In my view, the attack of Russia against Ukraine is inexcusable, and an unspeakable act of violence. Whatever reasonable arguments could have been made before the invasion, about the demands that Russia was putting forward implicitly and explicitly about security, its geopolitical ambition, its technological advancement or improvements in policy delivery, lose all of their value in the face of these disproportionate, cruel and premeditated actions.
We have spent the past week juggling between helping where we can on the ground, and processing the economic implications for the world.
The cost for Europe is significant; there is no point in hiding what is ahead. According to the financial accounts data provided by the Bank of Russia, the stock of foreigners’ financial assets in Russia was worth USD 1trn as of 2Q21, while the stock of financial assets owned by Russian residents abroad was worth USD 1.4trn. Both ends, in practice, have lost everything for the time being, given the way the situation is unfolding. Also, we must add the severe loss of activity going forward: tourism, FDI, technological exchange, and so on. In addition, we should also acknowledge the sharp inflationary hit that the whole world will feel, but that Europe, in particular, will be exposed to, via higher energy and food prices, and significantly less reliable energy flows.
The very by the year-end and some monetary tightening still materialising this year, as the central banks will have to deliver something in order to remain coherent with their inflation mandates.
What is particularly important to me, today, is not to convey the probable course of events from policy makers in the next 12 months. We all see the patterns: some fiscal measures to tame the energy shocks, some tightening to limit wage demand spirals. What is important to me, today, is to alert everyone and to make it explicit that we are facing a severe inflationary decade ahead, with devastating effects on inequality and economic growth potential if we do not begin to recalibrate economic policies to adapt to the current world. These are the things I would like to bring to your attention:
The green transition, the digital transition and the monetary policy strategy deployed since 2008 are highly inflationary in the long run, especially now that, with greater energy insecurity, we will be facing bigger supply chain challenges and pressure to diversify away from Russian gas.
Digitalisation, QE and global capital mobility polarise the corporate financial landscape: big companies are more likely to get bigger, small companies are being crowded out. I am oversimplifying here, of course, but the essence is that. This is not a growth strategy that will deliver higher wealth creation for the majority of people, nor higher productivity in the aggregate, no matter how much technology investment we see. It is a myth that more technology automatically delivers lower prices and higher productivity; if we do not make sure that all types of companies – big, small, new, and everything in between – are facing a genuinely level competitive landscape. This is not what we are doing now. We are supporting growing oligopolistic behaviour and eroding the productivity capacity of the majority of workers.
Digitalisation has, above all, an extremely powerful effect on humans, in terms of the amount of information we receive and its quality, and it also makes it easier to segment information across society. The segmentation of the type and quality of information, in my view, will fuel distrust, erode knowledge, and polarise points of view. Anybody that has experience in emerging markets knows well that there is a clear price for distrust in finance, and it often comes with weaker exchange rates and higher interest rates. Again, I am oversimplifying here, but the core message is correct. Digitalisation affects information and, as things stand, this process will have a cost at the macroeconomic level, which is, most likely, going to be negative. And this magnifies the consequences of economic inequality.
Information management, we could say, is a critical ingredient of human well-being. It is a biological necessity to screen the outside world for survival and to seek happiness; and, ultimately, it is also a necessary ingredient for risk taking. What I am trying to convey to you is that thinking about digital technologies purely from a technical and investment perspective is missing an important and equally powerful aspect of this process for society; therefore, you would be ignoring its major financial and human repercussions.
The inflation risks we are facing in the coming years cannot be addressed by monetary policy, as things stand, nor can they be appropriately addressed by fiscal policy using the tools we are focusing on: price caps and income support tools. Inflation risks can be mitigated by supporting genuine competition, genuine human creativity, and genuine economic opportunities for everyone – because the size of the difficulties we are facing is too great to exclude anyone from participating in the solution.
So, today, I would like to tell you this: it is time to think about the real long-term solutions that we need.