In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Janet Bush speaks with Guntram Wolff, the director of Bruegel, which is regularly ranked one of the top global think tanks. In early 2021, he was appointed to a new G-20 panel on pandemic prevention, preparedness, and response.
Wolff discusses the challenge of being better prepared for future pandemics, climate risk in the run-up to the UN Climate Change Conference (COP26) in Glasgow, and prospects for Europe’s economies as they begin to recover from the shock of the pandemic. He answers questions including the following:
- With your economist’s hat on, if you had to choose, what would be the one insight you would take away from the pandemic?
- What is the aim of the High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response?
- Is the balance of incentives tipping in the right direction for an effective response to climate change?
- Is Europe in good shape to recover from the pandemic?
- How could the tapering of pandemic-related economic support work with the very large economic imbalances between Northern and Southern Europe?
An edited transcript of this episode follows. Subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.
Podcast transcript
Janet Bush (co-host): In today’s podcast, I will be talking to Guntram Wolff. He has been the director of Europe’s influential Bruegel think tank since 2013. He has served his maximum term now and leaves Bruegel next year, and has enormous insights and interesting things to say after all those years.
Michael Chui (co-host): I have heard that his attention is already shifting to a more global perspective, notably to ongoing work on how to finance a more effective response to future pandemics.
Janet Bush: Indeed, and he also speaks passionately about the challenge of climate change.
Michael Chui: I am very much looking forward to Guntram’s insights. Over to you, Janet.
Janet Bush: Guntram, thank you so much for joining us today, and welcome to Forward Thinking, MGI’s podcast.
Guntram Wolff: Thanks for having me.
Janet Bush: I wanted to start with the pandemic. It’s what is on all our minds. It’s been such an extraordinarily turbulent period for Europe and all the world. With your economist’s hat on, if you had to choose, what would be the one insight you would take away from what has happened?
Guntram Wolff: The one insight that I would immediately take away is that pandemics are probably the most costly thing that can occur to humanity. Costly in economic terms, but of course beyond the economics also in social, human, and welfare terms.
If there’s one priority on which the world community needs to deliver, it is about reducing the probability of new pandemics emerging. It’s really about investing in the necessary medical and nonmedical preparedness so that we bring down the probability of these pandemics, bring them down massively.
The science tells us that these kinds of pandemics can happen more frequently now than they used to happen. And that’s a real risk. It’s a real risk for us as individuals, as societies, and for our economic prosperity. And frankly speaking, it’s appalling how little we’re investing into preventing this risk.
Janet Bush: You have been appointed as a project director of the High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response. Very long title [chuckles]. I would love to hear a bit about what you are doing there and what the aim is there.
Guntram Wolff: I didn’t choose the title, but I think the title sort of nicely summarizes what this project is all about. It is really about thinking [about] what kind of funding and how much funding is needed, and how the funding needs to be organized so that the likelihood of future pandemics is significantly reduced.
And if pandemics strike, the response can be rolled out extremely quickly. We were requested and asked to do this on behalf of the G-20 presidency of Italy, and prepared a report which was presented in July to the G-20 finance ministers.
What I think [is] striking is that it’s one of those first instances really where this pandemic topic—which is typically a global health topic and typically dealt with by health ministers and health ministries—was on top of the agenda of finance ministers. What the whole purpose of this project was—and the discussions are still ongoing now, more on the implementation phase—was really to bring this to the top of the agenda of finance ministries and to ensure that that funding is there.
The key message in our report really is that the funding that we need is actually very limited. I mean, we need something like $15 billion per year, which is nothing compared to the cost of a pandemic, which we estimate to be in the tens of trillions, actually. This is probably the cheapest global public good we can get with the highest return. It’s really not understandable why the world community so far hasn’t been able to put up the money.
Janet Bush: Obviously funding is a vital part of this, but it’s also the institutional arrangements, the execution of the policy. How do you get the international community, whatever that is, to work together?
Guntram Wolff: Our report has two legs, in a sense. The one leg is the funding leg, and the other leg is what we call the governance leg. And so the emphasis there is very much on the need to improve coordination globally on these issues.
The starting observation is that current institutions are not enough, not adequately resourced, and the competencies of the current institutions such as the World Health Organization, and others, are not strong enough to actually do the job. What we need, and what we are proposing, is something that we call a global pandemic threats board.
You can give it a different name, but basically the idea is to have a regular gathering at the G-20 level of finance and health ministers—ideally, [to] discuss the risks and discuss where the funding needs [are] most urgent. And how to channel those funding needs.
