(Yicai Global) Dec. 5 -- Dominique de Villepin, who served as the Prime Minister of France from May 2005 to May 2007, spoke today at the World Economy and China 2018 Forum, which Yicai Media Group and the China International Finance Society are holding today in Beijing, China.
Below is the retired diplomat’s speech.
Ladies and gentlemen,
I’d like to thank the organizers of this forum gathering renowned leaders and respected scholars. My experience in politics has taught me how precious it was to combine expertise and knowledge from various fields to better understand the world. That’s why such a forum is of great value today in a context where economic challenges are increasingly resulting from political uncertainties.
Of course, the global economy is improving today. International growth should recover at the highest pace since 2010, reaching 3.6 percent this year against only 3 percent in 2016. Global trade and investment are also much better than last year, giving positive signs of recovery.
But we are far from being immune to the next global crisis. Today, growth is subject to unpredictable troubles spreading worldwide:
It’s true in economics, given the rising distrust to international free trade and the risk of financial turmoil. It’s true in politics, as we can see today in the proliferation risk and Middle-Eastern instability. It’s also true in ecology, as resource depletion is casting a shadow over the future of growth and development.
In such a tense situation, I am convinced there is a room for new globalization leading to a more innovative and cooperative economy. After the 19th National Congress of the Communist Party in October, and the main elections that recently happened in Europe, I do believe we have to enter a new age of reforms, economic partnerships and multilateral action to ensure growth based on inclusiveness and sustainability.
But today, the global economy is under the threat of a major financial crisis.
All around the world, growth and confidence are being put at risk by uncertainties.
First of all, trust has been weakened towards Western markets. It’s a reality in the USA -- since last year, Trump’s administration has been heightening local and global division on major economic issues. It is the case in free trade with the withdrawal from the TPP [Trans-Pacific Partnership] and uncertainties on the TTIP [Transatlantic Trade and Investment Partnership] with Europe and the NAFTA [North American Free Trade Agreement] with Mexico and Canada. It is the case in financial regulation with the risk of going back to a pre-crisis status threatening banking stability. It is also the case in innovation, where the gap is widening between Silicon Valley and Washington -- only this year, public funding in artificial intelligence has been cut by more than 10 percent.
In recent months, trust in European markets has also been impacted by major crises. On the one hand, Brexit initiated a new era of doubts about the credibility of the European economy -- British growth has been impacted by the decision to leave the single market as economic perspectives in UK are lower than the rest of Europe. Today, Brexit negotiations will be key for the future of the EU, especially on trade facilitation, as was the case yesterday in talks between London and Brussels regarding the Irish border.
On the other hand, the collapse of coalition talks in Germany has also damaged trust in European solidity: the failure of Angela Merkel could strongly affect European markets given she’s been a stable force in the turmoil during the Eurozone crisis. Germany’s political future is also decisive for European integration in supporting the French initiative of stronger financial governance. Today, German uncertainty should continue at least until March 2018.
Second, market stability is also put at stake by the danger of bubbles and private debt. Short-term investment and overvaluation could lead to a sharp downturn on the stock markets. We can see that in American and Chinese exchanges with dramatic increase of capitalizations. We also see that in volatile assets, like bitcoin creating a new kind of bubble. Since the beginning of the year, bitcoin’s value has been multiplied by 10, before a sharp decline last week. Today, cryptocurrencies are raising new issues due to the lack of regulatory framework.
The surge of debt has also become a major concern for global economy. In the US, student loans have increased by almost 200 percent over the last decade, while car and housing credits are ever more alarming. Today, US private debt is at about USD13 trillion.
China is facing a similar challenge, based on the huge corporate debt of around 160 percent of its GDP [gross domestic product]. In the Eurozone, corporate debt has been dangerously growing in sectors like telecom with the recent difficulties experienced by the French company Altice after massive acquisitions driven by debt.
Powerlessness of politics has also been a major threat to market stability.
