Nobel prize-winning economist Sir Christopher Pissarides delivered the pre-dinner speech at the recent portfolio institutional investment awards. Here he talks to Chris Panteli about the future of the European Union, immigration and how technology is affecting labour markets.
“It just doesn’t make sense for the north and south to have the same currency; they don’t have the same monetary policy because their needs are so different.”
Sir Christopher Pissarides
What’s your view of the management of the financial crisis in Europe? In the end German views dominated. The French withdrew from being the core of the decision-making process and went for too much fiscal austerity and too much of what was good for Germany given the current state of the economy. The other countries had to conform and if they had extreme difficulty in conforming, they were given aid to help them survive the crisis. The problem with that however is the decision-making was not done on a firm institutional basis that everyone could agree on, so when a new crisis comes along like the immigration crisis, each country is looking more at its own interests. The union then becomes ineffective as a decision-making unit as a whole. Countries will feel they have allies, but they don’t want to sacrifice too much intheir own country. When I was at the World Economic Forum recently the typical statements I heard were people saying they would like to do things for Greece or the immigrants, but their voters won’t let them. So the ultimate constraint is that we have national elections and politicians care about their own countries much more than they do about Europe.
Do you feel there are now two Europes on the continent? Very crudely, the north and the south facing very different situations? I do. It just doesn’t make sense for the north and south to have the same currency; they don’t have the same monetary policy as their needs are just so different.And they are almost evenly split: Germany Finland, Austria, Netherlands and possibly Slovakia and the Baltic countries in the north and then Spain Portugal, Italy, Greece and France belonging to the southern side. There could be benefits from free trade between them and even free movement of people and capital – a common market – but whether they should have the same monetary policy is a different issue.Even fiscal policy would never be common and you cannot really have one without the other. Once you have common monetary policy you then have imbalances. They can be countered by migration of labour, but that’s not something that would be acceptable in Europe. Or there would have to be a massive transfer of funds from one country to another. That is not acceptable either; in fact the Maastricht Treaty was supposed to make them illegal, though there are some going through the European Stability Mechanism (ESM).Ultimately, imbalances are corrected by trying to get domestic prices and wages to move in ways exchange rates would move if they were free to fluctuate. So if your economy required a depreciation of your currency but you can’t do so as you don’t have your own currency, you could in theory bring this about by reducing your wage costs and your prices. It’s one thing for the governor of your central bank to say “we want to depreciate and it can be done instantly”, but it’s another to say you want to reduce your labour costs. You have employers and unions who won’t accept that wages are 10% lower; you have to go through recession, like Europe has already.
Is this likely to happen? A united Europe has always been such a grand dream. It would be difficult politically, but how long will countries put up with this and keep going on? It only takes one shock and if the UK leaves the EU it would create a shock. But most major politicians in the UK and Europe seem to favour a ‘no’ vote.
What do you think of Obama getting involved? Saying UK would be at the back of the queue for trade deals. I find it hard to believe. Obviously, America wants to see a united Europe doing exactly what America wants, or else it will have to deal with everyone separately, and that would be a headache. Turkey is already a headache for them and I bet they wish Turkey was in the EU already. For him to come out so openly on one side of the campaign is a little bit surprising to say the least. Although I am in favour of staying in, it does smack of interfering in domestic politics.
So you’re in favour of an in vote. Can you talk me through what that means? It is more about the uncertainty a no vote would create, not just for Europe, but especially the UK. The entire civil service would be employed for five or six years redrafting regulations from the last 40 years which have been geared to EU requirements and treaties. This will require the renegotiation of all the agreements, such as trade, migration, etc.Movement of people will be difficult and that will be damaging for the economy. The biggest effect however would be the loss of foreign direct investment, which is a driver for new technology and if you do not get new technology happening here, you won’t get the productivity growth you would have had in the EU. The Treasury and the London School of Economics
(where Pissarides teaches, though he was not involved in the research) came up with substantial differences, but many said there would be little difference. I am concerned about the transitional phase and, as my colleagues said, why go through that to get to another similar state? My colleagues (LSE report authors, Swati Dhingra and Thomas Sampson) were asked about the financial services sector in particular and they said it would not maintain its position. They argued that would be a good thing for the economy though, as it would mean the best minds from British universities would not go straight into financial services and end up selling derivatives, but instead would put their minds to research and new technology.
