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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Allaway.
And I'm Joe Wisenthal.
Joe, did you see last month the European Commission released a competitiveness compass with a bunch of recommendations for how to boost productivity in the Eurozone.
I missed that, However, I know that there have been a number of sort of similar reports and studies. Mario Draghi, I think the former ECB chief last year put out this big thing. There's certainly been a source of debate, consternation, anxiety, so forth.
So Mario Droggy's competitiveness report was four hundred pages and the European commission one was twenty seven pages. And I can't figure out whether or not that makes the Commission more productive than Joggy or less, Like their output is physically smaller, but maybe it's more efficient and succinct. You're absolutely right. This is kind of a tough spot for the Eurozone. So growth has been slowing while inflation is
still kind of sticky. In fact, we had EU inflation for January recently and it came in slightly hotter than expected.
I think it was something like two point five percent, and Europe's been dealing with an energy crisis, plus now the threat of tariffs emanating from the Trump administration and against all of those sort of short term immediate challenges, kind of hovering in the background is the sense that Europe is falling behind in key technologies like AI, that it's becoming less competitive, less productive relative to other places.
Right, and it's sort of Implaicitt, well, you're saying here, but the other big, key source of anxiety is just the sort of core industrial super powers and their competitiveness, particular visa via China, and I'm thinking about oil, perhaps the chemical industry and so forth. And then you know, you layer onto it, as you already mentioned, the possibility of tariffs and the future of trade with the United States specifically, There's a lot going on.
Yeah, all of this is a very long winded way of saying that Europe is facing both cyclical and structural problems or challenges. So I am very happy to say we have the perfect guests to discuss all of this. We're going to be speaking with Philip Lane, the cheap economist over at the European Central Bank. So Philip, thank you so much for coming on all.
Thoughts, Good morning, it's great to be here.
Why don't we start with the thing that is all over the news, which would be tariffs. Joe and I personally are kind of struggling to cover these because the headlines change so fast by the time we get a podcast out, like the news on trade restrictions has already changed. How does the ECB factor potential tariffs into its monetary policy,
because you're forecast right now. I don't think they actually take tariffs into account, but we know that Trump has talked about imposing tariffs on the EU at some point.
So let me make two differentiations there. Number one, of course, for a long time now there has been speculation about tariffs, so to the extent the speculation about tariffs is feeding into investor plans, consumer plans. It's there in the data, and as you said, a lot of the sentiment in disease are kind of subdued, and I think clearly the
uncertainty about trade is one of those factors. What is true, though, is we have looked in great detail about different tariff scenarios, but until you really know the scope of what we're talking about, putting those into the baseline we haven't done. We will essentially at us when and if we see more detail, and of course this kind evolve. The trade policy configuration we have in spring twenty twenty five may not be the trade policy configuration we have in the
autumn or next year. So I don't think it's kind of a zero one, one day only type event. It's something we will continually reassess.
Sitting aside, obviously there's a lot of uncertainty. We don't know ten percent, twenty five percent, zero percent, we don't know. But how do you think about tariffs, because you know, you hear two different things when it comes to tariffs and cyclical policy. One is, okay, maybe you get some sort of like price shock or something like that, and
maybe that's inflationary, maybe that's not. But then also the implication is that tariffs force a longer term adjustment and perhaps countries have to invest more to be more self sufficient, et cetera. When you think about the eurozones trading position today, what are the vulnerabilities and are how do you think about the sort of macro effects of how tarffs play out.
I don't think there's any question in terms of output. The effect of introducing frictions into global trading system is a negative, so it has to be bad rabit. Now there will be mitigants, as you say, firms who will work out Okay, now I'm going to find another supplier. Now I'm going to build another plant somewhere else to kind of get around tarfs. But those are mitigants. They're not going to say, well, all of a sudden, that's
a net positive. So I think there's no doubt it's net negative for output, as you say, for inflation, and there's many conjectures that. Of course, mechanically, if it turns out to be the case that there's more expensive imports from America, mechanically there's an operate effect from that. On the other hand, as we just talked about, if there's kind of a weakning of domestic demand in Europe, if there's a lot of trade frictions globally, if there's a
weakening in the global economy, those are disinflationy forces. So in December we basically and now again in our January meeting, we've said for output, it's a downside scenario. For inflation, the effects are uncertain, but as you indicated earlier on there's also classic issues about price level versus inflation, how big this is compared to all the other factors we
have to think about for inflation. So I would say, you know, I think it's very natural to focus on the economic effects and then we will look at the inflation effects as we see it unfold. Rather than taking a very strong exanity position on that.
