Kairos Hearing 1994.
Responses by the representatives of the EU Commission:
Now I would like to welcome the representatives of the Commission, Mr. van Serooskerken and Mr. Petrella. Please, join the podium with me. The first speaker will be Mr. van Serooskerken. He is an economic adviser to the Directorate General.
Sammy van Tuyll van Seeroskerken:
Thank you very much Mr. Chairman. I would like to start with a preliminary remark. Just to stress, I'm a civil servant, not a politician. As I was asked to replace Chris Boyd who is advisor to President Jacques Delors on monetary matters I would like to read down a message from President Delors to this meeting.
This is the message of Pres. Delors:
"I welcome the attention that Kairos Europa is giving to improving the conditions of marginalised people in South, East and West. I am convinced that the building of the economic and monetary union as agreed in the Maastricht Treaty not only will lead to a greater stability and better economic performance within Europe but also will contribute to an improvement of international economic conditions. Monetary stability, free capital movements and an economic order that is market oriented and aimed at fair competition will foster growth in Europe and has spill-over effects to other regions."
Well, there have been several examples this morning. But just to remind you of what Mr. Defraigne said about the man in the Philippines who sells one cigarette a day you can say that that is a waste of resources, and that is an economic problem. I briefly will go into the historic development of economic thought since World War II. Economics in the 50s and the 60s was based on the economic thoughts of Keynes which was based on demand management. In the 50s and the 60s you had high growth mainly because of the world trade catching up and the catching up of many industrialised countries with the US. There were relatively low budget deficits and the economic thought was that you can manage the economy through management of demand. This picture changed at the end of the 60s and beginning of the 70s. Inflation was picking up and in the beginning of the 70s there was a breaking-down of the Bretton Woods system. We had the oil crisis which led to high inflation in almost every country, low real interest rates, high budget deficits and unemployment. This was mainly the picture throughout the 70s. In the 80s the economic policy was directed towards the combat of inflation. Inflation as also has been said this morning can be seen as the poor man's tax. Poor people have less possibilities of hedging themselves against inflation than other people. That is one of the reasons not the only but one of the reasons why we should combat inflation and why the combat, the price stability, is one of the main objectives of the Maastricht treaty. And that is why I think hard currency as the policy in Europe at this time is a good thing, and if you are against the hard currency, as, e.g., Luc Peeters argued, you just increase inflation and you end up worse than without inflation.
In the 80s also it became clear that you could not fight unemployment through letting inflation increase. It became clear that fiscal policy became less important. You could not manage the economy by letting the budget deficit increase. More emphasis was given on market forces and that is why in many countries structural adjustment was advocated, which is, of course, something different from monetarism. Structural adjustment is essentially letting market forces prevail, and it became clear that an economy that is market oriented and free, free market oriented, leads to a better allocation of resources than an economy where markets are not free. But, and this is essential, there are occasions where market forces need correction: e.g., in environmental problems. The essence is how you do it.
In the 80s you also saw deregulation of the financial markets, the rise of the dollar, the debt crisis that has been talked about this morning, and in the European Community an increasing development of the single market. I said I go very briefly over it, I go to the 90s. What is the picture of the 90s? There is the aim of achieving the monetary union, and that will stabilise within Europe and will also have a beneficial effect on the economies of other countries. But we saw in 92/93 some exchange rate instability. And the only lesson that you can draw from that is that it is difficult to stabilise exchange rates by interventions. Exchange rate stability is only compatible with deregulated financial markets, if there is one single monetary policy. And that is the aim of the Maastricht treaty.
So, what is the future? In Europe we will achieve, and probably it will be in this century, in 99, and maybe, if conditions are favourable, in 97, a monetary union, some form of monetary union. This will lead to more stability, the ECU will be a major currency, it will compete with the dollar and with the yen. And, as the union assets towards low inflation, it will bring stability also to other countries that tie up their currency to the ECU. It will lead to more economic growth in Europe, and this will have spill-over effects to other regions.
These are the opportunities: stability, market forces, and globalisation of markets. But there are also threats: financial instability because of exchange rates that can fluctuate between those monetary blocks, and also within the monetary blocks there is a threat of financial fragility because of the derivatives that have developed. Other threats are: regionalism within a world where you have different blocks that try to isolate themselves from the others.
