The International Monetary Fund forecast global growth in 2022 at 4.4%, but these projections are being revised downwards as conflict and the fallout from sanctions ripple across global markets.
What are the headwinds and tailwinds facing the global economy and what mix of policies are needed in a new volatile context?
Kristalina Georgieva, Managing Director, International Monetary Fund
Jane Fraser, Chief Executive Officer, Citi
François Villeroy de Galhau, Governor, Central Bank of France
David M. Rubenstein, Co-Founder and Co-Chairman, The Carlyle Group
Moderator: Geoff Cutmore, Anchor, CNBC
Geoff Cutmore, Anchor, CNBC: A very warm welcome, everybody, to this World Economic Forum panel on the global outlook. My name is Geoff Cutmore. I work for CNBC and you’ll catch me Monday to Friday for 3 hours in the morning doing the Squawk Box programme. So hopefully after this panel is finished, if you haven’t already found me or CNBC, you will reach out and do so.
Good. So what I want to do here is start off this panel by engaging you, our audience before I start to ask questions of our panellists. And I want you to help me direct questions to our panel. And the question I have for you is, are we heading into recession or not? And what I’d like from you and let me just tell you, the room is quite dark, so most of our panellists won’t be able to identify you if you do put your hand up. So be reassured and be confident that you won’t necessarily be seen voting. But what I’d like to do is just, with a show of hands, ask the room, the brains trust here at the World Economic Forum, the people in the audience who are concerned or believe that we are heading into a recession. Could you please put your hand up?
Around half of you feel that a recession is very likely and a small number of you are confident that a soft landing can be achieved.
Okay. Just very roughly that feels like around half of the room to me. Nodding heads. Nodding heads. About half the room. Right. Okay. Let me ask you a different question. Who believes that the global economy will have a soft landing and that ultimately policymakers in our central banks and in our governments and heads of business will help the global economy achieve a soft landing? Who thinks that that is the most likely outcome? Please raise your hands. Okay. Well, this is not scientific in any sense of the word, but on a simple count of hands in the room, I would say that around half of you feel that a recession is very likely and a small number of you are confident that a soft landing can be achieved. So I think that gives us a very good sense of the mood in the room. And that, of course, helps me shape my questions to our panel.
And let me introduce our panel, because I’ve made them sit here and not say anything for a few moments. And I think it’s important that we bring them in because they are all very important people with very interesting connections to the global economy. So let me start with Kristalina Georgieva, the managing director of the IMF. Good to have you with us. Of course, you appear to have set the tone almost of this meeting by talking about the confluence of calamities that are facing the global economy right now. So hopefully we will address some of those potential calamities and we will address how policymakers can best negotiate them.
François Villeroy de Galhau, the governor of the Bank of France, a very warm welcome. You you’re also on the ECB council, of course. You said on Friday that our short term priority is fighting and mastering inflation. Events have overtaken us in a sense that Christine Lagarde today has made it very clear that the ECB is now embarking on a rate hiking cycle this year, and we may even see 50 basis points at a single meeting. We will see. I love the Gallic shrug so early on in the panel.
Jane Fraser is the CEO of Citi who forecast a brutal winter for markets. Not at the beginning of the year, not a month ago, back in October of 2021. So your crystal ball was working very well. I have to say, you also expressed caution about the Chinese economy coming off the boil. So that, again, was another very prescient call. And I’m now thinking about relocating my pension fund, given that she seems to be so accurate on what is likely to unfold in markets.
And David Rubenstein, co-founder and co-chair of Carlyle Group. Great to have you on the panel. You told CNBC back on the 5th of May, inflation has been a problem, but it should not cause a recession. And I think we can update that view because you were on CNBC earlier today and I think you reiterated pretty much the same point that you feel we can escape recession, as did President Biden when he was asked the same question. So you’re in esteemed company in Tokyo within the last 24 hours or so.
So, let me get on to some questions. The OECD has just trimmed first quarter GDP quarter on quarter to zero or negative for most of the G7 economies. So given the mood in the room here, Managing Director, are we actually already in a recession in some G7 economies? And how concerned should we be about that?
This 2022, it is going to be a tough year.
Kristalina Georgieva, Managing Director, International Monetary Fund: You scared the audience effectively. But I can tell you, you have not scared your panel. So my answer is going to be not ‘no’, not at this point. It doesn’t mean it is out of question. We have downgraded our projections for growth for this year in April, for 143 countries, this is 86% of global GDP. And since then, in the short period of time, a little bit like the weather here in Davos, the horizon has darkened.
Why has it darkened? Well, when we did our projections, the war was already ongoing. Now we see the consequences going far and fast. In addition to that, tightening of financial conditions, dollar appreciation and China slowing down. Jane’s prediction, unfortunately, has materialised. So we are looking down, this 2022, it is going to be a tough year.
The anxiety around access to food at a reasonable price globally is hitting the roof.
We have commodity price shock in many countries. And the particular shock I want to bring our attention to is food price shock. Over the last week, because of that sense that maybe the economy is getting into tougher waters, oil price went down. But food price continues to go up, up, up, up. Why? We can shrink the use of petrol when growth slows down, but we have to eat every day. And the anxiety around access to food at a reasonable price globally is hitting the roof. And I don’t want to be too negative at the start, but the climate crisis has gone nowhere, digital money has hit the little rough spots, we expected that and it happened.
