The nobel prize winner in economic sciences Joseph E. Stiglitz about the future of the western economic order and why it is at stake in its present form.
The basic consensus that guided economic growth in the West is breaking down. Since World War II we had been moving to an ever more integrated global economy based on rules, with ever increasing movements of labor, capital, knowledge, and people across borders. While as in any change, there were losers as well as winners, the overall gains seemed to be overwhelming. There were those who worried about the resulting loss of sovereignty, but their voices were drowned by those celebrating the economic gains. In Europe, the “European project” had gone even further, with ever tighter integration in the European Union. A continent that had been ravaged by two major conflagrations had had peace and prosperity for almost three quarters of a century. It was the opening of its doors to the countries of Eastern and Central Europe that was critical in their successful transition from Communism to a market economy.
Rules-Based World Order Dissolving?
The Great Recession of 2008 set the stage for all of this to break down. In the election of Trump in the US and the Brexit referendum in the UK those who seemingly had been left out demanded a change of course. The US, the leader in the creation of a rules-based global order, seemed now to be the leader in its dissolution. On both sides of the Atlantic and around the world, there was a great uncertainty: where would all of this lead, both economically and politically?
Shift from London to Frankfurt?
The breakdown of globalization, or even the more limited exit of the UK from the EU, had enormous implications for the location of economic activity. The debate over how much of the financial industry, centered in London, would have to relocate, illustrates; but deglobalization, especially if done rapidly, could prove as destabilizing as globalization has proven to be over the past third of a century. Large movements of businesses and people will have large impacts on property values and on real estate. And even the anticipation that these movements might occur can have large effects. Imagine the effect of relocating all of the financial activities that now occur in London to Frankfurt. It’s not just the demand for commercial space, but for housing for the thousands employed in the sector. And while whatever happens, London will continue to have a thriving financial sector, a significant part of what occurs in London today is on EU-related transactions, and what fraction of that moves will depend on the “deal” that is worked out.
Challenges for Europe
But this is not the only source of uncertainty confronting the economy in general and the property sector in particular today. The US recovery, while remaining faltering, has been strong enough that the Fed has begun the move towards a “normal” monetary policy. Interest rates have risen a full point. While there is sufficient uncertainty about the progress of America’s recovery to know precisely how fast future rate increases will occur, it is highly likely that they will occur within the next couple of years. Added to the inherent economic uncertainties are those brought by the Trump administration. The inability to translate campaign promises into legislation is perhaps unprecedented. Promised tax cuts and increases in infrastructure spending look increasing doubtful; on the more positive side, so too are the promised increase in protectionism. With a large number of vacancies in the Federal Reserve, and the Chair’s term coming to an end, Trump has the opportunity to change Fed policy, for instance, to take on a stance less concerned with incipient inflation. All of this raises important challenges for Europe. With Europe’s recovery slower than that of the US, monetary policies may be less synchronized than in the past, and this can give rise to large cross border capital flows and even more uncertainties. And this may be especially so with the ECB tied to its mandate on inflation, and with the US reducing its emphasis on inflation even if inflationary pressures were to grow.
Effects on the World Economy
The only thing that is certain is that these changes in geo-politics and monetary policy will have profound effects on growth and stability in general, and on virtually every sector within the economy, and particularly on those, like real estate, that are particularly sensitive to interest rates.