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With war breaking out on the eastern frontier, inflation rising amid a tightening labor market, and supply and demand imbalances creating uncertainty around monetary policy, the economies of Europe, the Middle East, and Africa face profound challenges in their path to postpandemic recovery.

At this year’s virtual Economic Outlook EMEA, held one day before Russia launched its invasion of Ukraine, experts from Chicago Booth and beyond came together to discuss these issues facing the EMEA region. Speakers included Veronica Guerrieri, the Ronald E. Tarrson Professor of Economics and a Willard Graham Faculty Scholar; Randall S. Kroszner, deputy dean for Executive Programs and the Norman R. Bobins Professor of Economics; and José Antonio Álvarez, ’96 (EXP-1), the CEO of Banco Santander, a retail and commercial bank headquartered in Spain. Chris Giles, economics editor for the Financial Times, moderated their conversation on what lies ahead for the EMEA region in 2022.

zoom photos of José Antonio Álvarez, Veronica Guerrieri, Randall S. Kroszner, and Chris Giles

- Hello, everyone, welcome
to Economic Outlook 2022

hosted by the University of Chicago

Booth School of Business.

My name is Madhav Rajan.

I'm the Dean

and the George Shultz
Professor of Accounting

at Chicago Booth.

I hope all of you are doing well.

Thank you for taking the time

to engage with the school
in this particular manner.

Chicago Booth has a long tradition

of informing public discourse

through platforms such
as Economic Outlook,

which we began back in 1954,

as well as our IGM,
Initiative on Global Markets

and the Chicago Booth Review Publication.

Economic Outlook provides a forum

for our pathbreaking thought leaders

to confront the future,

evaluate emerging trends

and share insights that help
reframe our understanding

of the world to come.

This is the final Economic Outlook event

of our early 2022 series.

EO Hong Kong was held last
month with Randy Kroszner,

Chang-Tai Hsieh and Richard Wong,

and we had more than 400 attendees there.

And before that, we had
Economic Outlook Chicago

with Austan Goolsbee,

Raghuram Rajan and Randy Kroszner.

And that welcome more than 3000 attendees.

Recordings of both those events

and key takeaway articles

are available on our
website at chicagobooth.edu.

We have an amazing program today.

I wanna thank our distinguished panelists,

Chicago Booth Faculty, Veronica Guerrieri

and Randy Kroszner, and our
alum José Antonio Álvarez,

CEO of Banco Santander

for being here to share their insights

related to Post-Pandemic Recovery,

Inflation and the Economies of EMEA.

My sincere thanks also to Chris
Giles of the Financial Times

for being here to moderate today's panel

on these very important topics.

Before we begin, I'd like to invite you

to celebrate Chicago Booth's
new state-of-the-art campus

at a special event in London on March 28,

from 5:30 to 9:00 PM, UK local time.

You'll hear from university
leaders and notable alumni,

including President Paul
Alivisatos and David Booth

in a panel discussion about leadership

and the future of business in London.

And the event will be followed
by a networking reception.

Information and registration

can be found on a leading in London page

through Chicagobooth.edu.

So with that, it's my great pleasure

to introduce today's panelists.

Veronica Guerrieri

is the Ronal Tarrson
Professor of Economics

and the Willard Graham Faculty Scholar.

Veronica studies macroeconomics,

search theory, growth
theory, dynamic contracting

and labor and financial market frictions.

Veronica has been a research associate

at the MBER since 2013 and a consultant

at the Federal Reserve
Bank of Chicago since 2014.

Randy Kroszner is Deputy
Dean of Executive Programs

at Chicago Booth

and the Norman Bobbins
Professor of Economics.

Randy, of course, was a governor

of the federals reserve
system from 2006 to 2009.

He chaired the committee on supervision

and regulation of banking institutions

and the Committee on Consumer
and Community Affairs.

And Randy took a leading
role in developing responses

to the financial crisis and initiatives

to improve consumer
protection and disclosure.

And finally, José Antonio Álvarez

who was named CEO of Banco
Santander Group in 2015

and Executive Vice Chairman in 2019.

Previously, he was the
bank CFO for a decade.

And before that head of
its finance division.

Before joining Banco Santander,

José Antonio held executive
positions at BBVA,

Argenteria and Banco Hipotecario de Espana

among many others.

He's a member of the Board of
Directors of Santader Brazil.

And we are very proud to say

that Chicago board's global leaders too.

Our moderator, Chris Giles
has been economics editor

for the Financial Times
since October, 2004,

after previously serving as a lead writer.

His reporting bit covers
global and UK economic affairs.

And Chris also writes
a UK Economics column.

Thank you all again.

And with that, I'll hand it off to Chris.

- Thank you very much, Madhav.

And welcome to the panel here

and from me here at the
Financial Times, also in London.

I think the topic today
is of extreme relevance

at a time of enormous economic uncertainty

and geopolitical uncertainty.

So we've got a lot to get
through Post-Pandemic Recovery,

Inflation and the
Economies of EMEA region.

I've got lots of questions

that have been pre-submitted to me

by the audience already in advance

that we'll cover many
of those already today,

but I do urge and encourage
people in the audience

to submit further
questions into the Q&A box.

And I'll be able to see those

and present those to the panelists

as we go through this era of discussion.

And I think just to
start with you Veronica,

inflation, one of the key topics,

we didn't think we were necessarily

gonna be talking about inflation.

It was supposedly dead,

and we had a great moderation

around the world in advanced economies,

but now in the European
region, 5.1% in February,

all the latest estimate,

do you think the ECB

can continue its very,
very loose monetary policy

when inflation has risen as fast as it has

and keeps on beating expectations?

- Yes, hi, thanks for inviting me.

So clearly, we come from a situation,

as you were mentioning where inflation

between 2014 and 2019

was averaging a 0.9% in the Euro area.

And so we are coming from an history

where inflation was not so much a concern.

If anything, the concern
was deflationary pressures

and this was reflected also in the change,

recent change in the like political

or the strategy of the ECB

that is now much more symmetric

in targeting the 2% both
from above and from below.

