The Davos Forum – that is, a significant part of the world’s political, business, financial and thought elites – is preparing for a new economic era. There is no consensus on how to face it, but there is consensus that the world faces a transformation that leads us to a substantially different phase from the previous one. The president of the ECB, Christine Lagarde, crystallized the concept in a debate held this Friday in the Swiss Alpine town, pointing out that the world economy is showing signs of stabilization, but is metamorphosing towards something different: “We are beginning to see normalization, but towards something that is not It will be normal. We will go from normalization to non-normality,” she said.
Lagarde’s verbal game reflects well the spirit of the debates held this week at the Davos Forum. After the crises of the pandemic and the invasion of Ukraine, the economy shows signs of resilience, it has absorbed the impact better than many expected, for example, in this same forum last year. But the magnitude of the forces of transformation underway are of enormous caliber, and represent a great challenge. Their names are clear: generative artificial intelligence, unstable and insecure geopolitical environment, runaway climate urgency, limiting political polarization, heavy accumulated debt, among others. These forces configure the new scenario to which the economy must adapt.
In Davos, there have been recurring references to the need for large investments, with multiple focuses: to protect the sectors of advanced societies most exposed to the negative consequences of the transformations (and thus avoid the political destabilization that their unrest causes); to protect less developed countries (more exposed to the negative impact of climate change or rising debt interest rates); or simply to maintain competitiveness in an environment of stark competition of powers.
Of course, there is no consensus on how to finance the necessary investments. Significantly, there were strong calls for public investment from figures who would not naturally be associated with positions typical of broader social democratic or progressive visions. They were invoked by the president of France, Emmanuel Macron, a liberal; or, on the same Lagarde panel, the president of Singapore, Tharman Shanmugaratnam, which certainly cannot be considered a classic social democratic fiefdom.
Faced with the idea of directing public spending to stimulate skills in strategic sectors or to care for the disadvantaged, there has been resistance from those who want to trust in the market sector. With the rhetoric and brutal approaches shown here by the new president of Argentina, Javier Milei; or with the less eccentric ideas, but in any case the antipodes, of the German Finance Minister, Christian Lindner, also present in this Friday’s debate.
Lindner called for betting on the mobilization of European savings towards investments through improved integration of the European capital market. “There are high levels of debt. This has contracted the space to finance the transformations. I fear that Europe wants to enter into a subsidy race with the United States. We have to avoid it, we cannot afford it,” said Lindner, in what sounded like a response to the idea, revived by Macron here on Wednesday, of resorting to Eurobonds. to finance a new large wave of investment in the EU focused on the green, digital and defense sectors. Lindner agreed with Lagarde that the economy is moving toward a “new normal.”
The president of the ECB listed three symptoms of stabilization of the economy. First, the moderation of the forces that have driven consumption tremendously in recent years, with labor markets strong, but a little less so, and the enormous amount of savings that is being reduced. Secondly, a rebound in world trade after a phase of recession – in this regard, the director of the WTO agreed, although pointing out that in any case the expansion of trade is proportionally lower than that of GDP. And, thirdly, an improvement in inflation. Lagarde did not make specific references to the Eurozone because next week there is a meeting of the ECB council and the institution’s rules require discretion in the previous week.
This stabilization buys time for adaptation to the formidable transformations. Perhaps the most exciting is the increasingly accelerated introduction of generative AI into the lives of companies. This promises great advances in productivity. Also considerable destruction of jobs, which may be replaced by others, but not necessarily at the same time, and not for the same people.
Climate change is advancing at a gallop. This has already begun to produce large movements of people, which in all probability will increase. Beyond climate refugees, there are major fights for technological primacy—which leads to subsidies, tariffs, and tensions between governments. Or great debates about a global carbon tax or, as Lindner tried to propose, a global carbon market, in which instead of investing to achieve progressive reductions in emissions in very expensive sectors – such as German heavy industry – using the money to promote green energy production actions in places where investment is more profitable.
The Davos Legacy
The geopolitical tension, which has erupted in an unprecedented way in decades, has no sign of disappearing as far as the eye can see. The theme of the Davos Forum this year has been “rebuilding trust.” One participant observed that managing distrust reasonably would be a great achievement.
This distrust is already producing, albeit slowly, business movements. Lagarde observed that for decades efficiency was absolutely prioritized, and that it makes sense now to put a little more focus on the safety equation. The West talks a lot about reducing the risk of its dependence on China. Supply chain reconfiguration movements have begun. Specific tensions such as those in the Red Sea force maritime transport routes to be altered. All this could produce an increase in costs, with a certain lasting inflationary tendency.
This is the picture that will have to be faced. There is consensus in Davos that this will require major adaptations, major policy moves, to stimulate positive change, mitigate negative impacts. In Western countries, this demand occurs in a year with a very important electoral cycle, and with degrees of polarization and ideologization that complicate the perspective. “Of this whole scenario, what I fear most is the inability of our political system (that of the United States) to act,” summarized the American David Rubenstein, former government advisor, president of the Council on Foreign Relations and entrepreneur.
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