The Future of the Global Economy and Financial System

February 3, 2012


The panelists focused mostly on discussing the situation in the EU and the US, as this is the biggest factor of uncertainty making the financial markets nervous.

Gordon Brown believes that one of the problems that caused the current crisis was low globalization at the supervisory level. The banking system became global, but was supervised by national agencies. This mistake should be corrected in the future. He concluded that global problems need global solutions. He expects the Eurozone to initiate fiscal consolidation and restructuring of the banking system.

Charles Wyplosz is an optimist. He does not expect the Eurozone to collapse and stressed that there is no legal mechanism for a country to exit. All contracts are based on the euro as a common currency and it is simply impossible to revise them without a total collapse of economic activity. The last few months have demonstrated progress in resolving the region’s problems. Mr Wyplosz believes that the debt of some countries will be restructured, the banking system will be recapitalized and the European Central Bank will increase its activity in all of these processes. He also expects the Eurozone to demonstrate more fiscal discipline. He admits that the Eurozone is not a sustainable construction, but added that this is a feature of all new constructions. The Eurozone will evolve institutionally, in at least two ways. The first path, which Germany advocates, is to give more power to strong countries with healthy finances. They should have the right to affect the economic policy of less successful neighbors. The second way is to create a system (as in the US) with two levels of governance, on the federal and state levels. In this case, the federal level would not bear the responsibility for the debt of states.

Kenneth Rogoff thinks that although economic policy in the US is unsustainable and the fiscal deficit must be reduced, the US finds itself in a better situation than the Eurozone, as it has common regulatory institutions. Decisions can be made quickly and they will be followed by actions.

William White started his speech rather pessimistically. He does not see how the crisis can be stopped. A decade of easy monetary and budgetary policy resulted in great imbalances and these imbalances are still with us. He expects the crisis to continue but does not know what will trigger its next phase. In order to resolve their own problems, the advanced countries will print money and their currencies will depreciate against emerging currencies. The emerging world will also increase emission in order to protect their domestic producers. As a result, the imbalances will continue to grow. Unfortunately, international cooperation is not progressing. Debt restructuring is not yet successful, while structural reforms need time, which the politicians do not have. He expects economic growth to slow due to debt problems, banks to become smaller, and the clash between state capitalism and the free market to continue. Mr White concluded that Europe needs one more crisis to start cooperating more actively.

Jean-Michel Six said that several years from now the spreads between bonds of European countries will have narrowed. Everyone will have realized that European countries comprise a single family with the same risk, hence no default will be allowed and no country will leave the Eurozone. All of these beliefs are being questioned now. The Eurozone will have to resolve the root of all its problems to survive. This root is a lack of convergence between European countries. Economic policy should focus on smoothing the gaps in competitiveness between the countries. Mr Six also believes that the responsibility for debt restructuring should be mutualized.