Global Shift: Implications of a Post-Western World Panel One: Competing Economic Models Jacob F. Kirkegaard, Peterson Institute

Outline 1)The EU Crisis Diagnosis 2)Different EU Economic Models 3)The Long-Term Concerns 4)Concluding Remarks

The EU Crisis Diagnosis

Design Flaws, Fiscal or BoP Crisis? No agreement exists regarding the cause of the European debt crisis; 1)The inevitable result of a flawed construction of a monetary union without being reasonably close to an OCA, i.e. without labor mobility or a central transfer mechanism/fiscal union? 2)The inevitable result of a loss foreign financing for excessively large current account deficits, arising from competitiveness divergences, i.e. German wage compression? 3)The inevitable result of unsustainable fiscal policies, which markets ignored for ten years and then suddenly woke up to when the real estate/construction growth model collapsed? In my opinion, it was mostly 3), although 2) played an unhelpful role Result: The EU sovereign debt crisis of 2010 accelerates global shifts, but were not caused by them

Different EU Economic Models

The Long-Term Concerns

Concluding Remarks The EU will decline substantially as a share of world GDP, but far less so in GDP/capita terms EU members (and their economic models) face different degrees of challenges in the Post-Western World: Southern/Eastern Europe – rigid, low-skilled, low-tech and depopulating (and now without German interest rates!) – most at risk North-West Europe – more flexible, higher skilled, higher-tech and less dramatic demographic trends – will cope better Europe has had a good crisis so far in terms of dealing with several of its rigidities Principal longer-term political challenge for Europe from both crisis and the rise of Asia will be the end of economic convergence between the center and periphery