Local systems, Europe and globalisation: How to get it right? Jean-Paul Fitoussi Professor, IEP Paris President, OFCE «Culture and Knowledge: Local Systems in a Global Context» European Colloquia Prague, November 30th 2006
I - Prolegomena Globalisation The phenomena of globalisation is happening in a world populated by nation States, without any emptiness in between the Nations. What is the function of a Nation state if not to protect its population? More than ever the Nation States of the world are well and alive the hyper power of the United States, the super power of China, Russia, India, etc Jean-Paul Fitoussi/2
I - Prolegomena Globalisation Hence the rhetoric of globalisation clashes with the reality of the phenomena as power and protection are putting strict limits on the interplay of free markets. The European Union is a case of its own: it is populated by nations which are no more full states as they have given up important elements of sovereignity especially in the euro area and the Union is not yet a full state. Jean-Paul Fitoussi/3
I - Prolegomena Globalisation Hence the concern among the European populations about protection. Protection is not protectionism. Indeed, it is the main incentive for people to live in society. Besides each nation is organized in several territories which constitute themselves local systems of protection. In other words some of the protection is delegated to local systems. Jean-Paul Fitoussi/4
I - Prolegomena Glocalisation But local systems have a dynamic of their own, just because they are the places where people live. From that came the idea of glocalisation, meaning that what matters is the direct link between the territories and the world. I do not subscribe to this idea. The local system, the country system and the european system are narrowly cooperating or so it should be to increase the welfare of the citizens (which are all living in local systems). Jean-Paul Fitoussi/5
I - Prolegomena Hence the title of this congress, «La cultura e la conoscenza: sistemi locali in un contesto global» is both right and wrong. Jean-Paul Fitoussi/6
II The short run - Forecasts 2006/2007 - Real oil prices - Relative stability of the dollar Jean-Paul Fitoussi/7
Forecasts 2006/2007 Weight 2005 GDP (in volume) 2006 2007 Germany 4.4 1.1 2.3 1.9 France 3.2 1.3 2.3 2.2 Italy 3.1 0.1 1.6 1.4 Spain 1.8 3.5 3.6 2.7 Euro Zone 15.7 1.4 2.5 2.2 England 3.1 1.9 2.7 2.5 European Union (15) 19.7 1.5 2.2 2.0 10 new countries 1.8 4.3 4.8 4.3 European union (25) 21.5 1.7 2.7 2.3 U.S. 21.2 3.2 3.2 1.9 Japan 7.1 2.3 2.8 2.5 Industrial countries 54.2 2.3 2.7 2.0 Russia 2.7 6.3 6.3 5.2 China 12.7 9.9 10.3 9.0 Other asiatic countries 13.5 5.8 5.9 5.8 Latin America 7.9 3.9 5.0 4.1 Africa 3.2 5.4 5.4 5.4 Middle East 3.1 5.7 5.8 5.2 World 100.0 4.3 4.5 4.2 Jean-Paul Fitoussi/8
Real oil prices Source: World Economic Outlook, IMF, April 2006. Jean-Paul Fitoussi/9
Relative stability of the dollar? 1,3 1,2 Euro 1,1 1 Yuan 0,9 Yen 0,8 0,7 1999 2000 2001 2002 2003 2004 2005 2006 Source: Financial Markets, BCE, 2006 et calculs OFCE. Jean-Paul Fitoussi/10
III - The long run - GDP Trends 1990-2006 - Assessing European economic performances - GDP per capita (PPP) - The widening of the gap : GDP growth Jean-Paul Fitoussi/11
III - 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 increase - The share of the US wil increase in the OECD GDP - The share of the euro area will decrease at the world level, at the OECD level and at the European level Jean-Paul Fitoussi/12