So clearly, the debate in the last years

has been about how can we do

to increase inflation and how not?

Should we be worried about
inflationary pressures?

Now things have changed
quickly, not only in Europe,

but in the rest of the world.

In the U.S. much more than in Europe

and actually that's an
interesting question

why in the U.S. inflationary pressures

are a bit more pronounced than in Europe.

It may be because of
fiscal policy packages

or it may be because of the
overall recovery of the economy.

I mean, this is an open question.

I think the ECB is trying
to understand that,

but despite this differences
between U.S. and Europe,

the ECB, I think in the
last policy speeches

have clearly made the point

that they're gonna be proactive

in responding to rising inflation.

Now that it said,

I think if you look at
forecast of expected inflation,

the impression is that this
spike in inflation nowadays

is driven mainly by the
particular type of shock

that hit the European
economy or the world economy,

which is the pandemic and the bottlenecks

and the supply chain disruptions

that have been created by the pandemic.

In fact, if you look into inflation data,

it's really the big
chunk of this big spike

is energy prices.

And so, the overall, I
think agreement is that

at least the consensus seem to be that

this is gonna be something
more temporary than persistent.

And so should ECB be
responsive to rise inflation?

Yes, for sure.

But maybe with caution

because of course we are still recovering

from a very bad shock.

And it looks like this is
more a temporary spike.

And so we wanna see what's going on.

Of course now we have the war.

We will talk about that later, maybe.

So there are other
concerns to be afraid of.

On the other hand,

what's happening in the long medium term.

I think expectations show that inflation

is gonna be reanchored to 2%.

So I don't think that the worry is

if the ECB is too expensive,
too contractionary now,

then we are gonna go back
in a low deflation period

because things have changed in Europe.

The political stance have changed.

Next generation, lots of fiscal effort

in Europe show the sign of a
more proactive political action

that actually seems to go in the direction

of not adding a stagnating economy

or low inflation levels as in the past.

So overall, I think the ECB should not

and does not seem

to worry about going back
to a deflationary spiral.

On the other hand, should they
be very active in tightening?

They should, they should for
sure keep inflation expectation

anchored to 2% so they will be,

and they have already shown
sign of being reactive,

but not too much because
the current spike,

it looks more temporary than not.

- Okay, so thank you.

Thank you, Veronica.

So that's the quite the benign view

that this is a temporary spike

and the ECB doesn't have to do very much.

Jose Antonio, do you agree
with that in particularly

for our markets perspective,

do you think the inflation we are seeing

at the moment is here just
because of the energy crisis

and will go away?

And in fact, even more benign,

the ECB doesn't have to do very much.

And we've got rid of
the deflationary threat

that previously afflicted
Europe, as Veronica said.

- Thank you, Chris and thank
you for having me here.

I'm not as optimistic as Veronica is

so I heard this message coming
in the last summer, yeah.

So don't worry.

This is gonna be temporary

while we don't wanna need to worry, right?

We heard this from the
fed, Bank of England, ECB.

Yeah, so later on in the fall,

the fed changed the
message at the beginning.

It's true that the temporary
inflation was based on,

or we have a result of the pandemia,

some supply chain problems

that translate into high inflation.

And as long as these problems

and the pandemic goes
away and this problems,

then the supply chain will disappear

and the inflation will come back

to where it used to be the normal path

as Veronica explained very well,

particularly in the EU

who has more worry about the
deflation than inflation.

Yeah, so for the last couple of years.

But what's has happened since that

the outcome of the pandemia

in one particular form,
probably in several,

but one that attract my attention,

the outcome was significantly different

than the one we were expecting before,

particularly in unemployment.

Yeah, so if we look both worlds,

we look when we were trying to forecast

well, was very difficult now,

because was a health crisis

and the economies were not well equipped

to predict a health crisis,

but we were saying, no,
we're gonna see unemployment

to go up significantly.

And at the same time we were saying,

oh, the asset prices are gonna suffer.

So as a result of the
combination of several things,

including the actions from the governments

and central banks,

we got unemployment levels
are the lowest we seen it,

particularly in Euro zone since 2007, six,

and nothing to say about UK and U.S.,

whereas labor shortage here
and there and all these things.

Having this situation in the labor market,

combined with spike and
inflation coming from energy,

supply chains and all these things,

second round effects,

I wonder if those gonna boost inflation

longer than we were expecting,
let's say last summer.

My idea right now is the inflation

is not gonna be so temporary.

So it's gonna be projected,

I don't know for how long.

And this will force the
central banks to react,

including the ECB.

And they already did somehow
after the last policy meeting,

they changed the message.

Yeah, they haven't
clarified as the fed did

when and for how long and how many times

they're gonna tighten the interest rates,

but a message saying, okay,
you know, you know what?

Inflation is just not temporary.

May last for the whole year,
may translate into 2023.

We cannot have such a real
negative interest rates

that we have today

that are in the real of
high 6% real negative

interest rates that this
in my view too much.

For that reason, I do expect even the ECB

recognizing that there's
some structural factors

that point to what Veronica said,

demographics in Europe, blah, blah, blah.

This point it is,

but at least for a
significant period of time,

you see inflation being persistent

and the ECB impose to react

probably more than they thought only three

or four month ago.

- That's really very interesting.

I think Randy, this gets
to the knob of the issue

on sort of monetary
policy at the moment is

how much can we look
through this inflation?

How much is it very much a temporary spike

called by energy prices?

And how much is it going to
run into second round effects

where companies feel they
have the power to raise prices

and also workers demand higher wages

and find that companies
are willing to pay them.

I was talking to the IMF today, in fact,

because they came up with their
assessment of the UK economy

where they said, look, we just haven't had

unemployed labor market as hot as this.

Monetary policy still is
stimulative as it was,

even though the bank of the
members raised rates twice

since December and also fiscal policy

still pretty stimulative.

So this is, if you ever wanted a situation

where you're gonna have second
round effects, this is it.

They're a pretty hard line.

It's gotta be said that

this is really IMF doing
the IMF sort of thing.

What do you think about that?

I mean, we haven't had to worry

about second round
effects for 20, 30 years

in central banking is now the time

where it's really back on the agenda.