What are the conclusions to be drawn?
I am now coming to more specific answers to the questions (A.1-A.3). At first the question about the international monetary system. I think we should pick out the good ideas that have been said in the papers that have been sent to us and also of the resolution of the European Parliament of 15 December 1993. This resolution has some good elements. As to the international monetary system it is not quite clear how it can develop to an integrated stable monetary system, not yet, there is, of course, a need for it, but, e.g., within Directorate General II, recently, a discussion has begun about how we can implement it and at what time we can achieve it. Nevertheless, new cooperation between the EU, the USA, and Japan is desirable in order to prevent large exchange rates fluctuations. But one should not expect to high a stability to be achieved very soon. See the European Monetary Union treaty: The conversion criteria are necessary to have a stable development towards the monetary union. There also is a need for a consensus on economic policy design and economic policy implementation. Without it you cannot have a monetary union, and without it you cannot have a stable international monetary system. See, e.g., 2 and 3 of the Maastricht treaty that is directed towards open and competitive markets. In the long run, however, if we achieve consensus about how the economy works and how the economy policy should be implemented, we can achieve stability and fixed exchange rates.
- In the first place: Many instabilities in the last decade are related to the markets not being familiar with the new freedom of transaction. The deregulation of the 80s has been favourable in one sense, but markets had to get used to new freedom, which means that sometimes you see speculative bubbles it was for the dollar in the 80s you see interest rates fluctuating in the last weeks, this has all to do with markets not being used to stable conditions and to their new freedom. In the end, if markets are used to this, and if this vision is right, then it will lead to more stability in the world;
- Secondly, stability of financial markets should be achieved by a sound monetary policy and ediquate potential supervision?
- And a third conclusion: one should learn of previous mistakes: not to fight unemployment by inflation and not to try to regulate forces that cannot be regulated.
The second question, about the independence of central banks: I will be very brief. I think the independence of central banks is very important for achieving price stability. Then we have one instrument with a monetary policy aiming at price stability, and they should not bother with other objectives, because, if you try to have two objectives with one policy, you always end up worse with something inbetween.
The question on agricultural markets: When agricultural market development is such that smallholder agriculture with a lower efficiency use too little profit one could think of a subsidy for maintaining a landscape in cases where it is an appropriate public choice. And this is, of course an economic vision on agricultural policy.
I would now like to add a personal and not an economic point, and that is the cultural element. We have been talking about trying to achieve economic and social cohesion, and that is, of course a very good objective, but it should not go at the expense of cultural identity of the countries. E.g., I would hate to see economic development leading to the same pop music, the same Coca Cola and the same Hamburger and maybe the same cheese in every country. I think economic development should not hamper cultural identity, but on the contrary it should strengthen it. And strengthening the cultural identity should, together with economic development and social cohesion, be one of the objectives of policy.
Thank you very much.
Thank you as well for the personal note. The concluding remarks will be made by Mr. Ricardo Petrella. He is director of the FAST-programme (Forecasting and Assessing Science and Technology) within Directorate General XII. He will introduce himself to some extent as well.
Yes, good afternoon. I'm coming from a research department, and I'm a researcher. I'm researcher to serve policy formation, policy design and policy implementation. This is why as a civil servant of the Commission I am going to talk about policy design and policy formation and policy implementation. In the past we were carrying out several studies which allow me today to talk about some things which are in connection with your point. We have done, e.g., a study on science and technology for the 8 billion people who will inhabit the planet in 2020, considered that the present science/technology policies are dominated only by the interests of the most developed countries. And then we need to re-orientate the global science/technology agenda to serve the basic interests of the 8 billion people of the planet. This was one study. The other study was a research on a new Bretton Woods system, searching for alternatives for a new global economic governance, more equitable, more socially just, more environmentally sustainable, and more politically democratic. And other studies we did with regard to the European development and the social cohesion. This is why I'm here today.
