Bloomberg Audio Studios, podcasts, radio news. Hello, how are you?
It's nice?
Yeah, of course, it's nice to be able to do this in person as well. So I saw I think you tweeted it, but you're here for an event right with Adam too? Yes, we just had him on. His episode came out today, So this is like a nice a nice segue. You're going to be sat right here.
I'm not going to read from the notes. I just took some notes on the report because there's so much in there.
I don't know that's good because it's four hundred pages and I didn't read.
All of it exactly.
Joe, is there anything more European than Mario Joggi writing a four hundred page report on how to boost European product perfect? I did a deadlift one, Jimmy, many up barges.
This isn't after school special, except.
I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.
Where's the best with imposta?
These are the important question?
Is that robots taking over the world.
No, I think that like in a couple of years, the AI will do a really good job of making the Odd lotch podcast, and people say, I don't really need to listen to Joe and Tracy anymore.
We do have.
The perfect You're listening to lots more where we catch up with friends about what's going on right now, because.
Even when the Odd Lots is over, there's always lots more.
And we really do have the perfect guest. So that report came out this week and it was sort of long awaited. I think it was delayed in the end, which also seems very European, but it took a year to write, and it's all about how to make Europe more competitive, right.
We talked about this a little bit on a recent episode with Adam twos some of the issues in German. There does seem to be a lot of anxiety about the state of the European economy in general, getting really squeezed on the manufacturing side, the energy side. Growth has been quite mediocre theres particularly if you compare it to
the United States. I think there was a good chart in the Droggi Report itself to about at one point European was like fifteen percent is big, and the gap is widened versus the United States.
It's not good. It doesn't seem good.
Oh yeah, Isabella, didn't you tweet that chart?
I did so.
Looking at that chart, I think we can basically see that with every crisis there's a bit of a divergence between the US and Europe, and it seems that the US is pretty good at bouncing back, Europe not so much, which has to do with the Fiskaver words.
I think.
So we are here with Isabella Weber. She is, of course an economics professor at University of Massachusetts Amherst, and she's been on the podcast a number of times. But it's interesting to see this report come out and act touch on a number of topics that you have addressed through your work on pricing and shock flation.
Yeah.
Thanks so much for having me on. It's a great opportunity to talk shockflation in the report. Maybe looking at this divergence convergence thing twenty eight, twenty twenty, I think that the energy crisis actually looms very large here, and the notion that was very prevalent in twenty twenty two in Germany that basically this is just like a little little shock that we can easily absorb that was very dominant in certain economics circuits, I think is now playing
out to possibly not be true. So we kind of start to see the medium term consequences of the energy shock and just how hard it hit Germany and Europe.
The idea of every crisis being a moment where the US and European economies further diverge. And I think, you know, one of the parts of the story is European fiscal constraints. You know, we know about you know, the session with government debt and particularly in Germany, but elsewhere in the fact that none of the countries have their own currency, their own central bank. So I guess basically, with every shock, productive capacity diminishes, people you know, lose their jobs, factories
closed down. That happens in any economy. And then what happens is basically in Europe they sort of accept that their potential is just lower than it was before. Is that basically the story, and then they don't really do anything about it.
I mean, in a nutshell, I mean, I would say that in the US has also been a steep learning curve from two thousand and eight to the COVID crisis, right, I mean, the kind of fiscal ambition that we have seen in the response to the COVID crisis, I think is a whole notch abuff of what we have seen in Obama in response to the global financial crisis. I mean, when it comes to the immediate rescue packages.
In twenty twenty, there.
Was also quite a bit across Europe, right, but then very quickly Europe returned to the idea that they had to go back to regular fiscal rules, and that really is thanks to the German government in large parts. I'm speaking with a German accent here, So when we look at the stands of the German Finance Minister on the reform of fiscal rules, and he has been a critical
player in preventing that reform. If we look at what the German government has been doing, then in twenty twenty three, they kind of declared victory too early on my mind, over the energy crisis, which then also meant that they went back to implementing the debt break, which basically tied up their hands. And then we got this constitutional ruling saying that they have to stick with that break, that all these accounting ways out that they had found were
basically not constitutional. Then in twenty twenty four they decided again to stick with the dead rule while Germany is at this point already like the worst performing major economy in the world. And really any macro economists would agree, I think in their right mind that this is a moment to spend. I wasn't a pan of with Jason Furman. Jason and I are not necessarily known to agree on big questions, but we both strongly agreed that this is
a moment to increase fiscal spending. Right, So this is really a German exception to have this extremely conservative fiscal stance in the middle of this crisis.
