Davos 2015 – The Global Economic Outlook

The World Economic Forum (WEF) is a Swiss nonprofit foundation, described in its Mission Statement as, “an International Institution committed to improving the state of the world through public-private cooperation.”

The WEF is funded by a membership comprising 1,000 of the world’s top corporations, global enterprises usually with more than US$ 5 billion in turnover,

“The Forum’s Members are at the heart of all our activities.”
— – WEF

The forum is best known for its invite only winter meeting in Davos, a mountain resort in Switzerland. The meeting brings together some 2,500 top business leaders, international political leaders, and selected intellectuals.

The event hosts a raft of influential figures; French President François Hollande, Chinese Premier Li Keqiang, German Chancellor Angela Merkel, and Italian Prime Minister Matteo Renzi are some of the 40 heads of state and government representatives in attendance. Other notable political figures attended, including former U.S. Vice President Al Gore, World Bank President Jim Yong Kim, U.S. Secretary of State John Kerry, and U.S. Treasury Secretary Jack Lew

This year’s panel for the discussion on the global economic outlook comprised of: Joaquim Levy – Finance Minister of Brazil. Haruhiko Kuroda – Governor of the Bank of Japan. Benoît Cœuré – ECB board member. Mark Carney – Governor of the Bank of England. Min Zhu – Deputy Managing Director of the International Monetary Fund. And an assuming host who neglects to introduce himself.

The congregation occurred earlier this week, closely following the announcement by the European Central Bank (ECB) of a €1.1 Trillion Euro quantitative easing package (QE).

Benoît Cœuré commanded particular celebrity in the panel, and was congratulated by his peers on the recent decision to increase the Eurozone’s monetary base by a substantial amount. The ECB will use the newly created Euros for the purchase of government debt and other financial instruments, with the aim of capitalising and stabilising the banking sector and maintaining low interest rates across the board.

This policy lowers the cost of finance for debtors; from governments and banks to mortgage holders and credit card users. It also lowers the interest rate that savers receive for holding their money in a bank, and reduces the exchange rate and purchasing power of the Euro.

Cœuré claimed to have learned from the policies of Mark Carney at the BoE, and Haruhiko Kuroda at the BoJ and the US Fed, while acknowledging that the Eurozone faces its own particular challenges because of its unique institutional structure and the contrasts of interests throughout the monetary union. “We have one single monetary policy for 19 governments”, he comments.

With the backdrop of many prominent European economies struggling with low growth, and high unemployment, Mr Cœuré said, “It became pretty clear we had to do something, given the weakening inflation prospects.” He continued, “In the last days the only discussions were on how to do it”.

When asked, “Was currency a component of the deliberation? And, was there a view where currency would ultimately go, then?” Mr Cœuré responded, “The Currency? It’s part of the channels. It’s probably not the most important channel. We don’t have targets as you know very well. We don’t have numbers. The currency adjusts… as a result of monetary policy decisions.  So it’s part of the transmission. It’s not the main consideration”.

The panel host adds some remarkable balance to the debate, adding;

“There are some people who believe that QE creates more social issues in society because there are big winners and big losers. Those who have capital in financial assets… and those who don’t.”

Considering this Cœuré responds “That’s a very deep question. We know that large scale asset purchases entail risks … if we make labour markets work better, in compliment to large scale asset purchases, then you can have the best of both worlds!”

Having declared earlier in the discussion that: “There is nothing we can do as ECB, as central bank, that can lift the growth rate of Europe in a lasting way”, it seems that Cœuré and the European Central Bank are committed to redistributing money towards governments and banks, and causing inflation, in spite of the fact that they are powerless to improve labour markets and produce lasting economic growth.

When the topic of conversation lands on technological development, toward the end of the panel, discussion moves to “disruptive technology” in the financial sector.

“This is going to be disruptive in so many places and it’s going to be those countries that adapt to technology, are going to be the big winners… and those who can’t adapt, in my mind, are going to fall further… How do you think about that in monetary policy..?” ~ Host

“In terms of financial stability policy and the change in banking that is imminent, we have to get the balance of regulation right. Not come down too hard and prevent this type of disruptive technology, but also not be in a position where we’re filling in prudential regulation after the fact, and have a difficulty… facing an Uber-like situation in financial services.”
— ~ Mark Carney

“We need monetary policy to provide confidence. And Apart from what mark said, it’s pretty obvious that the technology is reshaping the financial industry… it reshapes payment systems which are essential for monetary policy, which are really the nuts and bolts of what we are doing. So we are following very closely virtual currencies, for instance we are following very closely the cyber resilience of financial infrastructures.” ~ Benoît Cœuré

“As far as the financial sector is concerned and also the central bank as the host of payment and settlement systems, digital technology is quite vital and quite important. Decisive factor, I agree… As a central banker, we tend to focus primarily on digital technology: payment and settlement systems, the financial sector, the financial market. But I think we should broaden our view, our way of thinking, towards greater areas of new technology.” ~ Haruhiko Kuroda

“I think technology will have a disruptive impact on the emerging markets as well. I think it’s a huge challenge, but it’s a huge opportunity. Net to net, I think its good news… But technology actually imposes a huge question on global governance issues. It’s not all clear whether it’s to enhance global governance or it’s on the other way around. It’s not clear.” ~ Min Zhu