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Global Economic Risks and Geoeconomics: Applications to Europe and its Businesses

Global Economic Risks and Geoeconomics: Applications to Europe and its Businesses. Prof. Ángel Pascual-Ramsay Director, Global Risks, ESADEgeo Department of Strategy and General Management, ESADE Business School Non-Resident Senior Fellow, The Brookings Institution. 1.

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Global Economic Risks and Geoeconomics: Applications to Europe and its Businesses

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  1. Global Economic Risks and Geoeconomics:Applications to Europe and its Businesses Prof. Ángel Pascual-Ramsay Director, Global Risks, ESADEgeo Department of Strategy and General Management, ESADE Business School Non-Resident Senior Fellow, The Brookings Institution 1

  2. Why Do Economies Grow Rapidly?

  3. Lesson Road Map • New VUCA (volatility, uncertainty, complexity, and ambiguity) context • 12 Key global economic and geoeconomic trends • Rodrik’s Trilemma • Global economic and geoeconomic risks • Recommendations for EU businesses • Writing exercise on today’s lesson • Conclusion

  4. New VUCA Context Volatility Uncertainty Complexity Ambiguity Source: Bennett and Lemoine

  5. Context: Global Economic Landscape • Global growth • 2015 (projected): 3.1% (IMF WEO Oct 2015) • 2000-2010: 3.7% • Now, mainly up to the BRICS • Deteriorating outlook for emerging economies • Improved outlook for developed economies • Benefiting from low oil prices • But, still vulnerable (quantitative easing, low quality employment, etc.)

  6. 12 Key Global Economic and Geoeconomic Trends • Quantitative easing and possible risk of price effects • World financial system remains vulnerable • On-going euro crisis • Structural unemployment • Rise of state capitalism • Retrenching globalization • Economic axis shifting back to the Pacific • Slowdown in emerging economies • Increasing role of emerging and frontier markets • Secular stagnation • Deflation • Drop in oil prices

  7. 1. Economic axis shifting back to the Pacific The world economy’s center of gravity is shifting back to the Pacific at the fastest rate in history (“Return to 1820”) World's largest economy (PPP) 1000: India 1500: China 1600: China 1700: India 1820: China 1870: China 1913: US 2003: US 2014: China

  8. 2. Slowdown in emerging economies (1/2) It’s all about China…

  9. 2. Slowdown in emerging economies (2/2) …and China is slowing down • Decreasing growth • 7% first three months of 2015 • Transition to a new economic model • Consumption vs. investment • Services vs. manufacturing • Domestic demand vs. exports • Risks • Real estate bubble • Credit boom and bad loans • Unemployment • Social unrest

  10. 3. Increasing role of emerging and frontier markets (1/3) • Tapering: gradual withdrawal of Fed injections of liquidity • Less capital available to finance investment & growth • Risk of sudden stoppage

  11. 3. Increasing role of emerging and frontier markets (2/3) • Currency & price volatility • Slow-down in convergence • End to the factors fueling emerging economies’ growth: • High prices of raw materials • Low interest rates • External funding

  12. 3. Increasing role of emerging and frontier markets (3/3) Example: Latin America • Brazil facing serious slowdown • Domestic factors also behind slowdown in Chile, Colombia and others • Venezuela and Argentina are particularly vulnerable • Venezuela: • Hyperinflation • Price controls • Consumer supplies drying up • Drop in GDP • Argentina: • 26% inflation • Weak national currency and dollar convertibility • Low currency reserves Source: The Economist

  13. 4. Secular stagnation • “Secular stagnation hypothesis”—sustained lower levels of output • The new abnormal: EU & Japan • High public/private debt • Adverse demography • Decreasing productivity Source: Eurostat • Deflationary tendencies • Structural unemployment in Southern Europe

  14. 5. Deflation • Deflationary spirals are very dangerous; they lead to postponement of investments, and make debt-servicing harder. • Prices are falling or flat in Greece, Spain, UK, Ireland, and Portugal • ECB task: keep prices stable ("inflation rates below but close to 2%”), not stimulate growth (in theory…) • Inflation in “Euro Land” is around 0.7% but little political support for higher • Clashing interests • Core: wants low inflation and strong Euro • Periphery: wants higher inflation and weak Euro Source: Financial Times