Wait, can I ask a somewhat personal question, but I think given you're a German economist and we have German economists on the show, but certainly not every day and not in the week when there is this big competitiveness report, But why is fiscal austerity such a big thing in Germany?
Yeah? Great question.
There was actually an exhibition at the German Historican Museum a little while ago where they were trying to understand why this idea of saving is so deeply rooted in our culture.
Yeah, because it's not like there isn't a social safety net in Germany either, So.
Yeah, why And I mean savings rates are very high, right, So I mean their narrative was.
Basically going back to some ideas.
Of Prussian virtue, and then Nazi propaganda that very heavily relied on like kind of making it a German virtue to save because it was necessary for the war economy, and then after the war that like kind of someone who saves is a good person idea was perpetuated, And then I think there's this kind of equation between personal spending and fiscal spending by the state, and this narrative of the Swabian housewife, which is very prominently rooted in
people's mind. So if you do polls on whether the death break is a good thing, most people actually think it is a good thing because it's been preached to them for so long. Where by the way, I think this idea of this Swabian housewife is the way how to run a national budget also has a good portion of sexism because of it of course refers to the idea that the housewife doesn't really have authority over the budget, but that it kind of has to ask permission.
Ah, right, so passively, except this is the amount of income that you get you but you don't actually control the amount of income and then you just but now figure out how to spend it exactly. It's implication behind that term, which I hadn't I guess I don't really I'm not sure if I had heard that term before.
It's very I mean, this idea of the Swabian housewife all over the German discourse. I think it's a very German thing, and I think no one really thinks about the sexis implication of non sovereignty over your budget. But it's kind of there, and I mean Mackett really like to invoke it, which doesn't make it any less sexies, I think. So there's that, but then there's of course also the fact that this has been established as a constitutional rule.
Right So now, I mean, beyond all.
These cultural issues, there's a real issue of politics where basically the ruling government has a coalition of three parties and one party, the FDP, thinks that the best thing to do is to stick with the fetish of the black zero and the other two parties disagree, but they are not in a position to find the majority in parliament, so they're kind of locked into that straight jacket.
So you touched on the energy markets earlier. But it's really interesting reading Joggi's report. I mean, energy is a big component of this, and he talks about things like decoupling energy prices and gas derivative markets and things like that. Can you talk a little bit more about how that fits into your research, because I know you've a lot of work on things like carbon pricing and obviously shockflation, a lot of which comes through higher energy prices.
Yes, So for the whole question of European gas prices, I'm totally aligned with Druggy, and I think that in many ways. Actually, his section on prices reads a bit like an implicit commentary on what happened during the gas crisis. So, I mean he's saying that a number of causes for the high gas prices in Europe and the kind of I mean, gas prices have come down, but there's still
a persistent gap, persistent gap between China and the US. Right, So of course there's a lack of resources, which is obvious, but there's also low great development, low infrastructure investments, which is kind of these like more long run structural factors.
I talked about permitting reform as well, which is kind of interesting coming from Europe.
Yeah, but in terms of the like kind of short run dynamics, which I think is where the commentary in
twenty twenty two comes in. He's talking about financial markets having driven volatility, having basically increased volatility in these markets, which I think implies that the prices that we have seen in twenty twenty two were not necessarily prices that were reflecting fundamentals, but that some of these price movements were the result of animal spirts on gas markets where no one really knew what Putin was going to do next, and you basically got a lot of hurt behavior in
this situation of extreme uncertainty, which is something that Tom crapser Coat and mine have of mind, and I have actually argued in a recent study on the price control question, where we say, I mean, if you get these prices overshooting in relationship to the fundamentals in this extreme way, then this actually means that taking some of this overshooting out is optimal even from a general equilibrium like a very conservative standard economic modeling perspective, and that notion is
definitely there in the drug important terms of the volatility. The second point that he makes is that Europe should use its monopsonal power and global market, so it should team up.
Yeah, this is like the collective bargaining argument.
Yes, so that basically European countries should team up in buying gas and that way be able to get lower prices on the global market, which again was a very very hot topic in twenty twenty two where basically the rest of Europe was really trying to do that and the German government was quite keen to keep procuring by
themselves to make sure that Germany is supplied first. So again this is kind of a commentary on the last crisis looking ahead at the next crisis, that we need more coordinating procurement on the European Club.
Many people seem to agree that the Eurozone is sort of a half baked project. There is the common currency, but then you know there's like fragmented capital markets and fragmented regulatory schemes, arrangements, et cetera. Setting aside, Okay, we talked about energy, which is very important for industry. We talked about the fiscal straight jacket and the constraints that Europe imposes on itself for investment and how that makes
it harder. Do you, as an economist accept the premise that Europe has a competitiveness problem, and one of the other areas that Dragi talks about is like the regulatory environment, and you hear it from tech people it makes really hard to start a business or do a startup in
Europe because of various rules. Do you accept that component of the premise that there is other aspects of the regulatory environment that make it harder for companies to be at the global cutting edge against competitors in the US, in China, and that Europe needs to rethink some things.