I'm going to ask a very broad question. But European growth has kind of been flatlining, and at the same time we had that inflation number recently coming in slightly hotter than expected. How would you characterize the EU economy right now?
So I think what you have to go back to is twenty twenty two. So twenty two, on the one side, we were coming out of the pandemic. There was a burst of activity as we reopened, and remember Europe had a much longer lockdown than over here. But then we had the Russia Ukraine War in spring twenty two. So after that we had inflation going all the way to ten point six percent in October twenty two, and of course we had to respond to that by raising rates,
which were in a low for long before then. So our policy rate went from minus zero point five to plus four hundred in terms of basis points, So there's a lot of adjustment. What that meant is in twenty twenty three we did flatline. In twenty three Q four the year Area economy group by zero point one. Now look in last year twenty four, there was a partial recovery.
We went from zero point one in twenty three to zero point nine in twenty four, and that we expected that we expected consumption to recover in particular, now it wasn't as strong as we would like. Then we have as we just talked about new types of shocks hidden the economy. But let me emphasize is that we do think going back to this cyclical structural issue you raised that there is cyclical recovery as our baseline. We should expect to grow probably a bit above potential this year
and next year. And essentially, if you think about a lot of factors are kicking in as we ease market policy, we still expect this year to be led by consumption, and then in twenty six more than this year, a recovery in investment, and then also I think a contribution from exports. So I think it's important, you know, if you kind of are too backward looking about this, you're looking at maybe the stagnation in twenty three, or you are looking in fairness at the Q four which did
flat line a bit. But I think there's some cyclical factors in those key four data. On inflation. We're down from a zen point six in October twenty two to two point five in the most recent number. That's, by the way. I know there was some market speculation was that a bit high. From my point of view, what's been developing is a bit more energy inflation, But actually services inflation, which has been what we've been really looking at,
came in softer than I would have expected. So it's not the case the overall inflation profile is too dramatic and what we think is fairly soon we would be back at our two percent target, And essentially that's why we cut rates last week.
The market is still pricing in several more rate cuts for twenty twenty five. I take your point about the salience of services inflation, and obviously, you know, it's very common for central bankers to sort of recognize that there's always so much you can do about the energy price component. But given where inflation is in given what you describe as a cyclical recovery likely further impulse, does it make sense to still be cutting into that environment or at their depth.
Well, I think we're trying to be cautious. So one of our kind of stable sentences is no preset path. So even if the market is pricing several cuts, you know, and I'm not saying that there is there any reason not to have that market view. From a policy point of view, our emphasis is really on agility. The energy situation is changing, it may change again in either direction in the coming weeks, and I say we have a balancing act. We do have the recovery, but we also
know that essentially the disinflation is well on track. And as disinflation continues, finding if you like, the new normal for interest rates is essentially a part of our challenge. And when we cut last week from three hundred basis points to two seventy five, that was essential thinking, wow, this three hundred is not the new normal. I think we'll be in that search process as we go along.
Since you brought up the new normal. I mean, one thing the US and Europe do have in common right now is this debate over the neutral rate, so our star. How useful is that idea when it comes to setting interest rates? And also when you look at the economy right now, how restrictive do you think rates actually are.
I think it's important of narrative frameworks, and one of the narrative frameworks is when inflation is well above two percent, it's very important that everyone understands that munchopolicy is going to be restrictive, and that's important to be able to demonstrate that the policy rate is higher than so called normal. It's important to look at is demand dampening, is the pricing environment make them more difficult for firms to be
able to get through price increases? As inflation comes back to more or less around target, those factors lose kind of resonance and you do have to kind of change the narrative framework. Now what we set in December, and I think this is maybe not rocket science, but maybe it's helpful. Is what we're going to do is we're going to set mount policy appropriately. Now the appropriate phrase is essentially saying what do we need to do to keep inflation around two And this is where the neutrality
debate loses some relevance. You know what is the probability in the next number of months the world is neutral, so there's no shocks. So it's a nice hypothetical conjecture. But if you are more dealing with shocks, so whether downside shocks are upside shocks, manchopolicy has to if they're material, so they're there for the medium term, that not just noise. So I think now as you get closer to that zone, let's not talk about neutrality. Let's talk about what's appropriate.
