IE, IT, LU, NL, PT, SK and SI. The OECD does not provide data for the rest of the EA member states.

1. Long-term GDP developments

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

20

42

20

44

20

46

20

48

20

50

20

52

20

54

20

56

20

58

20

60

Real GDP at market exchange rates, share of world total

EA15 BRICS US

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1. Long-term productivity trends

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2. Global economic governance in historical perspective

● Post-WWII: global economic governance structured around the Bretton Woods system (IMF, World Bank) and GATT (later WTO)

● International monetary order was essentially unipolar: central role of US dollar

● First oil price shock brought down the system

● Triffin predicted the end of the Bretton Woods System already in 1960

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2. Global economic governance in historical perspective

● End of Bretton Woods and painful emergence of a more multipolar system with multiple pillars (e.g. at the level of currencies: dollar, euro, yen, renminbi, …)

● But the Triffin dilemma is still with us

● Rise of emerging and developing economies, facilitated by the success in trade liberalisation

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3. Impact of the financial crisis on global governance: economic impact

The financial crisis demonstrated global interdependence and importance of

effective global governance:

● Spillovers via financial markets can have dramatic consequences

Case of Greece has shown reality of 'butterfly effect'

● Financial and monetary stability have a global dimension

The exchange rate does not insulate national countries in a world of

free capital movements (H. Rey: from 'trilemma' to 'dilemma')

● In a post-crisis world, close cooperation between policy makers

is essential to avoid 'beggar-thy-neighbour' policies

This is particularly true in the case of non-conventional monetary

policy

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3. Impact of the financial crisis on global governance: institutional changes

● Starting in 2008-2009: Shifts in international institutional landscape to address crisis

● Impact of crisis on advanced economies -> greater confidence of emerging powers; demand for faster reform of global institutions (e.g. IMF, World Bank)

● G20 elevated to Leaders level: key global forum

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4. G20: key achievements and challenges

● G20 2009 Pittsburgh summit: Leaders designated G20 as "premier forum for our international economic and financial cooperation".

● G20 brings together key advanced and emerging economies and has demonstrated that it can take swift and decisive action, for example in dealing with the global financial crisis in 2008-2009.

● G20 has helped to reduce the mistrust between advanced economies and emerging markets for the benefit of all

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4. G20: key decisions

Decision G20 Summit

Assessment

Commitment to ensure "that all financial markets, products and participants are regulated"

Washington 2008 + + +

Implementation of concerted fiscal stimulus London 2009 + +

Commitment to refrain from protectionism London 2009 + + +

Decision to triple IMF resources London 2009 + + +

Decision to withdraw fiscal stimulus Toronto 2010 - -

Common approach to global imbalances Cannes 2011 +

Agreement on international tax transparency St Petersburg 2013 + +

G20 Growth Strategies Brisbane 2013 +

Three-pronged policy strategy Hangzhou 2016 + +

11 … and Hamburg?

4. G20: key challenges

● Moving from short-term crisis response to cooperation on long-term challenges for the global economy: "winning the peace"

● Delivering on implementation of existing commitments (e.g. on tax transparency, financial regulation)

● Finding points of common interest among diverse G20 membership to drive cooperation on new topics (e.g. on anti-terrorism financing, digitalisation, cyber crime)

● Increased awareness of the threat of populism and inclusiveness

● Challenges towards multilateralism

● Risk of renewed global imbalances

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5. A new development: G7, not quite like-minded

G7 as internal caucus on key G20 matters: trade, financial regulation, climate change

G7 as locus to overcome differences: macroeconomic policy, tax cooperation

But consensus has broken down:

- Bilateralism threatens multilateral, rules-based system

- Traditional "exogenous" assumptions are questioned

- Mistrust risks setting in

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A new dynamic game?

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G7 B S C R I

G20 US

G7-

China

G20?

5. A new development: G7, not quite like-minded

?

6. Challenges to multilateralism

● Trade shift to bilateralism

● International Monetary System (Crisis Management, IMF) US disengagement

● Tax competitive tax shifts

● Financial Regulation rolling back

● Migration lacking cooperative solutions

● Climate change US reneging

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6. Challenges to multilateralism: Renewed global imbalances as trigger

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-2

-1

0

1

2

3

4

5

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Advanced economies Emerging market and developing economies

Current Account (% of GDP) and Projections

Source: IMF Data Mapper

6. Challenges to multilateralism: Renewed global imbalances as trigger (continued)

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DE

NL

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

EA China Japan Russia India Brazil Turkey Canada UK US

Current Account 2016 (% of Global GDP)

Source: Calculations based on IMF Data Mapper

6. Challenges to multilateralism

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Global imbalance fuelled by unbalanced policy mix

External equilibrium

Internal equilibrium

CA > 0 OG < 0

CA > 0 OG > 0

CA < 0 OG > 0

CA < 0 OG < 0

Y

E

e

E: desirable equilibrium 𝐔𝐒 : over-expansionary fiscal policy 𝐄𝐀 : over-reliance on monetary policy

EA

EA

US US

7. Preconditions for EU to count: overcoming weaknesses

● Projecting strength externally requires internal strength: need for internal EU cohesion

Completion of the Single Market

Complete the EMU architecture

Overcome political challenges, in particular Brexit

● Shed the "small country syndrome"

● Reflection paper on EMU

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7. Preconditions for EU to count: overcoming weaknesses (continued)

● EU/euro area at risk of "reverse creditor paradox"

Traditionally, creditor countries hold strong position vis-à-vis debtor countries in global governance

This asymmetry now reversed: euro area's large and persistent current account surpluses are a sign of economic weakness and a source of political vulnerability

● Risk for the EU to attract criticism from both the US (not assuming our responsibility to boost global growth) and emerging markets (not acknowledging the shifts of power in global economy)

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7. Preconditions for EU to count: leveraging strengths

Leverage our strengths: attractive aspects of European model enhance the diplomatic 'soft power' of the EU:

European social model/inclusiveness: EU social systems combine equity with growth -> more attractive for many EMDCs than the US social model, still more to be done (European Social Pillar)

European environmental model: EU leads on global environmental issues and fight against climate change

Support for multilateralism: EU committed to effective multilateralism, working with international partners on win-win solutions

The EU as a beacon of stability and model for international cooperation

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7. Preconditions for EU to count: drawing the institutional implications Overcoming the inconsistent trinity

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8. Conclusion: Towards the G20 Hamburg Summit

● Global economy: exploit better times

● Trade: support for multilateral system/anti-protectionism pledge

● Climate change: react to dis-engagement by the US

● Keeping up momentum on tax transparency and financial regulatory reform

● Open new chantiers

But most important of all, clarity on G20 political relevance

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" … the construction of a stable and freer system of world trade and payments must be conceived as a continuing and permanent effort to adjust international institutions and policies to new needs and new possibilities."

- Triffin, R., The Future of the European Payments System, Stockholm, Almqvist and Wiksell, 1958, (pp.25-26)

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THANK YOU

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