All across the world, political tensions have created an unsecure environment. In today’s world, we witness many areas of risk threatening the perspectives of peace, trade and prosperity. On the one side, North Korea has become the most dangerous ground of nuclear proliferation and regional destabilization. On the other side, the Middle East has been the major ground of war over recent decades, accelerating the process of failing states in the whole region. Today, my conviction is that we cannot imagine sustainable global growth without building the conditions of peace.
But the risk of confrontation is also about the future. The truth is that climatic tensions could become a new cause of economic conflict as resource depletion will increase pressures at the borders. Natural resources like oil, gas and water will be ever more confronted with scarcity, creating both a risk of energy shortage and food insecurity. Today, global politics has failed to find a compromise on the necessity of nature protection, especially with the US decision of leaving the Paris climate agreement.
Economic insecurity is also increased by the lack of coordination and limited instruments of politics.
In recent times, political and monetary decisions have partly failed in containing deflationist pressures while reducing space of reaction to crisis.
First, major central banks, like the ones of Japan and Europe, didn’t manage to overcome low inflation despite quantitative easing. Today, it’s still unsure when the European Central Bank will announce further tapering and if it will succeed in monitoring softly the end of the asset purchase program. At the same time, Europe has no room any more to boost demand through further decreasing rates.
Second, the rise of public debt also reduced political ability to tackle crises. Today, the high level of public debts and deficits has also weakened credibility on European markets by reducing our capacity to finance stimulus. It is the case in Italy, whose public debt is reaching more than 130 percent of the GDP. Even in France, I can tell you the public debt increased from roughly 60 percent in 2007, when I was prime minister, to around 100 percent of GDP today.
But more than political powerlessness, there has been political failures in treating economy: austerity has created a negative spiral of slowdown and unemployment. Since 2010, the case of Greece has been emblematic of harmful policies promoting budget restriction instead of sustainable stimulus.
The lack of global coordination has also been a political failure in creating mutual trust. The rise of protectionism could lead to international tensions within the WTO [World Trade Office], especially regarding investment reciprocity as well as social, fiscal and environmental dumping. Rising competition also increased the risk of currency war that has become a major fear of Western economies in the last decade.
There is a second key to understand our current situation:
There has been a structural transformation of the world’s economy that has changed the structural level of risk.
The economic expansion of China has created a multipolar growth model.
Over the last few decades, China has been taking a rising part in global economy. First, China witnessed the age of trade. From the opening-up in the 1970’s to the its entry to the WTO in 2001, China has become a global pillar of economic exchanges. It has been the largest global exporter since 2010 and now represents more than USD2 trillion of exports with a trade surplus over USD500 billion.
Second, China witnessed the age of investment. For the first time in 2015, China registered an investment surplus with more than USD145 billion abroad. Global investment hugely contributed to the move upmarket and to build high-quality growth in line with the going global strategy and the national plan ‘Made in China 2025.’
Third, China has entered the new age of innovation. In technology, the rise of Chinese champions has increasingly challenged the US leadership. In a few years, China has developed digital leaders like Alibaba, JD.com, Baidu and Tencent that recently overtook Facebook with a market cap over USD500 billion. Two days ago, I attended the World Internet Conference in Wuzhen -- Chinese enthusiasm in exploring IT gave me proof of the huge transition towards more dynamic, innovative and sustainable growth. At this pace, the digital economy would be about to account for 50 percent of China’s GDP by 2030.
But the transformation of global economy has also created new kinds of threat. First, systemic risk can spread more broadly and from different sources. The world we’re living in is not the one of 2007 -- systemic risk is taking roots where growth and financial dynamism happen. The dramatic increase on US stock exchanges remains a major risk to global stability. The financial solidity of European markets is also a key to global growth. The rapid development of Chinese technology has also become a challenge for the world. Today, the price-earnings ratio of Chinese IT stocks is close to 40, considered a sign of a bubble with a risk of global spill-over.
