A Discussion on Current Trends in the Global Economy

In discussion with Sebastian Mallaby, CFR Paul A. Volker Senior Fellow for International Economics, Nouriel Roubini, Professor of Economics and International Business at Stern Business School, New York University, John P. Lipsky, Senior Fellow at the Foreign Policy Institute, John Hopkins School of Advanced International Studies, and Willem H. Buiter, Global Chief Economist at Citigroup, Inc., reflect on the current state of the global economy in light of the latest version of the World Economic Update from the IMF. The experts consider the projected low economic growth rate for this year, global monetary policies, and the state of the banking industry.  They also examine how TPP, the threat of climate change, and the possibility of a vote in favor of Brexit impact the current global economy. 

The World Economic Update highlights the quarter's most important signals and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy. This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

MALLABY: So let’s start off with the baseline. We have just had, Nouriel, the latest version of the World Economic Update from the IMF. Yet again, there’s a growth downgrade. Do these people ever upgrade? What’s going on? (Laughter.) What do you think, Nouriel? Give us—give us your reaction to the 3.2 percent growth projection for this year.

ROUBINI: Well, official institutions usually always are slightly more optimistic than the outcomes. And, well, even the IMF knows about, in this world, of low economic growth.

Me and my colleagues at Roubini call it the new abnormal, and the Chinese call it the new normal. The IMF calls it the new mediocre. Larry Summers speaks about a cycle of stagnation. Ray Dalio speaks about the great deleveraging. I would say, regardless of the label, I think there is a broader, now, consensus that potential growth, both in advanced economies and emerging markets, has fallen, is in part the consequence of the global financial crisis, aging of population—not just in advanced economies, but also important emerging markets like China, Russia, Korea. After the global financial crisis, investment collapsed, and it certainly has not recovered. So if human and physical capital are not growing as fast as before, potential growth is lower, to increasingly need structural reforms. But structural reforms are hard to make, both in advanced economies, in emerging market, in democracies, in less-democratic countries.

We also have probably an impact of—(inaudible)—probably might have implied some slowdown or reduction in trend growth, rising inequality that distribute income from labor to capital, from those who spend to those who save. So we have not just a global savings glut, but we also have a global investment slump. And this is a world in which potential growth is going to stay stagnant. And as there is deleveraging—first in the U.S., then Europe, now in emerging markets—actual growth goes below potential for a while. And the third leg of this great deleveraging is now in emerging markets. Maybe the U.S. is closer to having done some of that deleveraging and closer to achieving potential growth, but even the U.S. potential growth is, at the best, maybe 2 percent. So that’s the new abnormal or new mediocre, whatever you want to call it.

MALLABY: So, John, we’re talking about a situation in which, for a variety of reasons, post-crisis growth is slower; less investment; some redistribution, as Nouriel says, of money from those who spend it to those who save it—he didn’t mention technology, which of course has big distributional impacts—all of which leads to a political reaction, which we’re seeing a bit worldwide. Can you—do you think there’s a bit of a negative feedback loop here—lower growth leads to not only secular stagnation, but sort of secular policy stagnation?

LIPSKY: No, do you mean in terms of the IMF or the consensus forecast, or in reality?

MALLABY: No, I mean, I was thinking more in reality—(laughter)—and in sort of a feedback loop between, you know, disappointing economics leads to sort of toxic politics leads to more disappointing economics.

LIPSKY: Yeah, for sure. But I would say, when you read the IMF—the WEO, the World Economic Outlook, it says we both mark down the forecast, and the risks are skewed to the downside. Which says—to an economist, it says, well, that means it’s not a fair forecast because you’re supposed to have the risk balanced. So I would like to say that the recent downgrade may be—in growth may be fine, but I’m not completely convinced that the risks are only on the downside from that forecast.

But the feedback loop that you talk about is evident. We can see it in politics here. We can see it in Europe, we can see it in Japan, and elsewhere that this—a sense of dissatisfaction that produces pressure on authorities to do things, and to do things that have been different than what they’ve done before, which may not always be productive and with good results.

MALLABY: So, Willem, people in this post-2008 negative equilibrium have turned most aggressively to central banks. You know a lot about central banks. Their latest iteration of this kind of rabbit-out-of-the-hat was to experiment with negative interest rates. That didn’t go so well in Japan. Talk a bit about that, whether negative interest rates can be salvaged as a policy tool, and if not, what next.

BUITER: In principle, negative interest rates are a totally conventional instrument, right? It simply means lower interest rates—(laughs)—than when they were positive. And because an interest rate on the whole tends to stimulate demand, whether it is in positive ranges or negative ranges, two conditions it doesn’t: that’s either the policy rate cut or monetary policy action in general has no effect on asset prices and yields—in sort of textbook that’s horizontal LM, liquidity trap; or, yes, we move asset prices and yields with the policy, but there’s no transmission to the real economy. And I think we’re very close to that. And the main reason for that is because of leverage that every country in the world except North Korea is suffering from. (Laughter.) So—and probably they as well, but yeah.

And there’s a special handicap to negative rates, is that they can’t become very negative because there’s the zero lower bound, right? The carry cost of currency, basically, of cash, means that you can’t really, without arm-twisting and moral suasion, put the policy rate much below minus-50 basis points, half a percent. They’re going to get close to that. I don’t think that the fact that the day after Japan cut its rates the yen appreciated means that there is something perverse about changing rates. Many other things happened, and this is not a ceteris paribus sort of clean experiment of an unexpected cut in rates. So I have some hope.

Going negative, I think, in this environment does very little, right? It probably doesn’t do, on balance, any harm, but certainly it doesn’t stimulate aggregate demand.

ROUBINI: Can I make a—

MALLABY: But let me push on that. I mean, surely on the banks it did do some harm.

BUITER: No, no, no.

MALLABY: Bank profits got squeezed. Isn’t that right?

BUITER: No, No, banks live not off the level of rates, they live off spreads. And so, if the rates can be negative but the yield curve’s upward-sloping, banks are happy. The one problem was that banks have so far, largely for cultural reasons, viewed passing on their negative deposit rate to the central bank to retail depositors and other non-wholesale sorts of funders as a taboo, right? Well, that’s their choice, right? I think there is, again, a limit to what you can do there. Technically, the effective lower bound is either minus the carry cost of currency by banks or minus the carry cost of currency for households, plus the minimum margin between the bank deposit rate at the central bank and what they pay their depositors. So I don’t think you can get much, without arm-twisting, below minus-75. But I think there’s hope that a few years from now, for the next crisis, when we hopefully have less leverage and we need to use monetary policy again, because we’ll be at the zero lower bound on and off for years, possibly decades to come, right? I don’t think that the neutral—the (risk-reveal ?) interest rate that balances full employment, saving, and investment—is going to be positive for the foreseeable future. And it means that in any downturn you’re going to be against the zero lower bound again, and you really want to go to minus-2, minus-3.

