In 2007 a long-lived economic upswing came to an end. This upswing was marked by a strong increase in world trade and was driven by significant productivity growth. This combination resulted in an inflation rate that remained relatively low for several years flanked by simultaneously high global growth rates of around 5%. During this phase bond yields also continued the downtrend they had been charting for many years – this was the “Goldilocks scenario.” In this period questions about the distribution of wealth within society were largely irrelevant and were not discussed – admittedly also because property prices in some countries led to illusions of affluence and excessive debt during this time.
But increasing world trade led to gradual but ultimately pronounced shifts in the levels of affluence between countries and social groups. The emerging markets benefited very greatly from globalisation whereas in the industrialised countries many groups of workers got into difficulties. The level of affluence thus increased in broad sections of society in the emerging markets whereas in the industrialised nations some parts of society were increasingly left behind by general economic trends. Economically, this was not actually all that surprising given the underlying fundamental developments. However, there was no adequate political reaction to these trends and the shift in the distribution of wealth within society was largely taken for granted.
This “Goldilocks period” came to an abrupt end when the US property market collapsed and the European sovereign debt crisis ran rampant. Subsequently, governments were obliged to bail out or recapitalise banks and many central banks saw themselves forced to fend off the threat of a global economic depression with previously unknown measures.
At the same time, world trade contracted sharply and since then has been growing at best sluggishly. The gains in affluence previously brought about by increasing globalisation now failed to materialise and at the same time the structural weaknesses that had previously been masked by falling yields and high growth rates came to the surface in many countries.
In the Euro area there followed a crisis fuelled mainly by the structural differences between the Euro area states. The Euro area (and the world) is now virtually divided into two groups: on the one hand, countries with a very low unemployment rate and stable growth and on the other countries with a relatively high unemployment rate and only weak growth.
Parallel to this – but independent of it and largely unforeseen – digitalisation has picked up momentum that is manifest in all sectors of the economy. Simple jobs or those that demand little creativity are increasingly being taken over by computers and machines. A phenomenon that is not really new in the history of technical progress – and which has usually had similar consequences to those we are seeing today. But this time the proportion of the population that may be counted among the losers of this process could soon reach a critical level.
The fears of loss that had already built up in many people during the growth phase were further exacerbated by structural shortcomings in many countries as well as by high unemployment and by digitalisation, but this did not unleash any direct political reaction. This lack of political reaction has made people receptive for political ideas that are backward-looking and hostile to the growing interdependence of the world economy. Immigration, mobility and international trade are now viewed as negative. Political parties and movements reflecting such views have gained in popularity and some have been elected to positions of government responsibility. Examples include the USA, Great Britain (Brexit), Turkey, Poland and Italy (5 Stars Movement). What is conspicuous here is that this list does not yet contain any Asian countries.
All this is leading at the moment to a world that is changing fast economically and politically. Globalisation is faltering, the benefit of trade treaties is being called into question, mobility is no longer desired. The party landscape is changing. The consequences for the world’s economies are likely to make themselves felt soon. There is a danger that wages will rise notably amid only moderate growth and that inflation will then accelerate. As a rule, the central banks are pursuing a monetary policy that takes its lead from inflation so in the environment described above interest rates are likely to increase fast, thus curbing growth yet further.
After some time increased interest rates are likely to lead the big economies into a period of sluggish growth. The decisive question will then probably be whether the political environment will normalise again or whether it will shift yet nearer towards the political extremes. In the latter case, the period of sluggish growth could also last longer. In Europe such a scenario poses major challenges to the European idea. It is not yet possible to say whether the magnificent idea of a unified Europe will survive this in the end. If it is possible to reach political agreement on important common interests and to revitalise globalisation, it is quite conceivable that the world economy will again return to a path of higher growth.
But two questions are in urgent need of clarification here in the near future. First, the political decision-making process will have to pay greater heed to questions of wealth distribution in the future. Over time, growth must create more winners than losers otherwise the democratic basis for the underlying economic model will be lost. In this context, it will also be necessary to develop models that deal with increasing digitalisation and its repercussions on the distribution of wealth. If ever more value added is created by machines, alternative models will be needed for society. The current discussion about the universal basic income is undoubtedly a promising beginning, but indeed only a beginning.
Second, it needs to be decided how the Euro area is to develop in the future. The Euro area states need to move closer structurally again. But this will only work if the countries make the structural efforts that are needed to achieve this. As an alternative one could install a broad-based transfer union, but this would not attract a majority in those countries that would then have to make the bulk of the payments that this would require. Some countries such as Italy, for example, would have to change a lot for this to happen. As things stand today, this looks increasingly unlikely. So one must seriously consider the prospect of scenarios in which some countries leave the Euro area. This process may be necessary if the Euro area is to be preserved.
We are facing major challenges. These can only be met if the politicians involve people and are able to explain to them the inter-relationships and the value of what has been achieved. Given the new political style in the USA and the upcoming Brexit, Europe is cast in a special role here. If Europe fails to find the right answers and possibly enters into a close alliance with Asia, we are likely to be facing a longer phase of greater economic and political volatility.