We are muted, Randy.

- It is the core of the question,

because there are lots
of issues of whether

is this temporary?

Is this permanent?

Is it due to supply chain issues?

Is it due to energy?

Those are very important issues,

but there's also the issue
of market expectations

and individual expectations.

And so people are not...

I think most people are not really focused

on what is the cause of it.

They just know that
there's a lot of inflation,

certainly whether it's in the UK,

as you said, with incredibly
tight labor markets,

U.S. with tight labor markets,

much of Europe with super
tight labor markets,

people are acting in a different way

than they have for 20 or 30 years.

In the U.S., we call it
the great resignation.

If people aren't allowed to work from home

and don't get a 10% wage increase,

they just walk and they
feel that they can go

and get a job whenever they want

under whatever circumstance they want,

that's dramatically
different than it was before.

And regardless of whether
the price increases

are being driven by shorter run
factors, longer run factors,

that's the key thing that
we have to worry about.

The second round effects

are the unanchoring of expectations.

And we certainly have seen firms

and individuals operating at
dramatically different way

than they had before.

People being willing just to move on.

If they don't get exactly what they want

and firms being willing to
pass on increases in costs

in a way that they
haven't felt comfortable

to do in decades.

The key question is, is
this a one time adjustment?

And so, obviously prices fell

and demand fell radically
during the pandemic.

And now we have to sort
of readjust to that.

Is this just sort of something,

well, we do this one time adjustment,

maybe a little bit more than one time,

but then get back on the old path.

Or is it that people say, my goodness,

this is just something different.

I haven't seen this in 20 or 30 years,

so I'm gonna be acting differently

than I have in the last 20 or 30 years.

And I don't believe even of those people.

The president's been
telling me that inflation

is gonna come down.

The central bank's chair has said,

it's gonna come down.

Well, I see gasoline prices keep going up

and I'm not worried about sort of the core

versus the headline number.

My costs are going up.

And people tend to focus on the things

that are most salient to them

and where they can see the prices easily.

Things like energy prices.

And I think there's a
very significant risk

of this untethering of expectations.

And that's why I think it's very important

for central banks to be proactive.

Even though, of course,

they can't do anything about
the supply chain issues.

They can't pump more oil,

they can't build more computer chips,

but it's still their problem.

Because if inflation
expectations become unanchored,

then it's really tough to put
the genie back in the bottle.

And I think that's the key issue.

Can central banks bring down inflation

without bringing down the economy?

And I think we run a risk
that the central banks

may have to run interest rates up

much more than they are forecasting now,

to try to make sure inflation expectations

don't become unanchored.

- And so just to really try

and make that really
concrete for the audience.

So we've got a quest
question here from Peer,

from the audience can
inflation be temporary

once it feeds into wages?

Just Randy, I'm gonna come
back to Veronica in a second,

but just could you answer that question?

And when you say that we are gonna

have to have manage policies
significantly tighter,

what do you really mean?

How much tighter?

- The crystal ball is a little bit cloudy

because as you said, Chris,

we haven't been in exactly
these situations before,

but Peer's put his finger
on exactly the key issue.

So it could be that people will say,

oh, well, this is a bounce
back from the pandemic.

Yeah, things are a little bit outta whack.

I need an adjustment.

But then in the future,

I see things kind of going back

to the way that they've been
for the last 20 or 30 years.

We really don't have enough experience

and data to know how people
form their expectations

and how they change their behavior

related to the expectations.

So this is one of the
really great unknowns.

I think there's a lot more
work that could be done,

like the work that one of our colleagues,

Richard Thaler,

our most recent Nobel Laureate does

thinking about be behavior
and behavior economics,

such a banks can do a lot more
to try to understand this.

It's not something where we
just have to throw up our hands

and say, oh, we don't understand.

We could do a lot more
systematic research.

Not much has been done,

but I think we could
do a lot more on that.

And then how much are
they gonna have to move?

That's close related

to that first question about expectations.

So far market expectations
have not moved up dramatically.

They moved up, but they
haven't moved up nearly

as much as what it appears that
firms and individuals have.

And the key question will be,

are market expectations
gonna be catching up

to where the firms and individuals are.

If that's the case,

central banks are gonna have

to raise rates very significantly.

I think there's gonna be a tightening

in each of the seven fed
meetings for the next year.

Some form of tightening that'll
get us probably around 2%.

Inflation's around 7%.

That's still pretty far from the old days

when interest rates-

- We had great interest
rates the past two.

- Yeah, yeah.
- Four months five, yeah.

- Yeah, exactly.

And so last time we had inflation
in the five to 10% area,

the fed was raising rates to five, 10,

even above of that percent.

I'm hoping we don't get there,
but I don't think we have,

I don't have the
confidence that I can say,

it's just gonna stay.

We'll get to two and
everybody will be happy.

I think that's-
- Okay, Veronica.

- That was the reason for
why we should be nervous.

Those were the two reasons.

Why should we be relatively
sanguine about this?

What are the reasons to not worry so much?

- What are the reason not to worry so much

about inflation or more general about-

- Well, you took the view
that it was more temporary.

- Yeah, so, okay.

Let me, first of all, clarify
that when I said that,

I think it's gonna be more temporary,

I wanna emphasize that I still think

that the central bank should act.

I'm not saying that it shouldn't act

because it still positive.

So just say that probably my view

relatively to Jose or Randy's view

is that it shouldn't be so
aggressive as they feel.

And my impression is
that, okay, energy prices,

so energy prices are rising a lot.

And I believe that this is,

I mean, energy prices rose by 27% or more,

while inflation rose
like to 5% digit, right?

So all other sector in prices
have increased by two, 3%,

so much more around the target.

So these are for energy prices.

So if there are bottlenecks in the economy

that increase this energy price

that are gonna be in part
resolved by the recovery,

the strong recovery of the economy,

then energy prices are gonna go down

and then things are gonna
be a little bit better.

Now, of course, the worries
what Randy was talking about,

then what was the
question from the audience

about how about expectation
of inflation, right?

