by Marco Valsania
In his speech at MIT he outlines the challenges of a world that has gone from competition to conflict. And the role of the European Union to be redefined
5′ of reading
Ukraine e inflation. Mario Draghi, in receiving the Miriam Pozen Prize at MIT, where he had studied, for his leadership in international financial policy, gives a lesson in geopolitics and economics, addressing two interconnected dramas which, he says, took policymakers by surprise. Fruit of what he describes as an epochal transition, on the global stage, from competition to conflict. And which promise to continue to influence the future, imposing tolls on the economy and beyond.
War and inflation
In a broad and articulated speech, Draghi focused on two events which, together with growing tensions with China, “have dominated international relations and the global economy in the last year and a half: the war in Ukraine and the return of ‘inflation”. And he began with a diagnosis of the weaknesses that explain this present: «We assumed that the institutions we had built, together with the economic and commercial ties, would be sufficient to prevent a new war of aggression in Europe. And we believed that independent central banks had mastered the ability to limit inflation expectations, to the point where we feared secular stagnation.
It was not so. The open challenges “are rather a consequence of a paradigm shift that in the last 25 years has seen global geopolitics shift from competition to conflict”. A paradigm that “could lead to lower potential growth rates and would require policies that lead to budget deficits and higher interest rates”.
The optimistic vision of globalization of the 1990s, which would have led to the diffusion of liberal and democratic values, has proved to be fallacious, as demonstrated both by China, which has not become a market economy despite its inclusion in the World Trade Organization , than from Russia, now protagonist of the invasion of Ukraine with a war of aggression. And Draghi particularly underlined the significance of the new reality for the EU.
European values are under threat
«The existential values of the European Union are peace, freedom and respect for democratic sovereignty and that is why there is no alternative for the United States, Europe and their allies to ensure that Ukraine wins this war ». Only “a change in internal policy in Moscow” would see Russia abandon her goals, “but there is no sign that such a change will occur”. Draghi sees “geopolitical consequences of a prolonged conflict on Europe’s eastern border”. He lists them, inviting you to prepare as best you can.
«First of all, the EU must be willing to strengthen its defense capabilities. This is essential to help Ukraine for as long as needed and to provide meaningful deterrence against Russia.” Then “we must be ready to start a journey with Ukraine that will lead to its accession to NATO”. Finally, “we must prepare for an extended period in which the global economy will behave very differently from the recent past”.
It is here that “geopolitical changes and inflation dynamics intersect”. The war in Ukraine “has contributed to rising inflationary pressures in the short term, but is also likely to trigger lasting changes that herald higher inflation in the future.” Inflation “is proving to be more resilient than initially assumed by central banks”. And the fight to tame it “is not over and will probably require a cautious continuation of monetary tightening”.
Risk of higher budget deficits for the States
Draghi also expects “governments to register permanently higher budget deficits” in the name of a range of issues to be addressed: from the climate crisis, to the need to shore up our critical supply chains, to defence, especially in the EU. These “will require substantial public investments that cannot be financed through tax increases alone”. And there will also be an impact from similar commitments on the cost of living: “These higher levels of public spending will exert further pressure on inflation, alongside other possible shocks”.
It is therefore likely “in the long run that interest rates will be higher than in the past decade”, in a phase that will see a “volatile cocktail” composed of low potential growth, higher rates and high post-pandemic debt levels. However, it will above all be up to the governments to “redesign” fiscal policies in the new situation, taking into account a “fiscal space that is not infinite” as previously thought. The composition of fiscal policy will be a crucial element: the goal should be to raise potential growth and at the same time protect and include those most in need of help. One question is whether radical innovations, such as AI, should “shake up the world and boost global growth.”
For the EU the watershed of the war
In all of this, the EU will have to deal with “unprecedented supranational challenges”. Its social model, with its welfare network, has to date protected the most vulnerable better than elsewhere from the most harmful consequences of globalization and its robust institutions and rules have better countered the side effects of the free market. But the Union was not “designed to transform its economic weight into military and diplomatic power”. The response to Russia is thus a “watershed”. He demonstrated more than ever “the unity of the EU in defending its founding values”, beyond national priorities.
Such unity will be essential in the years to come, to redesign the Union in order to accommodate Ukraine, the countries of the Balkans and Eastern Europe, to organize a “complementary European defense system capable of reinforcing NATO”. And to manage collective challenges of the caliber of climate transition and energy security.
Draghi traveled to the United States to be awarded the 2023 Miriam Pozen Prize, motivated by his leading role in international financial policy. The award, administered by the MIT Golub Center for Finance and Policy, was presented to him in a ceremony at the Samberg Conference Center in Cambridge, Massachusetts. He became the second winner of the award, after Stanley Fischer. In recalling Draghi’s career, the MIT GCFP underlined his role as President of the European Central Bank, as Chair of the Financial Stability Board, as governor of the Bank of Italy up to that of Prime Minister of the country. Draghi received a PhD in economics from MIT in 1977, under Franco Modigliani and Robert Solow.
Il Miriam Pozen Prize
More specifically, the Miriam Pozen Prize “recognizes excellence in the research or practice of financial policy”. When the award was announced in March, Draghi let it be known that “as a student at MIT in the 1970s, I career that my education would help launch. I hope this award inspires a new generation of economists to enter the arena of politics.” Robert Pozen, who established the prize in her mother’s name, had stated on the occasion that Draghi “combines the intuition of an academic practitioner with the determination to apply her beliefs to policymaking”. It is, he added, “a model for the integration of financial theory and practice that the Prize intends to encourage”.
View on breakinglatest.news