Andreas Dombret: Election time(s) in Europe - challenges on the
way to economic recovery
Keynote speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at a Public Seminar at the University of Tokyo, Tokyo, 23 May 2017.
* * *
1. Introduction
Prof. Shinohara
Ladies and gentlemen
Thank you for the kind introduction. I am honoured to be speaking at the University of Tokyo, one
of the finest universities in the world.
Today, more than 13 million people live in the extraordinary city of Tokyo - it is one of the largest
cities on the planet. Almost 600 years ago, in 1457, Tokyo was established as "Edo", a small,
virtually unknown fishing village. Growing from of a small community of fishers into such a
tremendous city represents a major accomplishment, the outcome of human cooperation.
It is said that it takes a village to raise a child. What this proverb reflects is the common sense
that it takes more than two parents to integrate a child fully into a community.
It is used widely in different contexts; for example, some researchers tend to begin their
acknowledgements by saying that "it takes a village to write a book."
The frequent use of this expression mirrors a simple truth about human society: our success as
a species is rooted in our capacity to work together to achieve security and welfare; especially in
our modern-day societies, in which we divide labour and where specialisation is becoming ever
more prevalent, great achievements are always the product of a team - or a "village".
Everybody's individual contribution is highly important, and a certain degree of competition
among individuals is healthy for innovation and for being productive; but success on a large scale
- think of skyscrapers and building cities like Tokyo, monetary systems, or combating climate
change - such achievements are possible only if we cooperate; this is a precondition for modern
society.
This is true of the small village, it is true of the nation state, and it is also true of the "global
village" to which all human beings belong. Achieving a prosperous post-war international order
has been a remarkable success, in other words: we have created a global village out of many
smaller villages.
Is this post-war order under threat from populism? Are populist election victories the result of
conflicts within societies that could soon also become conflicts between societies?
Wherever I go these days on whatever continent, such questions seem to be on
everybody's mind. In my speech today, I will talk mostly about these fears as they present
themselves in Europe, focusing on some of the economic factors behind the current surge in
populism. My main message is that protectionism and confrontational politics pose a threat to
our security and our welfare. They would divide our villages and weaken them. But our security
and our welfare would be threatened just as much by sticking to the established regime of
international trade and cooperation. That would mean overlooking the fact that economic change
creates winners and losers in the village, thereby frustrating those who have lost the most. We
need to find a middle way.
2. Election times: The euro area economy and rising populism
So let's start with Europe's current economic condition. Since the financial crisis, the pace of
recovery in the euro area has been slower than it has been in the United States, not to mention
the emerging economies. Lately, however, there have been signs of a broad economic recovery.
For the euro area, recent figures held a positive surprise - with sound GDP growth of 0.5% for
the first quarter of 2017. Unemployment stood at 9.5% in March, down from its peak of 12% in
2013. But a recent study has shown that the labour market in the euro area is in worse shape
than the official job figures suggest, with workers unlikely to see real increases in pay because of
1
the level of underemployment. A measure of "slack" in the labour market indicates that about
15% to 18% of the euro area workforce are without jobs or would like to work more - which is
nearly double the official unemployment rate. Underemployment is even growing in weaker labour
markets, such as those in France and Italy.
The still weak labour market in many regions of the euro area is one of the gravest ongoing
consequences of the recent financial crisis and an indication that the recovery is still weak. This
is particularly true with respect to the high level of underemployment in peripheral regions and
among young people.
Thus, while the recent growth figures make the euro area economy look increasingly healthy, it
becomes clear on closer inspection that a lot still remains to be done in order to move onto a
sustainable, integrative path of prosperity.
And that may already give you some indication as to why protectionism has been on the
increase.
Ever since the UK vote for Brexit in June 2016, there has been much talk about the rise of
populism in Europe. National elections in Austria, the Netherlands, France, Italy as well as
regional elections in Germany and several other countries have seen populist parties on the rise,
and public debate has been circling around the issue.
Even though extremist parties have not gained government control in Europe, they have had
some impact on the public discourse. And even though the recent Austrian, Dutch and French
elections confirmed pro-European politicians, it is clear that the tide of populism has not receded.
How can we make sense of this? The whole debate is spinning around a number of issues,
some directly, some only loosely connected. But, at least from an economic point of view, there
seems to be one topic that unifies these debates: a growing percentage of people seems to be
voting against what has been a common denominator of politics for quite some time now: the
belief that global economic liberalisation and cooperation, "globalisation" for short, is a good thing
for everyone in our societies.
Should we ignore these votes? Should we simply be opposed to them? I believe that we cannot
afford to do that. There are too many people involved to simply dismiss them. We must dig
deeper to understand the underlying causes.
3. It's the economy, stupid! Reasons for the populist surge
The discussion about the root causes of rising populism is typically divided into two streams:
One is about national identity and citizenship, the other is about economic distribution. Both
strings play an important role, but I will focus my remarks on the issue of economic distribution.