And there’s a bit of luck: three years from now, five years from now, the large-denomination dollar bill will be $10, right, which increases the carry cost of currency. Getting rid of cash is one obvious way to eliminate the zero lower bound. The ECB is leading the way for unrelated reasons, having done away with the 500-euro note, right, which is one of the tax-evader’s dreams, of course. The Swiss, we’re still waiting to get rid of the thousand-franc note. But—

MALLABY: So you think that the largest American currency note should be $10?

BUITER: Yes.

MALLABY: Fifty shouldn’t be allowed, 20—

BUITER: No, no, absolutely, yes. This is for those who are—

MALLABY: So the sheer threat of holding sweaty paper—

LIPSKY: For the convenience of central bankers—

BUITER: Yes.

LIPSKY: —I think. (Laughter.)

BUITER: So central banks can set negative interest rate as far as possible. And also, of course, which is—whenever I say this, I get hate mail from libertarians like you wouldn’t believe—to penalize the criminal fraternity—you know, tax evasion, money laundering, terrorism financing, and all that—which is a cash-based business. But of course the libertarian says that the citizen needs anonymity given by cash as a defense against the predatory and encroaching state.

LIPSKY: If I could—

MALLABY: So Willem is saying that the—that the only thing that’s stopping us from this negative rate working a bit better is if we could just get our acts together and abolish cash and break this taboo of that—

ROUBINI: Well, even before we abolish cash and eventually get there with digital money, I think that you have to prevent banks for switching from excess reserves into cash. And I was just in Europe this past 10 days and I spoke with one of the central banks in one of the countries that has negative, you know, interest rates. And I say, you have this limit. And I say, well, you could pass a law/regulation that prevents the banks from switching from excess reserves into cash. That’s feasible, right? You tell them you can have only as much cash as you need for your own transaction. If you’re a customer, tough luck, the rest of it is held as like a sort of digital income tax. It’s much like—

BUITER: It doesn’t mean you can’t take it out and pass it on, you know? You have—there is not just—you have to not stop him from holding it, right? You’re actually stopping him from acting as an intermediary between a non-bank guy who is not affected by this and the central bank itself. What the Swiss have is completely ineffective.

MALLABY: OK. OK, let’s just switch it up for a second.

LIPSKY: Nothing esoteric here. (Laughter.)

MALLABY: I want a show of hands here. Hands up who think it’s plausible that in the next five years we will either eliminate cash—

BUITER: Not in the U.S. Not in the U.S. In Sweden. In Sweden they will do it. (Laughter.) Right?

MALLABY: Say a word about Sweden.

BUITER: In Sweden, the ratio of cash to GDP—annual GDP: 2, 2 ½ percent.

MALLABY: Last time I checked, Sweden was not systemic. (Laughter.) Yeah, but—

BUITER: No, no, but they set the trend. They set the trend.

ROUBINI: I mean, you know, the broader question—the broader question, of course, is how—what you do if you’re going to hit regularly the zero bound in the next recession or financial crisis. You have only a few options. Either you go with the quantitative money—QE1-3 to infinity—or you go negative with the price of money, more negative interest rates.

BUITER: Or helicopter money.

ROUBINI: Or the environment of QE is just helicopter and so on. Or third option is you change your inflation target from 2 (percent) to 4 (percent) or higher so you don’t eat it. Or, if you believe the BS, you give up on the 2 percent because the 0 percent is the new normal for the inflation target. You have to choose among—and each one of these four options I would say has its own problems. But when I hit those zero bound over and over again in the future, right? And that’s the dilemma that all central banks going to face for the next few years.

MALLABY: John. John.

LIPSKY: Let’s see if I—let’s see if I can conclude. So, despite all these considerations, right now there seems to be a consensus that negative rates aren’t having that big an effect—

BUITER: Absolutely.

LIPSKY: —nor are they likely to be much changed in the near term.

BUITER: No, monetary policy in general. QE has very limited effects. Further rate cuts, either from positive to less positive or from negative to more negative.

MALLABY: All right.

BUITER: Look, monetary policy—monetary policy is out of—

ROUBINI: Well, you know, no effect. I mean, I spoke with a central banker in a country that’s gone very negative, and they said, well, what do you mean there’s no effect? Our entire yield curve has flattened 20 (years), 30 (years), 40 years, 80 basis points down; our 10-year bond yield is -10 basis points; and it has a massive effect both on the steepening—

BUITER: But that is not negative. QE does that.

ROUBINI: –less steepening, and the yield curve all the way sharply down.

BUITER: No, no, no.

ROUBINI: So the impact has been huge in terms of financial regulations, right?

BUITER: But that’s—that’s completely wrong. Negative rates, other things being equal, steepen the yield curve. It is QE that flattens the yield curve.

ROUBINI: No, no. In Japan, the opposite occurred. When they went negative, the 40-year bond yield fell 80 basis points and in 10 years has gone to -10.

MALLABY: So what we’re hearing is—

ROUBINI: So it’s flattened and it’s pushed down the entire yield curve. That’s what happened in Japan.

MALLABY: —global monetary policy is obviously in a bit of a fix—(laughter)—and in order to—and in order to get out of this fix, we have to contemplate pretty amusing and radical things.

So I want to throw out another radical one, and I want you to answer this—okay?—with—I don’t want the sort of blanket like global sort of it-doesn’t-work story. Try and differentiate between the G-3. So tell me, is this more plausible in Japan, or Europe, or the U.S.? Which—because I think that’s where it gets interesting. Certain instruments—for example, simple outright debt cancellation. So the Japanese central bank owns some insane proportion of Japanese government bonds. They can cancel them.

BUITER: Yeah, but that’s—that makes no difference, right? That’s just cosmetic stuff, right? The Japanese treasury—Ministry of Finance—is already the beneficial owner of the Bank of Japan, so they have to consolidate their balance sheets. That is completely—that is just—

MALLABY: It’s not complete—

BUITER: It is pure tokenism, yeah.

MALLABY: No, it’s not. No, the implied space for fiscal stimulus—

BUITER: No implied space, because they assume profits from the central bank or the treasury. Only if you’re myopic would that make any difference.

MALLABY: OK, so that’s negative. All right. So—(laughs)—

ROUBINI: Well, I would argue that the main difference between QE and helicopter drop is that one is supposed to be temporary—you run up the balance sheet, you buy the bonds, and you’re supposed to sell them—and the other one you have it permanent. The tricky thing with doing it permanent is if eventually—if eventually you achieve your inflation target and velocity rises, then you have to mop up that excess liquidity. Otherwise, if credit growth is excessive, we get inflation, and you can do it only by selling the bonds or by increasing the interest on excess reserves. So the ability to having permanent QE, meaning permanent copter money, assumes the demand for money is going to remain at this level forever, and you’ll never achieve the 2 percent inflation.

