In times such as these, amid severe economic crisis in many European countries and persistent troubles in the United States, it may seem misplaced to search for Atlantic sources of growth.
In many nations, a succession of crises has had to be contained, from real estate to banking, from private debt to public debt, from contractions in output and employment to social unrest. This is more a time for crisis managers than for visionaries.
Sustained efforts to reopen the Atlantic sources of growth have yet to blossom. This is understandable.
First, policymakers are still stimulating economic activity via monetary instruments while facing the inevitable fiscal adjustment. Demand-stimulating fiscal policies are hard to pursue if capital markets are no longer willing to fund such programs at acceptable costs.
Doubts about the sustainability of public debt are aggravating policymaking even further in some nations. In the eurozone, the issue of interaction between sovereign debt and bank solvency has not yet been fully resolved. In the U.S., a healthy recovery of real estate has yet to happen, and the return to high levels of employment is still way ahead.
Second, financial regulators are completing the G20 agenda on improving the regulatory framework for global financial markets. Increasing the safety of the industry and resilience to shocks by strengthening capital and liquidity provisions in financial institutions, improving the infrastructure of financial markets, and setting the right incentives for internal structures of financial institutions are occupying policymakers in both the U.S. and the European Union.
Third, international economic diplomacy is at a stalemate. Rather than embracing globalization via better management and institution-building, global governance went astray. There is still no agreement on the Doha Round. Rather, there are outbursts of protectionism, mostly in large emerging markets but also in some industrialized countries. Preferential liberalization occurs but has too little impact.
Policies on climate change
There is still no agreement on the international architecture for limiting climate change or on measures to create a well-designed global carbon market. Policies are improving at the margins but have not delivered the clear, predictable, and long-term political policy frameworks that would propel private investment into sustainable activities. In addition, there is too little deregulation of investment barriers. Service markets remain highly protected outside the Atlantic area. Raw materials, energy production and security-related industrial activity face higher barriers to FDI, too. State ownership of industrial assets and economic infrastructure remains high in many countries, and proper regulatory frameworks for potentially dynamic services are in short supply. On international monetary issues, steps forward are gradual, and shortcomings are evident in many countries. In short, we are leaving too many opportunities for potential gains unused on the table.
In Europe, the EU has failed to deliver on its goal of establishing a dynamic economic region. Key measures to strengthen the common market and innovation have failed to meet expectations. True, there has been progress on raising labor force participation rates and education levels, but there has been too little improvement in productivity, real incomes and living standards. The same is largely true in the U.S., despite the global success stories of U.S. brands in modern telecommunications, software and media.
There is no easy fix. And yet, re-invigorating growth is a challenge that has to be urgently addressed since distributional conflicts are heating up again and complicating things further.
What options do we have?
First, national reforms are a political prerequisite for European and global progress. While weak nations do not manage to achieve fruitful collaboration internationally, recovering nations may do so. On this score, there is a broad challenge to cope with in the United States. Since the mid-1980s, limits to U.S. economic and social development have consistently been stronger on the political side than on the economic side. Clearly, the challenge is to find a long-term strategy for reinvigorating U.S. sources of growth while managing the imponderables of demographic transition.
Re-invigorating U.S. growth will require consistently higher public and private investment in the skill levels of the population, in physical infrastructure (most prominently in transportation and energy), and in R&D. There is a related need to upgrade the industrial skills of Americans, both workers and entrepreneurs, in modern and traditional fields, to increase investment in those activities, and to boost the competitiveness of the U.S. industrial sector internationally.
Managing the demographic transition will require a “coming to terms” with public finance. The U.S. should and will continue to maintain a global role well into the 21st century by providing security to a variety of partners around the world. But it will only be capable of doing so if it can properly finance public spending, substantially improve the sustainability of its social-security system, health care in particular, and reform its system of personal and corporate taxation with a view to better balancing efficiency, distributional effects and revenue levels. The U.S. needs comprehensive and growth-friendly fiscal adjustment on a long-term trajectory. This will require cuts in spending growth—and possibly even cuts in spending in absolute terms —but also changes in taxation.
In most European countries, structural reforms in labor and product markets and in social-security systems are firmly embedded. This holds true for fiscal adjustment as well. Though headline deficit numbers still seem high, strong improvements in structural deficit reductions are under way. But there is still a shortage of initiatives devoted to fostering education, innovation, and productivity improvements through better market regulations.
A larger role for the EU
In revamping efficiency and productivity through better regulation, the EU has to play a larger role. Governments are starting to use the EU for promoting comprehensive reforms in areas of the single European market where rules are out of sync with necessities. There is plenty of room for improvement, from electricity regulation to the digital market and in measures to improve labor mobility.
Meanwhile, too little attention is still being paid to promoting green growth through efficient means such as taxing emissions directly or indirectly via trading schemes. A certain amount of scope remains for marshaling EU budget resources towards those goals.
In such an environment, the U.S. and the EU should work together to embrace a number of global initiatives:
First, there is a need to move forward on opening up trade in services—at best globally, but at least across the Atlantic. The first-best option would, of course, be a reopening and successful conclusion of the Doha Round negotiations at the WTO. The second-best option is a broad and comprehensive agreement between the EU and the U.S. on all bilateral trade, investment, and related standards.
There is additional scope for moving forward on issues such as opening-up government procurement markets to international competition, liberalizing key service markets (particularly for business, financial, telecommunication and transportation services), and going beyond the EU-U.S. framework by inviting interested partners to join in.
There is also plenty of scope for enhanced coordination in R&D initiatives with regard to emerging economic activities such as e-mobility and nanotechnology, and for joint regulatory approaches to new business challenges such as data use and protection and other issues.
Realigning the reform agenda
There is also further scope for mitigating global climate change both by addressing the unresolved issues in the international climate protection architecture as well as by adopting comprehensive and mutually compatible domestic initiatives.
Finally, there is a need to bring the G20 financial regulatory agenda to a positive conclusion by aligning EU and U.S. implementation of key parts of the rulebook to such a degree that regulatory arbitrage or a fragmentation of transatlantic financial markets are prevented.
Adopting such a comprehensive agenda based on sound domestic macroeconomic policies, forward-looking microeconomic and foreign economic policies, and appropriate regulatory pathways into modern markets poses major challenges. But the potential results are well worth the effort.
At present, we are witnessing a breakthrough on fiscal adjustment and structural reform in Europe. Yet there are still shortcomings with regard to more comprehensive reforms. In the U.S., output and financial stabilization are progressing well, but fiscal adjustment and structural reforms are lagging behind. In the coming years, a better balance should emerge in both of these two large regions. This would certainly have beneficial consequences for the rest of the world.
Achieving such an outcome is a truly grand project, both for you as President of the United States and for the European Union. Call it the Atlantic Sources of Growth.
Josef Ackermann is the immediate former CEO of Deutsche Bank who recently assumed the chairmanship of Zurich Insurance Group. He is also a member of the Atlantic Council International Advisory Board. This piece is taken from the Atlantic Council publication The Task Ahead: Memos for the Winner of the 2012 Presidential Election.
Image: oval-office-2010-new-overview.jpg