China is now a better partner for the European Union in facing global challenges than the United States with Donald Trump in power, Nobel Prize-winning economist Joseph Stiglitz has said. He said that Europe, China and other countries should form a “G-1” without the US to address climate change and design a new global trade architecture.
“The hostility between Europe and China was always derivative from America’s hostility. There was no real grievance,” he told The Irish Times.
“In fact, we know on the existential issue of climate change, Europe and China are roughly in the same boat, and they both recognise it.”
The former chief economist at the World Bank and chairman of the US Council of Economic Advisers was in Beijing to attend the China Development Forum (CDF). The annual business conference, which opens on Sunday, will bring dozens of international chief executives to the Chinese capital including Apple’s Tim Cook, Blackstone’s Stephen Schwarzman, Pfizer’s Albert Bourla and AstraZeneca’s Pascal Soriot.
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Stiglitz said that Trump’s tariffs will hurt the US economy and that his erratic style has already unnerved American business and the stock and bond markets, introducing an element of volatility that makes business planning next to impossible. He believes the EU’s decision to authorise joint borrowing to fund defence spending is good policy that could stimulate the economy while strengthening sovereignty.
But to deal with the challenges of climate transition and defence, he says the EU should revisit the euro zone rules that require budget deficits to remain below 3 per cent of GDP and public debt to be less than 60 per cent of GDP.
A world in which there is more fiscal stress will have less tolerance for Ireland’s shenanigans
“The original idea was a fear of inflation going from one country to another. There’s no evidence that that has ever been a problem,” he said.
“That doesn’t mean that there’s unbridled spending. There has to be an awareness of the limitation of resources, and that might necessitate a European-wide tax on super-wealthy people, on corporations, on pollution. So they may have to raise more revenue.”
This need for all countries to raise revenue to fund new spending commitments could make Ireland more vulnerable to scrutiny of its tax regime.
“A world in which there is more fiscal stress, which we’re clearly going in to, will have less tolerance for Ireland’s shenanigans. So your business model is, I think, fraught,” he said.
This year’s CDF coincides with a big policy effort in China to boost domestic consumption, which has been depressed by a years-long property market slump. But Stiglitz believes that Beijing should focus its stimulus efforts on broad-based spending rather than limited programmes such as subsidies for trading in household appliances.
A trillion-dollar firm is a symptom of bad economic policy, not good economic policy, because it means you have a monopoly
“I think improvements of the overall social protection, healthcare, retirement, would have a double benefit. It would get money out, which people would spend, and it would give more security so younger people could feel like they can consume more. You get the direct benefit now and you get that double whammy,” he said.
A year or two ago, the consensus among economists was that the US economy was strong, China was slowing down and Europe was in trouble. But Stiglitz believes that this analysis flattered the US and misunderstood the weaknesses in the European economy.
“Many people in Europe, including the Draghi report, put, I think, too much emphasis on things like the capital market problem – that there’s not a capital market union. It’s a problem but I viewed the underlying problem was insufficient aggregate demand. The US had raised interest rates very high, had a strong fiscal policy that enabled it to do well in spite of that high interest rate and Europe didn’t. It was really that simple,” he said.
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“I used to get asked the question, where are the trillion-dollar firms in Europe? I would explain that a trillion-dollar firm could be, and in the US is, a symptom of bad economic policy, not good economic policy, because it means you have a monopoly.
“Competition drives down profits and you shouldn’t be having that much profit. It’s an irrationality of the financial market that it extrapolates that going on forever, that it extrapolates the success of Tesla even though its products are inferior to BYD. So it was a symptom, not of success, but of something going wrong.”