Nevertheless, think of numbers: 3.6 is our prediction. That is a long way from 3.6 to global recession. What we may see is recession in some countries that are weak to begin with, they haven’t recovered from the COVID-induced crisis. They are highly dependent on imports from Russia of energy or imports of food, and they have somewhat weaker environment already. But we have not seen that yet.
Geoff Cutmore: So you’ve laid out, I think, very clearly for us, some of the ongoing challenges. David, why do you feel more confident that recession can be escaped, and is that only for the United States?
David Rubenstein, Co-Founder and Co-Chairman, The Carlyle Group: Well, when I worked in the White House under President Carter, the inflation adviser, Fred Kahn, said that he thought we were heading into a recession right before the 1980 presidential election. And President Carter called him into the Oval Office and said, look, I’m running for re-election. Don’t use the R-word. It scares people. So Fred Kahn said, What am I supposed to do? I’m an honest man. So he said, Just don’t use the R word. Subsequently, Fred Kohn said he thought we were heading into a banana, and he used the word banana because he realised reporters wouldn’t put a headline that said, Fred Kohn thinks we’re heading into a banana.
So I’m very reluctant to use the word recession. But let me just say that we’re we’re not in a banana yet, but I think the signs are not as favourable as I would like. Only because the war in Russia and Ukraine is not likely to end soon. If the war ended tomorrow. I think the economy would bounce back. But since it’s not likely to end tomorrow, I suspect that will be the precipitating factor, given all the food chain and energy problems that come about because of it. So I think I don’t want to say we’re in a banana, but I would say a banana may not be that far away from where we are today. Unless the war ends very quickly.
Geoff Cutmore: It’s such an important question. I think we should let every panellist have a go at this. Jane, how do you feel about the outlook from here?
Jane Fraser, Chief Executive Officer, Citi: Yeah, I think, David, to your point about the R-word, there are three R-words right now. It’s Russia, it’s recession, and it’s rates. And it depends where in the world which one is more prevalent. So in the States, it’s much more about rates because there’s more resiliency in the economy, in the labour market, in the consumer. The consumer is sitting there on $3.4 trillion of deposits – coming into COVID they were sitting on 1 trillion. So there’s some buffer there – to be seen if it’s used wisely or not, the jury will be out on that.
I think this is much more concerning for Europe that is right in the middle of the storms from supply chains, from energy crisis. And obviously, just the proximity to some of the atrocities that are occurring in Ukraine.
When you go elsewhere in the world, I’m just back from from being in Asia and in the Middle East. And it was wonderful to see those countries again in person. They are different than they were going into COVID. When they come out of COVID, they are stronger. They’re coming out of the lockdowns. There’s more sense of optimism there. And I think even China is seeing this as an event that’s occurring rather than a long term trend. They’ll no doubt have some packages that they’ll come to stimulate the economy.
Food, to the Managing Director’s point, is, I think, the big worry here, because that could be the wild card. When people are hungry around the world – and there’s going to be 1.5 billion hungry people without necessarily either the means nor the access to food, particularly in Africa, but not only, that is a problem.
Geoff Cutmore: We’ll come back to the policy response and how we can address that, because clearly there is going to be a difference in how people experience a dramatic economic slowdown. I just want it to be very clear, though, because you mentioned Europe in your answer. Are you pretty much convinced them that Europe will experience a recession?
Jane Fraser: Yes.
Geoff Cutmore: Let’s take this to the Bank of France, Governor.
Jane Fraser: And I hope I’m wrong.
Geoff Cutmore: Can I can I bring this to you, Governor, because and let me, if you don’t mind, put another little spin on this. Is the EU ultimately going to drive Europe into recession by insisting that it abandons Russian oil and gas at this stage? Or is there an alternative?
We all knew from day one that this war was bad economic news – less growth and more inflation. And this is a price we accepted together to pay to protect our values, to be at the side of Ukraine and democracy.
François Villeroy de Galhau, Governor, Central Bank of France: So to take a European view first, we all knew from day one that this war was bad economic news – less growth and more inflation. And this is a price we accepted together to pay to protect our values, to be at the side of Ukraine and democracy. It was worth probably paying this price.
We now know a bit more about the effects in Europe, about activity, and this is why I would disagree with Jane, at least so far. Activity is obviously less buoyant than at the end of last year. We had growth in the euro area of more than 5%, 7% in France. So it was really a record high. But it’s resilient. If you look at German IFO this morning, or at Banque de France monthly surveys, and the IMF forecast for the euro area this year was 2.7%, we’ll see where we are, but that’s still significantly positive. By the way, services are in better shape than industry, so it’s an opposite image if you compare to COVID.
So the main problem, at least in the short run, is inflation, without any doubt. And inflation in the euro area is not only higher, even it’s slightly less higher than in the U.S., 7.4%. But it’s also broader, and this is probably the main issue. Core inflation is 3.4%. And this is why we have to normalise monetary policy without any doubt. It’s what President Christine Lagarde said very clearly this morning. There is an increasing consensus in our Governing Council about the start of the journey. Let me say one word about our aim. At the end of the journey, at least in two years, ’24, we will bring inflation back towards 2%. And this is not only in all our forecast. Look at all forecasts, including from the IMF. But it’s our commitment.
I would play down the idea of a short-term trade-off between inflation and growth. In the short run, our priority is clearly fighting inflation, and we will do it.
And we will do it through normalisation of monetary policy and not tightening. I will perhaps elaborate on that. It’s a normalisation, so question of growth will come back. But I would play down the idea of a short-term trade-off between inflation and growth. In the short run, our priority is clearly, as you reminded, fighting inflation, and we will do it.