I do agree with that basic premise.
So basically there is a challenge how to rethink the European model to make it competitive moving ahead. And I think that Drug is also right in emphasizing that in good parts that should build on existing strengths. So Europe is still pretty competitive in the whole clean tech sector. I mean, of course, China has become a very major player,
they're the most important player. But still there are many technologies where Europe actually is in a good position and where basically the pipeline from innovation to employment and then actually like turning this into successful businesses is where the project fails. And I think trying to tackle this is
bought on is exactly right. I will also say that the whole discussion around energy prices is of course related to competitiveness, and this is where I would actually add the CO two price question, which is something that he kind of touches on but doesn't really go into where I think in the US. I don't know how you see it, but my impression is that the idea of carbon pricing in the US is basically off the table. I mean, the Democrats are not going to do it
and Trump is definitely not going to do it. In China, there's some scope for carbon pricing, but it's really secondary to the kind of investment led big green stage transition strategy.
So this leaves Europe alone.
As a country that is trying to rely on making emission incentive stuff more expensive, and that I think is actually a huge competitive disadvantage in the approach to the
green transition. And as we have been arguing in a recent study where we have simulated the inflation impact from carbon pricing, could also actually trigger inflation, which then, given European inflation governance, which basically relies on interest rate hikes, could create another competitiveness constraint because if you get what we call carbon inflation, inflation triggered by carbon price increases, and you then respond by hiking interest rates, then of
course you make the cost of capital even higher, which is one of the points that Drug, he points out, is a disadvantage for Europe. But the model that is being pursued in the Green Transition also really matters for competitiveness. And basically what Drug is saying is that we need more of what the US is doing right but he doesn't quite say need to maybe rethink some of the stuff that we are doing right now.
Yeah, I think the cost of capital point is so important, and like the Green Transition, the way Europe is pursuing, it only really works if other countries are kind of doing something similar. And I remember there was this mind blowing stat I think it's like five years old now, so it's probably not true, but I think it's very indicative of the tension that we're talking about.
It's not true, but it sounds good.
Well, it was true. It was true in twenty nineteen. It's probably not true now, but I remember, I think it was City Group they put out this report saying that because of the different ways US and European investors were treating and approaching energy companies. It meant that European energy companies had borrowing costs that were two hundred basis points more expensive than their American counterparts. And what that meant is like, maybe it would make sense for like
Exxon to buy Shell or something. I think they said that somewhat facetiously, but that's the issue here. If Europeans care more about the environment and carbon pricing and that results in a comparative disadvantage, as Isabella pointed out, then that's not helpful to the green transition or the European economy.
Yeah.
And I think there's kind of a more general gap or unrealized potential in the drug report here, because a lot of the things that he is talking about could actually also be used for price stability, right. I mean, he is talking, for example, about buffer stocks. He is actually talking about strategic reserves for He's pretty wake on what exactly he wants them for, but he's putting this
on the table as one possibility. He is talking about lower energy prices, he is talking about a more coordinated industrial approach, And what we have been arguing is that basically in terms of the inflation governance as a huge gap in Europe, because if you get shoflation, if you get inflation that is actually triggered by major supply shocks or systemically significant sectors, and then respond the only way to respond is by hiking indust rates, you kind of
have a gap. You could have a much more sophisticated toolbox to deal with these shocks. And I mean a lot of the things that Drugy is talking about in terms of investments, in terms of strategic reorientation of sectors, in terms of resilience, and could also be used to make these sectors more resilient to price shocks, right, And I think this is kind of a bit of a missing piece in the past.
This reminds me, Joe, do you remember the first time we ever had Isabella on the podcast?
Oh, I think we're talked about China.
Yeah, we were talking about China. And since then, you've done so much work on things like pricing and shock flation, and it feels like there's been a lot more acceptance, certainly in Europe of things like even price controls. The transition has been like very remarkable to watch and it's only been a few years.
Absolutely, and I think it's actually quite remarkable how there is some sort of a pretext both in the US and in Europe that basically they now need industry policy because China is doing it, so we can no longer not do it. What is missing, from my point of view is that actually China has not just been doing industry policy as I kind of sector level one of policies, but has actually been thinking about re industrialization from the perspective.
Of system reform.