And then you do the standard wish list. You know, are we seeing, what are we seeing in the pricing data, what are we seeing in the activity data, what are we seeing in the transmission because again we have a bank based system over here in America, much more market based system. I mean the markets of course matter in Europe,
but we pay a lot of attention to banks. And right now to one of the dimensions of the question is what we see is credits starting to pick up, So there is some easing there, but it's still very subdued, still well below historical averages. So what I would say is compared to the peak, this been some easy but it's not the case that that process has gone into a kind of new steady state. We're still in a recovery phase.
I want to ask you a question that I've actually asked several policy makers in the US about the last several years. The nature of inflation in the US and in the Eurozone. Some similarities, some differences. The spike of the Eurozone was probably more pronounced a bit thanks to the energy shock specifically. But you know, obviously there's a sort of like cyclical component and then an energy specific component.
What's interesting to me, setting aside energy, unemployment in the Aurozone, if I'm looking at this correctly, is actually like at a multi year low right now, lower than it was
at the peak in twenty twenty two. What is your story for if we think of central banking as sort of working through this unemployment or employment activity inflation trade off, what is your employment for why the sort of core measures of inflation or services inflation have eased so much even at a time of what seems to be labor market tightness.
All so, I think the labor market titaness is part of it. And actually the your area is an interesting place to look at that, because, of course, across the area you have some economies that are hotter than others, you've kind of a laboratory, So absolutely the kind of there is a correlation between a tight labor market and wages, but the strength of that effect is not big compared to the size of the inflation shock we had, which
was essentially an intersection of two factors. One was the energy shock and to us the exit from the pandemic. So more or less exactly, at the same time in spring twenty two, we had the Russian innovation of Ukraine, and that wasn't just a kind of a level shift in energy from there until August twenty two, this really large, extreme run up in gas prices. But in the same six months, so spring to Autumn twenty two, this is
when the European economy reopened. So actually, if you look at activity data is quite strong for those six months because tourism restarted, hospitality restarted, So this is a very unusual configuration of events. That reopening had a demand element to it, because of course people really wanted to spend, and of course the supply was still a pandemic constrained. So this, I would say, is weird, unusual, not representative,
so not that surprise. Implementing the most basic macromodel only gets you so far, and then if you like, compared since then, and I think that's common across the US and Europe is a lot of what's happened is the supply side has recovered. The exact nature of it on both sides of Atlantic is there. And that recovering the supply side is essentially why you are able to have disinflation and recovery in economy. And as you say, we
do have the lowest unemployment in the history of your area. Again, let me come back to this differences across the you area. Germany has been suffering. We know that unemployment has gone up in Germany, so the labor market is what you would expect. Spain has been very strong. Unemployment is coming
down in Spain. And so when you think about the overall your area narrative, I mean, when you talk about the US economy, we all tend to think about the US and the aggregate, but of course the differences across California, Chicago, New York and so on. Same for US. There are big differences right now across some of the major countries.
You touched on this earlier, but could you talk a little bit more about the transmission mechanism of lower rates and how those actually feed into the economy, and perhaps more importantly, how long they actually take to take effect. So in the US we hear the Federal Reserve talk a lot about long and variable lags, which gives them quite a lot of wiggle room to argue whether or
not hikes or cuts are actually having an effect. How do you think about the transmission mechanism and the time frame for changes in policy to take effect.
So, I mean, this is what keeps us busy, and this is why throughout this period. Some people don't like these phrases, but they're essential. We said we're going to be data dependent, and we said we have this reaction function where essentially, as we see the transmission in action, we can recalibrate our policy. So let me maybe explain why it's the complexity in the area. We were in
a low for long environment. Even in December twenty one, when already inflation was picked up, the markets believed the policy rate would not go above zero until around twenty twenty seven. So there's high conviction that we were in this low for long period.
