Navigating the Economy Through Uncertain Political Waters

Joaquín Almunia and Alain Minc discuss the challenges

16/12/2016 Barcelona

EC Vice President Joaquín Almunia | IESE Business School
“If the mainstream political parties in Europe are not able to find solutions, uncertainties will prevail and political instability is here to stay,” says former EC Vice President, Joaquín Almunia / Photo: Roger Rovira

“Uncertainty is king everywhere because, for the first time in 70 years, the anchor of the world is politically unstable,” said CaixaBank Board Director Alain Minc regarding the U.S. The author formed a panel with former European Commission Vice President Joaquín Almunia this week at the Barcelona campus. Moderated by Prof. Xavier Vives, they discussed the current geopolitical reality and challenges for the economy.

From Brexit to the French elections next year, the panelists touched on the host of political developments in play, before detailing implications for the world, Europe and, in particular, Spain.

U.S. Ripples Effects in China and Russia

A key factor is the recent presidential election result, and its worldwide ripple effect. For example, “How assertive will China be in front of an unpredictable U.S. administration?” asked Minc. “We have always taken for granted that it is an empire with eyes turned within it. But if they resist imperialist temptation now, it will be the first time an overwhelming power has.”

Minc’s view is that China could go one of two ways in the face of increased U.S. unpredictability: either they play their hand more directly, or play their cards closer to their chest.

“There’s also the potential confrontation of a short-term unpredictable player in the U.S. and a long-term one in the form of Russia,” says Minc. Russia is keen to increase their influence but “till now there was a threshold: there was no risk of Russian intervention in a NATO country due to Article 5, which established that an aggression against one member constitutes an aggression against all,” explains Minc.

“However, during his campaign, Trump suggested that Article 5 is no longer automatic. It is logical that Russia should therefore test this in a Baltic state, for example, Estonia.” He adds, “the appointment of Exxon Mobil’s CEO as U.S. Secretary of State also changes the scope of their relationship with Russia.”

Back in Europe

Other political factors the panel considered included European unity or separation and Brexit.

“Europe was born out of fear for the Soviet Union,” says Minc. “If the Germans are afraid of a Russian threat but don’t feel protected by the U.S., there should be more unity in Europe.”

With reference to the United Kingdom’s exit from the Union, the panelists agree that, provided nothing dramatic happens in the world, it is likely to go ahead. What is still unclear even to the British, according to Almunia, is exactly how this is going to be executed when they present Article 50 in three months’ time.

There are a various economic challenges woven in with these political strands, but it is not always clear-cut whether solving political uncertainty is the key to economic growth, or vice versa:

  • Slow Growth from Cautious Investment

It is a known fact that the emerging economies of the world are growing at a slower rate than before, the key question is why?

“We could be close to considering the theory of secular stagnation to be correct,” says Almunia. “But if not, we have another problem,” most probable in his view, “we can grow but don’t want to invest, and investment is the engine for growth.”

Although potential investors have higher amounts of cash available, investment is still low globally. “Political uncertainty and doubts put investors in a wait-and-see position. Countries don’t want to increase their debt levels, public investors are prudent in the wake of the crisis, and private investors are wary of uncertain rates of return,” explains Almunia.

  • Getting the Measure of Productivity

“There had always previously been a positive correlation between advances in technology and productivity,” says Minc. “But at the same time that we are confronted by the digital metamorphoses, productivity is slowing.”

Minc has two hypotheses for this state of affairs: either we are entering a world of stagnation or, his preferred option, “We don’t know how to measure productivity in a digital world.”

  • Globalization Curbed

“Globalization is not increasing,” says Almunia, “but if investment returns to boost world economic growth, it will continue.” But, he argues, this will not be the same kind of globalization as before. “Due to the higher prudential requirements for banks after crises, financial globalization will be more moderate.”

In terms of people movement, Almunia sees no reason to expect migration flows to stop while the need to compensate for aging populations in certain countries persists. However, this carries with it the risk of rising populism. “Migration is easily used by populists to attack growing inequalities.”

  • Rising Inequality

However, Almunia does not believe that globalization is the main cause of inequality. “It is growing in part as a result of new technologies and the elimination of intermediate jobs. But we are also faced with lack of efficient tax systems to redistribute welfare and benefits, due to free movement of capital and tax havens.”

Only in stimulating as much growth as possible can we begin to find answers to these issues. And “if the mainstream political parties in Europe are not able to find solutions, uncertainties will prevail and political instability is here to stay.”

Spain Needs to Step-up

With reference to implications for Spain in particular, Almunia points out that the country is experiencing double the growth of the E.U. area, “but we are not sure if this is sustainable.”

“We are coming out of crisis with high unemployment and I am not optimistic about the future,” commented Almunia. “Because we are abandoning a medium to long-term national vision in favor of internal problems.”

“Spain is an inward looking country,” he says, “and it’s a pity that after the success of a democratic Spain becoming part of the E.U., we are not very active there.” For Almunia, the first step towards a brighter future is taking a more prominent role in Europe.

More generally, as we all face serious challenges in the current geopolitical environment, “we are lost without the E.U. in this very complex world,” asserts Almunia.