So it's always been like kind from this perspective, how do you change the system as a whole where the price question, inflation question, macro stability questions are integrated with the question of changing specific industries. And that is actually, I think something that hasn't quite taken on yet in
Europe and the US. Rainavaruja at the Ft was recently had this ope ad where she was saying that basically we need much more systems thinking in all these initiatives that currently run under the label industry policy, which makes it sound as if it's about specific industries, it's about innovation policy, where really what we need is more of a systemic approach.
Right.
I think the same I would say about the drug Ye report where we have several elements of systems thinking, Like when he talks about more coordination and so on, he's kind of walking in that direction, but then he's talking about prices without talking about interest rates and inflation. So kind of this like major link with the macroeconomy is missing, which I think comes from a lack of this kind of like system thinking. And that is quite
interesting to me. And it seems like, I mean, if I look back at the last couple of years and how quickly the discourse has changed, my sense is that this is the next like kind of cutting edge in terms of how the economic policy debate might actually shift in the vest.
It's interesting thinking about this sort of the US, Europe, and China all have similarities with respect to sort of the challenges or the opportunities of the sort of internal cohesion, right because even you know, China, for all these sort of talk about centrally planned and plan out of Beijing, there's quite a bit of competition, is my understanding, between the provinces and their desire to compete against each.
Other for I mean investment and jobs and things like that.
I mean, competition in China is absolutely cut throat in many areas, right, I mean, if you take the EV sector, like many people are talking now mainly about subsidies, which, of course, in the early phase when basically the Chinese state decided to create an EV industry, there was a
lot of subsidies flowing. But right now we are in a situation where we have a larger number of car companies than we have had, like since the nineteen tens or something, because there are so many new EV companies that came on the market in China, and they are engaged in the most brutal kind of competition that you can imagine. It's basically a competition for survival, where it's clear to everybody that at the end of this competition process there might be I don't know, three, four or
five companies left. So this is just one example where everybody points to subsidies, but I think it's really also about competition between Chinese players. Another example is if you look at the meat industry, which is something that we have talked about before, then this is an extremely highly
concentrated sector in the US and Europe. Right in China, I mean, concentration has started to pick up, but it's still extremely extremely competitive, with many small meat processes producing still pretty large shares of what comes to the market and to me when I first went to Beijing as an undergraded student, actually just walking around the city, you sometimes come to these streets that where the whole street
just sells one product. There's a guitar shop street, Okay, so there's one shop next to another that sells basically the same product portfolio, which is the most extreme kind of competition that you can imagine, Like none of them has any scope to move out of this, and the same model we see in a lot of the production towns in China right where I don't know one town that only does bottoms for shirts and it is the most important supplier for shirt buttons in the whole world.
There is that famous Christmas decoration town where they just make Christmas decorations.
Exactly, and each of these companies has like zero leve. This is actually kind of your idea of perfect competition as you see it in the textbooks, Tracy.
According to Bloomberg, a twenty twenty three piece in twenty nineteen or five hundred Chinese ev companies, but that's now down to one hundred, so I guess some are being weeded out.
That's interesting. What if Europe's comparative advantage is basically writing think pieces and four hundred page reports, Like maybe they can actually make money by being the global exporter of ideas McKenzie. Yeah, they're much better. They're also much better at like vacations and work life balance and drinking wine at lunch.
To figure out how to pay them for all that.
Yeah, it could become some sort of a Disney park for Chinese and American tourist.
Is that what yoursiona?
Yeah, intellectuals basically like observe what it would be like to have a European style work life balance.
It's not crazy actually, the Disney World example. I mean, Europe is a great place to go. Setting aside the issue with energy costs and whether you know, Volkswegens could be competitive, it's a great place to go.
I mean food is great, culture is great, city life is great. Yeah, many things in there. I would like to kind of add maybe one more thought to your
question on the cohesion and competitiveness and so on. I think that in this whole debate around external competitiveness and I kind of reshoring French touring and so on, there has been a tendency to think like, when stuff is national, it will be kind of good for everybody in that country, which is to me a little bit similar to the debate around globalization in the nineteen nineties, where was I kind of the exact same thing, but turn on its head, where was I, Oh, as long as we globalize and
we produce in the most efficient places and everything is free trade, it will be so wonderful and there will be welfare gains for everybody.
Expanding the pie is what people used to say exactly.
Now it's kind of no longer about expanding the high globally, it's about expanding the national pie.
And then there's an assumption that this will be great for everybody. And that is also like a little bit in the.