This is my favorite chart that charts, Yeah, the MEDUSA charts of market expectations or rates, and they're always always off.
Well, I mean, the world changes. Then we had this fairly rapid hiking cycle to four percent, and now we're coming down from that, and then the market is debating somewhere in the neighborhood of two percent, let's say, is the new steady state. So in terms of the how people are thinking about the financial system, some of it is, well, we're gone from an old steady state of basically at the floor. The new steady state is around two percent, and how do I value assets? How do I organize
my saving my investment around that. So on top of the cyclical issue of as we ease rates, but we're easing from four hundred to in the neighborhood of two percent, we're not going back to the pre shock super low rate. I mean we don't expect to. So that that's an additional factor in transmission. Let me emphasize a couple of things. One is about the bank based system, and then in
one is how the economy responds. So in a bank based system, and we had new numbers this morning essentially because of course banks are partly funded by deposits, partly funded by market funding deposits. They have responded, but not one for one. There's still lots of zero interest overnight deposits funding banks. So the one for one transmission of the policy rate that works in the runny market, it's soft both on their way up and on the way
down for the banking system. So we have taken their account in the banking system with a mix of deposit funding and market funding, the transmission is slower. And then on the economic side, one issue we talked about last week was has an investment. That's the classic interest rates sensitive area. And we are seeing mortgage loans pick up quite a bit in Europe, but we haven't seen housing investment move up yet. And this goes back to here
to some extent. Okay, someone's decided I'm going to start a new project, getting the permits, finding the workers, all of that takes time. And so this is why I said to you earlier on, we think the big recovery investment is going to take a while. It's not all going to happen this year in twenty five, it's going to go into twenty six. So a long way to summarize where we are is it's multi year. It really is a long lag. And again from word go, from the time we started hiking, I am the easy be
flagged quite a bit. We haven't done this very often. How much of an evidence space do we have about how long are those lags? How powerful this transmission? And in the context of a pandemic and a war. So for all of those reasons, it really goes back to I'm reassured that transmission is working. I see it, but I'm also validated if you like that it takes real time. It takes real time before it transmits all the way to the economy.
Tracy, I just remembered something, And you know, you started the episode talking about some of the big structural things that we should get to do you remember in the blog a sphere like the twenty tens. I just remember this, the sixth versus the structs debate.
Oh no, I don't remember that.
Some people were like, oh, it is the US face like just a cyclical challenge where we need more demand or is there a structs thing where we need to like structurally change how the US economy works?
Do you remember that?
Anyway?
It occurs to me like every time there's some big economic shock of any you get this debate right, how much is it a cyclical thing where you know, economies go up and down, inflation goes up and down, unemployment goes up and down, versus something structural deeper with the economy perhaps which demand policies, whether they be fiscal or monetary, are sort of to some extent insufficient to address them. And obviously, you know Tracy mentioned in the beginning these competitiveness,
so the Dragging Report, all that stuff. Do you feel like we're at a moment where it's important for Europe to be thinking about like deep structural issues or is it just weird sort of taking our eye off the ball. And then in the end these are still sort of cyclical challenges for the economy.
Well, let me make a few points about this, because of course this debate is ongoing. First of all, I think it's important to recognize there isn't a clear bright line between cyclical and structural because of course, if an economy faces structural issues more or less, if your pessimism on a structural basis, it will lower demand. So so cyclical policy is called for even if the origin is structural. But let me say, on top of all the structural
issues which are global. Every country debates, had to deal with aging, had to deal with climate change, had to deal with digitalization, AI, and so on. In the European context, maybe there's two extra fact. One is the structure of Europe. That's literally a structural factor. We have choices and debates about essentially more integration the single market, and as you mentioned earlier on Tracy, last week, the European Commission announced
this Competitiveness Compass. That's essentially a long to do list to convert the Drag Report, the Letter Report into essentially action. And of course you can imagine in a European Union there's a lot of things need step by step action. So I would say it's all aligned, but it's just we have a new commission. It's basically a kind of an agenda for the next few years. But fundamentally, and this is where the Dragy Report starts, is Europe had a very good idea forty years ago now that essentially,
in a modern world scale economies matter. If the European member countries essentially come together and build a single market, that will really help. That remains And the intersection now is I think with digitization with other new technologies. Scale economies really matter. It's really hard to think about. Okay, if I have a big fixed cost investment, if I build some new AI kind of business model, rolling that
out is a function of scale. So the European Union building scale through a single market, that the case for it is now reinforced. So I think there's a new energy about that. And then of course the other big one, maybe just because I think this is interesting from a global point of view, is the global if you like equilibrium. One thing the ECB has worked on and identified is essentially when you can do this exercise of comparing economies.