Economic distribution is just an abstract term with a very concrete meaning: that any economic
change will create winners and losers. Every innovation means that more use is made of some
resources than of others - this can improve our welfare, our health, and our environment. One
basic idea of a market economy is that creative destruction brings progress; yet, such a market
economy will at least temporarily leave people without a job, or force them to move to another
sector or another location. Unless losers find opportunities to offset their losses, they have an
incentive to oppose change.
So what changes might be responsible for rising political opposition? Well, there are several
candidates, as can be seen from the debate about the repercussions of a market economy - but
let me focus on globalisation and technological change.
First, there is international trade. Many attribute a considerable part of the rise in populism to a
desire for greater protectionism of domestic industries - this seems to be true at least with a
view to US presidential elections, the Brexit vote, and the recent French presidential election.
It is often argued that free trade puts workers of specific industries out of a job and that rising
international competition leads to lower wages and inferior working conditions. How do such
claims stand the empirical test?
We know that trade increases overall economic welfare owing to economies of scale and
comparative advantages. But we have also known for quite some time that international trade is
2
likely to create winners and losers within a society. As such, there is considerable evidence that
international trade pushes some people in import-competing industries out of jobs and reduces
3 4
their wages. There is even evidence that this leads to greater political polarisation.
In sum, it is clear that trade boosts overall welfare, but that it also affects many people negatively.
As much as some critics of globalisation seem to forget the substantial welfare gains from
international trade, so do the cheerleaders of globalisation appear to forget that trade comes with
substantial redistribution and negative effects on some parts of a country's population.
Let's leave this much debated subject and turn to the second topic, which is at least as important
as a factor of economic change - I am referring to technological change, and its latest stage:
"digitalisation".
In the context of rising populism, technological change has been identified with robots replacing
manufacturing jobs and software replacing low-creativity middle class jobs. Several studies
present educated guesses about how many jobs will become obsolete over the next few
decades. They see 9% to 57% of all jobs in developed economies as being potentially at risk of
5
being replaced by robots.
How accurate is this picture? Well, some of these figures probably exaggerate what is going to
happen. Yet, there is evidence that a number of low and medium-skilled jobs subject to
6
automation have seen declining employment levels and wage stagnation or even wage loss.
Similarly, recent research on US manufacturing sectors between 1993 and 2007 shows that
each new robot introduced per thousand workers reduced the employment to population ratio by
7
0.34 percentage points and cut wages by about 0.5%.
In sum, technological change and digitalisation have delivered massive welfare gains for our
societies, and will most likely continue to do so. Yet, there is growing evidence that technological
change also means job losses for some parts of the workforce and that these are jobs with lower
education profiles.
If we take the perspective of the cooperative village: Villagers in the past specialised in a given job
profile - such specialisation made possible a division of labour, thereby benefiting all the village's
inhabitants. When the acquired skills are no longer needed, this has consequences, because
people lose their jobs or their working conditions change. In simple terms, technology and trade
disrupt the status quo, they creates winners and losers. They change how a village cooperates.
It is clear that our societies face tremendous challenges from economic change: the creative
destruction of the market economy - and globalisation and digitalisation, in particular - are
restructuring our economies and having redistributive consequences. This cannot be ignored or
healed with a few patches.
Therefore, all their benefits notwithstanding, globalisation and digitalisation have had negative
effects for a significant number of people. Furthermore, foreign competition often serves as an
emotionally satisfying scapegoat for many problems. Moreover, a lot of people who see these
developments and hear such allegations fear that they might lose out in the future, too. Put these
individuals all together, and you get a group that can be easily mobilised.
But, whatever we do, we should take care not to throw out the baby with the bathwater: Trade
and technological change are both catalysts for tremendous welfare gains in our society.
Resorting to protectionism and holding on to unproductive technologies would mean discarding
something that is worth keeping: resorting to protectionism would severely weaken the welfare
gains of large-scale cooperation. Clinging to old technologies merely to prevent redistribution
would cause economic harm - just think how damaging it would be to stick with coal for our
supply of energy rather than using renewable sources.
4. What can be done? Improving, not ending global and European integration
But what can we do instead? To answer that, we should first clarify the question. I think the
question should really be: How can we harvest the fruits of trade, technological change and a
market economy without dividing our societies to a point where social cohesion breaks down? In
other words, how can the village become more prosperous without becoming splintered into
much smaller communities that are in conflict with each other?
One important thing to remember is that, while trade and technology play a role in redistribution
and restructuring, they are by no means the sole drivers of such developments - just think of the
increase in inequality or low productivity growth in both Europe and the US.
The point is that building walls and limiting technological change will not solve the problems that
our economies are facing; moreover, even when smart policies are chosen to balance the
negative repercussions without undermining trade and technology (too much), this will not solve
all the problems - globalisation is only partially responsible for the negative outcomes that some
are witnessing.
So what then can we do? That's for politicians and their sovereigns to decide. But, based on the
facts that I have discussed, there are a few lessons to be learned.
With respect to the degree of international cooperation, I suggest two things: First, resorting to
protectionism will help no one. It will hurt all citizens. Rather, we should use the gains from trade,
but also find mechanisms that help those who lose out from trade. Second, the same principle
applies with respect to cooperation within the European Union - all EU citizens have benefited
immensely from the EU, but the single market has also led to a restructuring of the economies,
and this is especially true of the euro area. We should strive not only to maintain these
achievements, but also to make them better, so that they work for everyone.