Drug report, I mean, he hinges at saying like, oh, we need to make sure that there's also democratic participation and like consultation with unions and civil society groups and so on as we are making these decisions processes to ensure that there is democratic legitimacy, which is I think great. But at the same time, when we look at competitiveness and we actually take inflation into account as one of
the dimensions of competitiveness. Then we have seen that it's been perfectly possible for very national companies to profit in enormous ways at the end of the day at the expense of the national competitiveness. So that you can get clean which between the national interests in the interests of individual companies, you can also get cleavages between the interests of companies and workers and consumers and so on, which
in the US is probably already a complex problem. I think in Europe is an even more complex problem because you have these different countries that have such different characteristics terms of their structures. Right, So if we go back to the car sector and we say, okay, we are going to put tariffs on evehicids so basically protect the European car industry, then we are really talking about companies
from the rich Western European countries, right. It's not like a lot of the Eastern European New Member states have internationally competitive car companies right now, so they for them it means more expensive cars in terms of production possibilities. It might mean some FDIs, but it's not entirely clear that having FDI from Volkswagen, which is about to actually cut jobs in Germany is better than having FDI from BYD.
So there's a bit of a you know, possible friction that is completely glossed over when we only think in terms of Europe as a whole, and I think for Europe being this not really integrated unit, this problem is even more severe than in the US context.
Yeah, you're back to the old tension between the Eurozone as a whole and the individual members, which used to play out in monetary policy but maybe now plays out more in industrial policy.
Interesting, Yeah, I mean it still plays out in monetary and fiscal policy, right. I mean Germany being the policeman of physical conservatism is a huge drag for everybody else. One more thing on the whole question of competitiveness and like some imagined nation, like imagining Europe as a nation as a unit of analysis, I think it's important to take into account that many of these European companies are actually totally global companies at this point.
Right.
If you look at for example, Mercedis Bence, this is an absolutely global company. It's in a way as Chinese as it is German. They have massive, massive investments in R and D in China. They say themselves that to kind of stay on top of the automobile game, they need to be in the Chinese market because the Chinese consumer is the most demanding consumer at this point. It's a market with the highest degree of innovation in all directions of the experience of moving in a four wheel
vehicle from one place to another. So that actually, for example, Mercy Dispands has been coming out against European tariffs on Chinese vehicles, right. So I think this is again and if you only take the nation as your unit of analysis, you might actually run into problems. And for the European continent that has been much more at least with Germany at its economic core, much more relying on exports and
actually integrating its own companies into the Chinese market. I think there's also, in a way something different at stake
from the United States. It has been running pretty persistent trade deficits with China, right, So just taking the US strategy and then like kind of adapting it to the European context runs the risk of overseeing the different role of European companies in the Chinese economy and the importance of the Chinese market and the Chinese innovation ecosystem for some of these core European industries.
By the way, Tracy, you know, going back to the earlier thing about some of the origins of the austerity obsession, of the schwatz nul as they call it, I hadn't realized up until recently.
I love it when you speak German, Jack.
Thank you put that in for you. How did I do?
Pretty good?
Thank you?
That's pretty good.
That Wolfgang Schorble, how is that? Is that right?
He was like one of the ones who is like directly involved with the reunification of East and West Germany. He saw firsthand the degree to which Eastern Bloc states had accumulated huge debts to the West, et cetera, and were major burdens than on the restructuring and they're coming out of that system or the unsustainability of this of
the system that they had. It makes me wonder too whether like his experience directly dealing with these Germany and some of these countries also informed his view on just like the utter importance of not accumulating persistent national debts.
That's a good point.
Yeah, just something I've been wondering about.
It's an interesting thought.
But then again, like if we go back to nineteen nineties East Germany, that's probably the purest example of shock therapy, right, And when we look at the at least initial knee jerk reaction in Germany to the question of the energy price shock, then of course there has been a change in course and the energy price breaks and so on, but there have been some elements of like kind of energy price shock therapy. So I'm not sure how much has been learned from the nineteen nineties experience.
I guess one point that I think.
Is kind of also important to keep in mind as we look at Europe is just the rise of the far right right. This is at this point something that I think cannot be glossed over by kind of some sort of homogeneous democratically minded politicians with liberal Western.
Values or something like that.
And in fact, this I think goes to some extent back to the point that I was trying to make earlier. We're collapsing the national interests with everybody else's interests. Runs the risk of overlooking how certain policies might not immediately benefit certain demographics, which could then fuel the rise of
the far right even more. And that's for me actually one of the considerations why, I think that we need to look much more systematically at how these competitiveness considerations, these industrial strategy considerations square with what this actually means for pocketbook politics.
Yeah, it's going to be interesting to see whether that more systematic thinking is like the next area of discourse. Lots More is produced by Carmen Rodriguez and dash Ol Bennett, with help from Moses onom and kel Brooks.
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