BUITER: I, again, have to—

ROUBINI: Otherwise, you cannot have it permanent. Eventually you have to go back to running down the balance sheet or taxing excess reserve.

BUITER: I again have to disagree with my colleague here. Helicopter money—it’s not that it’s permanent or temporary. Helicopter money is additional monetary issues. It goes to fund fiscal stimulus that wouldn’t—that is, you can’t affect a fiscal stimulus. It wouldn’t have taken place otherwise.

ROUBINI: But then you’re changing fiscal policy. I’m just saying, even with QE, you’re financing deficit.

BUITER: Yeah, but helicopter money is not QE.

ROUBINI: So you cannot change both. You have to—you have to assume—

MALLABY: I want the audience to observe that—

ROUBINI: Of course, if you want to run larger deficit, you could say we’re going to then print more money.

BUITER: That’s right.

MALLABY: We have—hey, wait, wait—we have glasses of water here and nobody—

ROUBINI: Conceptually.

MALLABY: —nobody has thrown the water that the other person yet. (Laughter.)

So we’re going to switch the subject a little bit. And I want to know whether the—and I’m going to go to John first—

MR. LIPSKY: Feeling I’m like John Kasich here. (Laughter.)

MALLABY: So emerging markets were everybody’s big concern back in January or earlier, and now they’ve bounced back in terms of equity performance. And I guess the question is, you know, is that sustainable in the context of, you know, they did very well—the BRICS especially—in a period of extraordinary bull market and commodity prices, a sort of historic bull market. Now that’s gone, probably not coming back. Emerging-market productivity growth is down. What do you think the outlook is for the big emerging markets?

MR. LIPSKY: Well, I suspect one lesson we’ve learned is that BRICS was nice acronym—(laughter)—but it didn’t explain much about what was going on in the individual economies. Each one of those faces a very different set of circumstances with different specific policy challenges. It’s been clear that when the tide ran out that some had lots more trouble—faced a lot more trouble than others.

I think in general the case has been that when times were good, the efforts at reform were lacking. Not shocking that politicians don’t do hard things when they don’t have to.

And now we’re going to see—first of all, they’re—why things have bounced back a little bit is because the sense is the world economy is not headed into something disastrous, so commodity prices are not going to do something terribly disastrous, and we see oil coming back. But the—again, what we—what we do see is a very significant downshift in medium- to long-term expectations about growth prospects in these countries absent some structural reforms.

And so the test is on. The test is different in each one of those countries. And there’s reason to wonder how successful they will be.

MALLABY: And, John, if you had to pick one emerging market that does appear to be grappling with structural reform, can you think of a good example?

LIPSKY: One of my colleagues may want to—I think I would say right now they’re all facing substantial challenges. The ones—the economy that has a coherent and thorough plan, in fact, is China. The question is, are they going to do it? They had the 12^th five-year plan—was also comprehensive and complete—and not all of it was done. So now let’s see if the 13^th is done.

Mr. Modi in India came in with a very ambitious reform plan, and it’s turned out to be harder to do than anticipated. Now let’s see if he really carries it—carries it forward.

But one of the large emergings—not one of the BRICS—that has actually, I think, done more than people seem to recognize, and have big problems but big prospect, is Indonesia.

BUITER: I agree with that. I was going to mention it as well.

Yeah, Modi, we have to wait, right? Clearly, you know, came out of a state government where he controlled both houses, and what he wanted happened. And he found out that if you don’t control the upper house, right, and if you can’t abolish it the way Mr. Renzi tries to do his, then, no, you are likely—you have to compromise and negotiate, and it’s been a complete debacle. So not even the sales tax—the regional sales tax subsidy—

LIPSKY: GST.

BUITER: —the GST—has been implemented. A bit of, you know—you’re going to need massive additional infrastructure investment; deregulation, especially of labor markets; increased FDI; increased labor force participation by women; and increased educational standards for women, especially in the countryside and all—et cetera, et cetera, et cetera. I think the potential is enormous, and I have greater hope for India than for China because of China’s governance system, right? You can’t imagine this becoming a happy, decentralized market economy, as there is more centralization of power going on now in decision-making competency at any time since Mao, right? So I think it doesn’t add up. And I’m very worried about the fact, also, that wherever the power is getting more concentrated, it doesn’t seem to be really focused on the economy. And that, I think, is a recipe for at least a cyclical hard landing, which I think is still on the cards despite the slight recovery we had in Q1, or rather a bottoming out of growth, which I think is the entirely predictable response of the economy to old-style, excessive credit-growth driven, and heavy-lifting infrastructure-propelled fiscal credit stimulus. Not sustainable, because it builds on the unsustainable debt that China’s already got, but, you know, good in the short run. But I think within two quarters we’ll back on this downward track.

MALLABY: So, Nouriel, the thing which interests me a lot about the state of emerging markets right now is that you’re running this experiment where after the Asian crisis in the late ’90s there were three lessons preached at emerging markets: build up reserves, have a flexible exchange rate, and don’t have too much foreign-currency-denominated debt. So I guess they ignored the last one, if you look at corporate dollar debt in the emerging world. But they did the first two, by and large. More reserves, flexible currency.

Do you think—obviously when you go through a crunch like Brazil, for example, has gone through recently, it feels horrific. But do you think when we look back at this in a couple of years’ time, we’ll feel as though this experiment worked? That the lessons were absorbed, applied, and then emerging markets came through way better than they would have done in previous cycles.

ROUBINI: Yeah, I mean, with the caveat that you made at the beginning that third leg of the great global deleveraging was in emerging markets, that it went on a borrowing binge when money was cheap—QE, zero rates—and was going to emerging market, and commodity prices were high, and China was growing 10 percent. And now there is going to be a painful deleveraging. But I would say, compared to the past, with exception, of course. There are some cases in which a credit event could occur—say, Venezuela, Ukraine, and so on. But we’ve not had the kind of sudden stop of capital, financial crisis, banking crisis, sovereign-debt crisis that you saw in previous generation of emerging market crises.

And I would say, after those crises, of course, there were some economic reforms, structural and also macro, and better banks. But having exchange-rate flexibility and having the buffer of reserves also has helped, and therefore we have not seen the kind of crisis, with some exception, we’ve seen in the past, in spite of a buildup of a significant amount of debt.

And, by the way, not all of that debt, of course, is in foreign currency. A lot of now is in local currency. And some of it is longer term rather than shorter term. So the kind of liquidity runs and currency liquidity mismatches are not as severe as they were in the—in the ’90s, for example.