Is it the case that if we have
this temporary last too long,

then it becomes self
feeling and then it becomes,

even though the source of the
shock maybe worse temporary,

maybe that you have this second

of the effect that stays there.

And so, unfortunately that it is a risk,

even though I believe the source
of inflation is temporary.

And the problem is that we have to keep

a very close eye to real time data

and expectation on inflation,

which are the key important variable here

to take into consideration.

Now, the energy prices now

are gonna be affected possibly
by the war we are, right?

I mean, Russia and Ukraine are going in.

The problem is that that
could feed back inflation

through if Russia decided
to retaliate on sanctions,

by stopping or reducing
access to natural gas,

which for the Euro is like 40%,

I think of the gas comes from Russia.

So that could be a problem

that could rise prices even
more in inflation, even more.

So it could be an additional source

of concern for inflation.

On the other hand,

the optimistic part of
me that is still there

says, I mean, I don't know
if it's optimistic or not,

but in terms of inflation,

it's not clear what's gonna happen

because there may be
actually demand effect

coming from the uncertainty around the war

and investment may reduce,
consumption may reduce.

And so this may actually generate

the price downward on inflation.

So it's not an optimistic view

because of course this means

that the economy is gonna be hard,

but in terms of what the ECB should do,

I don't think it's obvious.

I mean, we have to see how the demand

versus supply is gonna play out.

- And is this going to the inflation

that we are seeing in Europe,

but do you see that
being sort of symmetric

across most of the Eurozone economies?

We have a question here
on how much do you think

it's going to deviate between economies?

- Yeah, so I was looking
at the data yesterday.

There is clear about decent
amount of heterogeneity

with some countries, actually, France

I was surprised has
particularly low inflation rate

while Italy has a higher inflation rate,

Germany is higher than Italy,

but the range of heterogeneity

goes from 2.5 to nine in some rare case.

And of course, average is around five.

Because energy prices play a big role

it clear is impacted by the
structure of the economy

and how much each single
country relies on that.

But I don't think that at the moment,

I think in general,

the impression is that
there is this upward trend

on inflation that is pretty homogenous,

or at least all countries have this field.

And so I don't think that
there is enough heterogeneity

to push into the direction

of substantially
different economic advice.

So at the moment, I don't
think that this heterogeneity

should create problems of unity

in terms the decision of what to do.

So the problem inflation

seems it's rising almost everywhere,

somewhere more than other,

the prices is temporary or not.

That's the key question.

I think that's more
similar for all countries.

- And this raises,

Randy, if I may come to you very quickly,

a question that Bobby has just submitted,

which is that his question
is whether inflation

can be geographically contained
in today's global economy,

or does the globalization
of economic trade

and the globalization
of the global economy

mean that you can't contain it in one area

or one region apart from
the Venezuelas of the world?

- Right, and that's what I was gonna say.

Certainly, we can see that,

unfortunately, there's
some countries in Africa

that have extremely high inflation rates,

some countries in Latin America

that have very high inflation rates.

So you can have a fair amount

of geographic diverse differences.

But I think the key is that

I think there is an interlinkage
of monetary policies.

The fed has an outside influence
on interest rates globally,

and then exchange rates and capital flows.

So I think there are impacts there.

And then the key is really
what is driving the inflation?

If it is something like energy prices,

that's going to be global,

it'll have a differential effect

depending on what the energy consumption

is relative to GDP in that country.

But there are some very
important common factors

that I think make it
difficult to just say,

ah, we'll get it right

and everybody else is going to
have a different perspective.

Actually, I'd love to
hear from Jose Antonio

about why do you think
this seems to be disconnect

between the markets and
like individuals and firms?

'Cause if you look at market expectations,

they're pretty sanguine.

If you look at like
interest rate features,

those sorts of things.

But if you survey companies

and you work with a lot of companies,

they have a totally different perspective.

Why do you think there's that disconnect?

- Well, you are absolutely right, Randy.

The markets think that the
central bank's gonna succeed

in the relatively short period
of time fighting inflation.

The markets have strong
confidence in the central bank

being able to tackle
inflation relatively quickly.

Let's agree in two things.

Let's agree, first thing
that the central bank

is gonna react rather sooner than later,

less agree in the second thing
that the markets believe.

The markets believe that
we are gonna believe

for a significant number of years

with negative real interest rates.

And this is essential to me.

The markets reaction is relatively limited

compared with expectations
of firms and individuals,

just because when they
look at the levels of debt

as a result of the pandemia

that has been accumulated
around the world,

on all the states and governments,

they say, oh, wait a minute.

Looks at the level of debt.

Is that sustainable with
the usual interest rates

that at least me I got in the college

that used to be plus two,
plus 4% over inflation,

or probably this is not sustainable

with that level of interest rate?

So let's be pragmatic,

which level is sustainable?

And they say, oh, it's gonna be negative

for real interest rates.

And when they look
backwards to the history,

and probably you seeing Randy and Veronica

you are more expert than I am.

You're seeing plenty of people writing

about what happened after
the Second World War.

The world lives, for I don't
know, 15 years, 20 years,

I don't know exactly the numbers

with negative real interest rates

and probably the markets are
betting on this scenario.

We don't know the level, the discussion,

all the level, I agree with you is

well, it's very difficult,

but probably the market
there circumstances

that the real interest rates

are gonna remain in negative for a while.

That's, to me why the reaction is not

as strong as you were suggesting

or expecting based on individuals

and firm's expectations.

- And that's really interesting

because that then depends on,

they're not be being second round effects

or wage price spirals hitting

the sort of levels of the 1970s

like it did levels of the
1950s and early 1960s,

but we don't get into
something more difficult.

We've got a question from Mohamed here,

which is with inflation
being at multi years highs,

how far are we off of wage price spiral?

I'm suggesting that to you.
- We are far away.

- We're far away to price scenario.

Yeah, so we are very, very far away.

So if this happens to me, I don't know,

the risk of central banks over react

and having a significant impact

on the economic developments
and economic growth

is not a minor one.

This is the main ways I see going forward.

The central bank will react.

They are not able to get
inflation under control.

They keep reacting and they
are always behind the curve.