Geoff Cutmore: So, Governor, very clear, very clear answer. Can you be equally clear with this answer? Are rate hikes in July and August now a done deal?
François Villeroy de Galhau: In August we have no meeting, Geoff.
Geoff Cutmore: September? Well, you can have an emergency meeting at any time.
François Villeroy de Galhau: But do you want me to elaborate? Perhaps a general consideration. Attention is focusing very much on the short term. When will we precisely end net asset purchases? When will we have the first rate hike? All of this is important, but frankly, if you look at President Lagarde’s statement this morning, the deal is probably done because there is a growing consensus.
I think that the next steps of the journey are now more important. I made a speech two weeks ago about a possible road map going to a neutral rate and, yes, achieving 2% in ’24. I wouldn’t overfocus on what will precisely happen in July, September, etc., but we have a road map.
David Rubenstein: So I think central banks used to not tell people what they were going to do and they didn’t talk about it after they did it, you had to figure it out by figuring out what was going on in the market. Now, since Ben Bernanke in the United States and then Janet Yellen and Jay Powell, the Fed chairs have said it’s better to tell people what we’re going to do and explain what we did. And there’s a price to that. But the downside is, once you say what you’re going to do, if you don’t do it, you’ve got bigger problems.
So having said we’re going to have two consecutive 50 basis point increases at the next FOMC meetings, if we don’t do that, people are going to think that, A, we have no concern about inflation any longer, and that’s probably not realistic, or, they give a bigger increase than the 50 basis points, people are going to say, it’s a bigger problem than they thought before. So either way, it’s a difficult thing to do anything other than what you said. And so I think, what the Fed chairman said, it’s 50 basis points the next two meetings. I think it’d be unlikely he would change that position.
Geoff Cutmore: 2021, we were told that this was transitory inflation. 2022, the beginning of, we were told this is transitory inflation. Effectively, the causes of that inflation were misdiagnosed. And now we’re told that the right medicine is to dramatically hike interest rates, to choke off demand. We were told this is a supply side problem. How do we know that the right medicine is actually to give the European economy two interest rate hikes – so far – July and September, and perhaps the two that we’re talking about in the United States?
I use the word [monetary policy] ‘normalisation’ for a very simple reason. We are still releasing the accelerator. We had exceptionally accommodative monetary policy […] it remains accommodative. So we are releasing the accelerator.
François Villeroy de Galhau: Two quick reactions. First, you speak of dramatic rate hikes, etc.. This is not the kind of words we saw in Christine Lagarde statement or in my expressions. I use the word ‘normalisation’ for a very simple reason. We are still releasing the accelerator. We had exceptionally accommodative monetary policy with asset purchases, negative interest rates even in our cases. And as far as we are not at a neutral rate, it remains accommodative. So we are releasing the accelerator.
We will see if later, after the neutral rate, we have to press to press the brake. And second, you are again with this idea of 50 basis points hike, etc. Frankly, we are not there. What is important is to see this journey, and it’s not a dramatic change in the language. It’s a change in the situation. There was a supply side shock last year, you are right. But that’s why I mentioned that core inflation is increasing.
And if you allow me a technical remark, in our forward guidance in the ECB, we have an important condition on underlying inflation, the third one. I think it’s more and more important because if it is about core inflation, then monetary policy is relevant again.
Geoff Cutmore: With global debt higher than it was in 2008. Inevitably, markets are going to take this kind of messaging badly.
David Rubenstein: On inflation, I just wanted to add, it’s probably a mistake for all of us to comment on these things and think about these things, to have thought that you could stimulate the US economy as much as we did because of COVID and stimulate the European economy as much as they did because of COVID, and to think that there wouldn’t be inflation coming about as a result. Plus, the very loose policies the Federal Reserve and other European central banks had, in terms of buying securities and so forth. So that was probably oversight to think that that was going to produce inflation. And then when the war came in Ukraine, that compounded the whole thing.
It takes a lot longer to get inflation out of the system than get it into the system. It’s taken a couple of years to get it in. It’s going to take a while to get it out.
What we’ve learnt before, when inflation gets into the system, it takes a while to get in, but it takes a lot longer to get it out. And that’s what Paul Volcker always used to say: It takes a lot longer to get inflation out of the system than get it into the system. It’s taken a couple of years to get it in. It’s going to take a while to get it out.
Jane Fraser: I think the reality is that when you’re asking any of us what what’s the rest of the year going to be like, we don’t know. There’s certain uncertainties, I think, that will get clearer around supply chains. So if all goes well, we’re starting to see the supply of commodities beginning to outstrip demand because, to the Managing Director’s point, you have an ability to reduce down demand somewhat on the commodity front, excluding food. So I think we’re getting quite optimistic that there is a path forward from the chaos we’ve been seeing that the supply and demand imbalances on commodities will ease up. That will help.
We’re getting quite optimistic that there is a path forward from the chaos we’ve been seeing, that the supply and demand imbalances on commodities will ease up. That will help. But on all of the geopolitical and the other fronts, we just don’t know.
But on all of the geopolitical and the other fronts, we just don’t know. And so what we’re asking of our central bankers is a very difficult thing, which is to take actions now without quite knowing where they’ll overshoot or undershoot. And I think we’ve got to have some patience here and really have our eyes open and understanding what happens to consumer behaviour, what happens to confidence, what happens in the corporate sector, and take this step by step.