BUITER: Yeah, I think the lesson—don’t defend the indefensible, right, the fixed exchange rates—has really been learned well. I think the greatest example, I think, is Russia. OK, it’s a supply-side economic disaster, but they did everything right on the monetary, fiscal, and exchange-rate front. Because Russia was not just hit by a single whammy—the oil price going from, you know, 120 (dollars) to whatever it was, 27 ½ (dollars) in a year and a half—but they got hit with a double whammy, with the sanctions as well. So they should have done -10 percent, right?

Instead, what did they do? They took it on the exchange rate, but they made sure that they were not going to have a complete collapse of the exchange rate, which would have started a possible, you know, inflation spiral, undermined political support for the government and all that. So they raised rates to, you know, put a floor under the exchange rate. And then, when the exchange rate stabilized, they lowered rates again. Fiscal policy was roughly neutral. I think it was really—they should give lessons to the eurozone guys and the Japanese on how to manage macroeconomically. This was just right.

ROUBINI: I mean, even a case—even a case that was more messy, like Brazil, where there was not the fiscal adjustment and everything is political and otherwise messy, the risk of really—of a sudden stop of capital is limited. They have their reserves. They use the exchange rate as an absorbing mechanism. And therefore, even in this situation that’s very difficult, I don’t think they’ll have a run on the banks or run on the government, or anything like a—(inaudible)—crisis. It’s highly unlikely.

LIPSKY: All this is true. And all this is good. But you wouldn’t want to miss another big point, right, which is with regard to structural reform in these economies, what they’ve shown is that with good short-term macro policies they can run, but they can’t hide. In the end if they can’t produce total factor productivity gains, then they’re not going to get where they would like to go.

BUITER: So Brazil, with the current supply side, right, they have a potential upper growth rate of, tops, 2 percent, right? These guys used to do 4 (percent) and 5 (percent), right? Now, they need to open up the economy, which is, I think the most closed economy—again, after North Korea—way more closed to trade because of outright protectionism than any—in fact, than almost in any other South American economy. And, yeah, it’s—they need, for the labor market, the credit market—there’s a dual credit market system, Chinese style. The lucky few—or, not a few—the lucky ones borrow from the state-owned bank and from these other banks—(inaudible)—and the rest borrows at twice what the—you know, the fair rate would be as a result of that, and puts themselves in a—in a horrendous debt situation. So it’s a deeply distorted economy.

But there’s good news here. It looks as though, you know, one of—at least the government that’s responsible for many of these distortions is on the way out. And so Brazil may have—if we have a general election, right, which is not only possible before the end of the year, then we have a government that can focus on economic issues, rather than on survival.

MALLABY: What’s interesting here is that the Washington consensus, sort of, you know, orthodox advice—which has been hugely maligned, particularly since 2008—in this case was listened to, adopted—adopted notably by Russia, as you say, in a further irony—and actually worked. And to the extent that there are problems in emerging markets, it’s the non-application of further economic orthodoxy on the supply side in terms of microeconomic reform. That’s the problem. And the macro has been a success.

ROUBINI: Yeah, but I would add, you know, for the last decade, until ’13, emerging markets were lucky. China was growing 10 percent. You had the commodity super cycle. You had zero rates and QEs all over the world. So there were—three major global tailwinds are now headwinds. Too, in the easy years, a lot of this counted on smarter fiscal and credit policy, twin current account and fiscal deficits, rode falling inflation going up with the fragile five and a few others, and then most of them did not do the structural reform. If anything, their model became state capitalism and state-owned enterprises, state-owned banks, protectionism, resource national, you name it, you know? It was in China, it was in Russia, it was India until Modi, it was in Brazil, it was all over emerging market. And now they are paying the consequences.

Yes, financially they are more stable because of flexible exchange rates and reserves.

BUITER: But there’s nothing wrong with what—

ROUBINI: But they were lucky; when the tide turned around, they had the buffer.

BUITER: The Washington consensus was right, except they were probably too dogmatic on capital controls, which under certain circumstances can be useful. But for the rest, yes. I mean, it’s—the so-called discrediting is just the confused writings of—

LIPSKY: Yeah, but don’t forget, the folks who originated the phase currency wars were the Brazilians, at a time when their fiscal policy was as wrongheaded as it might have been.

BUITER: Yeah, but that was not the Washington consensus. (Laughs.)

LIPSKY: Fair enough. Fair enough.

MALLABY: Nouriel, you wanted to say something, actually, about currency wars. What’s the next stage in that story? Because—

ROUBINI: Yeah. Well, there were rumors that there was an agreement at the G-20 in Shanghai that a stronger dollar was actually bad, was exacerbating risk off, because stronger dollar implied a higher chance that China would do a step deval. It was implying lower oil and commodity prices that were leading then to credit spreads that go through the roof, global equities falling, and inflation expectation collapsing. And of course, strong dollar was weakening U.S. equities and global. And I think that there was not a formal accord, but there was an agreement that a stronger dollar would exacerbate this risk off. And risk off because risk on, in part because the data out of China were not a disaster, in part because the Fed went very easy, in part because U.S. was not faltering, but also in part because the weakness of the dollar could reverse all the cycle—stronger commodity prices, lower risk of China devaluing, and global equities going up.

But, by talking to European and Japanese officials for the last few days, I got the sense that this accord has become a discord, because European and Japanese say, wait, after Shanghai we play by the rules of the game, U.S. growth went higher, U.S. inflation and inflation expectation went higher, while in Europe and Japan growth has gone lower and inflation expectation are going lower. In the meanwhile, the U.S. stock market has gone back to what it was before, while in Europe and Japan it is even lower.

And in spite of all these things, the dollar now is weakening, and that’s really killing us in terms of achieving our growth and inflation target. And what happened was that the Fed went very dovish. The FOMC, then Janet Yellen. There are some Fed officials actually actively in their speeches talking down the dollar. So a senior ECB official told me in private, first of all, Janet Yellen should reign in her troops, meaning telling them to shut up and not talking down the dollar. And there was a threat: for the first time I heard the ECB official saying, if that doesn’t happen and there’s not an agreement this weekend in Washington, we could do QE with foreign assets. It was a polite word for forex intervention unilaterally. And if the ECB thinks this way, BOJ, where the yen has gone up even stronger and where growth and inflation are even worse, is even more upset about it.

So I don’t think it’s going to happen. But I’d say that if the dollar were to keep on weakening and euro and yen keep appreciating, apart from unconventional policy—BOJ doing more negative policy rates in April—they may not have the time to wait until the end of April. They might have to act earlier, because this is becoming a serious issue. So the agreement has become a massive disagreement.

Now, if you ask the Americans about it, they tell you, wait a moment, the strong dollar was causing risk off, so Europeans and Japanese should be happy they’re now in risk on. Two, we are in a situation in which, if growth is weak in the eurozone, you can use fiscal policy rather than using exchange-rate and beggar-thy-neighbor policies. And, three, Germany’s running 8 percent of GDP current account surplus. They can raise the wages, they can cut taxes, they can do lots of things. And the eurozone overall is having also a surplus.