And so some point the
market say, oh, let's wait.

We will run, we need to price that.

We are gonna go for a
inflationary scenario

that is not priced today as
Randy rightly pointed out,

and we need to reprise
the whole bond market.

And in this case, this
becomes more to recession

is not a minor risk in
this scenario, yeah.

And I'm not in this scenario.

I think that the confidence
bill over the last three

or four decades by the central bank

has strong influence in the behavior

of the different agents in the markets,

including the individuals

and the behavior of the
firms and individuals

visa vis with the inflation expectations.

All of us, we are living
world, which we think,

oh, we learn in the '80
how to tackle inflation.

And while for three decades,
the central banks were good.

They did very well in keeping
inflation well under control.

And the markets are still living there.

The other scenario is
much more is a bit scary.

Let's call in that way.

So I prepare at this stage.

I'm not betting on this scenario at all.

- It's certainly is scary

and it is also hypothetical.

A scenario that's not hypothetical
is tensions in Ukraine.

And I think we've gone for half an hour

without my mentioning it.

And I think we can't leave it aside.

And as Jeffrey asked here,

clearly I was a defacto,

an actual Russian invasion of Ukraine.

Wouldn't we then expect
a dramatic increase

in inflation over the near term?

And other rather we've got serious effects

on the European, Middle
East, African economies.

How do you see this?

Veronica, how do you see
the interplay of security

and economics at the moment?

- As I mentioned before, I
think this is pretty scary.

We are coming just right
now, out from a pandemic.

We are still bleeding in some sectors,

more than others, but we are
still bleeding and recovery,

the prospects are good,
and now this happens.

It's really, I mean,
something that policymaker

should be worried about.

In the shorter, the main economic impact

that they can see from this disruption,

as I mentioned before,

is the possibility of issues

with the provision of a
natural gas for Europe

that could be really dramatic
for many parts of Europe.

Some more than others,

maybe Spain, a little better than others

for the particular way
in which they get gas.

But the overall, as I mentioned before,

40% comes from Russia.

So the U.S. has been thinking

about contingent plan

to provide some of the
natural gas to the Euro area

in case Russia retaliate
and that's comforting.

But again, to achieve 40%
of the total natural gas

that Europe uses is a big number.

So in the short term,

I don't think that we can fix that

if Russia decide to retaliate on that.

And this is of course

is gonna have two
different types of effects,

both very bad.

One on inflation, price
are gonna rise even more.

And so this can may require

even more tighter policy from the ECB.

But on the other hand,

when we have seen the stock
market already reacted as well.

So it may be that the economy

is gonna respond to this uncertainty

in international relations for businesses.

Investment may respond,

confidence may go down

and we can see another big
demand shock in Europe,

in the world, in Africa
and all the country.

And so if that happens,

I mean, we are gonna
see another recession.

So then at that point,
it's not even more clear.

I mean, if we have high inflation
and big demand shortages,

what the ECB should do,
and we are gonna be in a...

there is gonna be a lot of uncertainty

and this is gonna be a
tough political choice

without knowing where we are going.

So I think these are the
terms of the problem,

both in terms of policy reaction,

like what's gonna be stronger.

This is gonna be clearly
initial current supply shock

in the middle run may
become a demand shock.

And then the only silver lining I can see

is that this may be a good occasion

for Europe to get unified more,

maybe creating a more fiscal effort

at the union level to invest in defense.

And so, given that there
is already a positive step

in the direction with
the next generation EU

to create an effort

into support investment
in some good investment,

like for green transition,

defenses and other of these topic

that can enter these project
of fiscal unification.

So on that side, I hope that Europe

is gonna do the right thing
and move in that direction.

- Presumably, one of the good investments

which needs to be done urgently

is investing in some sort of gas storage

and some strategic reserves-

- For sure,
- for the winter next year.

- We hopefully through
the worst of this winter

and then gas demand is gonna
go down a lot over the summer,

but next winter is
potentially very serious.

Randy, how much do you think
the Russia-Ukraine crisis

is likely to spread wider than Europe,

which is clearly on the front line here?

- Sure, this is something

where it has very big
geopolitical implications

including the role of China

'cause we've seen that

I think one of the things that Putin

and that Russian regime wanted to do

is try to find the cracks in NATO

and the relationship
between the U.S. and NATO.

And exactly as Veronica
said, the key question is,

will this lead to more fissures

or will it lead to more unification?

And so obviously I think
Russia is taking the risk

that they do this,

and it actually leads to more
dispersion, more less unity.

It's also been an
opportunity for Shi and Putin

to become much more aligned.

And so, as people often say,

oh, well, Russia has outsized influence.

Their GDP is the GDP, the size of Italy.

And so why no casting
those versions on Italy,

Veronica, as you know, I'm half Italian,

but why is it that Russia
gets so much attention?

I think they use the resource.

Well, obviously they're nuclear arsenal,

but also being much more strategic

and sort of like building
potential partnership with China.

And then thinking about using
the resources they have,

the natural resources
much more strategically.

So I think if it does lead
to more fissures in the west,

but more consolidation and consistency

between Russia and China,

I think that poses much, much greater

and long term challenge.

- Yes, and Jose Antonio,

there's a question here from Rick Davis

who says very simply

is a Russian invasion into
Ukraine already discounted

in the market?

Are markets already pricing this?

- No, the markets are not,

maybe are not pricing any massive invasion

in the sense that Russia
take over the whole Ukrainia.

I think this is not an scenario

that this has been already
discounted by the markets.

The markets are discounting in my view,

a relatively low intensity kind of war,

kind of tension around Ukrainia.

And the markets also discounting

what Randy mentioned that is

probably this has the
first effect has been,

and is already the case that NATO

becomes useful more so than the majority

of the people thought one
or two or three years ago.

So this has the first
reaction is to unite somehow

the NATO members having a mission.

People normally they look at the figures

from the figures point of view,

aside from energy that Veronica said

the 40% of the gas in Europe.

I'm more worried about the continent.