GDP trends 1990-2006 280 260 240 220 200 Asia* 269 6,4%** 180 160 140 120 3,0%** Euro zone 136,5 USA 160,2 2,0%** 100 80 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 *Asia includes China, India, South Corea, Taiwan, Hong Kong, Singapour ** Average growth 1990-2006 Sources : Banque Mondiale & OCDE. Jean-Paul Fitoussi/13
GDP Trends 150 140 130 England 2,4 % Euro Zone 2,0 % 120 110 Japan 1,3 % 100 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sources : OCDE-PIE. Jean-Paul Fitoussi/14
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? Since the beginning of the 1980s, European Economic performance has been poor. The catch-up process visà-vis the US has come to a term at the beginning of the eighties. Jean-Paul Fitoussi/15
GDP Per capita (PPP) 0.9 France 0.8 Euro 3 0.7 Royaume-Uni 0.6 1963 1968 1973 1978 1983 1988 1993 1998 2003 Jean-Paul Fitoussi/16
GDP Per capita (PPP) 0,90 Germany France 0,85 0,80 England 0,75 0,70 Italy Euro 4 0,65 1970 1975 1980 1985 1990 1995 2000 2005 Jean-Paul Fitoussi/17
The widening of the gap : GDP Growth 6% 5% USA 4% 3% 2% England 1% FRA EURO 0% 1997q1 1998q1 1999q1 2000q1 2001q1 2002q1 2003q1 2004q1 2005q1 2006q1 Jean-Paul Fitoussi/18
IV What s wrong with the european government - The monetary policy of the ECB - Consumer prices index Jean-Paul Fitoussi/19
And now? The monetary policy of the ECB Apparently, the monetary policy of the ECB has been successfull 7 6 5 England 4 3 2 1 Euro zone USA 0 sept m ai-06 janv ier-06 sept m ai-05 janv ier-05 sept m ai-04 janv ier-04 sept m ai-03 janv ier-03 sept m ai-02 janv ier-02 sept m ai-01 janv ier-01 sept m ai-00 janv ier-00 sept m ai-99 janv ier-99 Jean-Paul Fitoussi/20
Consumer prices index 5 4,5 4 3,5 USA 3 2,5 2 1,5 1 0,5 Euro zone England 0 1999 2000 2001 2002 2003 2004 2005 2006 Sources : OCDE-PIE. Jean-Paul Fitoussi/21
And now? 7 But in actuality, it has been a policy of benign neglect vis-à-vis the exchange rate 1,4 6 5 4 Taux directeur de la BCE (e.g.) 1,3 1,2 3 2 Taux de change euro dollar (e.d.) 1,1 1 1 0,9 0 0,8 s ept m ai-06 janv ier-06 s ept m ai-05 janv ier-05 s ept m ai-04 janv ier-04 s ept m ai-03 janv ier-03 s ept m ai-02 janv ier-02 s ept m ai-01 janv ier-01 s ept m ai-00 janv ier-00 s ept m ai-99 janv ier-99 Jean-Paul Fitoussi/22
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. Jean-Paul Fitoussi/23
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. Jean-Paul Fitoussi/24
V Macroeconomic policies & industrial strategy - Reactivity of fiscal policy - Structural reasons for the lack of reactivity - Proposals of reform Jean-Paul Fitoussi/25
Reactivity of fiscal policy Cumulative impulse 2002 2003 2004 2005 2006 Zone Euro 1.5 1.4 1.1 0.5 0.5 RU 2.9 4.5 4.6 4.2 4.1 USA 3.8 4.8 5.0 5.0 5.0 Japon 0.5 0.4-1.0-1.7-1.3 6 4 2 RU 0-2 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 EURO -4 USA -6-8 -10 Jean-Paul Fitoussi/26
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 Jean-Paul Fitoussi/27
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 Jean-Paul Fitoussi/28
Proposals for reform The stability and growth pact Exclude investment from deficit figures (golden rule) Jean-Paul Fitoussi/29
Proposals for reform The ECB Accountability : Political determination of the inflation objective and political determination of exchange rate policy Jean-Paul Fitoussi/30
Proposals for reform Competition doctrine Political guidelines for competition doctrine, in order to allow the conduct of industrial policies. Jean-Paul Fitoussi/31
A new Community? Towards an European Community for Environment, Energy and Research. Trying to combine the energy problem with the increasing «demand» for environment. Jean-Paul Fitoussi/32