Geoff Cutmore: Well, Kristalina, I mean, one of the – sorry, Managing Director – one of the problems with this story is that we know that in part, the supply chain challenges have now become incredibly politicised. You know, the focus very much for companies all around the world is looking at the manufacturing hub of China and China’s response to COVID. And we’ve talked a lot about that, you and I, in recent months. And you’ve given very frank views about how you think that living alongside COVID has to be the right response. But here today, we now have President Biden ratcheting up the tension again with China over the issue of Taiwan. This will only increasingly politicise the supply chain story and encourage disinvestment of Chinese businesses in America and American businesses from China. How does this help with inflation?
Kristalina Georgieva: Let’s go back in 2021. We were all overly optimistic that having vaccines is going to eliminate lockdowns. And at that point, we didn’t think that supply chain interruptions are going to play a major role. Now we know better. Supply chain interruptions because of COVID today are a major factor for the Chinese economy, for the Asian economies, for the world.
The second thing we learnt with the war is that there could be unthinkable shock that adds fuel to the inflation. And that is a broader lesson. We do live in a more shock-prone world. What is the conclusion if you are a business person? Forget about politicising, not politicising. You would say: I have to change my view of economic efficiency to include includes supply chain predictability. Security of supplies clearly cannot any more be left on the theme of least cost solution. And therefore, we all have to think of the years to come, whether this change in our concept of economic efficiency that includes supply security may be a more permanent factor pushing prices up. And if it is, then, since you say I am very frank, I will be very frank, then we all have to think collectively whether we can afford the luxury of fragmenting our economies even further.
What is going on in this more shock-prone world should press us to seek ways in which we work more together but […] we have to be less obsessed with globalising profit and more with localising benefits for communities and countries.
What is going on in this more shock-prone world should press us to seek ways in which we work more together. But we draw a lesson, and I’m sure Jane would note this lesson from experience, that if we want our people to support us working together, we have to be less obsessed with globalising profit and more with localising benefits for communities and countries.
So to put a positive note here, we did get a tax deal – 137 countries agreeing that there has to be a fair distribution of profits of global companies, some for the country they’re generated in, some for the countries they come from. And there should be a minimal tax that everybody subscribes to. In other words, more fairness in the way we split benefits.
And then think of how, as a world, we ought to be striving for our children, for our great grandchildren, to enjoy benefits of higher standard of living. If we fragment the world, we are all going to be poorer.
And one point I wanted, I was raising my hand, Jane talked about the fact that different countries are in a very different place, and that makes me go back to recession. Today, there are two countries in deep recession: Ukraine at least 35, maybe 40% contraction, and Russia vis-a-vis our October projection, 11.5% contraction. And they are countries that are so severely hit by spill-over of events, like Sri Lanka or Lebanon or Egypt, where the pain is felt there in a more difficult place. But you go to the United States, in the United States, no ‘bananas’.
Geoff Cutmore: David, you want to pick up?
David Rubenstein: Two points I’d like to add. One, all recessions are not equal. The definition of a recession varies. And some people would say it’s just two consecutive quarters of negative growth. If you have a two consecutive quarters of negative growth, it can be a mild recession. And recessions aren’t the end of the earth. They typically happen every seven years or so. So it shouldn’t be a great cause for alarm if it’s a mild recession.
Second point is that why when all the stimulus was going into the economy, did people not worry about inflation? To some extent the central banks’ mission has changed. When central banks were set up, their main mission was stable currency, little inflation. In recent years, decades, the mission has been changed a bit – it’s worry about unemployment. And the concern about unemployment has gone to make central banks more worried about things like rising interest rates because that will produce higher unemployment and that’s a bigger concern. That was not a concern 30 or 40 years ago when they were really only worried about currency and currency stability. So that’s a big factor.
When we had the COVID problem, we could have increased interest rates and increased unemployment. But the Fed, the Federal Reserve, recognised that its mission was to kind of keep unemployment low too.
Geoff Cutmore: Let me come back at you the. What do you make of the capital market reaction that we’ve had to the actions that the central bank has taken so far? It seems to me that there is, as we near this correction territory for the S&P, there is an argument here that the markets have overreacted. What’s your impression?
David Rubenstein: Remember when Ben Bernanke once said maybe at some point we’ll slow down quantitative easing, there was a so-called taper tantrum, and all of a sudden the market acted like they can’t believe he was saying that. This time we have the Federal Reserve has been saying very carefully, here’s what we’re going to do, we’re going to tell you in advance, no surprises, no tantrums, please. And the markets overreacted. Why? Because markets are nervous and markets like to overreact. So I think the markets have overreacted to what the Fed is doing. I can’t control the markets, but I think they have overreacted a bit.
Kristalina Georgieva: Also being complacent…
Geoff Cutmore: Hang on, I’ll bring you in in just a second. I know everybody wants to get in on this. But David, let me just press you for a moment, because markets have overreacted, and we think about the markets as the S&P and the Dow. If you look at the technology stocks, some of them are down over 70-80%. It looks like 2000s tech crash all over again for some companies in that space. Is this not 2.0?
David Rubenstein: In the crash that occurred in 1999, 2000, 2001. you had internet companies with no revenues, obviously no earnings, they had nothing but a business plan in some cases. And those companies shouldn’t have gone public, let alone maybe been getting any capital. Now you’ve got a company like Netflix, which has 250 million subscribers. It may not have been worth what it was worth than the market a few months ago, but it’s certainly worth probably more, in my view, than it’s currently traded for. Markets overreact, and when they overreact, that’s a chance for good investors to go in and say there’s an overreaction and buy at the bottom.
