Good economy vs Bad policy: who will drag Europe?

Nowadays the world is facing different issues of primary importance and government institutions are working to find timely solutions in order to bring together all the forces involved. The main issues in EU concern Brexit and the current negotiations for a long-term relationship between EU and UK, Italy’s government situation after 4th March political election, Germany’s political situation, Franco-Germany agreement about Europe leadership and the large unemployment in EU.Moreover, Trump tariffs and his protectionist policy are worrying the global economic context and they look like a threat in particular for China and Europe.In this way there is an evident contrast between good economies, due to the fact that Countries are experiencing a positive period of growth after the severe economic and financial crisis of 2008, and a bad policy, linked to the above-mentioned problems.This paradox between the recovering economy and the uncertain political climate represents a source of uncertainty for the future scenario, as underlined by the weaker economic forecasts for the next few years.All these actual themes are treated in the ISPI annual report 2018 “Big power is back. What about Europe?” that offers an overview of the European and world political-economic framework, focusing on common projects and shared problems.In this report some “Fault Lines” have been identified as reasons that explain in part the big crisis of 2008; nowadays they haven’t been overcome at all, increasing the actual uncertainty.First of all, the credibility of the élites is failing and the distance between “people” and national and supranational decisions is growing, with the alarming consequence of an increasing wave of populism and nationalism in several Countries.An evident proof of this lack of trust in both national and European institutions is represented by the Italian case, as we can see from the result of the recent political elections.The second cause is the internal splitting in European societies in general, due to different political-educational-fiscal policies and different reallocation of the sources (income and wealth distribution).Other relevant Fault Lines concern the excessive global leverage, financial innovations (e.g. crypto currencies), the crisis of the traditional banks’ business model and risk-taking models.Another element that could threat the global economic development is represented by Trump’s recent decision to introduce impressive duties on imports of aluminum and steel from China.In response, China has increased tariffs by up to 25 percent on 128 U.S. products, triggering a war on increased tariffs between the two world’s biggest economies.In experts’ opinion this tariff explosion is the result of a too-long-term no-tariffs policy: full liberalization and free trade are as wrong as strong protectionism.Governments should not make an ideological choice between protectionism and total absence of tariffs; they should balance these two radical positions and find a common solution, in order to reach trade policy cooperation, based on well-studied temporary compensations for excessive differences in cost of producing and adapting productive structures to the new comparative advantages.In this new tense and delicate situation, it is fundamental that Europe acts as a single entity, with a common point of view. It has to proceed carefully step by step, and to react in a diplomatic way, trying to convince USA that there are mutual benefits in cooperation.Moreover, the next G20 in November 2018 has the important task of working in this direction, seeking a compromise between the needs of the various Countries. What happens when global economy is recovering but there are political problems?  What can we do to improve the situation?

We start from the premise that Europe is a collective system, composed by some positive and more negative realities (e.g. Greece, Cyprus, Portugal, Italy, …): Countries of the Union have to cooperate solidly, and they have to sustain each other in order to reduce common and countries-specific sicknesses, participating both as member of a system and as system in its complex.For example, about immigration (very debated topic in recent years), Countries that are directly involved call for greater involvement by European institutions and for greater collaboration from the other Member States; Europe, in its complex, on one hand has to help more Countries who welcome migrants and, on the other hand, has to improve the integration of migrants into society.Moreover, governments should focus more on long-term goals with structural reforms, rather than focusing only on short-term political schemes in order to win over the electorate: institutions are strictly concentrated on short good economic news, and they don’t look in the far future, in which there are weaknesses.Now the question is: are Europe and the global cooperation waiting for the next Great economic crisis? Or can they immediately take advantage of this good economic cycle as a window of opportunity in order to correct the actual wrong policies?

By Paola Ferrarini & Federico Paronetto