A financial or a social crisis? l’Europa e (è?) il nostro futuro Cortone il 1/10/2010 Jean-Paul Fitoussi

L’Europa nella globalisazione I. Retorica e realtà della globalisazione I.1. Globalisazione in teoria I.2. Globalisazione & Nation-States II. La crisi III. The long run IV. What’s wrong with the european government ? V. The economic cost of the non-political Europe: the European economic government

©Jean-Paul Fitoussi/3 I. Retorica e realtà della globalisazione I.1. Globalisazione in teoria 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/4 I. Retorica e realtà della globalisazione I.2. Globalisation and Nation-States 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. That explains the concern the European populations about protection. Protection is not protectionism. Indeed, it is the main incentive for people to lie in society.

©Jean-Paul Fitoussi/5 II. la crisi  La discesa del 2009  Output gaps  Inequalities  Global imbalances

©Jean-Paul Fitoussi/6 Growth’s loss Source: Datastream.

Annual OECD output gap (Output gap in 2007=0), plus OECD projections for 2010 & 2011 Source: OECD Economic Outlook.

©Jean-Paul Fitoussi/8 II. Interprétation – Interpretation – Interpretazione II.1. Inégalités – Inequalities – Disuguaglianze II.2. Déséquilibres globaux – Global Imbalances – Squilibri Globali

Average yearly growth of income minus growth of total average income. Mid- 1980s to mid-2000s

Number of tax brackets and marginal income tax rates BelgiumNumber of Brackets23775 Minimum Rate72%55% 50% FranceNumber of Brackets12 64 Minimum Rate60%56.8%52.75%40% GermanyNumber of Brackets2222 Minimum rate56%53%48.5%45% ItalyNumber of Brackets32755 Minimum Rate72%50%45%43% Central government rates* Source : OECD Tax Database. Calculations of the authors

Number of tax brackets and marginal income tax rates* SpainNumber of Brackets Minimum Rate65.1%56%39.6%21.7% IrelandNumber of Brackets5322 Minimum Rate60%52%42%41% UKNumber of Brackets6232 Minimum rate60%40% USNumber of Brackets16255 Minimum Rate70%31%39.1%35% Central government rates* Source : OECD Tax Database. Calculations of the authors

Wage Shares

©Jean-Paul Fitoussi/13 The building of global imbalances: the US external deficit Current account balance, % of GDP Source: Datastream.

©Jean-Paul Fitoussi/14 III. The long run  GDP Trends  Assessing European economic performances  GDP per capital (PPP)

©Jean-Paul Fitoussi/15 III. The long run Ik we look ahead, the most likely evolution would be the following conditional on the continuation of past trends:  The share of Asia in the world GDP will importantly increase  The share of the US will 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/16 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 vis-à-vis the US has come to a term at the beginning of the eighties.

©Jean-Paul Fitoussi/17 GDP trends Sources : FMI.

©Jean-Paul Fitoussi/18 GDP Per capita (PPP)

©Jean-Paul Fitoussi/19 Labour productivity

Productivity in the manufacturing sector

The Italian Puzzle GDP per capita dynamics (average rates of growth) Source: Confindustria 2010

©Jean-Paul Fitoussi/22 IV. What’s wrong with the european government?  The monetary policy of the ECB  Consumer prices index

©Jean-Paul Fitoussi/23 The monetary policy of the ECB Apparently, the monetary policy of the ECB has been successfull

©Jean-Paul Fitoussi/24 Consumer prices index

©Jean-Paul Fitoussi/25 Exchange rates & Interest rates Sources : Datastream.

©Jean-Paul Fitoussi/26 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. 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/27 Reactivity of fiscal policy Government deficit, % of GDP

©Jean-Paul Fitoussi/28 V. The economic cost of the non-political Europe V.1. A dissociation between legitimacy and power The European contradiction lies in 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? What are the structural reasons for the lack of reactivity of European policies?

©Jean-Paul Fitoussi/29 Sources : Eurostat OCDE. A big economy: the first or the second of the world USUE (27)Euro zone (15) Population (2008) 305 m497 m321 m GDP (2008) 13,800 bn16,570 bn11,900 bn GDP growth ( ) 3,1 %2,5 %2,2 % GDP per capita(2007) 44,760$30,100$32,900$ Unemployment ( ) 4,98,69,0

©Jean-Paul Fitoussi/30  Lack of legitimacy for the European government, once discretionary action exceeding its mandate is required  Limited national sovereignity

©Jean-Paul Fitoussi/31 V. The economic cost of the non-political Europe V.2. Proposal for reform The two weaknesses emphasized above explain why Europe has no strategy to benefit from globalisation, nor to protect its enterprises and citizens. This lack of strategy is magnified when we take into account the geopolitical dimension. Here Europe is very weak whenever it exists a bilateral negociation (i.e. oil and gaz with Russia or trade and technology with China and/or India)..

©Jean-Paul Fitoussi/32 V. The economic cost of the non-political Europe V.2. Proposal for reform The absence of reactivity in Europe is not contingent, but structural. It stems from the dissociation between power and legitimacy. The European government is unable to act in a discretionary way, because it would go beyond its mandate. National governments, that have the legitimacy to act, lack the instruments. Exclude investment from deficit figures (golden rule). As the following graphs show, there is no other way to close the gap with the US.

©Jean-Paul Fitoussi/33 R&D spending by the public sector (en % du PIB) Sources : Eurostat X pas de données

©Jean-Paul Fitoussi/34 V. The economic cost of the non-political Europe V.2. Proposals for reform  The ECB. Accountability : political determination of the inflation objective and political determination of exchange rate policy.  Competition doctrine : political guidelines for competition doctrine, in order to allow the conduct of industrial policies.  A new Community ? Towards an European Community for Environment, energy and research. Trying to combine the energy problem with the increasing « demand » for environment.