The venue to discuss the declining economic health of Western economies could not have been located in a more ironic setting: The opulent Emirates Palace hotel in the capital of Abu Dhabi, one of the richest cities in the world. The panel was situated inside the hotel’s expansive auditorium, featuring a stage framed by gilded reliefs of falcons, the symbol of the United Arab Emirates, amber lighting and surrounded with floral bouquets.
But attendees at the biannual Festival of Thinkers conference heard a prognosis for the global economy that was far from rosy. The session opening the gathering of internationally renowned scholars, business leaders and educators was largely downbeat, highlighting persistent concerns with the euro and sovereign debt.
"The problem is none of the institutions or countries have incentive to take into account the chain reactions their failures may make," said Eric Maskin, the 2007 Nobel Laureate in Economics. "Even when the world hasn’t recovered, high leveraged ratios are a problem again."
Panelists reserved most of their criticism for European and U.S. lawmakers, claiming bad policies and near-sighted politics were to blame for many of the dilemmas presently facing Western economies. Finn Kydland, the Nobel Laureate for economics in 2004, suggested a double-dip global recession is looming, and he and other panelists suggested recovery would only come through restructuring and a focus on strengthening economic regulations.
"It’s a very dire situation," Kydland said. "Even if there is not a double-dip recession, you need growth rates of about 1% to approach old trends. Bad and inconsistent government policies are a big problem."
Kydland and Maskin both shared pessimism about the short-term global economic outlook, but for different reasons.
In Kydland’s opinion, the reason most economies have not recovered since 2008 is because of continuing errors in government positions on finance. Pointing out that he received the Nobel Prize for his framework to study macroeconomics, "I don’t think the past four or five years we have felt those kind of shocks," he said. "Fiscal policy is at the heart of current problems."
He predicted that instead of restructuring and investing more prudently, politicians in Western countries faced with budget shortfalls would seek first to increase taxes in some regard, though there was already enough money being generated through revenue collection.
"There is a need for predictability of government policy… I am completely confused about how fiscal policy is made in Europe," Kydland continued. "Key decisions that make nations grow are very forward-looking; costly at the time, but returns come years later."
Maskin said that the current economic situation did not mean that the world was looking at a repeat of the crisis that began in 2008. But he took governments and banking institutions to task for still borrowing too much.
"We need regulators to worry about systemic risks, and limit leverage," he said, adding that recent measures enacted by the Fed were a step in the right direction. "But is it enough for the long run? Probably not."
Maskin took note of recent government initiatives across Western economies to reduce costs, but still found them wanting. Cutting government spending would not help the unemployed find jobs, he said; instead the role of government is to stimulate the economy.
"Austerity seems to be the catchphrase of the day through Europe and the U.S.," he continued. "The idea that the way to solve government debt is with spending cuts is unfortunately a very short term view of the matter. Overall, we’re still in an economic downturn."
Discussing the eurozone’s continuing problems, opinions were split amongst the European scholars and business leaders participating in the panel. Malcolm Grant, president of the University College in London, described "Britain [as] the disgruntled child of the party."
Grant acknowledged the U.K.’s economic future is closely entwined with Europe’s, and it was willing to make contributions to the International Monetary Fund to shore up the euro. "But as we approach the second crisis, Britain is compelled to help save the euro, but not being part of the euro," he said.
But Friedrich Joussen, chief executive officer of Vodaphone Germany, was willing to view Europe’s problems as an opportunity. "I’m very optimistic," Joussen said. "With so many different philosophies, cultures and politics, Europe requires consensus. We can maybe use this financial crisis to foster the next level of cooperation."
Joussen argued that, unlike Kydland’s contention, European institutions showed they were capable of forming and following consistent policy. "When this crisis came, our banks have accepted regulation," he said. "We see the need regulation and political leadership, not everything can be done by (consensus)."
The ongoing economic problems pose a unique challenge to universities, Grant added, describing a visit paid to university heads by Queen Elizabeth II. "The queen asked why no one saw this economic crisis coming," Grant recalled. "What is the role of the university? Why can’t a university answer this question? It compels us to ask, ‘What’s the role of universities in the 21st century?’"
Grant said educational institutions had to organize disciplines around global questions. "That’s biggest challenge of universities of the future — much more collaboration. Something has to bring together universities, because we’re failing, we’re doing brilliant things in isolation."
The lone politician on the panel, former Kentucky Governor John Young Brown Jr., gave little defense for the actions of his fellow lawmakers, noting many were not qualified to make fiscal policy, as "they have never learned to add or subtract."
"Their only motivation is to get reelected," Brown continued. "It’s human nature. Government, they’re just trying to keep their jobs. It’s a matter of survival."
The introduction of greater demand for accountability in American politics will result in sounder economic policies, he said. "I think America will regain credibility once it balances its checkbooks," he said. "We’re a nation of survivors. When I was in office, inflation was 20%, and interest rates were 22%."
Brown said that despite the shift of resources, the U.S. was still competitive. "It’s the entrepreneur that built the U.S.," said Brown, who helped build the Kentucky Fried Chicken fast food brand into a multi-million dollar business. "I’m very optimistic, entrepreneurs can seize the day. It’s our time."