So I think there’s a conflict on currency right now. There’s a conflict on monetary policy, also a conflict on fiscal policy. Within the G-7, some people hope that there’ll be an agreement on more loose fiscal policy in exchange for less monetary. Germany is against it and the U.K. is against it. So, like at the G-20, we’re not going to get an agreement that resolves this tension by doing more fiscal. So I think this is a sense in which things are difficult right now.

BUITER: There never was a Shanghai accord, not even an implicit understanding. Each nation has since then, and before then, done exactly what it wanted for the, you know, perceived national interest, no attempt at coordination or assisting. It hasn’t always worked out the way they hoped. The Japanese certainly didn’t expect that after cutting rates, right, the day after their currency would appreciate. And this reversal of the normal laws of economics, which actually is not quite as crazy if you look at what else changed at the time, but there is not a sense that the people are pursuing this. The Fed did not talk more dovishly, right, than they did—in February and since—than they did in December, because—

ROUBINI: They did. The Fed has become extremely dovish by any standard. They went from—(inaudible)—of four hikes to two. The FOMC was dovish. Janet Yellen in her speech was even more dovish. And some Fed officials are even more so.

BUITER: But that has—that has nothing to do with—that has nothing to with international—I agree. They are very dovish, but it is for domestic reasons, because—

ROUBINI: It’s not just domestic. Janet spoke about international factors. The view was a stronger dollar was causing risk off. We shouldn’t have a stronger dollar.

MALLABY: This is another real disagreement. We can just—

BUITER: I think this is not—

ROUBINI: There was an agreement—

BUITER: There was no agreement.

ROUBINI: —that was tacit on preventing further dollar appreciation. The problem has gone all the way the other direction and European and Japanese are pissed off about it.

MALLABY: But whether there was an agreement or not—

ROUBINI: And they are saying so.

MALLABY: —what’s interesting is that now there is—if it’s true that there is a discord—(laughter, applause)—

ROUBINI: There is a discord.

BUITER: And there will be further—there will be further cuts—rate cuts in the euro area. There will be further rate cuts in Japan. And the Fed will sit on its hands as long as the American economy shows sign of the kind of weakness we had in this first quarter.

MALLABY: John.

LIPSKY: Well, first of all, Sebastian, I guess you’re getting ready to moderate a Republican debate. (Laughter.)

ROUBINI: Well, Willem and I are good friends and we were colleagues at Yale.

LIPSKY: We’re all good friends.

ROUBINI: I’d say Willem hired me, so—(laughter)—ever-grateful.

MALLABY: All right, so now that we have the backstory. Let’s talk about some—

LIPSKY: All right, but I just want to say—

MALLABY: Academic disputes are so vicious because the stakes are so low.

ROUBINI: Exactly.

LIPSKY: Right. (Laughter.)

The idea that these—that international policy agreements or cooperation is like a football huddle—American football huddle—in which you’re going to go down and cut left, and you’re going to fake right. And it’s not going to happen. It’s never going to happen, except in the most exceptional and emergency situations, like in 2008. Instead, the idea, which was created in—remember, the principle institutional response to the global financial crisis was the creation of the G-20 at the leaders level. And in September 2009 at Pittsburgh, at the—promoted mainly by the Americans, the creation of the so-called Framework for Strong, Sustaining and Balanced Growth, which created a framework working group that has produced detailed plans for policy consistency and cooperation that the idea is that exactly we should be following macro policy that seem mutually consistent and supportive of global stability.

At the technical level, this is happening. And in fact, in Melbourne at the last G-20, as in every G-20 leader’s summit, there’s the adoption of an action plan of things that are to be done. My guess is none of you have read the Melbourne action plan, may not have ever heard of the Melbourne action plan. There’s going to be a Chinese action plan—

BUITER: My God.

LIPSKY: Yes, but agreed by the G-20. The problem is, at the political level, you haven’t heard any commitment to a process of making macro policies and structural policies mutually consistent. And that has robbed confidence and led to these kinds of unrealistic expectation that somehow that cooperation’s going to involve next Thursday you do this, and then Friday I’m going to do that, and then next Monday I’m going to do the other.

BUITER: I have only seen one example since the great financial crisis started of international coordination. One act of international—of one side—unselfishness, intelligent unselfishness, that is the Fed making its help lines available, was I think the most important act in keeping Europe alive. The only act of cooperation or coordination was the simultaneous rate cut after Lehman, right? And then we had—there was supposed to be fiscal coordination in the November 2008 meeting. What there was was the coordinated announcement of national fiscal policies, all of them expansionary, right, which had already been agreed on without any consideration for their internal coherence. So it was—there was no coordination of policies; they just happened to all be in London at the time and said put it on a sheet. So there has been no cooperation.

MALLABY: OK, so, reading from my notes here, which are always formally prepared by the Council on Foreign Relations, it says: At this I would like to invite members to join—to join the mosh pit—(laughter)—

BUITER: In prayer. (Laughter.)

MALLABY: —with their questions. So if anyone has a question. Yes, I see one right over there. Earl. Remember, this is on the record.

 Q: Thank you. Earl Carr, representing Momentum Advisors, based in New York City. And thank you for a very lively discussion.

BUITER: We do our best. (Laughter.)

Q: As you know, it’s an election year in the United States.

BUITER: Really? (Laughter.)

Q: And the four leading candidates are all opposed to the Trans-Pacific Trade Partnership. If TPP is not passed, how important does that affect global growth? If it is passed, how important is it as well?

MALLABY: Who wants to take that? TPP, how much does it matter?

ROUBINI: Well, you know, whether it’s passed or not depends, of course, on who is going to win the election. I mean, Hillary Clinton has said there are certain things she doesn’t like about it, but I think that if she were to win, probably could be passed in the lame-duck session between the election and the new presidency. That’s the window at which you could have a chance of doing it. So I think there is still a hope it’s going to be passed.

You know, usually people say that the trade agreements don’t have a huge impact. If you do the general equilibrium on GDP it’s a positive, but it’s modest. And also, by the way, winners and losers—you have to make sure that you compensate the losers, because otherwise you have a backlash. And I see the Brexit risk in part driven by those who are losers from trade and globalization saying enough of Europe and blaming it on Europe. So you have to think about those questions.

But I would say that TPP has also a geopolitical dimension. You know, without TPP, the pivot of the United States towards Asia is empty. There is a rising China. And the U.S. wants, if not to contain it, to make sure that it doesn’t become too aggressive. I would say that the right solution eventually will be TPP is passed, China join TPP, and the U.S. joints the AIIB, and we have a greater amount of both trade, investment, and so on around the world. And I hope that that’s going to happen. Whether it’s going to happen or not is going to take time.