Second, the global economic shift from the West to the East has initiated a new era of competition and sometimes of distrust. In North America, Chinese investment has massively increased to around USD50 billion in 2016, creating some anxieties. In Europe, Chinese investment surged by 90 percent in 2016, heightening tensions and misunderstandings. Last week, the Summit in Budapest [6th Summit of China and Central and Eastern European Countries] was seen by some European diplomats as a sign of Chinese competition with Brussels. The fact is that the 16 + 1 framework is including European countries like Hungary, Bulgaria and Romania that are in need of infrastructure. Since 2012, more than USD15 billion has been invested in infrastructure by Chinese companies in the region. Since last September, we have also witnessed some suspicion in Western countries, especially from Germany, a core partner of China. Today, the investment screening process initiated by the European Commission could lead to a further limitation of Chinese acquisitions in strategic sectors.
However, I am convinced that these tensions can and must be overcome thanks to more cooperation and better economic global governance.
In this regard, EU-China cooperation can become the cornerstone of a new global economy. First of all, we need to build up lasting confidence between Europe and China as shown by the visits of Foreign Affairs and Finance Ministers of France, last week, to deal with a joint roadmap for the coming years. We need to define a new method to tackle the issue of reciprocity as a pillar of economic cooperation -- it’s even more necessary that China and Europe currently represent a trade volume of more than USD600 billion. We need to boost win-win initiatives in growth and investment as Chinese FDI [foreign direct investment] in Europe accounted for around USD50 billion in 2016. We also need exemplary and sustainable projects on third-party markets like the common development of renewable energy in Africa.
Second, we need to work on stronger economic governance, including better representativeness and effectiveness. Over the last years, the growing role of China in international institutions has been a great step forward in this way. We saw that in the World Bank, where China became the third country in terms of voting rights in 2010. We saw that in 2015, with the decision of the IMF [International Monetary Fund] to integrate the yuan inside the currency basket strongly contributing to the recognition of Chinese financial and monetary power.
China also took crucial initiatives to promote more balance and representativeness within the global economy. The AIIB [Asian Infrastructure Investment Bank], launched in Beijing two years ago, was a great step forward to finance sustainable development. Last September, the BRICS Summit held in Xiamen also gave the opportunity to highlight Chinese commitment to a more sustainable and cooperative world alongside emerging countries.
Europe, on its side, has also paved the way for a more stable economic integration. Let me give you some examples of the French ambition for Europe striving to enhance economic stability. We could set up a European Monetary Fund and a Single Finance Ministry to get more credibility and independency on the global stage. We should also accelerate the creation of a strong common budget to effectively address local economic crises. Today, France is back on the move. With a new president pushing for structural reforms, we want to break the vicious circle of debt and low employment to create strong momentum for new European growth.
But today I come to you with a third message. The major risk we’ll face in the coming years is both economic and political: it’s inequality.
In recent years, addressing inequality has become a major economic challenge.
It is a systemic threat to security. The race to resources is now a major cause of economic war. Conflict in the oil economy has been continuously weakening Middle-Eastern security, in particular between Iran and Saudi Arabia. Water competition is sharpening the risk of war in many regions of the world, as is the case in Israel around the Jordan River.
Climatic insecurity is also highlighting huge inequalities. Once again, the African continent is the most vulnerable area in terms of climate stability due to poor resilience and weak institutions, especially in Sahel. Increasing temperatures in Darfur, for instance, have been the source of more than thirty conflicts due to pressures on resources and competition for arable lands. Asia is also under growing danger, due to the very high level of pollution and the water scarcity issue. In Southeast Asia, a 30-centimeter rise in sea levels may be expected by 2040, according to the World Bank.
Inequality is also a threat to growth and development. In the last fifty years, growth has not been distributed on a fair and sustainable basis. Today, the world is torn apart between winners and losers of economic globalization -- the nations of the G20 account for 85 percent of global GDP, mainly concentrated in Europe, China and the USA. By contrast, Latin America and Africa represent less than 10 percent of global GDP. But inequality is also spreading inside each society as globalization has deepened the gap between integrated metropolises like Paris, Beijing, San Francisco and left behind areas of the countryside. Today, half of the global wealth is in the hands of 1 percent of the population.
