Nobody wants to be third!

The start of 2017 was marked by not only a dichotomy between truths and alternative truths, but also by the divergence between economic reality and political uncertainty. Incoming macro figures for the Eurozone, UK, US and also emerging markets were generally better than expected which colors a picture of an ongoing recovery around the globe.

Political uncertainty has by all means increased highly since the inauguration of Donald Trump. ‘America first’, as the dominant strategy for economic policy, might create short-time gains for the US economy if backed by government spending. However, the long-term damage to the American and the world economy could be larger given the protectionist reasoning of the Trump-government.

The America first agenda of the Trump administration is a challenge for the European economy. If America wants to be first, Europe wants proverbially become second. Before becoming a second Europe must face its old problems. The never-ending story of the Greek debt crisis, recapitalization of Italian banks and upcoming populism in almost every country makes a strong Europe a foregone dream of the distant past.

What is certain, is that the new political reality of rising inequality, more protectionism and less coordinated climate measures bears the risk that the world society at large will be worse off. Who will win the third place in this uncertain world?

 Global economy bodes rather well

In recent months the incoming macro figures from almost all over the world painted a rather favorable macroeconomic picture. World trade continued to increase (figure 1), although at a markedly slower pace than before the Global Financial Crisis (GFC). Unlike last year, this year’s headline figures are rather boring: no great shifts in expectations, the political earthquake in the US has not (yet) harmed the real economy or the financial world. The upward Trump-trend in the stock market has not yet faded away and volatility is rather low.

All in all, the economic outlook for 2017 and beyond, is slightly more favorable than it was last year. The forecasts from major institutions, such as IMF, World Bank, European Commission and OECD do not differ substantially from each other. Not surprisingly, the expected growth rates are markedly higher in emerging markets and developing economies (EMDE’s) than those in advanced economies (figure 2). The scars of the GFC seem to be healing in the Western economies, with decreasing unemployment rates, and in some countries even approaching natural rates, on average slightly declining government deficits and inflation picking up.

The economic picture seems to be a good news show, but at least two remarks have to be made to dampen the party mood. First, economic growth, although increasing, is rather low by historical standards. In many advanced countries labor productivity and private investments are estimated to be lower than before the GFC. This remains a counterintuitive phenomenon: despite the cheap access to funds and the huge global pool of savings, mostly accumulated by firms, profitable private investments are still not over-abundant. Along with still high gross private and public debt, makes deleveraging very painful in many advanced countries.

Secondly, it remains to be seen who will benefit from the economic recovery. Part of the growth story is due to the increased employment and hence lower unemployment figures across the board. Admittedly, this contributes to a higher disposable income, but the increase is not enough to put an end to a prolonged trend of falling share of wages in national income in many countries (figure 3). Next to it, unemployment figures, especially youth unemployment, are still extremely high in countries like Greece and Italy. In other words, the gains from economic growth have largely ended up in the pockets of big companies, while they barely see ample any opportunity to use those profits productively.

America first

‘America first’, a much-quoted one-liner of Trump simply means buy American and hire American. To put it differently, by lowering corporate taxes and increasing tariffs on foreign products American firms will be encouraged to invest domestically in order to create jobs in America. In contrast to internationally active American companies, the more domestic-oriented companies, like construction firms or SMEs, will probably welcome such a policy of lower taxes for corporates and high incomes. This might give the Fed leeway to hike the interest rates at a faster pace than previously expected.

It is however very questionable if the aforementioned will leave the average American, let alone those at the bottom of the income distribution, better off. Opposite to the ‘America first’ proposal, millions of mainly lower income Americans will be faced with the intended abolition of Obamacare resulting in a further increasing gap in life expectancy, and hence lifetime wellbeing between low and high incomes. The proposal to lower taxes for higher incomes will only further increase the differences.

