Global economic governance: Can fragmentation be overcome?

The European Studies Council at the MacMillan Center invited Marco Buti, Director-General for Economic and Financial Affairs at the European Commission, to speak about the current state of the world economy on November 1.

Mr. Buti began the event by providing historical context regarding the global economy from two decades ago. “We entered a benign view of rising international economic integration twenty years ago,” Mr. Buti stated. According to Mr. Buti, there was an “emphasis on overall gains from trade, capital market liberalization, and financial integration.” There was largely a “focus on capital movements because labor was not a problem.”

However, the global economy experienced a great shift during the crisis of 2008. “We now have an uncritical view of downhill capital flows,” Mr. Buti explained. The current world economy is characterized by “unbridled financial markets,” in which “capital flows ended up in the wrong places,” and had a “negative impact on working conditions.” Many “believed globalization would increase the size of the cake and the distribution of the pie,” but what really resulted was a stagnation of median income. “Look at Trump, the Brexit vote, and Macron,” Mr. Buti pointed out. All of those examples represent a battle between the “Center” and the “Periphery,” reflecting a perception increasing in popularity—that globalization is a threat.

“We have become much more splintered,” Mr. Buti stated. The global economy is defined by both financial fragmentation and social fragmentation. Moreover, we have “renewed global imbalances.” But, there is hope yet to reverse these trends. “Rolling back history is impossible and inadvisable,” Mr. Buti explained. We must turn to other methods of recomposure. “The first imperative is to keep the global economy open,” Mr. Buti advised. “We must also avoid a protectionist race to the bottom.” But, above all, “a new industrial design is necessary,” in which “Inclusive Multilateralism” and a “consistent global policy mix”—involving the United States, Europe, and China—should be key components. At the end of the day, “increasing multilateralism is the name of the game.”

So, what roles should the United States and Europe play together and alone? “Disengagement from Paris and the WTO characterizes the United States’ attitude towards multilateral institutions.” Moving forward, we must “enhance debt transparency” and “participate in the Paris Club.” Although Europe is “well-placed” because it “has practiced multilateralism,” it must strive to create a “more attractive social model” and address the “demand for greater leadership.” Together, the United States and Europe can remedy the shortcomings of the global economic model.

Written by Sophia Zhao