Access to health and education has also been challenged by major discrepancies across the world. The average penetration rate of the internet is under 20 percent in Africa, against more than 80 percent in Europe and North America. The lack of infrastructure is also a huge concern, as poor access to care and education is creating a negative spiral of underdevelopment, generating low productivity and brain drain.
That’s why we need alternatives to inequality through boosting cross-border partnerships.
Above all, there is the Belt and Road Initiative which is one of the most ambitious projects of current times. It’s first of all a political game-changer serving a common objective: providing long term stability and shared development in more than 64 countries, from Asia to Europe and Africa through the Maritime Silk Road.
In a context of low rates and weak investment, the Belt and Road project is also an economic game changer. It is a chance for infrastructure expansion and modernization, as we witnessed in the construction of a freight rail network from Wuhan to Lyon, in France. It is also a chance for sustainable and profitable investment given the massive needs of financial resources. In Asia alone, the needs are estimated around USD26 trillion by 2030.
Last but not least, it is a unique chance for stronger financial cooperation. There is room for improving financial partnerships between Chinese institutions and the European Investment Bank as a huge driver of collective growth. For example, the Junker’s investment package of EUR630 billion could help develop infrastructures alongside the Sino-CEE Fund operating in Central and Eastern Europe.
Second, we need projects from Europe to Africa. I have long been advocating the creation of an EU-Africa partnership. In this way, the Union for the Mediterranean, created at the Paris Summit of 2008, was obviously a good start. But much remains to be done in cultural and economic areas around the Mediterranean -- development project in infrastructures, shipping partnerships and university cooperation should be improved from UK to South Africa.
In this framework, exemplary partnerships would also be possible with the New Silk Road. Connectivity would be made easier from Eastern to Western Africa, which is not included in the New Silk Road. Complementarity of Asia and Europe would also be a key asset, especially between France and China, which both have great cultural and economic experience in Africa.
But we also need new instruments to ensure a more stable and sustainable growth.
First of all, we need new tools for economic stability.
It’s true in financial regulation. In Europe, the creation of a banking union is mainly focused on improving reducing systemic risk in the financial industries. In China, the Central Bank has shown strong commitment in reducing shadow banking and internet finance.
It’s true in risk assessment and prevention. Today, we need new credit rating instruments that are both less market-focused and less concentrated, giving more importance to new criteria like environmental risk and social responsibility. For example, China and Europe could create public rating agencies inside the central banks, based on more transparency, diversity and sustainability.
It’s also true in monetary cooperation. Over recent years, I have been pushing for the creation of a G3 meeting, annually set up with the People’s Bank of China, the European Central Bank and the Federal Reserve. The G3 would aim at discussing the risk global currencies, like the yuan, the dollar and the euro, face, in order to prevent potential crises.
We must also develop new tools for development and climatic stability.
First, the internet economy can become the new driver of global connectivity and communication. I really do believe that digital economy can create a positive spiral of growth and development. It can expand education by creating new instruments of online learning. It can improve healthcare and resource protection through collecting and sharing data within smart cities. It can also build mutual understanding by opening new spaces for communication and dialogue.
Second, renewable energy must be set as priority sector along the New Silk Road. Today, China is the largest driver of renewable energy, contributing last year to 40 percent of the new green capacities globally. In this field, financial synergy could be achieved, for example through co-investment between the Silk Road Fund and the 10 billion innovation fund which France is currently opening.
Third, green finance is also opening the path to sustainable, innovative and cooperative growth. Europe has become a leader in the green economy, with France issuing in 2016 the first sovereign green bonds, worth over USD8 billion. The Climate Summit hosted in Paris next Tuesday will be a good opportunity to announce new financial projects.
Ladies and gentlemen, 2018 will be a year of major challenges.
It would be a decisive period for growth and development as we enter an age of systemic and cross-border risk.
But pessimism is not a response to economic threats. My conviction is that we can jointly tackle the issues of the century through better innovation and cooperation.
It is the aim of the Belt and Road Initiative that has become a major example of diplomacy projects based on long-term vision and global commitment.
Only through collective projects combining shared prosperity and common politics will we manage to build a more stable global economy.
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