This article is part of our special report Davos 2018 debates ‘shared future in a fractured world’.
Optimism dominated the World Economic Forum (WEF) which concluded last week, despite lingering doubts about the EU’s integration process and risks affecting the global economy.
Europeans arrived with renewed confidence in Davos this year, after a long period flying below the radar screen at the forum.
Europe suffered like no other region from the global financial crisis that hit just over ten years ago. Two recessions and seven state bailouts turned the EU into a source of concern for the global system. The risk of Greece leaving the euro and the UK’s departure from the bloc prolonged Europe’s agony in recent years.
But this year, the message was loud and clear: “Europe is back”. At the center of this renewed sense of optimism is the positive economic momentum and a political situation that looks better compared to last year, despite the complicated Brexit negotiations and risky elections in Italy next March.
“The optimism about the situation in Europe is one of the issues that I picked from this edition,” former Swedish prime minister Carl Bildt told EURACTIV.
EU budget commissioner Günter Oettinger was under the same impression: “Two years ago, or even last year, there were many questions about whether Europe would remain united after Brexit. But now what I have perceived is high expectations about its future. I got a positive impression,” he told this website.
These hopes are linked to the ability of EU leaders to carry out the reforms necessary to strengthen the eurozone.
But doubts remain about the likelihood of achieving concrete results over the next few months.
“It will not happen,” the prime minister of one of the most skeptical governments told EURACTIV on condition of anonymity. In his opinion, the Brexit talks and the lack of reforms in some countries are the major obstacles.
Paul Sheard, executive vice president and chief economist at Standard and Poor’s, pointed out in the corridors of Davos that there is a “narrow window of opportunity” to achieve results, or at least to lay the basic political groundwork, so Europeans can be consulted in next year’s elections on a mandate to progress on eurozone reform.
Lithuanian President Dalia Grybauskaitė said some member states are “afraid” of more integration. During one of the panels, Grybauskaitė and former Commission President José Manuel Barroso (who is on the payroll of Goldman Sachs) had a long discussion about French President Emmanuel Macron, the political future of Angela Merkel and the future of Europe.
The optimism about the world economy was even stronger.
Spurred by the IMF’s improvement of the growth forecast for the next two years, the elite broadly shared a bright reading of the global outlook.
“I have heard that the main concern is that people are not worried,” joked Mary Callahan Erdoes, head of asset and wealth management at JPMorgan Chase.
“But we should not feel bad for not being worried,” she told one of the panels in Davos.
For the IMF, complacency is the worst enemy at this stage, because vulnerabilities remain.
A significant number of participants agreed that there is a bubble in asset prices, and that sooner than later markets would adjust.
The question is whether this adjustment will shake the entire financial system, and ultimately affect the real economy.
“Some people are interested in predicting the next crisis as doomsayers,” Nobel laureate in economics and professor at the London School of Economics, Christopher Pissarides, told EURACTIV.
He agreed that there would be “a small correction in the markets,” but said it won’t pass on to the whole system.
“We must differentiate between the economic cycle and underlying structural problems, and I do not perceive huge imbalances, except in the case of China,” said Sheard.
For the Governor of the Bank of England, Mark Carney, the financial system has been sufficiently bolstered with capital provisions in this post-crisis period.
“Probably” there will be an adjustment in the markets, but the probability that this adjustment affects the core of the financial system is “quite low”, he said during one of the panel discussions.
A crisis on the horizon
But many voices considered that the next recession is already on the horizon.
Founder and president of Bridgewater, Ray Dalio, and Min Zhu, president of the National Institute of Financial Research in China, and former senior IMF official, agreed that the probability of a recession in two or three years was “high”.
PwC global president Bob Moritz noted in an interview the disconnection between “the big risks” and the buoyant market situation.
Among these risks, some worry about the high indebtedness in the planet. But for Pissarides the levels have not reached yet the red zone.
“The biggest danger is that people do not think there will be a financial crisis in one or two years,” said David Rubenstein, co-founder and co-chair of The Carlyle Group.
For some, the question is rather what may be the trigger of the next financial collapse.
A clumsy exit from the expansive monetary policy, geopolitical risks and China top the list.
Central banks, heroes in the worst episodes of the crisis, could become villains if they rush to withdraw the monetary stimulus and to rise interest rates.
“When you drive at high speed on the highway, you need to be especially careful, “said the ECB Executive Board Benoit Coeure. “We will be prudent,” he added during a debate.
Consumption and investment would be affected when the era of ‘cheap money’ comes to an end. The effects could be amplified if confidence falls due to a new conflict in the world.
For Axel Weber, UBS Group AG Chairman and former president of the Bundesbank, geopolitical risks have even a “greater potential” to disrupt the global economy than a sudden change in interest rates.
Against this backdrop of market bubbles, debt, unchartered waters in monetary policy and geopolitical risks, the IMF, the OECD and the ECB urged countries to roll up their sleeves and continue reforming their economies and regaining fiscal space.
Education and life-long learning appear on top of the list of reforms. Not only because these measures would equip citizens to navigate in a more unstable world of work, but also because they would help to reduce inequality, one of the big challenges the world faces today.
If “fundamental reforms to market capitalism” are not carried out, human development is “at risk”, warned the forum.