A new economic era is dawning, accelerated by the measures implemented by countries around the world to contain the covid-19 pandemic. What is your assessment of the current economic crisis? What kind of world will emerge once its effects are overcome?
We are facing the most severe economic crisis in history since the Great Depression. It is a very unique crisis; it did not originate from economic causes, but it caused a very significant disruption to global supply and demand. The recovery is looking very asymmetrical, mainly due to the most damaged sectors. Economies whose service sectors have relatively greater presence, particularly tourism where physical mobility is essential, will suffer more. Likewise, those with little room to maneuver to stimulate growth through public finances will be slow to recover. We see this differentiation in growth rates between advanced and emerging economies. We also see this in central Europe, where economies such as Germany have made more active use of their public resources, which has tended to support a more agile recovery, while in others such as Spain and Italy it has been more limited and the reduction in their GDP will be greater. Some trends that we were already observing before the pandemic
are more pronounced. It will probably take time to assimilate the most important feature of the day after; that the world will remain heavily indebted, and the propensity to consume will be largely conditioned. It is, therefore, highly likely that a return to normalcy will be difficult.
Since the 2008 financial crisis, the European Union has undertaken multiple efforts to return to growth. How prepared is Europe's current institutional architecture to respond to this new crisis? Are its unity and the coherence of its leadership at risk?
Europe has been in a complicated situation, although not so much right now. Unlike during the 2008 crisis, when the European Central Bank (ECB) took a long time to adopt monetary stimulus decisions and the European Commission (EC) adopted counterproductive fiscal policies based on austerity, this time Europe has reacted in the right direction, fortunately.
Why do you think the European Central Bank's measures are appropriate? And is there a different strategy compared to the previous crisis?
In stark contrast to the 2008 crisis, the ECB is being very active in preventing the slowdown from becoming worse and facilitating the financing of public debt. The European Commission has also proposed some important fiscal support measures for the economies. Perhaps the most important is the creation of a recovery fund of 750 billion euros that will be backed by debt raised by the Commission, not by the member states, and this is a major step. With this, Europe is moving toward strengthening integration in order to have a treasure trove of instruments with which to borrow on the markets. I believe that this will bring the countries of Europe a little closer together. It does not mean that we are in an optimal situation, but the risk of fragmentation is now less than it was just a year and a half ago.
In spite of Brexit?
Brexit is a decision that was already made a long time ago. Europe has taken it as a wake-up call and is reacting in terms of greater internal cohesion in response to the United Kingdom no longer belonging to the European Union.
Does the current level of public debt compromise economic recovery? Will too much time with low interest rates exceed the limits of government borrowing in Europe?
In Europe, the increase in public debt is a result of the effect of a paralysis caused by the pandemic and the inevitable increase in public spending and investment, while tax revenues have plummeted. In the private sector, there may be incentives to increase debt, given low interest rates. But States do not normally borrow simply because the cost of financing is declining.
European public debt is sustainable but also uneven. There are countries, such as France, with levels higher than those of Germany or Spain, above 100% of GDP. We must trust that growth will generate public revenues and thus reduce its volume. In any case, the European Central Bank will continue to buy bonds in secondary debt markets to keep interest rates low and debt service from rising. For the time being, public debt is not jeopardizing recovery in Europe because its markets are applying very low interest rates and risks to all countries, for example Spain. During the previous crisis, in July 2012, Spain or Italy paid seven additional percentage points for borrowing at the same maturity as Germany. In contrast, this year they are paying only 0.7 points more than Germany, less than one percentage point difference.
Given the uncertain evolution for the pandemic and normalization of economic activities, what is the outlook for banking institutions?
The evolution of the pandemic and, above all, the deterioration of economic activity and employment may undermine the quality of lending. As of now, there are no threats like those experienced during the previous crisis. The solvency index of most Eurozone banks is in acceptable positions. The concern is that if unemployment remains at relatively high levels and the circumstances of companies continue to weaken, it is very likely that non-performing loans will increase. In that sense, we may have a problem, but it is not the continent's main concern at the moment.
Since 2008, the business sector has become increasingly leveraged. Under the umbrella of policies to preserve the corporate fabric and employment, is there a risk of the emergence of zombie companies?
This is a major risk. I am much more concerned about how corporate debt is growing around the world than how public debt is growing. The debt of some companies in sectors with weakening demand is increasing and, therefore, their creditworthiness is declining. There are companies whose sales revenues are less than the debt service they must pay. This is where the concept of the zombie company comes in, which can jeopardize the stability of an economy. I am quite concerned because we may encounter financial turmoil, perhaps as a result of a major corporate bankruptcy, not necessarily in Europe. These could, therefore, be episodes that could threaten the recovery of the world economy as a whole.
What kind of stimulus should be favored: consumption, VAT reduction or job creation in cutting-edge sectors, such as energy or digital transformation?