I think the global tension on this debate is whether or not this should be primarily a G20-driven process or a United Nations driven process. In the end, we are advocating more for the G-20 approach because we wanted to prioritize efficiency of decision making over, let’s say, breadth of representation. But that clearly is a tension, and my biggest worry now is that in the negotiations that are ongoing, these kinds of institutional battles will prevent meaningful progress. And that would really be a pity.
Janet Bush: It was very interesting in the European context on the vaccine drive that you saw a tension between moving in lockstep and having a European response with the European Commission in charge of vaccine procurement, and member states who wanted to go quicker.
What were your reflections on that episode and what it said about the institutional setup of pandemic preparedness, vaccines, and our response to events like this?
Guntram Wolff: On the European level, my main view is that it was the right decision to centralize the purchase of vaccines. It would have been extremely painful, extremely difficult for the cohesion of the European Union, if some countries had had the vaccine and had vaccinated their populations while others wouldn’t even have had any access to the vaccines.
This was the right decision, to do this. And the second observation is that when that decision was taken, that was the summer of last year, it was taken half a year later than the decision of Donald Trump to actually get the program going.
In a sense, the US had a head start, and so did the UK, relative to the European institutions. European institutions didn’t even have a proper institution for that, so they had to find resources within the institution to actually mobilize the competences and the resources to do this.
These are good reasons that explain why, initially, it went somewhat more slowly. But the third point I really want to make is that the European institutions then overdelivered. We are now ahead of the US and I think even ahead of the UK in vaccination rates.
The European Union has actually exported half of its production and so has given a big contribution to the global community and has kept global trade also open, and thereby helped combat this pandemic quite substantially. In the end, I’m actually quite proud of how the European institutions handled that. In the end, I think it will be remembered as a success story.
Janet Bush: Yes, it was slow at the start, but clearly the vaccine drive became a success. Obviously we also have another huge reason for international coordination, and that is climate risk and climate change. We’re talking in the run-up to the COP26 meeting, which is so crucial, in Glasgow. How do you see that panning out? What’s the mood music like? What do you think?
Guntram Wolff: The first observation, and also linking it to our previous topic—I sort of understand that it’s difficult to get climate change under control, because doing that is costly. I mean, it’s not that these are small investments. We need huge investments to change our energy and transport systems. Very much in contrast to the pandemic, where we talk about double-digit billions; here, in climate change, we are talking of three-digit [billion] or even four-digit global investments that will be needed.
There, it’s understandable that every country will have a tendency to hope that somebody else does the job first and delay the costs on their own citizens. It’s a much harder nut to crack, a much harder global commons to deliver on.
We are starting to enter a phase on climate change where there’s actually more and more business interests, because the technology for clean energy has become so cheap that it’s becoming competitive—and a real, realistic alternative to fossil fuels.
In that sense, I do think there are some reasons for optimism. The technology, the progress really helps us achieve these climate goals. But on the whole, on the big picture, perhaps the last point on this is, we are still very far away from reaching our climate goals.
Global emissions continue to rise. They don’t fall. They continue to rise. And the speed of decoupling between economic growth, on the one hand, and emissions is just too slow. We need to massively accelerate this decoupling. Otherwise, the world will just miss the 2050 targets. And that means climate change will be unchecked in the next years, in the next decades. So massive investments, a massive speedup of technological development, a massive speedup of rollout of these technologies is all needed. And the world community is far away from really solving this.
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Janet Bush: But as you say, there are technological opportunities. There is business and money to be made out of renewables and other technologies. MGI has written extensively on the huge cost to the global economy of extreme weather events and a warming planet. Do you see the balance of incentives tipping in the right direction?
Guntram Wolff: The way I would interpret the risks that climate change poses on our economies, on our daily lives, that’s really an important factor for domestic politics. And in that sense, it changes the narrative. Citizens see how climate change is affecting now their daily lives. And they demand action, and politically it becomes more of a winning proposition now to say, “Well, we are going to do something. We’re going to invest in adaptation,” which we will have to do.
We will have to do massive investments in adaptation, because climate change is already with us and will be more with us in the next 20, 30 years. Even if we do an extremely rapid decarbonization, we will still face more adverse weather events in the coming two decades.
We need to invest in adaptation. That’s a politically winning strategy.