And what's interesting of the last fifteen years is Europe and China have become more similar. The US has not become more similar. So if you think about which industries are important activity, the composition of activity, and of course this is immediate applications like in the car industry, now China is much more similar to Europe. And with that, of course, if you think about individual firms who might have been used to certain margins, certain ability to obtain
market share, they are under a new competitiveness challenge. So that is something where Europe is in between China and America. Everyone has their kind of structural priorities, but this issue how do you not kind of try and build a wall, but how do you navigate this new world?
Is important.
So there's a general recognition that competitiveness is an issue, low productivity is an issue, and as you mentioned, there's probably multiple to do lists and ideas about how you could go about addressing some of these issues. I guess my question is how confident are you that the various parties within the European Union will be able to follow through on some of this and actually turn their economies around.
Because the other thing that's happening is we've had the rise of right wing parties in lots of places in Europe, and often those parties come with an agenda which is cutting spending and really cracking down on debt and things like that. So it feels like there's a tension there, right How are you thinking about that?
So I would say, does it shared identification of essentially the challenge that what I would say is a lot of the problems your faces let me not say problems, but a lot of the desires what we want. A lot of these would look a lot easier to achieve with a faster growth rate. And this is going back to the four hundred pages with the dragging report. Some of those pages are devoted about look all of this debate about fiscal space, it looks a lot better if
you get your economy to grow more quickly. So I think fundamentally the identification that if we can grow more quickly, how to distribute resources, how to make progress on decarbonization, all of these issues would look a lot easier. So let me focus on the fact that there is a kind of more and more and identification is the only way to square the circle is to commit to policies to improve the growth rate. But let me say there's
a huge opportunity here. You can look at the fact that Europe has been a bit slower in terms of, for example, option of AI. You might say, oh my god, going more slowly under the hand, you may say, okay, here's the real opportunity. So to embrace the diffusion of new technologies. Again, if you looked thirty years ago with the transmission of internet to the business sector, that happened here first, but it then happened in Europe because of
course European firms could see what's possible. So i'd be, you know, in the optimistic camp that there's a lot of opportunities and going back to the single market idea. Again, it does require political will, it does require political leadership, but there's a huge opportunity here just.
On this point about the idea that the euro Zone is an unfinished project, that there's still more opportunities for integration between the member nations. In one very crude way of sort of looking at European fragmentation so to speak, in they're probably multiple ways. It was just looking at like sort of you know, fact that there is not a uniform sovereign spread, right because each country has its own bond market, and we saw that play out very
dramatically in twenty eleven and twenty twelve. But lately spreads for some countries are widening out again. It's come in a little bit, but say the French German ten year spread is certainly higher than much of the sort of post twenty fourteen period, not as high as it was
in twenty eleven and twenty twelve. How much when you look at these spreads, is this a function of part of the agenda of some of the parties in Europe is essentially capital as sovereignty, this idea that like, is it compatible to talk about creating a single market finishing the project of integration at the same time as there is this big push for a sort of like nationalist sovereign agenda.
So I think what you've seen in Europe is essentially I'm not seen that debate these days too much. Okay, no one is really saying the answer is to kind of go out nation state basis, because, of course you can see going back to the scaied economy issue, it's really hard to think about being a small country in today's world. So the value of the European Union is I think common. I don't think there's any anti EU, serious anti EU kind of proposals in any of the
national systems. And going back to the spread issue, I mean there's nothing like the situation we had fifteen years ago. So of course, going back to division here that essentially the European Union is a unique structure, and I think that's very important because sometimes in my career I've heard why can't he just be like the US? And of course this kind of one.
Line do people still say that.