Geoff Cutmore: For every Netflix there’s a Peloton or another business. I’ll push it back at you because there are a lot of people who look at the the way that Wall Street has behaved over recent years, the whole SPAC phenomena. The way that the private equity community have thrown money at moonshot ideas – has this been an irresponsible phase, and is this part of the reason why we’re now going to have to take the pain?
David Rubenstein: Well, I’m not defending Wall Street and everything that was done in the SPAC market and all the valuations put on all the companies. But some of the companies that were highly valued and people made fun of for a while, like Amazon. Take Amazon. People made fun of it in 1999 and 2000, said it really shouldn’t exist and obviously turned out to be a great company. A lot of these companies whose values have gone down now recently are still great companies and maybe their value has overreacted by the market. I think there’s some great buys there. I don’t think it’s all of a case of 1999 and 2000. Now SPACs is a different situation, that may be a phenomenon that might not come back again.
Jane Fraser: Sitting on a bank that sees a lot of these flows of activity globally, I think one of our observations in the US is it’s actually been remarkably orderly amongst the investors. They have not sprinted to the door the way they have with the world financial crisis when that crash happened and where we were in 2020. We have seen a fairly systematic take down and change in asset allocation. The fixed income markets, when we look at issuance, have been incredibly constructive. We haven’t seen problems of companies or governments indeed being able to access the markets, and debt issuance has been identical to 2019 as it has been this year.
So I think it’s important not to confuse order and orderly shifts and the changes that David’s talking about with some necessary corrections that occur. And from our perspective, frankly, what Chairman Powell is wanting to have happen, which is an adjustment in the behaviour, and in the States it’s not only that the inflation but is adjustment in risk assets. We’re seeing that occurring in the equity market, the credit market. There isn’t so much strain yet. We’ve seen some in commodities. We’ve seen a bit in high yield. But this hasn’t been the catastrophe it could have been.
Geoff Cutmore: Governor.
François Villeroy de Galhau: First, I want to reassure David about Central Banks’ mission. In our case, ECB at least, it remains very simple. We have a single primary mandate, price stability, full stop.
David Rubenstein: In the United States it’s changed.
François Villeroy de Galhau: I said at least from the ECB standpoint. But can I come back to what Kristalina said about the supply side? Because I think it’s extremely important. To put it in a nutshell: there are two significant changes this year. First, inflation is back, and this is why we will normalise monetary policy and we will deliver.
And second, we are not allowed to forget about growth, but the policies are not the same. If you look at the last 10 years, it was mainly on the demand side, especially during COVID, thanks to accommodative monetary policy and, yes, fiscal policy. These two support policies will have less space for obvious reasons. And now growth is linked with supply side policies, be it trade and, yes, rules and avoid fragmentation if possible, education, investment, climate change, etc. And we should not forget this part of the agenda. Inflation is priority number one short term. Supply side is a priority for the medium term.
Can I introduce a last reflection on that, Geoff? Growth remains a positive word probably for most of us in this audience. But if we look at out to our fellow citizens, unfortunately, it’s not the case. If I would oversimplify: for our older fellow citizens, growth is over. And for our younger citizens, growth is dangerous because it’s a threat to climate, etc.
So we must win this battle and show – and this was our discussion in the G7 last week with Kristalina and others – we must show that growth is still possible thanks to modern supply side policies, and it is a condition to have fairness and climate transition. But this is a battle which is absolutely key.
David Rubenstein: We haven’t mentioned globalisation and globalisation has been a deflationary situation. It really helped keep inflation down. Now because people are challenging globalisation and because supply chains are being brought back into various countries it’s probably inflationary, and that’s one of the reasons we have more inflation now because people are worried about globalisation for other strategic reasons.
Geoff Cutmore: We’ll come back to this globalisation story because I’ve got another angle around the financial aspect to this. But Governor, I just wanted to come back to you because I have a quote. You responded to a view expressed, I think, about the way that COVID money was handed out and the approach that President Macron’s government took. Many people see debt as limitless and cost free. You said such a seductive double illusion is our greatest danger today. And yet we hear governments now talking about a fiscal response to the unequal pain that is being felt by inflation. We’ve just had overnight from the States, I think a $40 billion spending plan put forward. The Commission is now talking about suspending the fiscal rules until 2023. The Commission is talking about raising money in the debt markets for the green transition, the energy transition. Who knows where that money is going to end up? They raised money in the debt markets to address some of the pandemic impact. It seems to me that no one is listening to your words here, that governments feel that they can continue to spend and raise money in the debt markets even as interest rates are rising. Something’s going to break, isn’t it?
François Villeroy de Galhau: To put it in a nutshell, because it was a long and sophisticated question, but these were exceptional circumstances, COVID, which required exceptional answers. So I supported in France and in all our countries, Kristalina, the so-called whatever it takes. But the illusion that it will last forever is very dangerous. Two years ago, the debt had almost no cost because we had zero or even negative interest rates, and no limits because everybody was borrowing. But now that has a cost everywhere, in the US, in Europe, it has a positive cost.
If you look at the ten year US at 3%, if you look at France it’s 1.6. So it’s a dramatic change. And secondly, it has limits because it cannot be exceptional circumstances forever. So this is why we should care about sustainability. And I believe that we can find other ways to to finance these supply changes Kristalina mentioned, associating also private resourcing and funding. In our case in Europe in the so-called capital markets union. So not everybody should rely on fiscal policy.