Other points on the policy agenda will probably also not foster longer term wellbeing of the average American. The renewed exploration of coal, oil and (shale) gas and the intended retreat on the Global Climate Agreement bode ill for a sustainable future of the US and world. Even if the damage, caused by the exploration of fossil fuels, is limited by the competition of renewable energy and too low fossil fuel prices to induce an investment surge, the policy direction could not get any worse for sustainability. What also is damaging is that the results of scientific research on climate and the effects of human action on the environment can no longer be published freely. This blurs the debate on climate change and gives too much room for alternative or unchecked facts. Although the effect of this inactive or even reversed climate policy will not be noticed in the short term, the long term damage will be large.

Europe wants to be second

Let Europe be second! What started as a joke, contains a certain amount of truth. If the US really put their own narrowly defined interest first, the impact on the Eurozone will not remain unnoticed. The US are not only one of the major trading partners, but they are the Eurozone’s closest political and military ally. In addition, the economy of the Eurozone – although recovering from the GFC – is performing poorly compared to the American.   With the 15th consecutive quarter of economic growth (figure 4) the average Eurozone GDP is above pre-crisis level. This does not hold for Southern European countries such as Spain, Italy and Greece. With the unemployment rate at 9,6% in December 2016, down by 2,5%-point since2013 ,the worst of the Euro crisis seems to be on average over. As shown in figure 5, the differences between countries and age groups remain however large.

Against the background of the current economic situation the ECB and also the OECD to increase public expenditures in the Eurozone. After all, monetary easing and extremely low interest rates have not yet been effective in raising the inflation rate close to the ECB target of nearly 2%. Although slightly rising, the inflation rate remained at 1.1% last December, the 48th consecutive month far below the ECB target (figure 6).

A more promising strategy to lift European economic growth in the Trump- and post-Brexit era would be to stimulate Eurozone domestic demand in a sustainable way. Especially in the case of countries like Germany and the Netherlands, this would mean public investment in infrastructure, greening of

the energy supply and transport. However, political uncertainty in the Eurozone related to Brexit, Trumponomics and coming elections in five member states will overshadow the debate on promoting sustainable growth. As a prelude to more political unrest peripheral 10-year sovereign spreads have already been on the rise relative to Germany. The turmoil emanating from the still unresolved Greek debt crisis and uncertain recapitalization of Italian banks are illustrative of Eurozone’s political inability and unwillingness to provide sustainable solutions.  

Instead of making effort to become second, Europe needs to deal with domestic problems first.

Global wellbeing will become third: SDGs on the verge?

The tide in the global society can actually change more rapidly than we might think. From a common effort to put Sustainable Development Goals (SDGs) on the political as well as business agenda, and the establishment and the historically rapid ratification of the Paris Agreement on Climate change in the autumn of 2015, we have currently entered a world in which narrowly specified self-interest dominates the arena

This is very understandable when we look at people’s main concerns and interests: increase in material well-being and national politics acting in their interest. And it may sound counterintuitive, but collaboration with other nations and free trade are in everyone’s more broadly interpreted interest. In recent decades free trade and more integrated world economy have been one of the catalysts for decreasing world poverty and increasing prosperity and welfare. This is not a zero-sum game, but this does not prevent us from striving for a well-balanced distribution of free trade gains. National governments must play their role in that respect.

But on a supranational level, there is still more than enough room to collaborate on challenges that encompass the national self-interest. Even more so, the SDGs might give lead to an investment agenda which helps both material wellbeing and the future of the planet. At the global level, total investment needs are in the order of $5 to $7 trillion per year to reach the SDGs by 2030, or 7 to 9% of annual GDP (Worldbank, 2017). Both public and private investment efforts are needed to fill this gap (UNSDSN, 2015). It is also a responsibility private investors should take up, especially in this scattered political landscape. First steps on this road are taken in the Netherlands at the end of last year

For global wellbeing there is no way back from international collaboration. International collaboration is the way forward to ensure an appropriate level of well-being globally and win-win for all parties involved. Or else, no one will be first, we will all be third.