I get it, But of course you need a certain amount of fiscal integration. We have stepped forward with more joint debt and so on. You do need a certain amount. You need to make sure your backing system don't require a lot of physical support i e. They have to be well capitalized and well regulated, and we've come a long way on that. And you have to make sure every member country is following fairly stable policies so we don't have the really large property bubbles, the big current
account deficits we had. So Europe is quite a kind of stable environment, not super growing fast. So dynamism is an issue, but stable, yes, But stability is if you like a kind of minimal condition. And I think this is where the conversation is. Let's move on from being stable to be delivering more of what we want and if we grow more quickly, we can do more on all of the different dimensions of policy that Europeans want.
Just going back to the very beginning of this conversation, we were talking about energy prices increasing and feeding into inflation. I mean, energy price is just one of many external shots to the European economy in recent years. As a central banker, what can you do to actually offset those types of supply side shocks.
So what we have to make sure is when we had a really big energy shock, and we had to make sure and to be able to provide the reassurance to everyone that we will make sure inflation comes back down to two percent, not overnight, but in a realistic timeframe and essentially threat the whole process to keep inflation expectations stable. So in contrast to nineteen seventies, this has happened.
So the famous second round or third round effects, they were there to an extent that they'd have to be a catchup phrase for wages, which is now maybe nearly over. But no, I think the central bank world, once it was diagnosed that we needed to act, that has not been the biggest headache here. So for central banks, that's our offer or our promise. We will deliver price to
polity and meet in term. That doesn't mean there won't be shocks, but when there is a shock, we get it back down to two percent in a realistic timeframe.
One of the things that we saw recently is that the Federal Reserve has removed itself from the ENNGFS organization where central banks think about the greening of the financial system, the effect of climate change on its goals and so forth. The ECB is a member of this organization. Over the last several years various political reasons, I'm sure inflation and the energy shock. It feels like menu organizations, certainly in the US, have lost some of their motivation to prioritize
climate What is that like in Europe? Is there any change in the amount of energy and interest and prioritization of climate change issues, both at the ECB specifically, but also at the sort of political and corporate set avoids around it.
So I think the assessment is pretty stable, and that that's not just in central banking but in many dimensions. The assessment is the world is getting hotter. The assessment is policy is needed both to slow that down and the cap it but also to make sure the economy and society adapts to hotter temperatures. So it's I think important for central banks to prepare the financial system for that.
It's important for central banks in how we do multi policy to recognize the effects of these climate shocks and also the underlying transition issue. So what is true which is inevitable? These are pretty big policies. There's big policies, but of course all the time you have to recalibration.
What exactly is the right subsistye policy for heat pumps, for example, so to move housing away from using oil and gas towards using heat pumps, what is the right pole see and the right timeline for getting people to move from petrol and diesel cars to electric vehicles out viewing all of that as recalibration tactical adjustments, but again coming back to where we started with the European Commissions agenda for the next few years, decarbonization remains central to that.
So I would say we're learning a lot the evidence from all of the severe weather effects, not just in Europe but around the world. People see it, they see
it every day how they live their lives. So I think the identification of the problem is there, but of course making sure that the trade offs are recognized, the scope for new technologies to help and to be sensible about what you ask different parts of the economy, whether it's households, large corporates, small corporates, and the banking system, that's essentially in evolving work in progress.
So I can't pass up an opportunity to talk more about the hairy charts of market expectations of the future path of interest rates MEDUSA charts, spaghetti charts people call them. Sometimes the market currently is pricing in at least three more twenty five basis point cuts. Is that reasonable in your mind? Is the market finally going to get this one right?
Okay? I'm going to side step up to some extent because you know, philosophically, the world is subject to shocks. So going back to when you get these market revisions, that's their point in time view. Right now, let's see what happens. So you know, my world is not really I think too kind of overly comment on the market view. But let me go back to the peak inflation of
late twenty two. We well are staff to your system. Staff, I think did a pretty good job of provide the timeline saying, look, where you are now around ten percent inflation, you're going to be basically back around two percent in twenty five. That was a kind of timeline that's been
very stable. And under that timeline, which has really been followed, then of course the market is recognizing the interest rates you need when you're at ten or five or three percent inflation are not the interest rate you need when you're around two So I think in that context the predictability of how this inflation works has held up fairly well. The big issue was had that inflation erupt in the
first place, and the scale of it. But once we got to the peak, going from peak back to two percent has been I think in line with how the macro modeling community would think about it. So I don't think there's been all that surprising so far, and so
let me go back to this year. What I would say is, as we've thought about, there's a lot going on in the world, and so the fluctuation of inflation, what would be the appropriate market policy is very much It could to depend on a lot of policy decisions around the world.