LIPSKY: Well, I would like to say the following: First of all, TPP is at best a second best. And TTIP, actually, I think is probably more important from the U.S. point of view, even though it’s taken—most people don’t even know about it or think about it. But the big picture here, is we seem to have abandoned multilateral trade negotiations. We abandoned Doha. And I suspect it is not—it’s not the only cause, but as you’ve all heard in the last few years since the crisis, global trade has grown at a pace slower than the global economy. And I think the fact that there has not been a multilateral trade agreement for the last 20 years or so is not irrelevant for this gradual slowdown in the growth of world trade, that was associated with better global—and better balanced global growth. So I find the current political debate on trade policy at best disappointing, and at worst disconcerting, and a little bit terrifying. Because if we’re going to—if the United States is going to decide that we’re against new progress on trade liberalization, then I would think that we’ve got many more risks.

MALLABY: But I want to bring Willem in on this one, because he’s a reliable contrarian. But so here is what I’m going to invite you to comment on. So Nouriel rightly points out that, you know, the effects on growth of TPP are positive but small, in the models, and that there’s a distributional consequence and you should deal with that. But we’ve run that experiment, and the political system is very bad at dealing with the distributional consequences. So you then get negative political results from these trade agreements. Isn’t there an argument for saying, look, for this rather modest economic gain, the political costs are too high. And you know, this globalization experiment has been pushed a long way, further than the politics is willing to tolerate, and it’s time to cool it?

BUITER: Not at all. I would like to see a TWP, a Trans-World Partnership, rather than a TPP. But this is the best we can have in this, I think, increasingly de-globalizing world. It’s not just to the trade field. You know, the welcome extended to immigrants everywhere is also getting increasingly worn, you notice, both in Europe and America. So it really is—I think we are at risk of giving up all the gains from globalization, which have been massive. And the reason is, of course, that—one of the reasons it; there are other reasons—but that we have no internal mechanisms for compensating the losers. And the U.S. is especially poorly placed there. At least in Europe there is a tradition of an active redistributive state, right? In America, that is much more—much less developed.

So I think that, in terms of the ability to ultimately get rid of the populist, nativist, nationalist, regionalist, localist, you know, eruptions in the West, I think that Europe probably has a better chance than America, because there is an internal redistributive ethic that does not—you know, does not exist in this country. So I’m quite worried about the ability of the U.S. to do anything other than say, well, shucks, tough luck. You know, Detroit–

(Audio break.)

MALLABY: So the paradox here is the more you reduce boundaries between states, the more you have to empower states.

LIPSKY: Well, but, Sebastian—

BUITER: Or allow people to move.

LIPSKY: Just take your—take your discussion, flip it around. What if—what if WTO had been rejected? Would we be in a better place? I don’t think so. That happened in the ’90s. We tend to look back on the 1990s as a time of great prosperity in the U.S., and success, and improved productivity, right, and good wage growth. That came in the wake of the last significant agreement on trade liberalization. So what we’re missing here is a lot of this discussion reflects not the lack of compensatory measures, which are always difficult, but the sluggish growth in the overall economy. In the past, relatively rapid growth compensated politically for these kind of problems.

MALLABY: OK. All right, let’s go to the lady on the aisle there. Thank you.

Q: Lyric Hughes Hale from Chicago.

This Sunday, OPEC is meeting. Freeze, no freeze? Why haven’t lower oil prices been more simulative? What do you expect to happen going forward?

MALLABY: Who wants to take that?

BUITER: Well, first, I expect that the meeting this weekend will be like all the meetings before it. Nothing will happen, because it is basically not in anybody’s interest to do—that’s in a position to do impose a solution to do anything. Saudi is key here, and they have changed their view on peak oil from peak supply to peak demand, right? And they are—they feel themselves at risk of being stuck with a stranded asset, and they’d rather pump and sell it at 30 (dollars) than keep it in the ground and sell it at zero 10 years from now. So I think it’s not going to happen.

Why there hasn’t been more of a—of a lift, well, first instance, right, look at consumption. And oil price decline, like an oil price increase, is purely redistributive. So there should be neither—if the losers spent the same as the winners, there should be no net effect. Now, I think clearly, even on the consumption side, if the decline, in this case, is totally unexpected as was, right? If anybody told me in June 2014 in January 2016 you’re going to sell oil at 37 bucks a barrel, I’d have said, come on, pull the other one, right? So totally unexpected. Large and very disruptive, right? So clearly I would say, you know, the losers have probably cut back their spending more than the winners.

But then there’s the investment dimension. And there, of course, the asymmetry is even greater. In the U.S., you know, the oil sector, you know, is the late and lamented oil sector. And so CAPEX is gone. Now, 97 percent of U.S. GDP is produced by sectors that use oil and gas as an input, so they should benefit from this. But I think they want to see that this price decline is permanent, and that the recovery to 40-ish (dollars) that we’re seeing is not the beginning of a crawl back up the hill. I don’t think it will be. I, myself, think that, between Iran, Libya, and the interests of the Gulf States in keeping the spending up, and the total lack of interest, I think, of Russia in any fundamental agreement, we are not going to see any serious recovery in oil. And the benefits, I think, will become more visible as time passes, and we get the very widely diffused investment benefits from the lower oil price, as well as, I think, a normal consumption response.

MALLABY: Let’s go in the back there. Lady in the white.

BUITER: But Mr. Roubini, I think, was going to disagree with me.

ROUBINI: No, other than—

Q: Hi. Claire Casey, Garten Rothkopf.

MALLABY: All right, start again.

BUITER: Not this again. (Laughs.)

Q: Sorry. Claire Casey, Garten Rothkopf.

There seems to be a growing body of literature saying the reason governments are having such a hard time managing this economic situation is because it’s actually the models are broken, and even the tools we use to measure productivity, like GDP, fail to capture large elements of our economies, particularly the digital economy. Could you comment on that, and how relevant it is to this discussion?

MALLABY: So undermeasurement of productivity in the tech sector.

BUITER: A bit, but it’s not a major issue.

ROUBINI: Yeah. I mean, there’s a bit of a paradox, because when you go to, say, Silicon Valley, you speak to these innovators, they say, we have innovation like we have never seen it before—you know, energy technologies, biotechnology, information technologies, manufacturing technologies, robotic automation, AI, 3D printing, personalized computing, whatever, even financial—fintech technologies, defense technologies—so they say we’re on the verge of innovation that are going to change the world for the better. In the macro data, you don’t see it.

So I would say there are several interpretations. One is that Bob Gordon (usually ?) says all these things are gimmicks; all these apps we use we make life a little bit easier, but compared to the major revolution occur in the past, that they’re not significant.

Second explanation, I think, is there is a lag, even during the first Internet revolution. Only when these apps went from B to B, to B to C, and eventually from the tech sector spread to the economy, you saw an increase in productivity.

