Marco Buti Director General

Directorate General for Economic and Financial Affairs

European Commission

Global Economic Governance: can fragmentation be

overcome?

Columbia University, 29 October 2018

I. Expectations and reality – What happened to our earlier beliefs? II. Increased fragmentation –crisis legacy III. Overcoming the divides – in search of "inclusive multilateralism" IV. What roles for individual players?

Outline

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I.1 Our early beliefs

• Entertaining a benign view of rising international economic integration twenty years ago

o Emphasis on overall gains from trade, capital market liberalisation and financial integration

o Focus on capital movements, not labour flows

o Distributional impact (along skills and spatial dimensions) perceived as manageable by established social systems

o Faith in the functioning of multilateral institutions to address possible imbalances by co-ordinated policy action

o Liberalised markets and democracy seen as winning strategy

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I.2 Globalisation: what we missed

o Uncritical view of downhill capital flows

o Migration not manageable at national level

o Increasing/persistent regional disparities

o Negative impact on fair working conditions / protection in the market

o Distributional impact bigger than expected (stagnating median income, winner-takes-all dynamics)

o Systemic risk from unbridled financial markets

o Real/perceived loss of control vis-à-vis big business, financial sector

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I.3 Globalisation: a perceived threat

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II. Increased fragmentation – crisis legacy

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7 South

North

West East

pro EU +

risk sharing

sovereignist +

risk sharing

sovereignist +

risk reduction

FR

ES*

PT

EL IT IT*

HU

PL

SK

CZ

pro EU +

risk reduction Nordics

Baltics

NL

DE

ES AT AT*

II.1 Political fragmentation: intra-EU divide

II.2 Financial fragmentation in the Euro Area: down in prices, not yet in quantities

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0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

price-based financial integration composite indicator

quantity-based financial integration composite indicator

euro intriduction

subprime crisis

Lehman default

EA sovereign debt crisis

OMT and banking union announcement

Source: ECB Note: The price-based composite indicator aggregates ten indicators covering the period from January 1995 to December 2017, while the quantity-based composite indicator aggregates five indicators available from the first quarter of 1999 to the third quarter of 2017. The indicators are bounded between zero (full fragmentation) and one (full integration). Increases in the indicators signal greater financial integration.

II.3 Social fragmentation – Income inequality on the rise

The elephant turned into a whale

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IMF, World Bank

WTO

G20/G7

MDBs

OECD UN

Basel Committee

and BIS

FSB BRICS: New Development Bank

China: Asia Infrastructure Investment Bank

Euro Area: European Stability Mechanism

South East Asia: Chiang Mai Initiative

Strengthened Regional Financing Arrangements:

New Multilateral Development Banks:

South America: Latin American Reserve Fund

Russia and Eurasia Eurasian Fund for Stabilization and Development

New Bilateral Lenders (China)

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II.4 Institutional fragmentation

II.5 Renewed global imbalances

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III. Overcoming the divides – in search of "inclusive

multilateralism"

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III. 1 Keep the global economy open

13

0

2000

4000

6000

8000

10000

12000

14000

1998 2001 2004 2008 2010 2013 2015 2018

Total Number of Trade Restrictive Measures in force

USA China EU Developing Countries Developed Countries Source: WTO

10 years before the crisis

III.2 Avoid a protectionist race to the bottom

Is this the way to go?

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IMF + RFAscoope

ration

G20/G7

UN

OECD Basel

Committee and BIS

FSB World Bank + MDBs

working as a system

WTO

The right global governance structure Tackle common challenges, provide global public goods and regain citizens' trust.

III.3 A new institutional design

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o EPG report first attempt at defining operationally the concept of inclusive multilateralism

o Proposals in three areas:

o Development: Making Multilateral Development Banks (MDBs) work better as system

o Finance: improving surveillance

o Governance: refocus G20 agenda on economics and finance, provide strategic guidance for MDBs, and strengthen corporate governance of the International Financial Institutions (IFIs)

Important report deserving appropriate follow-up

Should not aim for lowest common denominator

III.4 G20 Eminent Persons Group on Global Financial Governance

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IV. What roles for individual players?

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US From inward looking strategy and pro-

cyclical policy mix

To continued contribution to multilateralism and more prudent

macroeconomic stance

Europe From excessive reliance on

external surpluses

To stronger investment, structural reforms and

deepening of EMU

Emerging Markets / China From unbalanced growth model and

market-distortive practices

To more sustainable development model and greater adherence to global

level-playing field

IV.1 Towards a more consistent global policy mix

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• Re-occupy the role as anchor of the rules-based

multilateral system

• Constructive approach on the modernisation of the WTO

while refraining from unilateral action on trade (including

against China)

• Fuller engagement with other international and global

governance fora (G20, G7) and institutions (IMF, UN)

• Due consideration of potential spill-over effects of

domestic policies to other parts of the world which could

fuel global imbalances

• Return to its commitments made within the framework

of the Paris Agreement

IV.2 What role for the US?

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• Increasing economic weight comes with bigger responsibility in

the multilateral setting

• Need for credible commitments to address distortions

• Further progress to tackle steel excess capacity

• Acknowledge and address the role of state-owned enterprises

• Ensuring a level playing-field on export finance

• enhancing debt transparency so that bilateral lending to Least

Developed Countries is compatible with international best practices

• Active engagement with the Paris Club

• Foster connectivity of big initiatives (Belt and Road; Asian

Infrastructure Development Bank; BRICS Development Bank)

IV.3 What role for China?

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• Serve as an example of effective cross-border cooperation and coordination

• Promote high standards for social and environmental protection, gender equality, R&D, and data privacy

• Continued commitment to an open, level-playing field global

economy

• WTO compliance and WTO reform

• bilateral trade deals of new generation (Mexico, Canada, Japan,

Singapore)

• Adapting to the digitalization of the economy (e.g. digital

taxation)

• Continue to lead the world in climate deals

IV.4 What role for Europe?

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Domestic tasks

• Address the risk of low structural growth

• Tackle more effectively inclusiveness challenges

• Complete EMU (Single Market, Banking Union, Capital Markets Union, fiscal capacity, safe asset)

• Tackle the Brexit challenge

External tasks

• Overcome the "small country syndrome"

• Deal with the "reverse creditor paradox"

• Foster a single/unified representation in international fora

• Bolster the international role of the euro

IV.5 …provided we do our homework

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• Strengthen cooperation in G20 and other fora to uphold the rules-based global trade system

• Lead by example in respecting international rules

• Continue work towards a growth-friendly global rebalancing

• Increase efforts to promote sustainable development and fight climate change

• Be clear on final goals and reaction function to rebuild trust

IV.6 What role for us together?

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