Economic fragmentation is the real danger: coronavirus is deadly, but beware nationalism and neglect of the young

Gertrude Tumpel-Gugerell

Gertrude Tumpel-Gugerell is an Austrian economist, and former member of the Executive Board of the European Central Bank (ECB) from 2003 to 2011. Prior to this, Dr Tumpel-Gugerell held a number of prominent positions at the Austrian National Bank in Vienna, including Director of Area Corporate Planning and Management (1992-1997), Executive Director of the Economics and Financial Markets Department (1997-2003), and Vice-Governor (1998–2003).

Trends and opinions expressed in this article are accurate at the time of writing (November 18, 2020)

Economic fragmentation is the real danger: Coronavirus is deadly, but beware nationalism and neglect of the young
A darkening mood across Europe is certainly enough to strike a very cautious tone for 2021, according to Gertrude Tumpel-Gugerell, a former member of the Executive Board of the European Central Bank.
Until now, the economy had been on the way to recovery, and Q3 2020 had been particularly strong, according to Tumpel-Gugerell, who had – given the current conditions – the rather difficult honour of delivering the keynote at the Real Estate Finance Summit 2020 hosted by the European Public Real Estate Association (EPRA) and Bloomberg Intelligence on November 18.
Indeed, a worsening economy now appears to be an inevitability and is not something that looks likely to solve itself, she says. “Up until now, there were some real positives,” explains Tumpel-Gugerell, “governments have compensated people and businesses alike, while the biggest businesses have successfully navigated half a year of working remotely.”
This is a phenomenal achievement, and with news of successful vaccines a regular thing at the time of the summit, the mood, at least in the markets, has been good.
But with Europe entering a much stricter lockdown towards the end of October and beginning of November last year, it seems that some momentum to the real economy could be lost. The difficult question is to understand what steps must be taken to help Europe emerge from long-term stagnation. And, it seems, there is no simple answer.
“I think stimulus will be kept for some time,” says Tumpel-Gugerell, unsurprisingly. “But it should not be a long-term measure. The economy must adapt and innovate.”
What Tumpel-Gugerell alludes to here is the European economy giving itself a means with which to grow revenue to sustainably battle the pandemic fallout. What this means in practice is both difficult to articulate and to grasp. Economic structures do not simply change overnight. And, while major projects like digitisation and automation as well as ecological transformation are predicted to become huge revenue drivers in the future, it is unclear how that translates to solving the most immediate problems.
“We have definitely not yet used the full capacity of our brains to invent the greatest things or build the greatest possible world. We must use our brains to innovate and build a stronger, fairer and more sustainable economy,” explains Tumpel-Gugerell.
“In the meantime, however, we have to work out a different role for the state and for the tax system,” Tumpel-Gugerell says. “Right now, expenditure is increasing, and tax income is falling. It needs to be the reverse. The obvious answer in the long-term, unfortunately, is higher taxes.”
An uneven economic landscape
What is interesting about this particular crisis is that it has really crystallised a dichotomy between what can be roughly referred to as the top and the bottom half of the economy.
Like the illness itself, which has disproportionately impacted people in lower-income brackets, the economic crisis and its ensuing downturn look like it will hit the vulnerable and least stable the hardest.
“There are groups of society that are severely affected,” says Tumpel-Gugerell. “Those with service jobs, for example.” At the same time, those in traditional centres of wealth and who can work remotely are experiencing the crisis in a very different way.
In the corporate world, picking the winners against such an uneven backdrop is a hard task. Tumpel-Gugerell suggests that businesses and governments alike must “look carefully at demographic developments and buying behaviours and draw conclusions from these”. Even supposedly small changes in how people are using transport will be vital indicators of how the economy is shifting. “Predictions suggest that business travel will remain on a lower level compared to the past few years,” says Tumpel-Gugerell. “The knock-on effects of this could have massive repercussions for many sectors.”
The winners, if there are any, will be those that can adapt to these small yet significant trends.
This biggest risk is the sheer number of risks
The coronavirus has certainly brought into focus the reality that, as a continent, Europe requires the support and commitment from each of its member states to succeed as a whole. This level of collaboration is a blueprint for the economy of the future, whether we are under the thumb of coronavirus or not.
For a start, ensuring that digitalisation is a force for good must be a medium-to-long-term priority. Yes, it can be a revenue driver but “we have not yet seen the effect it will have on the labour market,” says Tumpel-Gugerell. “This is yet to come, and we must do what we can to ensure the effect is positive.”
“We also need to address the climate crisis,” she says. “These are huge structural risks that we must collaborate on in order to succeed.”
A key danger despite this that Tumpel-Gugerell highlights is the tendency of nations to believe that solutions to these problems can be found at a national level. And, indeed, the rise of nationalism has seen a trend for policymaking and problem-solving in isolation increase dramatically.
“Just listen to the electoral campaign in the US and the conversation around Brexit in the UK. Listen to what is being said in the US and in China,” Tumpel-Gugerell highlights. “Every day, we find increasing nationalism, and this is a threat because isolation leads to economic disintegration and lower economic benefit.”
According to Tumpel-Gugerell, this cannot be argued. Taking the US as an example, the world’s largest economy and assuming total isolationism, it is impossible to substitute foreign labour and imported or exported goods with products and services from any one economy. Isolation leads to poorer economies – end of story.
Yet, the narrative of world leaders today points to a trend of increasing, albeit not total, isolationism. And while this is economically damaging in the short-term, the longer-term concern is a total failure to address issues like mass-unemployment and unnatural climate disaster. This sort of disenfranchisement, which looks likely to disproportionately affect younger people with fewer skills and less experience, may only fan the flames of nationalist and isolationist feeling.
The longer-term is where we should be looking, says Tumpel-Gugerell. Safeguarding the economy for our children is not only the right and kind thing to do, but it is economically important for us all to ensure that there are jobs to be done and incomes to be had in a world that is sustainable, both from an environmental and a growth aspect. Tumpel-Gugerell is clear that, yes, we must deal with the coronavirus first, but for long-term prosperity, the message is clear: “Beware the rise of nationalism and think of the young.”