The third explanation might be that we are mismeasuring it. Probably there is some mismeasurement, but you’ll have to argue that the mismeasurement that was also in the past has gotten worse than it was before to argue that this is a significant factor.

So the honest answer is with a no. (Laughter.)

BUITER: There is a bit—you can give up an example of the fact that quality improvements in services are especially hard to measure. Hedonic price indices, which are used in principle, right, are terrible. And then on top of that, of course, every advanced country in the world has cut back on its spending on statistical services. So the quality of the data is not deliberately doctored, don’t get me wrong, but they’re just poor quality because you get what you pay for.

Now, an example is, if you look at the price indices for software—for packaged, standardized software—there they do quality adjustment, hedonic indices. And they don’t do it for made-to-measure software. If you simply assume that the quality improvements, right, in the made-to-measure software is the same as in the packaged software, then you add about 0.2 (percent), 0.3 percent a year to GDP growth. So that’s just—but it’s not the end of the world, right? But it’s quite interesting.

For the rest, I think that the Gordon notion that the, you know, knowledge—the tree of knowledge metaphor of innovation: the low hanging fruit has been plucked. We’ve done fire. We’ve done water, right? (Laughter.) We’ve done the horse. We’ve done, you know, motion, power. And then all we have left now is boring old, you know, second-generation IT, artificial intelligence, robotics, and bioengineering.

And no, that’s not—I think it is complete baloney. These things are so exciting. The problem is, in order to see it in the data—in any data—you have to incorporate the new innovations in people, products, process, and capital. And we’re not investing, right? Not in people or in capital. So of course they don’t see it.

MALLABY: There’s also—the business model is often to give away new tech products like search functions or any number of apps you can think of on your phone. And if you give it away, it’s not in GDP.

BUITER: But that’s correct.

ROUBINI: Yeah, the other comment I will make is eventually there will be an increase in productivity. The question’s going to be then, however, that we know technology is increasingly capital-intensive, skill bias, and labor saving. And we—already there has been an increase in inequality in part driven by trade and globalization. I think technology might be actually—under some circumstances it might be a driver of that rise in inequality.

LIPSKY: Quickly, but I must say—

ROUBINI: But that’s going to feed into this backlash against trade—

BUITER: Remember, in a world where—

ROUBINI: —globalization, even technology over time unless we do something so that everybody benefits.

LIPSKY: The idea—but that’s—part of that—but, Nouriel, part of that skill bias stuff is the idea that technology favors the higher skilled and not the lower skilled.

BUITER: Some of it, actually.

LIPSKY: But I thought technology did just the opposite, right—made smart people—made stupid people smart, made weak people strong. So it’s not obvious to me that the long-run effect of advance—of accelerating technological advance is to disfavor or has had a regressive distributional impact. I think we take that for granted without thinking it through.

BUITER: Well, I think just in general you’re right. But I think for artificial intelligence, and you know, basically we’ll be able to run banks without people before long, right? You know, hundreds of thousands of jobs that are going to be wiped out here, replaced by just—you know, a few high-tech plants and probably and high-tech—

LIPSKY: You’re not turning Luddite, are you?

BUITER: Well, no, it’s—and so—

ROUBINI: Only fine economic research within banks is destined. (Laughs.)

BUITER: —and so I think—but, again, the challenge will be, how do we deal with the world, which I think we are headed for, where basically income and work will have to be decoupled? I think the answer is you move to a guaranteed minimum income, what Tobin and Friedman called the negative income tax, right? The sort of super earned income tax credit, but it’s not even an earned income tax. The super income tax credit, even if you don’t do anything.

MALLABY: An unearned income tax—

ROUBINI: Yeah, and then some.

BUITER: And again, here the U.S. is, again, poorly positioned because it has—doesn’t have this leadership position. Even that doesn’t solve the problem, because there’s a cultural problem that we have to learn to define ourselves as human beings without work. And that is going to be much harder, even, I think, introducing a guaranteed minimum income.

LIPSKY: That we should all so live so long to face this problem. (Laughter.)

BUITER: I think that—I think that 50 years from now—50 years from now.

MALABY: We’re getting a bit existential. I think we need—we need another question. Right there, yeah.

LIPSKY: Yeah. (Chuckles.)

Q: Thank you. Judith Kipper. (Coughs.) Excuse me.

Climate change is probably the single most important shared global problem that we have. We’re already seeing its impact in all sorts of ways in many places on the globe. It’s had an economic impact in some countries already. Have you factored the consequences of climate change into any of your assessments? And what do you think will be, in the next 10 (years), 20 (years), 30 years, those consequences? Because it seems to me it’s going to be major.

MALLABY: Well, let’s focus that maybe on—well, we could—we could take the example of the U.K. financial sector, which has been required by the Bank of England, right, to change the way it accounts for contingent losses.

BUITER: Yeah, and there’s, again, also the—what do you call it, the standard asset stuff, right? Yeah, yeah, it’s a part of—yeah.

ROUBINI: Right. Usually the argument on global climate change is set in terms of at which point in time—10 (years), 20 (years), 50 (years), 100 (years) from now—Washington and New York are going to underwater and so on. But I think the impact in the short term is actually already evident.

Take, for example, what’s going on in the Middle East. There are about 15 (million) to 20 million people between Middle East, North Africa, and Sub-Saharan Africa that are displaced. And what are they displaced by? Global climate change that is leading to desertification, desertification leads to collapse of water resources, and then your collapse of agriculture. And guess what? Then they start to kill each other. People forget that before the Syrian civil war started, you had four years of a massive drought. And the same things happen in many of these other failed states.

So if Europe is worried about how to absorb a million refugees last year, you have about 20 million people that are knocking on the door of Europe. And unless we do something about it, the next few years are going to be a total disaster, economical also, in terms of what’s going to happen for Europe as a major threat. So the consequences of these things are not 50 years from now. They are things we have to think about today.

BUITER: I agree. Sorry, you—

LIPSKY: I was going to say something very simple. If we’re not willing to talk about charges for carbon use—i.e. carbon tax—then we’re not serious. It’s that simple.

BUITER: First, I think it’s sort of too late no matter what we do, right, to stop us bouncing through the 2 percent—through 2-degree increase. So it’s going to be a little show of horrors. And all we can do is, of course, try to cap it as reasonably as possible, by carbon taxes most likely, and—but also then sort of resist and respond, right? You want to definitely own stock in infrastructure companies, right? In the Netherlands, we are raising already the size of the dikes, the second Delta plan. We’ve created artificial dunes now also to be ready for the global rising. We’re going to need to construct 1,600 miles of sea defenses in Bangladesh unless that country’s going to be underwater before.

