Mario Draghi brought a surfeit of pessimism to the Jackson Hole meeting of central bankers. He argued that the 2 per cent trend rate of growth for the OECD rich countries prior to the banking crash of 2008 has now halved to a trend rate of around just 1 per cent. Recognising that even the Eurozone growth is currently racier than that, he asserted that: “Without stronger potential growth, the cyclical recovery we are now seeing globally will ultimately converge downward to those slower growth rates”.
He was bold enough to tackle the big picture. His worries included the much higher levels of state debt that the main OECD countries have incurred, up from around 50 per cent in 2007 to 87 per cent today as a percentage of GDP. He expressed concern over the big increase in elderly people needing welfare and pension support. In 1950 just 14 out of 100 people were over 65. By 2025 he expects this to reach 35 out of every 100. Without a major breakthrough in productivity growth he finds it difficult to see how all these financial liabilities can be met.
This analysis draws much on the southern European experience. There, falling populations produce ageing societies. The birth rate is too low, compounded by many talented younger people emigrating to places where there are more jobs and better prospects. The state debt climbs as the government has to meet liabilities for the elderly and unemployed without having sufficient tax revenues from younger and more enterprising people to offset these costs.
So, what is his solution to the economic bind he describes? In a way it is more of the same. He comes out as a strong proponent of globalisation. With more free trade and movement of people there will, he hopes, be more productivity breakthroughs. There will certainly, in his view, be more rapid introduction of better technology as people quickly learn what is on offer around the world. Companies will have to fight back against superior foreign competition armed with better technology. His speech is at one level a wish to open trade more fully and to allow the strong winds of Chinese and US competition to sweep through the EU as well as implying we need to allow good Chinese access to western technology. It is curious to see one of the crucial figures of the Euro project effectively recommending that the world does more business the Google and Facebook way.
In order to root his speech more firmly in the continental European traditions of social solidarity and regulated capitalism, he spends much of his time discussing how decent regulation EU style can provide an offset to the impact of more open trading competition on perceptions of fairness, safety and equity. He argues that the OECD must and can benefit from a bigger competitive shock, as long as there are regulations in place to deal with welfare, inequality, labour standards and the rest. He does not reconcile how you still get the favourable consequences of the competition if regulation interferes too much. Explaining how regulation is organised in the EU single market, he seems to propose a similar approach for the rest of the advanced world through world regulatory bodies. In finance he pinpoints the global Financial Stability Board and the Basel Committees as the way forward. He wants to design and agree globally a “regulation that preserves financial stability without unnecessarily restricting the flow of credit to the economy”. Few would disagree, but who will do this and how will it work?
Meanwhile adopting best technology worldwide and encouraging more great global companies to exploit the economies of scale from a more integrated world market will not eliminate or abate the issues of fairness that can be important democratic politics. The larger and more successful they are, the richer their owners will be. Welcoming freedom of movement globally and not just within the EU will have consequences for better-paid workers in richer societies. Trying to control tax abuse or poor employee conditions becomes more difficult the more countries and companies that are involved in the supply chain.
In an unexplained coda to the lecture Draghi says: “Multilateral institutions are necessarily staffed by experts. But it is essential that they always remain accountable to elected representatives who set the parameters and have the final say”. It would be good to hear more from him on how this can happen in the Eurozone, where the difficult issues of accountability and nationally acceptable economic policies have been temporarily eased by a cyclical recovery. They may return to haunt, as there is still resentment of the austerity and high unemployment that results in parts of the zone. The US, with lower unemployment and a longer period of sustained growth, still voted for Donald Trump in the hope of something better. The Democrats offered the voters something closer to Draghi’s world.
John Redwood is global strategist at Charles Stanley