What do our studies suggest? The first thing that these studies suggest is that the last 50 years of economic and social development in Europe and the world are a disaster, a disaster from the economic point of view of efficiency which means that our world economy today is very inefficient. are a disaster from a social point of view because our world economy today is socially unjust; are a disaster from a political, democratic point of view because our governance of the global economy very undemocratic; are a disaster from an environmental point of view because our global economy is close to collaps from an environmental point of view.
Despite all considerable progress that we did in the last 50 years in economic efficiency terms, in social equality terms, in democratic political terms, and in environmental terms still, despite all this progress that we did, we are in an epoch of a global economic disastrous global economy. And one of the major characteristics of this disaster is the fact that our economy has been able to produce more and more wealth. The global wealth has increased. The wealth of the EU countries has increased. The wealth of France has increased by two factors' time between 1960 and 1990. The British wealth has increased between 1961 and 1992 two times. The Belgian wealth has been increased seven times between 1960 and 1990. But the poverty has increased also, and we are in a situation where the economy of advanced countries is creating more and more wealth together with expanding more and more poverty. And this is what shows that the market economy at the global level is definitively an inefficient system.
The second point which emerged from our studies is the identification of the reasons why this world economy, which is locally at the level of Calabria, at the level of Namibia or at the level of Costa Rica is not only inefficient at the local level, but also inefficient at the global level. There are many reasons. But some of them are very clear. Since 20 years our economy at the level of our cities or our rural villages, the level of Africa, the level of Japan, North America, Western Europe has been increasingly dominated by four ideologically based principles. When I say "ideologically based principles", I also say "ideologically biased principles", and these are: privatisation of entire sectors of the economy, deregulation of all market configurations, liberalisation of the national markets, and, finally, the best, "the cherry on the gateau", the ideology of competition. Privatisation, deregulation, liberalisation, competitiveness have created the disaster which I was referring to. These four principles as yet have not reached their ultimate potentials. And we have to be very cautious and very much aware of the fact that they have just started to change the economy of the 60s and 70s. And that the risk that the privatisation, deregulation, liberalisation, competitiveness combined together will remain the most prevailing and predominant aspiring principles of the next 10-15 years' global economy. And they will, perhaps, lead to more severe economic inefficiency, to greater social injustice, to more clear political undemocracy and to less sustainability at the global level.
This is why in these connections the famous "3 Ds" of the Bretton Woods system deflation, devaluation, deregulation just were coherent principles with the privatisation, deregulation, liberalisaton, competitiveness principles. So, don't be astonished, if the structural adjustment policy were just characterized and dominated by deregulation, deflation and devaluation. It is true that all studies of serious economists not some that are in some institutions which we know serious economists, or: "non-serious" economists, would pretend that these international financial and economic organisations have really enabled us to make a progress at the economic, social, environmental and political level. I pretend to belong to the "non-serious economists" while saying that this happened. And I think we can leave it to all the serious economists of IMF, World Bank and GATT to explain us why the disaster happened or why, according to them, it didn't happen and we are still in the glorious development of the world economy.
One of the characteristics of the economy is precisely a stronger process towards a financial globalisation. We have to understand what is going really into the matter of the financial development. Our economy is producing what you have outlined several times this morning and this afternoon, because the financial globalisation is increasingly introducing the linking between the so-called financial economy, as you know, and the real economy. The logic of financial markets is not to finance production activities or trade. The logic of financial markets is just to remunerate the patrimony, the assets, by just operating about the prices of financial and capital assets. The financial markets pay very marginal attention to the question of financing industrial or trade activities. Just I would say by correctly characterizing the situation, it is by accident that the financial markets finance the production activities by accident. Of course, this is not totally true, but I will say that it's almost true. And we know today that financial markets which are more and more organised at the global level enable today to make money and money, and today, when we are here, you know quite well that there are $ 1.200 billion which are available in a tenth of a second to be mobilised and go to be transferred from one area to another without creating any real value added for employment and services which can satisfy the basical needs of the world's population. They just satisfy the search for profit return of those who have to control $ 1.200 billion at the world level. "Punkt".
