Crises legacy: the challenges ahead

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1 Roma Tre University 26 th April and 4 th May 2018

2 Overview 1, Techonological progress and Inequality 2 Completing the Banking Union Adjustment Mechanisms

3 Trump and Brexit: clear signals 23 June 2016: UK chose to leave the EU 8 November 2016: Donald Trump is the new president (elected) of the US Historical results interpreted as protest vote One of the main interpretation: the dissatisfaction has led to the worse the better Only a political matter or not? What role for the economy?

4 Trump Election

5 Brexit

6 Middle class: losers and culprits Geographic analysis of the vote: wealthier and more educated area chose continuity Rural areas, the mid-west and the rust-belt voted for a clear change Do you think it is poor coincidence? The great economic phenomena that changes the economy and shape the society always bring losers and winners The discontent of the middle class is not due directly to the double financial crisis, but this just made it crystal clear Here the real causes are globalization and technological progress Pay attention: this does not mean these phenomenon are not desirable!

7 Tech progress and employment - 1

8 Tech progress and employment - 2

9 Bye bye routin jobs Graphs: bank clerks, shop assistants and so on are slowly disappearing Routine workers and workers with mid-low skill levels are the looser of the tech revolution Who are them concretely? Middle and lower class What should we do? Relinquish to tech progress or are there other ways around?

10 Kodak and Instragram A curious and clarifying example: Recent empiric evidence shows that well over 80% of job losses in advanced economies are not due to trade, but to increased productivity through technology and innovation. As Robert Azevedo, Director General of the WTO recently highlighted in Berlin, Kodak employees lost their jobs to new technologies like Instagram, which was developed by just 15. A to one ratio. Almost 50% of existing jobs in the US are at high risk of automation. And the number is higher in many developing countries. Almost 6 out of 10 newborn children will work in jobs that do not exist yet. - P. Benassi, Italian Ambassador in Berlin

11 Losers and winners, again Free trade, open markets, economic integration and dynamic labour markets can facilitate economic growth and convey benefits but they do not help everyone. For manufacturing, for example, rising imports are associated with costly job loss.

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13 The elephant curve

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16 Is inequality a real problem? The people hit by these phenomena are middle and low class members, namely the back-bone of the aggregate demand in advanced economies Even though the new super wealthy spent much more, their increased level of consumption will never replace the consumption of such a big chunk of the society The lower income of middle class family diminish the possibility for them to pay a higher level education for their children, killing social mobility Co-consequences: negative expectations and political instability aggregate demand shrinks further lower level of education + lower level of investment = low productivity growth!

17 Monetary policy 1 Foster employment through expansionary policies Problems: difficulties in directing liquidity and winning negative expectations over 2 Macroprudential supervision of financial sector Avoid a situation like the one that led to the Crisis in 2008 and at the inception of growing inequality

18 Fiscal Policy It is mainly a redistributive problem Pareto improving and potential Pareto improving move: Both Technological progress and are potential Pareto improving moves: some get hurt, some are better off, but the total increase in wellness is greater than the loss. So what? These phenonema are not to be refused or inverted (is it even possible?) What we do need is redistribution of the effects to counteract inequality How? Main instrument is Fiscal Policy

19 Practical measures BEPS iniatives Guiding principle: make winners pay their part to use these resources to create instrument for the losers (better access to the education, better services to change job-sectors, etc) How?

20 Moving T e G T: tackling profit shifting by multinational and tech firms Tackling Base Erosion practices, avoiding the race to the bottom G: Use the resources expanding G in this sense: active labour policies social welfare

21 Completing the Banking Union Adjustment Mechanisms 2011: EMU is not working properly The Sovereign debt crisis of 2011 was a purely European Crisis It showed that the common currency area was fundamentally flawed The dynamics of that crisis were possible only in an incomplete architecture such as the EMU Where do we go? Europe had and still has just 2 alternatives 1 Destroy the EMU and go back to national currencies 2 Complete the EMU and make it more resilient

22 Completing the Banking Union Adjustment Mechanisms Still an important but incomplete step 2012: The 2011 crisis spurred an important step forward to complete the EMU The banking union Two main pillars: 1 Single Supervisory Mechanism (SSM) 2 Single Resolution Mechanism (SRM)

23 Completing the Banking Union Adjustment Mechanisms The Single Supervisory Mechanism (SSM) 1 From microprudential to macropudential supervision 2 The ECB directly supervises the systemic players, namely the 118 significant banks of the participating countries. These banks hold almost 82% of banking assets in the euro area 3 Banks that are not considered significant or systemic continue to be supervised by their national supervisors, in close cooperation with the ECB that can decide to directly supervise any one of these banks to ensure that high supervisory standards are applied consistently

24 Completing the Banking Union Adjustment Mechanisms Single Resolution Mechanism (SRM) 1 The main purpose of the Single Resolution Mechanism (SRM) is to ensure the efficient resolution of failing banks with minimal costs for taxpayers and to the real economy 2 A Single Resolution Fund (SRF), financed by contributions from banks, will be available to pay for resolution measures 3 NB: passage from bail-outs (bank survival with public support) to bail-in (imposing losses on the banks shareholders and creditors) 4 Need to use European Stability Mechanism (ESM) as a backstop (safety net) for the SRF? 5 The backstop would only be activated as last-resort insurance in the event of a bank resolution in case the resources available in the SRF were insufficient

25 Completing the Banking Union Adjustment Mechanisms Something is missing: EDIS EMU member states managed to build succesfully and swiftly two of the three pillars of the banking union The third one is still missing: European Deposit Insurance Scheme (EDIS) Again an incomplete construction does not work! EDIS important to avoid bank runs and foster resilience of the European financial and banking system

26 Completing the Banking Union Adjustment Mechanisms Where is the deadlock? Risk sharing vs Risk Reduction Problems of sovereign exposure, doom loop and NPLs Sovereign Exposure and Doom Loop If a national bank has a too large exposure on national sovereign bonds, a financial sovereign problem could turn into a banking problem and viceversa NPLs Non Performing Loans: Banks lent money to businesses and households who are not able to repay

27 Completing the Banking Union Adjustment Mechanisms Aggregate level shock absorber The structure of the EMU lacks mechanisms to absorb idiosyncratic shocks Possible solutions Foster Labour Mobility Facilitate a really unified capital market Create a fiscal capacity to have a fiscal tool to absorb asymmetric shocks

28 Completing the Banking Union Adjustment Mechanisms Some references First part - Inequality Alvaredo et al. (2018), World Inequality Report Dabla-Norris et al. (2015), Causes and Consequences of Income Inequality: A Global Perspective, IMF Milanovic (2016), Global Inequality: A New Approach for the Age of (Video or Slides, PIIE)

29 Completing the Banking Union Adjustment Mechanisms Some references Second Part - Completing the EMU Buti et al. (2017), Completing EMU, VoxEU Benassy-Quere et al. (2018), Reconciling risk sharing with market discipline: A constructive approach to euro area reform, CEPR Messori and Micossi (2018), Counterproductive Proposals on Euro Area Reform by French and German Economists, CEPS