And so—but Nouriel is completely right also on the refugee issue. To call the Syrians and the other Middle Eastern, or Central Asian, and Africans coming into Europe a refugee crisis as opposed to migration crisis, that is incredibly superficial. Yes, the wars and the civil wars in the failed states brought forward and probably speeded up the arrival. But as he says—I actually have a number of 50 million between Africa, the Middle East, and Central Asia of countries where there’s demographics, right—an enormous number of young people. Second, climate change. And also, technical change on top of that—the death, even independent of climate change, of labor-intensive agriculture in Africa, the Middle East, and Central Asia. Then, fourth, terrible governance in almost every country, right, in the region.

And then two other little facts which also are not going to go away. One, there has been enough real income growth in even these poor countries to create a sizable number of people who have just enough income to sort of pay the fare—pay the criminals to take them to Europe. And then, of course, they have the iPhones, right? And so it’s incredibly easy to plan the route and to know, you know, where, you know, the next roadblock is going to be. So Europe is going to have to face this, right? We’re going to have 2 million every year for the—for the foreseeable future.

LIPSKY: So the simple answer to your question is no. (Laughter.)

MALLABY: Let’s take another question. Yes, right there. Hi. The microphone is just coming behind you there. Paula.

Q: Hi, thank you. I’m Paula Stern. As Sebastian knows, usually I ask a question that I think I know the answer to, but I’m really going to take a wild one on this one.

You’ve talked about oil and you talked about a carbon tax. You talked about our trade system—trading system. As you know, energy—oil—has never been subject to any of the trade rules. And I am wondering if you could imagine them being subject—the trade in energy resources being subject to the trade rules. Would it help in any way from a climate change point of view, as well as an economic point of view in terms of growth? Can you image a world? And would it be better or not if we applied the trade rules and restrict the kind of—which are based on economic principles—to the trade in oil, or gas, and other resources?

BUITER: What is question about, the oil trading—

LIPSKY: Yeah.

MALLABY: What kind of trade rules do you mean, Paula?

Q: Well, the WTO. (Off mic)—on dumping, on—it just—I don’t know. I mean, I don’t—we’ve ever done it all these—all these decades.

BUITER: Is oil exempted from that? I didn’t know that.

Q: Even though it’s the largest-traded item—

BUITER: Yeah?

LIPSKY: Yeah.

BUITER: Yeah, yeah, yeah.

ROUBINI: I would make only one point. Probably compared to 20 (years), 30 (years), 40 years ago, OPEC is less powerful, and therefore its ability to affect through restricting supply and so on global prices is less. First, it’s very fragmented economically and politically. One of the reasons why they’re so—they’re not going to do a deal is because, of course, they don’t want to make any favor to Iran and Russia as long as Assad is in power in Syria, leaving aside other types of issues. And with the shale gas and oil revolution, and lots of new production in other parts of the world outside of OPEC, probably, that cartel is not as powerful as before. So its ability to affect price is not the same as it was.

You know, we had three major global stagflationary shocks that were driven by geopolitical shock in the Middle East that led to an oil embargo. In 1973, Yom Kippur War between Israel and Arab states; 1979, Iranian Revolution; 1990, Iraq invasion of Kuwait. This time around, the Middle East is burning. You have failed states right and left—Syria, Lebanon, Iraq, Yemen, Libya, you name it. So you would think that the (fear of pain ?) would be through the roof. And instead, oil prices are lower and lower. Why? Because there is this glut of supply, in part is the shale gas and oil revolution.

So, luckily, the same kind of meltdown in the Middle East that in the past led to spikes in oil prices today is not occurring, because there are so many more suppliers.

LIPSKY: But the—it’s easy to be—to be either pessimistic or cynical about this, but of course COP 21 meant that there are no major countries that are in denial on climate change and the need for action. The decline—the decline in energy prices in some countries like India, like Indonesia, have been used to reduce fossil-fuel subsidies. There is—there is room for practical action in the near term, and you just got to keep the pressure up. It’s not going to get solved quickly. But I think, ultimately, they’re just—as I said before, if we’re not willing to impose a tax on carbon usage, then we’re not serious.

BUITER: You’re not serious. I agree. Yeah—yeah, yeah.

MALLABY: Let’s squeeze one last question in. We’ll go right over here, yeah.

Q: Thanks, Sebastian. Frank Finelli from the Carlyle Group.

Nouriel, I enjoyed your ECB trip report yesterday. You talked about the ECB acting, perhaps, this summer, which is right about Brexit time. What do you think is going to happen with Brexit? And how does that drive activity with the ECB and the Fed?

ROUBINI: Well, I—

MALLABY: We almost achieved an hour on the global economy without talking about Brexit, so that’s pretty good.

ROUBINI: Well, we don’t know what the result’s going to be. The vote is going to be close. If the U.K. remains, it remains.

In the most interesting case, if there is a Brexit vote, in that case I think the Europeans have two options. One is to say, well, can we renegotiate and give you something more so that you’re going to stay, and have another referendum? I spoke with some senior European officials who told me—the French, the German, Italian—unless the vote is very, very close, if they decide to exit, then we’ll have to negotiate essentially a divorce, because otherwise Europe becomes a Europe à la carte and the Poles and Hungarians, everybody else is going to say. And there are also limits to how much more you can give them, given current treaty. So I’d say that option is not there. So there is—there is then negotiating of exit.

I think the short-term impact is going to be sell-off of the pound, sell-off of the stock market in the U.K., weakness in economic activity because of confidence effect. The BoE most likely either stays on hold or eases; unlikely they would hike, unless there is a disorderly collapse and a sudden stop. And then, in the medium term, I would say the impact on the U.K. depends also on what happens in the rest of Europe. If the rest of Europe stays together as Europe and the eurozone, then probably the impact is different than if there is a disorderly collapse of the eurozone, in which case the U.K. might say we’re better off being an island outside of this messy club; they were sinking.

On net, I would say the impact is going to be negative over time. It depends very much on whether you can renegotiate access to the single market. I don’t think it’s going to be easy. The Norwegian model implies you accept the regulation as they are, and they have free mobility of labor. And even the Swiss model, where they renegotiated for 40 years’ access to the single market, the condition was free migration. So even if you could renegotiate à la carte every agreement, at the end of the day EU requires free movement of labor as a condition for access to the single market. And therefore, if you voted against it, you’ll have a problem—you’d have restricted access.

I think the biggest loser is going to be probably the city of London because, well, the French and the German(s) want the U.K. to stay in. If they really are so stupid to leave, they’re going to try, however hard that might be, to have Frankfurt and Paris as being more important financial centers for Europe and try to crowd out as much as they can the city of London.

MALLABY: And I think we should probably leave it there. Thank you to everyone.

We’ve done—you know, we’ve contemplated the end of money. We’ve contemplated existential angst in the face of the end of work. (Laughter.) So thanks to the economists, and thank you to you. (Laughter, applause.)

LIPSKY: Thank you.

BUITER: Thank you.

(END)