Janet Bush: It’s a very, very big challenge and a very big topic. I just wanted to narrow our lens a little bit and talk about the postpandemic recovery in Europe. Do you think that Europe is in good shape to recover?
Guntram Wolff: It’s a big topic, and it’s always the most difficult part of the eurozone, the discrepancies between countries. In single countries where recoveries are more even, it is easier to implement a monetary policy. But the EU and the eurozone do have this divergence and do have these different performances. Now, having said that, in a sense, this COVID pandemic was, from that point of view, a “good” pandemic, because we had a shock that affected everyone.
Even though the south of Europe was affected more strongly than the north of Europe, everyone was affected by this pandemic. And that allowed [us] to come up with a joint response, which is now called a recovery fund, the NextGenerationEU.
There is a joint response now, a joint budget instrument, that is providing actually a lot of support, in particular to the south of Europe. And so it helps overcome the divergences and reduce the divergences in the eurozone, and therefore gives a good starting base for a more even recovery.
In that sense, I do think that the European Central Bank has more capacity to act on monetary policy now based on the eurozone aggregates or on the average numbers of the eurozone, rather than having to worry too much about individual countries.
Janet Bush: The recovery fund is clearly an example of a Europe-wide economic support in the face of the pandemic. But there are broader issues, which you and I are very well aware of, about fiscal policy to back the eurozone.
The OECD said in its May 2021 outlook, “Slow or inefficient implementation of the EU recovery plan, possibly accompanied by the reinstatement of essentially unreformed European fiscal rules in 2023, would slow the recovery, risk reigniting sovereign debt tensions, and, more generally, weaken the cohesion and further integration prospects of the euro area.” What did you make of that?
Guntram Wolff: The fiscal rules have quite a bit of flexibility. And a lot depends on, how do you interpret and how do you implement the fiscal rules? It’s clear that if you take some of these rules literally, and you were to implement literally what the rule says, it would be a disaster. But I think we also need to accept the fact that now we are in a situation where deficits are very high, debt levels are very high, growth is back, inflation is back.
At some stage, governments will have to tighten the belt. And there’s just no way around this. You shouldn’t do it too rapidly, but it will have to happen. We are now in a phase where this message needs to sink in.
Now there’s one area where I think we need some sort of an exception, and that’s green investments.
Janet Bush: The other “ring fencing” argument that’s relevant is youth. Youth unemployment has remained high in the ten or more years since the global financial crisis in parts of Europe. And I think you’ve called for more financing to support young people. Can you say a little bit about what you have in mind?
Guntram Wolff: My thinking there was very much shaped by the aftermath of the global financial crisis, where governments across Europe committed to preserve investment, preserve education spending, preserve everything that’s future related. And when I looked at what actually happened in 2015—I looked back at what actually happened in the budgets—exactly the opposite happened. So investment was cut, education spending was cut, research and development spending was cut.
Now, in this consolidation phase, [if] governments again deprioritize the future, it’s going to be very painful and very bad for our future and very bad for young families, for the younger generation. And given how few young people we have, we just can’t afford spoiling our youth.
Janet Bush: The economic recovery after the global financial crisis took a long time, because of the debt overhang and possibly policy choices that were made. Do you think that there’s a danger that the same very slow recovery might happen this time? Or are you more optimistic?
Guntram Wolff: I’m more optimistic this time, I think because policy makers, I’m firmly convinced, have learned their lesson. It’s a very different conversation in Europe now than the conversation was back in 2011 or ’12. Clearly, policy makers want to avoid the policy mistakes that they made eight, nine years ago.
No premature tightening, no excessive fiscal tightening, I think that everybody is agreeing on. I haven’t come across any sort of major policy maker saying, “Oh, now we need to have rapid fiscal consolidation and a very strong stop to that [pandemic support].” So in that sense, I’m more optimistic.
The optimism there is, we’ve also advanced a lot in terms of the use of digital technologies and so on and so forth. I’m somehow thinking, well, perhaps in the end, this will even be remembered as a productivity-increasing event. I mean, it’s been bad at the moment, but we all learned so much. So perhaps productivity will actually go up.
Janet Bush: MGI wrote a report earlier this year saying that there could be a productivity bonus from this pandemic because its accelerated digitization [and] its accelerated business innovation possibly accelerated automation. But of course that has its own imperative to skill people and to help them to make those transitions.
So that could be indeed a silver lining to the pandemic. Do you see any other silver linings to the pandemic? Perhaps for society, perhaps for the way we interact with each other?
