Shifting Gears: Merging Growth and Prosperity
The seventh annual Bertelsmann Foundation-Financial Times conference explores how stronger global growth can promote more widely distributed prosperity
WASHINGTON, DC (April 16, 2015) – A healthy US economic recovery is providing a foundation for overall global growth, but many regions around the world are lagging, and inequality is on the rise within many developed nations, participants of the seventh annual Bertelsmann Foundation-Financial Times conference warned. They were, however, divided on the causes of the uneven wealth distribution, and a consensus on reversing the trend proved elusive.
Despite the differences, there was agreement on one point. In the face of slower growth in Asia, stagnation in Western Europe and armed conflict in eastern Ukraine, the US is the driver of global growth and best positioned to re-invent itself through technological change.
“The US is showing greater economic vitality,” said Bertelsmann Foundation President and CEO Aart De Geus. “But the US alone cannot sustain the global economy.” It cannot even close the wealth gap within its own borders, which shows no signs of narrowing even in times of higher growth.
Exploring the reasons for these uneven developments was the goal of this year’s conference, “Shifting Gears: Merging Growth and Prosperity”. The meeting at the Washington, DC headquarters of the US Chamber of Commerce brought together finance and trade ministers, diplomats, and representatives from the World Bank, the US Congress, European institutions, think tanks, and the media.
European speakers conceded that the US was in much better shape than their own continent. European Investment Bank (EIB) President Werner Hoyer bluntly warned that the EU was falling behind. He warned of continuing gaps in European investment and innovation, adding that “…my main concern is that we won’t act fast enough to close [them].”
Belgian Finance Minister Johan Van Overtveldt joined in the self-criticism. “The way societies deal with change is crucial for growth,” he said. “Even compared to Asia, the US is in pole position, and certainly when compared to present-day Europe.” Ronnie Chan, chairman of the Hong Kong-based Hang Lung Properties, was ready to bet on the US as the safest place for long-term investments. “The US will become the manufacturing center of the world that it once was,” he said.
But even in the US, the current wave of growth is not lifting all boats. This observation provoked an energetic debate about the influence of education systems, labor laws, monetary policy and trade on wealth distribution within a country.
Former US Secretary of State Colin Powell pointed out that those with fewer skills were losing out in today’s high-tech driven world, and he complained that the American education system had not caught up to this reality. “I want youngsters who know how to fix robots… not… be robots,” he said. He also called for labor-market policies aimed at creating jobs that provided a secure income and dignity. “Growth has to be accompanied by the creation of jobs, not just minimum-wage jobs.”
Thomas Mayer, Deutsche Bank Group’s former chief economist who now runs the Cologne-based research institute of wealth-management company Flossbach von Storch, disagreed with Powell’s analysis. In Mayer’s opinion, labor-market interventions such as minimum-wage laws create “barriers against inclusion” by leading companies to exclude newcomers.
Mayer also drew attention to the winners and losers of an expansive monetary policy. In the years after the crisis of 2008, the Federal Reserve relied on low interest rates and quantitative easing to stimulate growth, a model the European Central Bank is now emulating for the eurozone. Mayer and moderator Gillian Tett pointed to research that showed that lax monetary policy overwhelmingly benefited the wealthiest segments of society in Germany and the United Kingdom. On the other side of the equation, middle-class savers and pensioners were hurt by falling interest rates and yields.
Winners and losers also dominated a debate over free trade. New Zealand Trade Minister Tim Groser pointed to a “paradoxical explosion of interest in giant multilateral trade deals” in the years after the Great Recession. Groser concluded that the prospect of strategic gains must have outweighed concerns about the negative impact of trade for those countries that joined the negotiations. “At times of slow growth, people are looking for growth opportunities of even modest dimensions wherever they can get [them],” he said.
New Zealand is a party to the proposed Transpacific Partnership (TPP) agreement, which received a jolt after US congressional leaders struck a compromise―on the day of the conference―to give President Barack Obama so-called trade-promotion authority (TPA) needed to fast-track a trade deal with 11 other pacific nations from Australia to Vietnam.
The debate over TPA pits Obama against many in his own Democratic Party. The conference audience got a sense of the battles ahead from listening to Congressman Sander Levin, who predicted “a difficult passage” for TPA despite the compromise. The liberal Democrat from auto-producing Michigan is his party’s ranking member on the House Ways and Means Committee. He fears that a trade agreement with Asia-Pacific will lead to further job loss in the American manufacturing sector.
To the Europeans on the panel and in the audience, New Zealand’s Groser pointed out that the success of the Transatlantic Trade and Investment Partnership (TTIP) would ultimately hinge on the outcome of the TPP negotiations. If TPP fails, he warned, the anti-trade forces in Europe will make the European Commission’s job more difficult.
Former European Commission Vice President Viviane Reding agreed that public opinion is a big obstacle for TTIP. “In Europe, the naysayers have [taken] over, and no one from industry, the member states or the Commission has gone out and explained why we need TTIP,” said Reding, now a member of the European Parliament. In the US, a possible free-trade deal has yet to stoke public interest. “TTIP is essentially unknown in the US Congress,” Levin admitted.
A trade agreement with the US may add to Europe’s growth, but it won’t solve the continent’s structural problems. Greece is still struggling to meet its debt obligations, and none of the panelists would rule out the possibility of the country’s exiting the eurozone. But the EIB’s Hoyer assured the audience that the risks of a so-called “Grexit” or “Graccident” are more manageable given recent steps towards a eurozone banking union and stronger crisis-resolution mechanisms. “If Greece decided to leave the eurozone… we would certainly encounter political spillover effects… but not economic or fiscal effects,” Hoyer said.
Challenges also abound for Ukraine, which the country’s energetic, American-raised and Harvard-educated finance minister, Natalie Jaresko, freely admitted. But she committed herself to budget consolidation and structural reforms amid continuing conflict in her country’s eastern regions. She said failure in these aims was not an option. “At some point the Minsk agreement will work, and at some point we will find peace again. And when we have peace, our investment needs are only going to grow,” she added, taking the longer-term view.
The discussion about Ukraine was a stark reminder that the smartest fiscal and monetary policies have their limitations if the most basic prerequisites for growth and prosperity are not in place: peace and political stability.