  15. 6. Drop in oil prices • Structural or cyclical? • Excess supply: fracking, but also Iraq, Iran, etc. • Weak demand: China slowdown • Geopolitics: Saudi Arabia vs. Iran, US vs. Venezuela, etc. • Competitive dynamics • Trading & speculation • Good or bad? • Growth stimulus vs. deflation • Excessive supply vs. weak demand

  16. 7. Quantitative easing and possible risk of price effects • German 10-year bond yield below ZERO • Eurozone economy grew 0.4% in Q1 2015 • Asset price bubbles; EU stocks at 15-year high Source: BBC

  17. 8. World financial system remains vulnerable • Shadow banking • Credit boom and asset price bubbles • Regulatory uncertainty • International liquidity crises: sudden stops and capital outflows • Systemic financial crises • Stock market volatility and crashes

  18. 9. On-going euro crisis (1/2) • Risk of disorganized Grexit and contagion • Austerity programs socially untenable. Democratic deficit of EU institutions. ‘Emptying’ of democracy. Return of nationalism. • Risk of EMU fracturing, through capital flight, unorderly sovereign defaults (Grexit), voluntary/forced Eurozone exit, etc. • Unsustainable debt & meager growth prospects in Southern Europe • EMU design flaws: Monetary union, but no fiscal union, no lender of last resort

  19. 9. On-going euro crisis (2/2) Why geopolitics matters • Two key geopolitical events behind the Euro’s current predicament: • Beginning of reforms in China • Growth and amassing of savings in emerging economies • Fall of Berlin wall • German re-unification, D-mark parity, recession, low interest rates in Eurozone 1978 1989

  20. 10. Structural unemployment (1/2) Employment in US manufacturing industry (blue) vs Production (red)

  21. 10. Structural unemployment (2/2) Source: The Economist

  22. 11. Rise of state capitalism Market Value of State-owned Enterprises as a % of GDP (2011) Source: OECD

  23. 12. Retrenching globalization • Fragmentation in international trade and finance • Dysfunctional global governance (UN, G20, WTO) • Greater difficulty in reaching truly global agreements • Regional trade agreements (TPP, TTIP), new regional institutions (AIIB, etc.) • Alternative institutions and mediums of exchange (Yuan) • Increasing diversity in economic models

  24. Group Reactions to Key Global Economic And Geoeconomic Trends

  25. Rodrik’s Trilemma Choose any two…but only two Deep economic integration Golden Straitjacket Global Federalism Nation state Bretton Woods compromise Democratic politics Source: Dani Rodrik. ‘The Globalization Paradox’

  26. Global Economic and Geoeconomic Risks • Macroeconomic risks • Financial risks • Governance risks • Geoeconomic risks

  27. 1. Macroeconomic Risks • Global macroeconomic imbalances • Global growth slowdown • Global economic and regional recessions and crises • Contagion of national imbalances: recessions, fiscal deficits, inflation, deflation, etc. Source: voxukraine

  28. 2. Financial Risks • System financial crises • Shadow banking • Credit bubble contagion • International liquidity crisis: sudden stops and capital outflows • Stock market volatility and crashes • Currency wars

  29. 3. Governance Risks • Global economic governance shortcomings. Lack of institutional capacity. • Divergence between US, Japanese, and EU policies • Excessive dependence on Central Banks • International competition and new technologies lead to low tax-gathering capabilities • Incorporation of emerging markets in global institutions

  30. 4. Geoeconomic Risks • Companies aligned with the interests of their states: diplomatic ambitions, supply of raw materials, local job-creation, infrastructure, positioning on key trade routes, etc. • Sovereign wealth funds buying critical infrastructures in foreign countries (ex. Huawey) • Use of SWFs investment as a tool of foreign policy interference • Companies faced with “unfair” competition by state-sponsored rivals

  31. Recommendations for EU Businesses 1. Boost the internationalization of European businesses 2. Promote multi-localization (combining outsourcing and market access) and SME collaboration 3. Rethink human resource strategies to attract multicultural, flexible, and adaptable human capital 4. Focus on emerging social groups and new consumption patterns

  32. Two-minute Paper Please write for 2 minutes about what you have learned in today’s session and why the information is important for EU businesses.

  33. Conclusion Questions? This powerpoint presentation and the matching teaching plan were developed as a part of the Jean Monnet project MEKBiz (Mainstreaming EU Knowledge in Business Studies and Strategy), hosted by ESADEgeo – Center for Global Economy and Geopolitics and partially funded by the European Commission. “The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

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