This will not be enough to solve the problems of restructuring and redistribution that arise from
trade, technological change and further economic developments.
If we want to foster our economy with a complex division of labour - that is, our modern village -
we have to deal with the redistributive and restructuring tendencies. If we want to foster a global,
market-based economy and liberal democracy, policies need to help those on the losing side of
redistributive and restructuring tendencies so that they still feel that they have a stake in society.
What could be on such a wish-list of policies for Europe's economy to recover?
Well, this could include giving those who lose out from globalisation and digitalisation a fair
chance to reintegrate into the system and compensating them for losses.
It should include implementing more sustainable growth-enhancing policies; these should target
investment in infrastructure and innovation - and that does not just mean road infrastructure and
internet connections, but much more complex investments such as in child welfare and health
care.
And it does include not depending on growth alone, since many policy problems cannot be
solved by means of higher GDP growth - instead, what is required are demand policies of
sustainable resource utilisation and intelligent countermeasures against rising inequality: for
example, increased public expenditure on extending educational opportunities for everyone in
society as a whole.
One final point is especially important in my eyes: we have to tackle these challenges rather
sooner than later. Some may feel comforted by the fact that populist parties performed less
successfully than expected in the Dutch and French elections; but this is no time for
complacency. Populism is not a mere short-term electoral challenge. It has a strong base
among economically frustrated individuals. This frustration must at least be taken seriously -
otherwise it will come back with a vengeance in elections at a later date. We must identify the
underlying problems and do our best to fix them.
5. Conclusion
Ladies and gentlemen
We live in a global village; European citizens live in the village that is the EU - it will take these
villages, together with our local communities, to raise future children; it takes these villages and
their division of labour to continue our security and welfare.
Villages prosper through cooperation, not through conflict - 15th century Edo was no different
from our global village and from the EU.
But why is populism on the rise? I have talked about the economic side of this issue. People vote
for populists, because globalisation and technological change - together with further economic
and non-economic forces - have been penalising significant segments of societies in developed
economies. If we want to secure a global, market-based economy and liberal democracy,
policies need to help the losers from redistributive and restructuring tendencies so that they have
the chance to remain active citizens of their societies.
Think of the modern version of the division of labour in a global village: The baker or investment
banker owes a debt of gratitude to their doctor, if she saves their children's lives. But the doctor
also owes a debt of gratitude, as she would not be able to specialise in a particular area of
medicine in the first place, without someone else baking her bread or investing her money. In a
complex economy we all rely on each other, on the contribution made by everyone to the
economy.
A cooperative society means progress and therefore change - as brought to us by international
trade and technological advances. Protectionism and confrontational politics would threaten this
progress; it would threaten our security and our welfare.
But simply sticking to the established regime of international trade and cooperation would
likewise threaten our security and our welfare; because that would mean ignoring the fact that the
current approach has also led to many people in our societies losing out. If we do not take the
needs of such people seriously, we will undermine the social fabric of our global village and our
local villages - and that is how social cohesion is weakened and populism is fuelled.
Thank you very much for your attention.
1
European Central Bank (2017), Assessing labour market slack. ECB Economic Bulletin, 2017(3): 31-35.
2
WF Stolper & PA Samuelson (1941), Protection and Real Wages. The Review of Economic Studies, 9(1): 58-73.
3
See, for example, for the US: DH Autor, D Dorn & GH Hanson (2013), The China Syndrome: Local Labor Market
Effects of Import Competition in the United States. The American Economic Review, 103(6): 2121-2168; JR
Pierce & PK Schott (2016), The Surprisingly Swift Decline of US Manufacturing Employment. American
Economic Review, 106(7): 1632-62.
4
See, for example, D Autor et al (2016), Importing Political Polarization? The Electoral Consequences of Rising
Trade Exposure. NBER Working Paper No. 22637; for Germany: C Dippel, R Gold & S Heblich (2015),
Globalization and its (dis-)content: Trade shocks and voting behaviour. NBER Working Paper No. 21812.
5
M Arntz, T Gregory & U Zierahn (2016), The Risk of Automation for Jobs in OECD Countries. OECD Social,
Employment and Migration Working Papers, No. 189, OECD; World Bank (2016), World Development Report
2016: Digital Dividends.
6
G Michaels, A Natraj & J Van Reenen (2014), Has ICT Polarized Skill Demand? Evidence from Eleven Countries
over Twenty-five Years. Review of Economics and Statistics, 96(1): 60-77; M Goos & A Manning (2007), Lousy
and Lovely Jobs: The Rising Polarization of Work in Britain. The Review of Economics and Statistics, 89(1): 118-
133; DH Autor, F Levy & RJ Murnane (2003), The Skill Content of Recent Technological Change: An Empirical
Exploration. The Quarterly Journal of Economics, 118(4): 1279-1333.
7
D Acemoglu & P Restrepo (2016), The Race Between Machine and Man: Implications of Technology for Growth,
Factor Shares and Employment. NBER Working Paper No. 22252.