The recent discovery, maybe in the US about deep seek create a lot of anxiety about Chinese growth and AI, but also just sort of hammered home. There are a lot of areas where China seems to be doing very well at the technological edge, and obviously we all know the incredible story with batteries, electric cars, the technology for green power. They have a growing petrochemical industry. They even
have a growing pharmaceutical industry. These are industries that I really think of as core to you know, a big part of when I think of European industry, pharma, automobiles, chemicals, and so forth. I'd like to just hear your thoughts about this more broadly. How anxious does that make you? And are there opportunities with respect to China, especially if the US is reliability as a trading partner grows more questionable.
So let me focus on the economics. Yes, of course there's a parallel political debate which is not for me. But economically, what we've had for a long time now is China growing, becoming a bigger share of the world economy. And the most basic point is that operates in both demand and supply. So as they get more productive, the technologies they diffuse around the world. So you know, those who are able to buy a cheap electric vehicle, to buy cheap solar panels, windmills, all of those. I mean,
there is a kind of global impact of that. Also, it's trying to get richer again, their interest in buying exports from Europe and from America goes up. So the baseline, of course is essentially the world gain richer is win win. Now, of course, there is a debate about industrial policy and you know under what circumstances, whether for economic security reasons or for kind of stability of various industries. You recognize that there are concepts such as kind of countervating tarits.
So Europe imposed in a very calibrated way tarifts and Chinese evs a wile ago. But essentially that was done within I think WTO rules, which is basically, if you think the origin of some of the low prices out of China, or if you like unfair subsidies, then the handbook says you can countervail that and correct that. So what I would say is there are kind of WTO mechanisms that can go a long way in dealing with any kind of identification of if you like unfair subsidies.
But I think we should remember the word gaining richer technologies getting invented wherever they get invented creates global possibilities. I'll call them possibilities. But I would say, and I said it earlier on, is the fact that China is becoming more similar, whether in chemicals, auto and so on, does create adjustment issues. It does mean the kind of price in which a European firm can sell its output
around the world is compromised. The answer to that is not to say, look, I wish this new competition didn't exist. The answer is, okay, how do we adjust? So I would say individual sectors, adjustment issues. That's always been true with trade, but also to recognize that rising real incomes in China are at the world's at demand as well.
All Right, Philip Blane truly the perfect guest to discuss all of this. Thank you so much for coming on the show.
Well, thank you for having me, Joe.
I thought that discussion was really interesting, and it's been a while since we've had a europe centric episode. One thing I was thinking is it's kind of amazing how much politics is intertwined with the economy and minetary policy right now. And we asked a bunch of questions along these lines. But there's a broad recognition of the challenges that Europe faces, and there are some concrete ideas about
what to do about those. But at the same time, it feels like politics is heading in the other direction, away from multilateralism, as you pointed out. And even I mean even Belgium, so Brussels is like the seat of the European Union. Even Belgium has a far right party in power now. Yeah, so you know it seems like an uphill battle.
Yeah right. I mean, I really like the.
Way he framed the answer when we sort of pivoted to structural questions, because sure, there's always structural quote, but Europe seems to have both external structural questions and internal structural questions, and it's hard to think about addressing some of the external structural questions such as how and do you sort of have a competitive AI sector? Do you want a competitive AI sector, but how would you have one given the scale of investment, or can you compete
with the scale of Chinese chemicals or autos. At the same time, as the internal structure still is not complete, there's still individual states and obviously there are formal trade barriers between the states, but there's you know, there are different countries still in different financial markets and a not fully integrated banking system, and whether, as you say, there's the appetite currently in today's twenty twenty five politics to talk about further integration is a.
Challenge, definitely an open question. Shall we leave it there?
Let's leave it there.
This has been another episode of the Odd Loots podcast. I'm Tracy Alloway. You can follow me at Tracy.
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