Yeah, so I'm more worried
about the persistency

of these geopolitical tensions

start to deteriorate confidence,

start to deteriorate demand

rather little by little, yeah,

and complicate in a significant way

the reaction of the
authorities, including the ECB,

Veronica said the 40% in gas,

very likely energy prices will remain high

or go even higher.

And this complicated
reaction, the normal reaction,

the pattern of the monetary policy,

and we may need at some
point the fiscal policy

to come to the rescue

because central banks may be in a position

in which on one side,

they have relatively high inflation,

the other side, they have as
a result of losing confidence

due to the geopolitical tension,

having economic growth,

that is not that good, or is poor,

and they may be forced to stay.

And the fiscal policy needs to come.

I don't know, complicates
significantly the situation,

but the markets by any measure

have discounted a full
invasion of Ukrainia

by Russia taking over the country, yeah.

- That's a very good momento
to come to fiscal policy,

but just before we do, Jose Antonio,

I just wanted to ask you

from what you've got extensive contacts

with businesses across Europe,

are you seeing what you were just saying?

You were worried about that companies

are beginning to look at
what's happening in Ukraine

and beginning to get nervous

and therefore, beginning to think,

is this the right time to invest?

Are these questions now being asked?

- I should say, depends on the sector.

I bet on the recovery,

I do think that our sector
that are unduly penalized

by the whole situation, not only this.

So we have on one side the
likelihood operates going up.

So obvious sector displays in favor,

probably there are other
trouble related sector

were badly affected by the pandemia.

The plenty of opportunities
arise in there.

And this is another
obvious reason to go there.

So I tend to think that are
good opportunities in Europe.

Assets are not expensive.

There are significant pockets of assets

that are unexpensive today.

And I think is at this point,

as I embed not having escalation

on tensions in Ukrainia

to remain relatively low intensity level,

I think there are
significant opportunities

across the market.

I think it is good time
to put some money at work,

taking into account interest rates

doesn't matter the reaction
of the central bonds,

it's gonna remain very, very
low and well below inflation.

So to protect your wealth

again, inflation is highly
recommend to invest.

At least Europe is relatively cheap.

- Just before we do come to fiscal policy,

we have a number of questions coming in

about the effect of sanctions

and whether the very, very timid sanctions

to date suggest that either
Putin has the upper hand

or, and what the effect they might have.

Randy, how do you think
this is going to affect?

I mean, these are really
difficult questions.

Everyone is doing the game theory on this.

When to introduce sections,
how big they should be.

Should we include energy in all this?

These are huge questions for European,

NATO, Western governments.

Why do you think it's sort of...

what's the balance at the moment?

- You're exactly right.

They're trying to consult
with some game theorists

to try to think what
the optimal approach is.

I think Putin has been very, very clever

in sort of taking these first steps

that he would argue are not invasion

and become more difficult
to characterize an invasion,

'cause he's also trying to gather data.

How much solidarity is
there in the coalition.

He's trying to understand
what the responses will be.

And so I think it's actually valuable

for NATO and the west to
take a fairly strong stance

because I think they need to signal

that they have the willingness and ability

to undertake these sanctions,

even as the first steps are being taken.

Putin even if he doesn't
do a full invasion,

can at least then say,
well, he's gotten something

out of this, but I think
it's very important

for the west to take a tough line.

Obviously that is gonna hit
certain sectors very hard,

obviously certainly banking
and financial sector

within in Russia

and then others who have have
connections to that sector,

energy sector is gonna be hit hard.

But I think at least the
way I would play it out,

I think it's good to take
the tough stand early

to signal a willingness to stick together,

even on a relatively small first steps,

because if they don't do that,

then I think you're gonna see

the tanks rolling in much
more rapidly than otherwise.

And so you have to bear
the pain in the short run

'cause I think in the long run

that'll mean there'll be
fewer negative consequences,

but also politically
that can be very tough

when there's high pain in the short run,

especially when it's so
focused on certain sectors.

- Now, one of the things
that we've learned

during the pandemic is how
powerful governments can be

in defending their populations
against external threats

and fiscal policy across
the world was transformed.

Not every country did it in the same way

during the pandemic.

And Europe certainly had a big change

both in its the proactivity
of fiscal policy.

And also in the forward looking investment

that Europe was able to put in place.

Veronica, just how much has
European fiscal policy changed?

Is this gonna continue?

- Yeah, so I think fiscal policy

has changed not only Europe,
but overall everywhere.

And the reason for that is
come from different sources.

First of all, I mean until
before the great recession

basically was almost automatic

that's monetary policy was the tool to use

to help stabilize an economy.

And this got policy was
a kind of a side show.

Some play that some automatic stabilize

are a little stronger,
little bit of intervention,

but not big packages.

Now, of course, why fiscal policy

since the great recession

became much more an active
tool of stabilization?

Well, first because the zero
were bound was hit in U.S.,

in Europe, in many countries.

And so monetary policy didn't have

the power anymore to help
the economy to recover.

And so governments have been acting

to help mitigate the adverse effect force

of the financial crisis,

and then the Euro crisis,

and then actually Euro
crisis it's parenthesis.

I'm gonna go back.

And then the pandemic,

the other thing is that

we are in a very different
environment in terms of,

we were in a very different environment

in terms of trends in interest rate

of what we call secular stagnation.

So interest rate have
been a particularly low

for now for many, many years.

And so there has been the
idea that in policy circles

and also among economies

that actually maybe that's not a bad time

to have fiscal policy more active

because borrowing is
cheaper for governments.

So these changes a little bit,
the stance of fiscal policy.

Is it a good idea to spend
more when interest rate low?

This is a big chapter to open.

I mean, my view is that it's
true, that it's cheaper,

but on the other hand,

it's also true that it's easier

to reach the zero lower bound.

So you need to keep some
fiscal space in that

in case that happen,

but in general,

there has been a much
bigger fiscal policy.

Now how about Europe in
particular is where you started?

Well, there has been a
big change on top of that

after the experience of the Euro crisis

of the Euro bound crisis,

because at the time,

there was a big financial crisis.

And the worry of course was
how can we avoid default

and the European fiscal rules

that are active at the moment.