This is the situation, and this is why more and more enterprises are obliged to capitalize themselves. And this is why every enterprise, big or small, is trying to increase the capital licence of their enterprise in order to be put into stock exchange in order that they can draw capitals. And this is why more and more financiers are becoming the decision makers even in industrially oriented companies. And financiers who don't think about and don't look at what they are producing or what service they are doing. They are just looking at how much I will have in three years' time or two hours' time, particularly in three quarters and in three months because of three-quarterly reports. It is under this condition that the financial market has become a tremendously relevant issue for social policy, for society to have a capacity to monitor and control the development configuration and management of the financial markets. It is not because people want to be against finances, but because the financial markets and the development of financial markets have severe serious economic, social, political and cultural consequences. And this is why society has the obligation, the duty, to establish those mechanisms which enable the society to monitor and control, orientate and guide a development and functioning of the financial markets. And what is the situation today? Our societies do not have this capacity. Particularly at the global level there is no control, no monitoring, no guide, no orientation of the financial markets from the society's point of view. The financial markets are just self-regulating their services without paying any interest to any other of the world's social and economic aspects.
So, what can we derive from this? Very simple consequences. I don't know whether what I'm going to say next will be acceptable to some people, but you cannot hide the reality. This situation makes IMF/World Bank and GATT, the new World Trade Organisation, institutions which are profoundly inadequate, obsolete, and inappropriate to govern the world economy in the coming future. They are no longer the institutions for the future.
So I would say that we have to think what new systems we put and we develop to replace the obsolete, inadequate, inappropriate system. Of course, in 3 minutes which are remaining right now I cannot tell you what should be done. I have a list of 175 measures but beyond the joke, just let me say a few of them. What one has to know about this sectorial approach: Do gradually, do sectorially, take first this, going there this the best way how we will not change the system at all!
Don't believe those people who tell you that things are impossible. As Pere Le’n told us yesterday in front of "La Bourse", it is not true that things are impossible. Don't believe those in power who tell you that things are impossible because precisely they don't like change. And this is why it is impossible to change where they are. And this is why they can have strong arguments to demonstrate that what you want is absolutely unrealistic. Of course, it's absolutely unrealistic in their own interest. But don't believe that, don't believe! So, it's possible to do many, many things. And the one which we have to look at immediately it is really urgent time to think about the design, development and implementation of a new global social contract. A new global social contract which would introduce in the priority determination and in the priority modes of managing the available fantastic enormous human, natural, technical potentials that we have in the world today, tools that the basic satisfaction and aspiration of the 8 billion people who will inhabit the planet in 26 years' time. In 26 Christmas' I don't know whether all of you are Christians I hope not, I am a Christian in 26 years, and 26 years are nothing, we will be 8 billion people, and we have to be intelligent enough to organise our economic abilities to social ability, institutional ability, political ability to satisfy the basic needs and aspirations of these 8 billion people. This is, to my mind, the only priority. All the others should be subordinated.
We have to be very clear: market mechanisms cannot govern the process to satisfy the basic needs and aspirations of the 8 billion people. Market mechanisms have proved to be profoundly uncapable, unable to do so. These previous remarks demonstrate: Why should we care about market mechanisms for the next 30 years. They have demonstrated in the last 30 years that they have been unable to do so, why should we have faith in the market mechanisms, when they proved not to be efficient. If they had proved to be efficient, I would be the first to have a faith in market mechanisms. But this didn't happen. So, we have on the contrary to think more about a kind of mixed economy where the recovery strategy for the basic needs of the 8 billion could be developed. We have to think about the restructuring process of the debt, of the production system, of trade, and definitely we have to work towards a new plan of redistribution of wealth, and this is why, e.g., our studies suggest that we have to think not about a World Trade Organisation, not only about IMF or the World Bank, but that it is urgent time to think to fuse all them in one single organisation which should be the World Organisation for Social Development. And one of the points of the next summit on social development should be: to propose that the World Organisation for Social Development will be created and that the World Trade Organisation, the IMF, the World Bank, and the Organisation on Labour should not be maintained as separate organisations. Because the Britains have always demonstrated: divide et impera! If we maintain all these kinds of organisations we will not achieve significant results in the next 30 years.
So, I stop here because our chairman showed me that we have to close at 6.00, but I want to tell you that it is not true that the new global social contract cannot be designed and implemented. We have another 50 years' time in front of us and we will try our best, and it is good to go in this direction.