Europe has reacted well in this respect. I prefer complementary stimuli. Europe has already promoted stimuli for employment and financing for the most vulnerable companies, which are complemented by the monetary policy stimuli being provided by the ECB. It is now time to ensure that this recovery also supports investment to modernize European economies. The European Commission has therefore agreed that the 750 billion euros it will raise on the financial markets will be invested essentially in two major areas: in the energy transition, aimed at meeting the environmental requirements agreed in the 2015 Paris Agreement and, at the same time, in a digital transition— an intensification of investment in infrastructure and in the deployment of digital technologies that will enable Europe to make up for lost time in that digital economy rivalry that the United States and China have been engaged in over the last few years. We must rely on the multiplier effect of investment to accompany the recovery and ensure that, afterwards, economies are more resilient and more modern.
You have written that the world needs to return to growth, but to grow better. What do you consider the best to be and how can this be done?
Better growth means increasing human and technological capital and, although perhaps less necessary in Europe, physical capital. Without these resources of technology and human capital, fundamentally, growth potential cannot increase. The best way to grow is to do so in a less vulnerable way and on the basis of increases in potential growth, which basically means generating greater productivity gains today.
In your most recent book, you point out that many citizens of the most developed countries perceive globalization and digitalization as major threats. How will these two major trends affect the economy's revival?
In Europe, digitalization will indeed be a way to revive the economy. There will be important actions, especially in terms of infrastructure. For example, rural Spain will see an increase in these, but we will also see throughout Europe an increase in the digitization of medicine, one of the most important areas that will make it possible to improve healthcare and generate, so to speak, greater value. The extension of these technologies to sectors damaged by the crisis, such as tourism or the automobile industry, is also desirable.
Regarding globalization, we will be witnessing a period in which, not only in Europe but also throughout the world, it will continue to be questioned while nationalist interests are protected. This is not exactly new, but its intensity will be associated with persistently low growth and unemployment. The U.S. presidency has systematically questioned essential aspects of globalization, introduced tariffs, opened a technological struggle with China and other economies, and has not sufficiently respected multilateral agencies or the World Trade Organization (WTO). Before the pandemic, globalization was already damaged, it was already faltering, and proof of this is that the volume of international trade was not growing as before, nor were international direct investment flows, which will take time to recover their former levels. One of the characteristics we have seen in this crisis is the dislocation of cross-border value chains, and this has generated a breakdown, a certain distrust, of outsourcing production processes. I think we will see a certain return home of investments that previously relied on international value chains.
Will the depth of this crisis bring the need to update the multilateral order created after the post-war period out of the morass? What adjustments do you think are essential?
First, respect the existing rules. That all countries, starting with the U.S., followed by China and Europe, respect the rules. They are not being respected, the WTO has collapsed, and the appointment of internal judges has been pending for some time. The second element is to review the mechanisms for decisions and representation in some of these organizations, the International Monetary Fund for example, the World Bank or the WTO. Many of these institutions came out of Bretton Woods in 1944, and the global economic reality has changed.
Therefore, it would be good if the decision-making mechanisms were more open. A third aspect is that perhaps some of them should have a greater role in the coordination of economic policies. The IMF is trying to consolidate a new era, be closer to the economies that need it most, the emerging economies. It is also seeking to strengthen its lending role as well as its technical assistance role. These are basically the three steps. It is not that I am particularly ambitious and want to radically alter the international economic order, but I think it is fundamental to respect the institutions we have and adapt them to a reality that is quite different from the one that existed when they were created.
What is the current role of Europe in the global economy?
It is a somewhat more limited role than it had 20 years ago because, as we have said, Europe was hurt in the previous crisis and also weakened in terms of prestige, of intellectual authority, because the economic policies it pursued were not the right ones. However, Europe can aspire to be a model in terms of what it has always been: respect for legality, democracy and human rights.
Europe can also become a global model in terms of technological progress. It is for this reason that it has decided, in the wake of this pandemic and through the European institutions, to make the important decisions on indebtedness that I have mentioned in order to accelerate a transformation with two purposes: one, to be a world leader in meeting climate change objectives, and two, to make up for lost time in the digitization of all areas, from human interaction to the construction of infrastructure for 5G networks as modern as those in Korea or the United States. Of course, we also need to have a repertory of artificial intelligence and data economics on a par with that of the most modern countries. This should be Europe's objective: if it is able to complement its political influence with prominence in energy and technology, it can consolidate its position as a global reference. This will definitely not be achieved overnight.
Is the European Union's response to reactivate the economy different from that of the United States, China or Russia?
All countries in the world have basically taken two types of action: those aimed at financing companies in difficulty or providing them with guarantees and those to offset the impact of unemployment. The European Union as a whole has taken the measures I have described, but the countries have adopted quantitatively heterogeneous decisions. For example, for the first time in history, the European Commission has made a joint decision to borrow 750 billion euros internationally to undertake the reactivation process with countries. I believe that validates Europe's position.
*Interviewed October 2020.