Actually right now,
there is an escape close,

but that could be active
if the escape close

would require to do a
bigger aesthetic package.

And that's what happened during

in response to the Euro
crisis in 2011, 2012.

Now, of course exposed,

I think there is overall consensus

that those aesthetic
measures were too severe

and actually generated double depression.

And so that in general,

we learned that the counter cyclical...

policy needs to be more counter cyclical.

There needs to be more room

for countercyclicality in fiscal policy,

and that lesson was learned

and used for the pandemic
when big fiscal packages

have been implemented.

Now, there is an ongoing debate about

what should we do about
European fiscal rules.

And 2023, January, 2023,
the ESCAPE close ends.

So if nothing changes,

all the rules are gonna be back in place.

It looks like there is a lot of pressure

to change these rules.

And then the commission has
already started open requests

for different proposals.

And there has been a lot of proposal

for putting around discussions,

policy debates, and so forth,

and the idea is that we want the rules

that would be active now would be probably

if applied literally too strict
and would maybe generate,

to restrict the moment in which
you maybe need to recover.

And so maybe there is
an idea that probably

rules needs to be revised

in order to make them more
simple, more transparent,

but also more countercyclical,

which of course means
that during an expansion

you have to cut, you have
to create fiscal space.

That's an important part of the story.

But I think that there is
like a trend towards that.

And there is an idea,

this revision of the
fiscal rules should come

also because there is this Europe

as been made clear that
there is this objective

of doing a green transition

that is gonna require big investment.

So government cannot do it with out rules.

There is need for some new
framework to think about it

and to do it in a reasonable way

to avoid other suffering
that crisis that of course,

financial stability for the
Euro is still a concern.

And we should be aware of that.

And I think that Europe is going direction

and next generation EU

has been a very successful
blueprint for that,

has very successful.

Now, we'll see how Italy
is a big player in that.

So let's see how it uses it.

I mean, how the
implementation is gonna go,

but I think that has been successful

in several dimensions
first in terms of defining

what's perimeter of action.

So there was digitalization,
green transition

and inclusion were the three keywords.

Of course now maybe defense

should be taken into consideration.

And there has been a
very careful structure

to make sure that there was no...

I mean, money were used
for the right purposes.

And the monitoring was very attentive.

And on the other hand
what was very successful

is that Europe to finance

that created next generation EU bonds,

that actually were pretty
well rated in the market.

So it seems that there's
overall a general the market,

the finance market seems

to show that there is
appetite for Euro bonds

or for investment at the Euro level,

if there is a fiscal union

and there is some
coordination that happens.

So I think that this is gonna go forward,

that there is gonna be more of that,

especially for the green transition,

there's gonna be more investment

and probably is a step
towards fiscal union

for Europe defense may the
next step to talk about.

- And Randy, when we looking wider,

the global aspect of fiscal policy,

do we now have to realize
that we care too much

about levels of government debt

and that it seems to be

that we've ratcheted up government debt

in advanced economies.

Clearly there's certain
countries that cannot borrow

and have no market access,

but advanced economies seem
to have enormous market access

even when the world is very uncertain,

when inflation is high,

does this mean that we just have

a lot more fiscal space than we thought?

- Well, in the short run,

that certainly seems to be the case

that the markets are letting
many advanced economies

could get away with quite a bit,

an enormous amount of increase in debt.

Now over the pandemic period

with the enormous increase in debt,

actually death costs went down

because interest rates came down so much.

So I think as interest
rates start to go up,

the markets are not going to treat

those countries quite as well

because it's gonna be more challenging

to make the payments.

And that's also true
on the corporate side.

And this is a very important issue.

And we think more broadly
about Middle East,

Africa and emerging markets generally

about the big differences

in the way the markets are treating them.

And so certainly this role
for the world bank and IMF,

but I think the developed countries

have to be very, very cognizant

of what the relative consequences

are for what they are doing.

And certainly that could
put a lot of pressure

on emerging markets,

a lot of pressure on many
of the countries in Africa.

And so I think that's something

that I don't think should be ignored

because that I think has a very
important both intermediate

and long-term consequence.

- Now it's just two minutes to seven.

So it's a real shame.

This is such a lively and
interesting discussion

that we're coming to the end,

but there's a wonderful last question.

I'm gonna put to all of
the panel from Ramona Fox,

which is very simple question,

but often these are the hardest questions.

Given this uncertain, how
can investors, private people

and companies best react?

Jose Antonio, I'll give
you the hot potato first.

What's the best advice
for people out there?

- Well, the best advice
to them is to keep going

and going back to the normal
life before the pandemia.

This is the first thing
and all of us we should do.

And I hope the pandemia
allow us to go back to our,

let's say all normal work.

Yeah, so this is my
recommendation to everyone else.

And taking out from our heads fear

and having confidence in our capacities

to overcome whatever
problem we are facing.

So the optimism is the best prescription.

Yeah, so for the society,
yeah, so as a whole.

- That's very good.

Almost keep calm and carry on,

but certainly carry on.

Randy, how about you?

What's your advice to people?

- So I think it's always crucial

to try to take a long run perspective

because things can look
very dark in the short run

and many people responded to
different political events

in the U.S. by just selling everything

because they thought there'd be a problem

or during global financial
crisis selling everything

or the pandemic selling everything.

And if you have the
wherewithal to be able to keep,

to maintain your investments,

not try to time the market.

I think that's extremely difficult

to know when is the right time

to respond to geopolitical uncertainties

and then know exactly when
they're gonna resolve.

So I think making sure
that you have have enough

of a liquidity cushion

to make it through
foreseeable circumstances,

but just take a longer
run perspective on things

rather than try to sort
of time this or that.

I think that's important-

- You sound optimistic, Randy.

So for having interest rates negative,

I'm recommending liquidities
a bit pessimistic.

So a bit negative view.

- Well, what it is

is I think it's very
important to (mumbles).

- It's just for that.

- It's important to have insurance.

And unfortunately insurance
is not more expensive

than it has been because of
the negative interest rates,

exact negative real rates, as you said,

but I think it's always important

to have some insurance,

but I say that you wanna
go all in that direction,

you wanna make sure that you can survive

through the volatility

that we're gonna see in the
short term intermediate run.

