Carlo Thelen has written an article for his blog in which he outlines his view of the global economic outlook in what he calls the somewhat “disruptive” circumstances caused by the interplay of macroeconomic imbalances, “innovative” political events and frequently volatile financial markets.
In the article, Thelen argues that increased protectionism will hurt the global economy, including the countries that embark on such strategies, and “could be potentially very damaging to economic growth, thus for employment and social cohesion.” He also cites the challenge posed by surging public debt and the volatility of financial markets as among the looming dangers faced by the world’s economies.
Focusing on Europe, Thelen says that “Brexit, the situation in Italy or the risk of political standstill in Germany are good illustrations of the risks at stake” and warns of the knock-on effect these developments could have on the European integration process, which he says is “so crucial for the resilience of the European economy to the next economic crisis – in the euro area in particular.”
As for Luxembourg, Thelen cites economic studies made by Statec and Fondation IDEA that show “a decline of stock exchange indices of about 6 to 7%, namely the magnitude observed in October…would contribute to decrease economic growth by about 0.2 point of GDP.” And, to underline the impact and close relationship between macroeconomic and financial variables, Thelen points out that this is “more than one tenth of the growth rate we recorded in 2017.”
Furthermore, with the grand duchy being such an open economy, it “would not be insulated from foreign uncertainties” with the European Commission’s latest economic forecast (published on 8 November) indicating growth of 3.1, 3.0 and 2.7%. for 2018, 2019 and 2020 respectively. “This is quite low by Luxembourg standards,” Thelen points out, adding that its effect on employment growth also “implies (once more) adverse productivity developments.”
The solution, Thelen says, is for Luxembourg “to anticipate the aforementioned challenges and to ‘put our own house in order’ in a preventive way in order to become more resilient to future shocks.” This means, among other things, a leaner administration and the implementation of the “digital state”, putting SMEs at the centre of the economy, creating a roadmap to establish and sustain tax competitiveness, more intergenerational fairness, more accessible housing, and energy supply at competitive prices.
The grand duchy “should also support and promote external trade based on the principles of multilateralism, forge long-lasting connections and reach new growth markets,” Thelen concludes.