On attending The Future of Europe Conference @ Bocconi (Part II)

On March 10, Bocconi University in partnership with the BLEST Lab and the Institute for European PolicyMaking hosted The Future of Europe Conference. This very special event brought together high-level representatives of European institutions, member states, and think tanks for a discussion of what Europe’s governance, macroeconomic, and sustainable future looked like. Since each of the panels involved lengthy speeches, debates, and (at times) combative Q&A’s with the audience, I decided to devote separate blog posts to the Governance and Macroeconomics panels. This one focuses on the proceedings from the Macroeconomics panel, which was chaired by Prof. Elena Carletti of Università Bocconi and involved Michala Marcussen (Chief Economist of the Société Générale Group), Kalin Anev Janse (CFO of the European Stability Mechanism and European Financial Stability Facility), and Ugo Panizza (a professor at the Geneva Graduate Institute). These reflections do not represent my own opinions, but those of the panelists I quote, and is an effort to share and communicate the current mood and thinking of expert European economists on the health and future of the economy and financial system in the present moment. If you read Part I of this blog, then you will notice that the headings of these reflections are the same, although the Macroeconomics panel took their thoughts and recommendations in a very different direction than the Governance one. In my view, they are equally insightful and revealing!
 
Reflection #1: Treaty reforms inspired the most enthusiasm, and the biggest ideas.
While none of the panelists were supporting or detracting from calls for fiscal union in the EU, Panizza did suggest that, if such a step were to occur, it was the massive capitalization of the NextGenEU funds (referred to as PNRR in Italy) that broke the taboo in EU institutions influencing and injecting money into member states’ fiscal policy. However, with the ECB taking on a more and more discretionary role in member state financing through policies of quantitative easing (QE) and outright monetary transactions (OMT), Panizza worries the ECB is becoming the “fiscal watchdog of Europe.” Marcussen added later on that all the current proposals for common EU debt suggest dividing the fiscal union into ‘normal’ and ‘excess’ levels of debt such that in times of fiscal downturn or crisis, states are still responsible for solely their own ‘excess’ levels. Such measures are supposed to calm fears of the 'Frugal Four' (Austria, Denmark, the Netherlands, and Sweden) that fiscal union would lead to precarious spending across the bloc and tie their sovereign wealth to fiscal impropriety by other member states.  
         Marcussen also brought up how it may be wise to create mechanisms of some kind for governments to have access to safe funding at all times, instead of only having access to the ESM in times of crisis.
         Concerns over the fiscal health of member states and the EU more broadly also remain from the Covid-19 shocks, and those from the war in Ukraine and resulting energy crisis. Prof. Panizza was very frank in describing how debt-to-GDP ratios are at more elevated levels than they were before the Great Recession, and accelerations in GDP which bring this number down may be due to inflation, not real growth. While the spreads between bond yields in Eurozone countries remain relatively low, the markets can judge the economic health of the entire system incorrectly.
         The largest and most explicit calls for reforms came from Janse. Janse argued that the treaties should be reformed such that the ESM is accountable to the European Parliament, instead of the individual member states, as it is currently. However, it should be noted that the ESM, in its current design, is highly accountable to the national parliaments, and as such is an intergovernmental institution.
 
Reflection #2: More Europe, but also smarter/“strategic” Europe.
For Marcussen, the economic risks from de-linked fiscal and monetary policy strategies are only part of the need for more Europe in macroeconomics. The other reason is that challenging geopolitics along with high inflation and shorter economic cycles will make economic transitions more volatile and unpredictable for economists and experts to manage.
Janse made the position that European institutions like the ESM are better positioned from US-centered or even global institutions like the IMF. (To my own surprise, the ESM is apparently better capitalized than the IMF.) The ESM also works similarly to the IMF, with countries in fiscal distress and undergoing market exclusion able to access precautionary lines but under conditionality measures of structural reforms. The ESM has a hugely positive brand with private lenders, which has led to low “market stigma” and helped to create the view that ESM lending is critical to investors trusting new and re-investments in states that go to the ESM for help.
         It was raised by Goulard in the audience, however, that part of why ESM reforms (like being brought directly into the Treaty on the Functioning of the EU) might not be implemented is because more mechanisms, like the ESM itself and open monetary transactions (OMT), are created and work. From this perspective, creating more institutional European mechanisms to respond to crises has instituted much-needed emergency instruments, but prevented having more difficult conversations about long-term institutional reforms that are necessary. Goulard referenced at this point fervent debate in France over Macron’s plans to raise the retirement age; a policy change and reform we now know quite literally burst to the surface of French politics after Macron invoked article 49.3 of the French constitution to ram through the raised pension age. Her main point was that macroeconomic funding needs to not only be dedicated to creating new instruments, but most importantly to investing in the future (such as in education).
 
Reflection #3: America was front and center, in good and bad ways.
In Marcussen’s opinion, the US overstimulated household income with its Covid-19 relief policies, whereas the EU provided the right amount of economic stimulation while also protecting household incomes. The US and Europe are not conceived of as rivals in Covid-19 recovery and anti-inflation plans, although the fiscal and monetary decisions made on both sides of the Atlantic can and will influence one another (particularly due to the linkage of reserve currencies). Each should therefore pay attention to the actions and macroeconomic forecasts of the other.
         The US also came up in history lessons from Janse – he explained how the Dutch Guilder was the global reserve currency before it was the British Pound, and is now the US Dollar; but, the euro’s creation has given the Eurozone a way to compete for control in the global financial and monetary markets as the world’s second reserve currency. As the current bout of inflation and recent collapse of some regional banks brings monetary and macro-prudential policy front and center once more amidst claims that the US dollar is slowly declining in its role as the global reserve currency, we might all benefit from taking some meaningful glances at monetary history in its longer perspective.
 
Writing these two blog posts has made me think about what types of issues would garner the most focus if US states were to host a conference amongst various policy experts. Obviously the US is not in need of anything like “treaty” reforms between the states since the US is a complete political, fiscal, monetary, and prudential union. But it is still an interesting intellectual exercise to think about what issues might predominate the discussions, and if/how state and federal action could work in tandem to reduce polarization on some issues in favor of tangible, implementable solutions. Gun control reform, the opioid epidemic, and healthcare costs/equity come top of mind to me as potential areas that might benefit from tempering down the “national” heat and anger that comes from different ideological sides and may benefit from state-level cooperation and task forces to create actionable and politically feasible steps to make real progress.
 
Acknowledgements
Thanks Università Bocconi and BLEST for hosting events like this and allowing students to attend!