Guntram Wolff: I’m not so sure on that one [laughs]. That’s more difficult, as an economist, to evaluate. But my view is that our societies and the way we are, and the way we operate—yes, we have shown some resilience, but it’s been very tough on so many individuals and so many families.
Janet Bush: Looking back on your eight years as director of Bruegel, you’ve been through a couple of big crises. When you reflect on those last eight or nine years, what are your key reflections from those eight or nine years that you’ve been at Bruegel?
Guntram Wolff: One reflection is certainly that the European Union project has been remarkably resilient. It’s been so many times that a journalist called me up basically asking whether this is now the end of the EU, the end of the eurozone, et cetera, et cetera.
And here we are, and every time there’s new instruments, new joint decisions, new capacities that are being built, the thing looks stronger than it used to look when I started in my current position.
Yes, I think there is positive forward momentum that we can observe. Second, however, that’s perhaps the more negative side on it, it always takes a bit too long, and it’s a bit too difficult to make these decisions.
That’s not just painful to observe, but it also costs us dearly as a society and doesn’t help us to be quite as advanced as we should. If I look forward, what I worry about is that our societies and our countries have fallen behind on some key issues, on investment, on new technologies.
Because we’ve been so absorbed with solving the eurozone problems, the banking problems, then the pandemic, we probably haven’t invested enough into artificial intelligence, new technologies, where we risk falling behind even further.
The next five or ten years, the focus should really be on these kinds of investments, that we get again to the top. The talent is there. The money is there. But it needs the push to actually get this done.
Janet Bush: MGI’s written about digital Europe and Europe’s position on AI, for example. And it’s clear that apart from some pockets of real innovation, Europe has fallen behind on some of these frontier technologies.
I just wanted to ask you one thing about the last ten years. Ten years ago, you described the lack of a fiscal union for the eurozone as a fundamental weakness. And yet, as far as I know, we’re no closer to achieving that fiscal union. In my past life as a journalist, I interviewed Robert Mundell who won the Nobel Prize for his optimal currency theory. And large-scale fiscal transfers are absolutely the sine qua non of a successful currency area. How do you see that?
Guntram Wolff: I personally still think that the core fragility of the eurozone is the fact that we have a central monetary authority but decentralized fiscal authorities. And that produces all kinds of problems and frictions. But I do think, if I compare the eurozone now with what it looked like in 2008 when I actually moved to Brussels, it’s just such a different animal now. There are so many fiscal instruments that have been created. There’s the ESM [European Stability Mechanism]. Significant steps on the banking union, with some also fiscal backup to it.
And more recently, of course, the recovery fund. And the recovery fund is a pandemic one-off, but it’s a massive transfer at a time of severe negative shock to the south of Europe. And it’s massive, the transfer. Yeah, it’s just a one-off, but once you create a one-off, I’m convinced if there’s another big, big, big, big shock, that insurance instrument is there and can be activated. It requires the political will then. But it can be activated.
In that sense, the eurozone is now much more robust, because it has created insurance mechanisms that depend on political decisions. Every time it will be a new political fight, but the fact that it exists changes the conversation. In that sense, I think the eurozone has become much, much more robust. And it’s really a much more stable animal now than it was in 2008.
Janet Bush: I wanted finally to share with you a wonderful image painted by a German politician who spoke at an MGI meeting we held in Berlin two or three years ago. He was talking about how Europe feels hemmed in by geopolitical threats, and how that means that Europe needs to be big and bold and united. And what he said was that “Europe is the last vegetarian in a world of carnivores.” And I just wondered if that resonates with you.
Guntram Wolff: I’m not so sure I like this metaphor so much, to be quite honest. I like the argument that Europe needs to be united because of the world and because of its role in the world. The prime motivation in the initial phase of the European Union project was peace on the continent. I think that has shifted now to being a player on the globe and managing globalization in our interest. That I like.
But “carnivore”—I don’t think we want to be such strong carnivores now. And I also think, by the way, that in some areas we actually are quite robust. It’s not that we are just eating grass. On some issues we have pretty strong instruments by now and make our neighbors feel those instruments. In that sense, it seems to me, we probably moved quite a bit from the vegetarian way.
Janet Bush: Although being vegetarians of course is extremely good for the climate [laughs].
Guntram Wolff: That’s right.
Janet Bush: On that note, thank you so much for a fascinating chat. Good luck with your work on the preparedness for future pandemics. And fingers crossed for COP26.
Guntram Wolff: Thank you so much for having me.