Geoff Cutmore: I mean, you know, unfortunately, it always seems to be an exceptional circumstance, doesn’t it, when governments raise money to address problems in the economy. David, very quickly, and I want to bring the Managing Director in because she’s waited a long time to respond.
We’re spending 7-10% of our budget in the federal government on interest. It’s going to rise to the teens and higher than that. And so that’s a big problem, which I think is a bigger economic problem in the future than almost anything we’ve talked about.
David Rubenstein: You raise a very good point on debt, which we hadn’t talked about. The United States has now $31 trillion of debt, 31 trillion, about 129% of GDP. The only Western European country with higher GDP ratio is Italy. So we have a very high debt ratio. And the truth is, we’ve been paying this debt for a long time with very low interest. As interest rates rise, it’s going to eat up more and more of the budget. Right now, we’re spending 7-10% of our budget in the federal government on interest. It’s going to rise to the teens and higher than that. And so that’s a big problem, which I think is a bigger economic problem in the future than almost anything we’ve talked about.
Geoff Cutmore: Managing Director, let me come to you because I want to ask a slightly different question, but it does relate to everything we’ve talked about. The World Economic Forum’s own economists survey threw up an incredible statistic.
I think of the 50 economists that they had in this survey, 90% of those economists expect average real wages to fall across low income economies. Now back to this question of the appropriate policy response, how do you protect those people without worsening inflation, but guaranteeing they have access to food, to the security they need to live a good life?
Kristalina Georgieva: From the very beginning of the pandemic we have been ringing the alarm bell that there is a dangerous divergence in economic fortunes between advanced economies, middle income countries, low income countries. Remember the statistics: advanced economies poured 28% equivalent of GDP in support for their households and their businesses. Middle income countries, 6%. Low income countries, 2%, of a tiny GDP. This is first time in the last decades when poor countries, rather than catching up with those better off, are falling further behind. Why should we all in this room worry about it? Because it breeds instability in these countries. What can be done? You’re asking the right question, Geoff. What can be done is first for richer countries to stick to their pledges to support low income countries.
Two: for institutions like mine, to, in relative terms, step up support for those who most need it. Last year, we did $650 billion new allocation of special drawing rights. This year, we are doing for the first time a massive transfer of special drawing rights from countries like France that gets it but has a great central bank and a policy a very sound policy. They don’t need this so much. So France committed 20%, other countries followed. We are now moving this money to be able to support exactly what you’re flagging – the tragedy of poor countries not by fault of their own, but by exogenous shocks like COVID and now the war, to be able to sustain these shocks and secure, you know, the livelihoods, the lives of their people.
Globalisation has served the world well, except that we made a big error to pretend that it has worked equally well for everybody everywhere. It did not.
I would add a third point that is so critical for our conversation. We must improve the way we cooperate, but not throw the baby out with the bathwater. Globalisation has served the world well, except that we made a big error to pretend that it has worked equally well for everybody everywhere. It did not. So concentrate on fixing what needs fixing so these countries can have a chance to be part of global value chains, to offer their people better opportunities. And this is why we are here in Davos to do exactly that.
Geoff Cutmore: Jane, I just wanted to come back because what David, in a way, implies with this hike in interest rates is there’s going to be an even more intense competition for global capital. But I think we’re now beginning to see the start of real the globalisation of the financial economy, because the sanctions against Russia have just told anybody that has dollar reserves they can be seized at any time. And your access to the SWIFT system for payment settlement can be closed off at any time. We’ve had a salutary lesson on how easy it is to cancel countries in in monetary terms.
Now, I don’t want to pick on you, but I know that since you’ve been at Citi, you’ve now talked about exiting 13 markets. That’s the kind of message that that sends, that’s the kind of act that sends a message that increasingly you don’t see a value in being in some of these international markets as we see this de-globalisation of the financial economy. So one, the competition for capital is going to increase, which is going to encourage countries to put up interest rates that can’t afford them. And two, companies like yours that are relocating out of those economies are taking your business away from them.
Jane Fraser: So we’re not exiting 13 countries.
Geoff Cutmore: So I read I read it wrong in the report.
Jane Fraser: We open our banks’ doors in 97 countries every day. We operate 160 and we intend to stay that way.
Geoff Cutmore: You are you are not selling the retail operations in Mexico, in China…?
Jane Fraser: I’m exiting a consumer business line to focus on the institutional clients that we serve in those countries precisely because we see such growth in globalisation. Our bank moves $4 trillion of volume a day in foreign exchange, cash management and trade. That number is going to be 10 trillion before we know it. It requires significant investment. So I think like many industries and many different companies around the world, we all have to invest in digitisation and scaling up and be able to operate with the scale and speed of a digital world.
To bring that back to globalisation, what are the threats and what are the opportunities therefore from what we’re seeing? Clearly there are threats of fragmentation, splintering. There’s been some weaponization of not just financial services through sanctions, but trade flows and other pieces. So it’s changing the nature of globalisation.
I think one of the critical pieces is what do we need to solve to tackle exactly what we’re all talking about here? And it picks up a bit of what David said. It’s the technological advances that will enable us to move supply chain resilience. It takes someone 5-10 years to move supply chains dominated by China to other parts of the world and build this out. These are problems are going to take long. It’s a Herculean task to get the global economy to greenify. It’s a complete overhaul of the global economy that’s required. These are big challenges. They’re sources of important resilience for globalisation going on and we’re all going to have to be institutions with a brain and institutions with a soul and operating both of those together to solve these problems. It can be done, but we’ve got to work on this on long term problem solving. And it’s exactly what David said.