But it's not like sell everything.

I think that's exactly the
wrong kind of approach.

I think, think about the long run,

make sure you have enough
liquidity to make it through

in the short term intermediate run,

but don't fundamentally change things

because I share Antonio's
long run optimism,

even if sometimes it seems that long run

is very far in the future.

- Okay, so we've had
the case for carrying on

as if nothing's happening or not quite.

That's a bad paraphrase.

- Yeah, yeah.

- We've had the case for insurance,

Veronica, what's your take on this?

- I'm glad by the end of the panel,

Jose Antonio came on the
optimistic side as well.

I am also optimistic in a sense that

as I'm kind of a combination
of the two views,

and so I think business should keep going.

That is gonna be some uncertainty.

And so I see where Randy's coming from

and see where like be
careful on the balance sheet

and liquidity is definitely
something important.

But I think that the right approach

is to look at the medium term

and take stock of what we
learned from the pandemic.

During the pandemic,

there were some good outcome,
digitalization expanded.

There was a more step
towards green transition.

So going that direction of
exploiting the new technology

and new sectors and new products

where there is hopefully
gonna be growing demand

as a coming out from the pandemic,

I think is the right way to go.

- Thank you.

I think that is the unifying
message I think here,

which is that if you look

beyond the very short term uncertainties,

there is really quite a remarkable sense

that that economies have adapted very well

to extraordinary times
in the past two years.

So I'd like to thank the panel hugely

for really stimulating hour

so thank you, Veronica,
Randy and Jose Antonio,

and thank the audience
for lovely questions.

Lots of them keep them coming.

And thank you very much, everyone.

Thank you.

- Thank you.
- Bye-bye.

- Thank you, bye.
- Take care.

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Economic Outlook - Post-Pandemic Recovery, Inflation, and the Economies of EMEA

Ukraine War and Concerns over Growth and Inflation

The final Economic Outlook event took place on the eve of the invasion of Ukraine by Russian troops that followed weeks of uncertainty, which had threatened to weaken consumer and business confidence just as the EMEA region was emerging from the worst of the COVID-19 pandemic.

Guerrieri said she was worried the crisis would deliver a demand shock to the European economy if investment plans were cut and consumer and business confidence tumbled. “If that happens, we are going to see another recession,” she said.

All three panelists predicted that the crisis would likely impact inflation, especially given Europe’s reliance on Russia for 40 percent of its natural-gas supply. Guerrieri said the challenge for the European Central Bank would intensify if Russia decided to retaliate against Western sanctions by stopping or reducing access to natural gas. “That could raise prices and inflation even more, so that could be an added source of concern,” she said.

Álvarez also suggested a hit on consumer confidence would further complicate the ECB’s task. “There is a growing risk that the persistency of geopolitical tensions starts to deteriorate confidence and deteriorate demand little by little,” he said.

Inflation That Keeps Beating Expectations

Inflation is already a worry with the eurozone rate hitting 5.1 percent this past January—the highest since record keeping started in 1997. Álvarez said high inflation combined with low unemployment levels could lead to second-round effects as workers seek higher pay to offset the spike in prices.

“Inflation is not just temporary. It may last for the whole year and may spill over into 2023,” he said. “I do see inflation being persistent, and the ECB will face the challenge of finding the right balance between fostering economic recovery and slowing inflation.”

Kroszner said this was the core question facing policymakers—whether the spike in inflation would be temporary or permanent. While issues such as energy prices and supply chain problems were crucial, the role of market expectations and consumer expectations was also important.

“Most people are not really focused on what the cause of it is. They just know that there’s a lot of inflation,” he said. “Whether it’s in the UK, the US, or much of Europe with super tight labor markets, people are acting in a different way than they have for 20 or 30 years.

“I think we run a risk that the central banks may have to run interest rates up much more than they are forecasting now to try to make sure inflation expectations don’t become unanchored.”

Guerrieri had a more optimistic perspective, explaining that analysis of the eurozone inflation data shows a “big chunk” of the recent spike came from energy prices. “The consensus seems to be that this is going to be something more temporary, rather than persistent,” she said

While the ECB must be responsive to rising inflation and ensure inflation expectations are anchored to the 2 percent target, Guerrieri urged caution given that the spike in prices appeared to be temporary and the economy was still recovering from the shock delivered by the pandemic.

“I think we run a risk that the central banks may have to run interest rates up much more than they are forecasting now to try to make sure inflation expectations don’t become unanchored.”

— Randall S. Kroszner

How Much Has European Fiscal Policy Changed?

While monetary policy is under the microscope, fiscal policy in Europe is also changing—rules on debts and deficits have loosened, and the European Commission has unveiled a €2 trillion investment package.

Guerrieri said politicians now realize the austerity imposed following the European debt crisis was too severe, and that fiscal policy needed to be countercyclical—increasing spending in the face of a downturn, or vice versa. A positive change is that policymakers are using the funds to target specific areas such as digitalization, green transition, and inclusion. “Of course, now maybe defense should be taken into consideration,” she added.

While financial markets have tolerated governments taking on large amounts of debt, Kroszner—who previously served as a governor of the Federal Reserve Board—warned this could change as interest rates continue to rise.

“This is a very important issue when we think more broadly about the Middle East, Africa, and emerging markets generally, about the big differences in the way the markets are treating emerging markets,” he said. “That’s something I don’t think should be ignored, because that has a very important intermediate and long-term consequence.”

‘Optimism Is the Best Prescription’

Given this uncertain outlook, how can investors, people, and companies best react? Kroszner said investors should neither sell off all their assets nor try to time a market recovery in the wake of the current crisis.

“That’s extremely difficult to know—when it’s the right time to respond to geopolitical uncertainties,” he said. “It’s always crucial to try to take a long-run perspective, because things can look very dark in the short run.”

Álvarez struck a positive note when asked about how to move forward amid economic uncertainty. “The best advice is to keep going,” he said, “taking out fear and having confidence in our capacity to overcome whatever problems we are facing. Optimism is the best prescription.”

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