What about the rest of the eurozone? The Treasury thinks that if UK is in then important decisions won’t be made in favour of the members of the eurozone, but the EU as a whole. If the UK leaves however, they think decisions will be taken with regard to the whole of the membership. Otherwise the eurozone will be the dominant influence and that would not be good for the Scandinavians. It wouldn’t surprise me if Sweden said why don’t we do something similar to Norway or Denmark?So Europe is more likely to become the eurozone and that’s not a good thing as you don’t want to have an economy where all the new treaties between members are driven by monetary policy. Monetary policy is there to look after inflation, but that’s not what is happening in the eurozone.Then it depends on how negotiations go with UK. If they go well and are flexible, maybe countries like Greece will ask why they should go through a long recession if they see UK flourishing outside and it could encourage more countries to consider their own referendum.
Greece flirted with the idea. What other countries might reconsider? Apart from the Scandinavians, who might feel they were being left out, there aren’t really any countries that are in such deep trouble they might want to come out. But anything could happen in Italy or Portugal and then what happens there? It’s more about future crises and what might happen if they were forced to follow policies they didn’t like.
What do the high levels of unemployment mean for the EU and immigration? There are things you can do about unemployment. (Angela) Merkel and (Francois) Hollande tried, but they didn’t put up enough money and made it too hard for nations to claim the money to create jobs. If you leave it to the private economy to do without government aid, the only thing to help is an expanding economy, growing 2%+, so the problem is more of a Keynesian macro problem; it’s the fiscal strain not the structural unemployment, a straightforward demand deficient unemployment.
Can asset managers/investors play a role here? Small and medium-sized enterprises (SMEs) probably have more of a role. Banking has collapsed in most countries. Institutional investors could look at equity investments and private lending; it can be done through private equity funds and that would be a big benefit.
Can asset managers learn anything from these? Someone suggested to me equity managers prefer high unemployment as wages are low, whereas bond managers prefer low unemployment as there is less risk of defaults. Is there any truth in that? I think they should prefer high employment as it shows the economy is booming, because there is more confidence, consumption and demand and better investment prospects. Low wages are better than high wages, but the other things that come with high unemployment numbers are much more harmful than the low wage numbers. Whatever type of investor you are, you should prefer to operate in a booming economy.
What impact will immigration have on labour? The numbers involved are not very big. A country like Germany could absorb one million people quite easily; look at how they absorbed East Germans. Problems come from a concentration of certain jobs or certain markets and they will feel the impact. East Germany still has higher unemployment.If there are not many jobs available, locals will complain they should belong to them, but there’s no economic argument for that; that’s a political reaction. It is potentially a time bomb and if it goes off, it could start some social conflict. If it was just peaceful absorption, it could be done very easily.
Technology has always been disruptive, but are white collar jobs now more at risk than blue collar roles? New technologies are displacing middle management jobs just as the unskilled jobs were displaced by early automation in manufacturing. Unskilled jobs are no longer being affected in the same way as they were in service industries which are highly labour intensive, such as cleaners, cooks, leisure, even nurses. Instead the jobs we are losing are the more highly-skilled jobs in industrial services. Even here, we used to have many more middle managers, secretaries, etc, These roles are now done by computers, but we have the same number of janitors, security staff, etc.There is some concern about the jobs those displaced will get. They can’t all be educated to get the top management jobs. They will be in the service sector and these jobs will need to be upgraded from where they are now. The biggest expansion will be in the healthcare sector due to the ageing population. However respectable a job is and how much people want to do it are all about the level of pay. In the US now, anything that is ‘personal’ – trainer, driver or shopper – is getting very expensive.
Does that mean more leisure time? If you look at annual hours of work, there is already a very big drop, especially In Europe, though not in US. The biggest drop came with longer annual holidays. In the 60s it was two weeks in Europe, but now it’s five or six weeks – and yet still two weeks In the US. We are going to need more flexible working week expectations and the weekend will lose its special significance.
Where would you invest? Aside from healthcare, I would look at the food delivery industry. It’s one of the biggest growth sectors in Europe, but especially London. It’s an example of people valuing their time, who don’t want to stay at home and cook or do their shopping. On the other hand they don’t want to go out to a restaurant every day, but want the same quality at home. If you invested in Deliveroo three years ago, it would have been a great investment. Income inequality will increase and wealthy people will spend money on services that save them time. Leisure too. Streaming services such as Netflix and Spotify are both highly successful start-ups, with Spotify being about the most successful European start-up to date.
Are fears about China still justified despite the huge growth of the middle classes? I think those fears are exaggerated. People are negative because they don’t trust the government to run the economy well, partly because they are so secretive and opaque. But the private sector is doing very well. They’ve created a demand for these services too and are copying what is happening in New York to Shanghai and if you do that, you have a blueprint for success.