David Rubenstein: Your question pointed out a very good point. There are three financial consequences, leaving aside inflation, to what’s happened in Russia. One is the banking system – it’s clear you can shut people out of the banking system. People hadn’t realised you could do that so easily.
Second is the confiscation you could argue or freezing of somebody’s assets. Nobody had ever thought you could take the dollars in somebody’s farm reserve account and freeze them. And that’s a big issue that the Chinese are obviously going to have to think about because they have $3.2 trillion in foreign reserves. And they’re probably wondering, could this happen to us?
And the third issue is the centrality of the dollar. The dollar is still almighty dollar, while people say another reserve currency might come along, it’s going to be a long time before there’s another reserve currency. But people are worried that the dollar is now so powerful and so important that other countries are going to say, what are we going to do about this?
Geoff Cutmore: Well, Governor, the intriguing question really, that I don’t suppose you’ll answer, but I will ask you, because you have talked about the value of the euro, is did the euro just get too weak to the dollar and that’s why the ECB is responding? Because the euro is now at 2017 levels against the greenback and that is importing inflation into the euro zone. Are you responding to the euro?
François Villeroy de Galhau: I will try to answer your question. No, no, Geoff, we have no exchange rate target. Obviously we have an inflation target. But exchange rate matters and I repeat it here, because imported inflation can put us away from our target. But our monetary policy is not targeted for exchange rate purposes.
Can I add one thing on globalisation? Because there is a risk of de-globalisation, of fragmentation. We should be careful about that. I agree with Kristalina. Obviously there should be common rules, common values. But can I plead that at least in payments, we shouldn’t have a fragmented world? Because if, David, if it’s a fourth financial consequence, you didn’t quote, it would be a catastrophe, including for diversification of flows, as the one you mentioned. We could have geopolitical fragmentation in payments. We could have also private fragmentation. By the way, this could be one of the very few good news over the last weeks or months, that we said clearly in the G7 that we appealed for a quick global, strong regulation of crypto assets worldwide. If we can take this opportunity, we will protect investors and we will preserve the world from an unnecessary fragmentation.
Geoff Cutmore: Christine Lagarde said they’re worth nothing. Why are we regulating an asset class that has no value?
There are some countries like China which intend to prohibit crypto assets. I think it’s more innovative and more innovation-friendly to say we regulate them.
François Villeroy de Galhau: Because there are several investors around the world, including many young people who have lost much in recent months. And the illusion and frankly, it was an illusion, that you can have an investment with a high reward and low risk. It should be regulated, explained. There are also anti-money laundering issues.
There are some countries like China which intend to prohibit crypto assets. I think it’s more innovative and more innovation friendly to say we regulate them. But it’s an emergency question now. And again, we said it last week in the G7. I strongly hope we will have this regulation in Europe this year. We can have it in the US and elsewhere. We will have done our job.
Geoff Cutmore: Managing Director, I want to come to you on this, but David, very quickly, 19,000 cryptocurrencies, are any of them worth anything?
David Rubenstein: Well, crypto, the younger generation says the older generation has devalued the the dollar or the value of the currency, so maybe something else isn’t so bad. Secondly, if they put a small percentage of their net worth in, it’s not likely to bankrupt them. But the most important thing that’s coming out of this, I think, is this: whether crypto is worth X or Y or Z, to a lot of people, doesn’t make a difference. The government can’t get it and figure out what you have. So a lot of wealthy people who want to hide their assets after the Russian situation will say, all right, I’ll put 5% or 10% in some basket of cryptocurrencies. The government won’t know what I have. They can’t get it, and I can always get access to it. So I think people are not going to be dismissing these cryptocurrencies because it can be hidden from the government and that’s what people want to do in some cases.
Geoff Cutmore: Since you brought that up and the Managing Director mentioned the agreement on a global tax deal, if the Republicans win in the midterms, is that tax deal dead?
David Rubenstein: Well, whether they win or they don’t, I think the tax deal isn’t going to happen. Global tax deals always sound great, but getting them implemented is very, very difficult because somebody always kind of breaks the system. So I’m not sure even if the Democrats were to win the House, all of a sudden, the global tax system that we’ve talked about will come into being. I think it has some good sense, but getting a global tax system is one of the hardest things to do in the world. And getting all these countries to agree on a certain minimum rate, I think it’s going to be very difficult to do.
Geoff Cutmore: Managing Director, you can come in on any of these topics.
Kristalina Georgieva: On this one. Of course, it is very difficult. This is why for a whole decade we would be in meetings, Francois and me, and there would be discussion about a tax deal and I frankly would switch off because I know nothing is going to come out of it. But now there is a renewed sense that there has to be more fairness and that taxation matters. And if we are not able to fix it, then we would be all poorer because we would be more fragmented. And that gives a bit of a chance for a tax deal. Maybe it would be somewhat modified. Maybe you’re right, David, and nothing is going to happen. But in my lifetime, this is the best moment we have had. And it is on the basis of wanting to have a world economy that works better for the majority of countries and people, not just for the few.
David Rubenstein: It’s a good thing, I applaud people that worked on it, but my experience is that what motivates humans and all beings species is one, staying alive, eating, shelter, reproduction, and tax avoidance. And tax avoidance is one of the great motivators of human life. And I just worry that it won’t be able to be implemented so well.
