Reshaping globalisation is Europe’s responsibility and chance, write Karl Aiginger and Heinz Handler. Policy should ensure that there are no more winners and losers from globalisation, they argue.

Karl Aiginger is the director of the European Policy Crossover Centre-Vienna Europe and professor of economics at Vienna’s University of Economics and Business. Heinz Handler is WIFO Emeritus and deputy director of the European Policy Crossover Centre-Vienna Europe. Previously he served as director general in the Austrian Ministry of Economics.

Political opposition to globalisation has risen in industrialised countries, although the overall positive effects on economic growth and alleviating poverty are empirically verifiable. This critique is understandable as the effects of globalisation vary according to regions, professional groups, and education. When globalisation occurs concurrently with technological breakthroughs and weak demand, and when economic policy fails to implement the necessary stabilising measures, globalisation will entail unemployment and rising inequality. This is the rationale for nationalist and populist reactions which in turn affect election results, strengthening illiberal tendencies and the call for protectionism. Populist calls for renationalisation and new fences would severely hamper successful solutions to the most pressing societal problems, such as climate change, water shortages or security issues, which can only be solved by international coordination, if not global cooperation. In this situation Europe should not only remain open to globalisation, but even try to grasp the opportunity to shape globalisation according to intrinsic European values, including liberal democracy, social balance and environmental sustainability. The partial withdrawal of the United States from these goals opens up the potential for Europe as a leader in shaping future globalisation.

Turnaround in the political discussion

In the third phase of globalisation starting in the early 1990s, the critique of globalisation has shifted from damning the exploitation of developing countries to stressing the disadvantages for industrialised countries. Increasing inequality and high unemployment can be identified as the two central causes for sceptical assessments of globalisation and the call for protectionism and re-nationalisation. Today the income and wealth distribution within most countries is more unequal than in 1990, specifically the share of the top 1% has increased. Most analyses emphasise that the effect of technology is stronger than that of globalisation, but the problems may actually reinforce each other. Unemployment is regionally and sectorally concentrated, mostly in former manufacturing areas and in medium skilled occupations. For low-skilled people, an oversupply prevails despite stagnating or even declining real wages, while skilled workers are in short supply, especially in technical professions. Above all, policy failures have amplified the problem fields. First, globalisation losers have not been compensated or re-qualified early enough. Second, the financial crisis has resulted in a lasting distrust in the financial sector and a persistent savings glut. Third, national policy makers tend to ascribe successes to their own merits, while failures are attributed to external forces. The recent phenomenon of migration could entail positive effects in the target country, if it matches the demand for labour, as well as in the country of origin, if it limits the brain drain by circular migration. However, if the negative effects of massive migration (resulting in particular from war and famine) dominate and unemployment is already high, they are often exploited by populist movements in a distortive way. Economic fears may then be aggravated by fears of loss of cultural identity.

A strategy of responsible globalisation under a European lead

Reshaping globalisation is the only chance to continue the welfare-increasing process and at the same time prevent radical populist opposition. We approach this tricky task with a strategy based on basic principles and instruments reflecting nation-specific search processes which are necessary to change the game. Our strategy is based on seven principles:

Globalisation is no final goal, but a means of promoting well-being and peace. It should be shaped by economic policy to increase the set of choices for individuals and countries, encouraging bottom-up elements and allowing for differences in preferences and mutual learning. Up to now globalisation has been fuelled by market forces and new technologies; henceforth economic policy has to assume responsibility that social and ecological goals are attained. The speed and burden of change accelerates in open countries, and losers therefore have to be compensated, less skilled people be enabled to switch from the losing to the winning position. The functions which provide quality of life have to be defined, and progress and deficits under globalisation must be continuously monitored. Europe should try to shape globalisation more actively according to its values, but should also learn from other cultures. Looking for jointly advantageous solutions increases well-being and economic success, while shaping rules with “my country first” slogans are bound to fail in the long run.

Potential game changing instruments will support the attainment of the strategic goals, although not all instruments have to be applied at the same time and with the same intensity. Trial and error and national preferences on the choice of the instruments are possible and efficient, given that the reshaping of globalisation is a search process in unknown territory and no one knows the best solution in advance.

Government policies should be oriented at “Beyond GDP” goals, refocus expenditures towards investment in education and innovation, and redirect innovation from saving labour to saving energy and resources.

should be oriented at “Beyond GDP” goals, refocus expenditures towards investment in education and innovation, and redirect innovation from saving labour to saving energy and resources. Social policy should target unemployment and inequality, in particular by switching from ex post protection to investing in future capabilities, starting with early education.

should target unemployment and inequality, in particular by switching from ex post protection to investing in future capabilities, starting with early education. Environmental concerns should be addressed by internalising the costs of emissions in production, consumption and transport and by setting rules of conduct for multinationals to prevent pollution and exploitation of scarce resources.

should be addressed by internalising the costs of emissions in production, consumption and transport and by setting rules of conduct for multinationals to prevent pollution and exploitation of scarce resources. Trade agreements should be redesigned to increase well-being while respecting cultural differences, and upgrading social, environmental and health standards. Dispute decisions should be integrated into in the hierarchy of the courts with the potential of recourses. International organisations should cooperate in shaping economic, social and environmental rules.

should be redesigned to increase well-being while respecting cultural differences, and upgrading social, environmental and health standards. Dispute decisions should be integrated into in the hierarchy of the courts with the potential of recourses. International organisations should cooperate in shaping economic, social and environmental rules. Knowledge transfer can be enhanced and political instability mitigated through an exchange of researchers and qualified workers and by stimulating investment in the European Neighbourhood (European Neighbourhood Programme –ENP). Mutual benefits of migration should be reaped by supporting early integration of migrants into the work sphere and encouraging circular migration.

Following these principles and searching for the best instruments to implement them will hopefully make the welfare effect of globalisation increase for all partners. Europe should try to increase its impact on shaping the rule, but at the same time learning from its partners.