Willkommen auf den Seiten des Auswärtigen Amts
Ladies and Gentlemen,
If you look at the world economy in late 2016, one year after we last met here late 2015, it seems almost as if we were caught in a time-loop: World growth continues to be sluggish and, even more so, world trade.
However, since we last met at the Caixin summit in 2015, we have seen a proliferation of new risks and uncertainties. We undoubtedly see a global rise in populism and protectionism. These two are twin-brothers because they both offer easy fixes for problems at home by blaming them on others. We see a global backlash against globalization. At this point, there seems little chance that this trend can be reversed anytime soon.
The outcome of the US elections has opened the door to wide speculation and uncertainty. One thing that seems almost certain is a US rejection of TPP. Some analysts see this as a geostrategic victory for China. However, if the TPP remains dead in the water, we will all feel the negative effects. It will contribute to an anti-trade-agreement malaise and will give a boost to protectionism. No other project will be able to completely compensate these effects. Worst of all, it will remove pressure from economies in Asia Pacific to reform their economic structure towards more market-orientation.
At this point, not much else is known about the future direction of US policy. The stock markets seem to bet on a huge infrastructure program, banks pin their hopes on less regulation, fossil energy companies on less policy support for renewables. Whether this will create benefits, and for whom, nobody really knows. Only one thing is clear: US policy will determine to a considerable degree whether the current haze over the world economy will further thicken or slowly dissipate in 2017.
A year ago I gave a cautiously optimistic outlook on Europe: Growth was back on track, the financial sector had been stabilized and those Member States that had seriously tackled reform, like Spain and Ireland, were reaping the rewards through fast growth.
Today, growth continues to be reasonable but it would be silly to deny that huge risks have emerged in 2016:
The shock of the Brexit-referendum has struck deep and its effects are only beginning to emerge. Now, almost half a year after the vote, it is still hard to decipher a strategy. The most fundamental question is far from resolved: Will the UK be able to remain part of the European single market or not? Until there is clarity about this, more and more investment decisions will be put on hold, hampering growth. The uncertainty is damaging to Europe as a whole, but the risks are greatest for the UK.
Italy will hold a referendum on constitutional change this Sunday. Austria will hold a second round of presidential elections. The relationship to the EU and, behind it, globalization, plays a major role in these campaigns. Especially the outcome in Italy, a founding member and always a strong supporter of the EU, could have huge repercussions in Europe. The markets are clearly worried: Spreads between Italian sovereign debt and German bunds have shot up sharply in recent days, after a long period of stability since 2014. The Italian stock market has dropped over 20 percent this year. Capital flight and shifts towards seemingly safer assets such as gold are signs that the markets worry about Italy’s future in the Eurozone. If the outcome reinforces populist trends, our crisis will deepen. And in just a few months’ time there will be presidential elections in France, which is for my French colleague to comment on.
Will Germany remain stable and open? Germany has definitely a lot on its plate: Over a million refugees, growing risks in Europe and its neighborhood, including Ukraine and Syria, as well as an increasingly difficult international economic environment. Despite these problems, Germany has remained remarkably stable, both politically and economically. Growth is close to two percent, not glorious, but decent. We have had balanced national budgets for three years running, despite additional costs due to the refugee inflow. Germany also has financial space to spend more on internal and external security. Politically, we have witnessed some successes of populist political forces but these have been limited. Indeed, a recent international poll found Germans to be the least receptive towards populist sentiments in Europe.
Will we see a more protectionist Germany? There is indeed a debate about a torrent of takeovers of German high-tech companies by Chinese buyers. The truth of the matter is that out of 350 international acquisition cases, Germany has so far not prohibited a single one. We are an open economy and depend on remaining open. However, cross-border investment cannot be a one-way street to remain sustainable. Germany invested 25 billion US dollars in the US last year, almost ten times as much as it invested in China. This shows the enormous space we have for increasing investment in China if China opens further.
What can China do? China’s headline growth is good news for the world as a whole. However, there are huge challenges as Premier Li and other political leaders never tire to point out. It seems that getting the private sector to invest vigorously in China, and not just abroad, remains a big challenge. If, as it happened in the first half of this year, the private sector in one major province increases its domestic investment by only 3% and its investment abroad by almost 40%, questions about the domestic investment environment are bound to come up. Around 6.7% growth has been achieved this year largely due to fixed asset investment, in large part by the government. Another huge investment package for additional high-speed rail lines has just been announced. This will undoubtedly create more GDP but it will also increase debt.
Structural reform is becoming more and more urgent. The core challenge is and remains SOE reform. Real reform of SOEs might have a negative effect on growth in the short term. However, it would increase confidence in the direction of government policy toward more market-oriented reform. This would give a real boost to private and foreign investment. It would also help solve problems of overcapacity and in creating a more level playing field between Chinese and foreign-invested companies.
Ladies and Gentlemen, allow me to sum up.
Caixin has chosen a good term to describe the global economic situation: We are indeed covered by a haze. But will there also be a new dawn? Or will the title of this panel next year be: “World economy: Have we entered the Twilight Zone?”
I am convinced: It is the cooperation between the world’s three leading economic areas, Europe with Germany as its core economy, China and the US that will make the difference between “twilight” and “dawn”. We need to keep all three areas on a growth trajectory. This is not impossible but we all have work to do: In China on economic reform and further opening up, in the US on openness for trade, in Europe on reversing current centrifugal trends and better competitiveness.
Or to sum it up with a Chinese proverb: 风向转变时,有人筑墙,有人造风车 – in English: When the winds change, some people build walls, others build windmills. I suggest: Let us all build windmills together when the wind changes, not walls.