Kristalina Georgieva: Look, we can talk about that all night long, but we have three minutes. Adam Smith, going back to the father of the market economy, what did he say? What do we need for a country from from a mess to turn into a prosperous country? We need peace, low taxes and rule of law. So I’m all for low taxes, but I’m against income from poor countries being sucked into rich countries, leaving the problem you asked me about unaddressed. And can I say something about…
Geoff Cutmore: We can go a little bit longer, I am told.
Kristalina Georgieva: The the one big responsibility for all of us is to actually explain to people what is what: what is central bank, digital currency, what is stablecoin, what is the differentiation between real stablecoins and non-stable stablecoins and what is crypto? We haven’t done our job. When we look at stablecoins, this is the area where the big mess happened. If a stablecoin is backed with assets 1 to 1, it is stable. When it is not backed with assets, but it is promised to deliver 20% return it’s a pyramid. What happens to a pyramid? Eventually they fall to pieces. And that is where regulation, Christine is talking about this segment, but regulating the stablecoins, ensuring interoperability of CBDCs [Central Bank Digital Currency], and recognising that bitcoin may be called coin, but it’s not money. All of this we need to work on.
Geoff Cutmore: Governor, very quickly on that.
François Villeroy de Galhau: First, I agree 150% with Kristalina. By the way, you have an excellent panel at 6pm CBDCs, so don’t miss it. And no, I only wanted to bring good news, hopefully on this tax agreement. We could have good news on the European side. And believe me, having unanimity of EU 27 is not that obvious. But we could have good news still in June and then the good news might cross the Atlantic. And I think there is a sense of common responsibility.
What is at stake with this crypto regulation, with taxation? It’s not bureaucracy, it’s not red tape. It’s giving our fellow citizens the feeling that globalisation can be fair. And if we miss these two opportunities, they are examples but very good examples, if we miss these two opportunities, we will have missed something much more dramatic. Because here in Davos, in this room, we are in favour of globalisation, but we must show that it can be fair, green and bring more social justice. So let us take the opportunity. It’s a burning political question.
Geoff Cutmore: Jane, you wanted to come in?
Jane Fraser: If you look at what’s happening in the world, we’re unbundling from what was the old institutions of the world financial order and we’re now re-bundling around new digital architectures that are largely born digital. There’s a disconnect between the two. I think to the point we talked on crypto or we’re talking on all the different dimensions in the world, the imperative is that we bring with that the safeguards, the independence of institutions and some of the software to make sure that that new system around these digital architectures does fulfil the promise and the opportunity they can afford for inclusion, tackling the countries that are having challenges here, but it’s going to require a lot of brainpower and thought rather than just economic opportunism to make sure they work. So we love the technology. Not sure about some of the crypto, as an example.
Geoff Cutmore: It says time out on the board. But I’m going to grab a couple of minutes just to wrap up because it’s always better to finish these panels on a generally positive note, I find, and we’ve talked about a lot of the challenges here and that confluence of potential calamities that we could be facing. So maybe if I could just leave each of you with the opportunity to say in a few moments, what is the most positive thing that policymakers could do to make sure we have an easier ride going forward than perhaps some some of the messages from the audience have suggested we will have.
Over the last 25 years we’ve had at least three crises that are worse than this. The bubble burst of the early part of this century, the COVID problem, and the Great Recession, they were all far worse than what we face right now.
David Rubenstein: I would say over the last 25 years we’ve had at least three crises that are worse than this. The bubble burst of the early part of this century, the COVID problem and the Great Recession, they were all far worse than what we face right now. And I think the people responsible in government for the economies recognise the challenge we have. People are on top of it and I don’t think it’s going to be the crisis that we’ve experienced in the last 25 years in any of those three instances. It’ll be a mild banana if there’s a banana.
Geoff Cutmore: Jane.
Jane Fraser: Build long term resilience and thinking in the longer term. Let’s get government policies for climate change in the framework we need in place for longer term, the same for health care for the next pandemic, and the same for the economic resilience that we need and the social resilience. We need some more long term policies, long term planning here.
Geoff Cutmore: Governor.
François Villeroy de Galhau: My positive message would be that democracies are not that bad. We had an impressive proof – we reacted together stronger, quicker and more united than expected to the war. And look at what happened to non-democracies. We have painful debates, divisions, but they didn’t avoid very heavy mistakes. Broadly, China for its COVID strategy and Russia for its Ukraine invasion. It’s a good lesson.
Geoff Cutmore: Managing Director.
Kristalina Georgieva: The overlaying crises – crisis Upon a crisis – they have taught us a very important lesson. Think of the unthinkable. Pandemic stopping the economy – unthinkable. War in Europe, until it happened, unthinkable. How many more unthinkables are going to come? And the positive is that now that we know, then this concept of resilience, resilient people, educated, healthy, with social protection under their feet; resilient planet, one that we care about to pass to the next generation in good shape; and resilient economy that is more than just the banking sector – labour conditions, how we work, all this matters. And I honestly think very positively about us becoming more mature and therefore more able to deal. Only one problem for me, David, I would never think of banana the same way as I did before.
Geoff Cutmore: Well, on that very positive note, let me wrap up the panel. Our panellists have been terrific. You as an audience have been terrific. Please thank them for their contributions here. And thank you, everybody that’s watching at home or in your office. I hope you’ve enjoyed this event from the World Economic Forum in Davos.
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