In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Janet Bush talks with Marco Buti. Buti holds the Tommaso Padoa-Schioppa Chair in European Economic and Monetary Integration at the European University Institute. Before that, he was chief of staff to Commissioner Paolo Gentiloni, the European Commission official responsible for economic affairs and taxation. From December 2008 until November 2019, he was director-general for economic and financial affairs at the European Commission.
In this podcast, he covers topics including the following:
- The evolution of European policy coordination
- European competitiveness
- Whether Europe’s business model is sustainable
- The need of more speed among European companies in frontier technologies
- The importance of Europe’s capital markets union
Janet Bush (co-host): So, do you think acting with speed is important for competitiveness?
Michael Chui (co-host): I do. In the technology field, we sometimes say that speed is in itself strategy. In many cases, it makes a really big difference.
Janet Bush: Well, our guest today posits that regulation keeps Europe’s standards high, but potentially at the expense of speed. And that affects competitiveness. Yes, and technology is part of Europe’s competitiveness issue.
Michael Chui: I am very interested to hear what he has to say.
Janet Bush: So welcome to our podcast, Marco.
Marco Buti: Thank you very much. Thanks for having me.
Janet Bush: Well, you’re an economist and a European to your fingertips, with a long career at the European Commission. The quintessential man inside, as your book title says: The Man Inside: A European Journey Through Two Crises. So tell us a bit about yourself, where you were brought up and educated, and how you forged your career in what I suppose we’d call European governance.
Marco Buti: Well, thank you, Janet. I did my first degree at University of Florence. Then I went to Oxford. Then after a brief academic spell and a year working at the research institute of Fiat in Torino, I joined the European Commission and have been there for 35 years. A very long journey indeed.
Janet Bush: Was it hard to leave the European Commission, or do you feel that the European University Institute is carrying on that work, in a sense?
Marco Buti: The European University Institute in a sense combines the best of both worlds. I mean, I could go back home, because I’m from Florence—the European University Institute is in Florence—and at the same time remain in an international environment and dealing with European matters. So yes, it’s a very good landing zone for me. There is a little bit of a struggle between peace of mind and adrenaline. So being out of the line of fire, in a sense, I miss that element there, to which I got used to over many years.
Janet Bush: A quieter life, but maybe less exciting?
Marco Buti: No, exciting nonetheless, because the debate on Europe is so lively. The main job here in Fiesole, the European University Institute, is to launch what I have called an EMU laboratory.
There are several topics where the debate is essentially stuck. From fiscal union to banking union. I think there is a need for a different take, a different approach. And that’s what we are trying to do in Florence. And the principle of a laboratory is that you may devise a new molecule and everything goes well, or it can explode in your face and then you have to pick up the pieces. But I think the idea of being a bit less risk-averse is what is needed in Europe at large.
Janet Bush: So to be more bold and say more bold things. Well, I think we would love to discuss some of those big issues, the fiscal union, the capital union, et cetera. But before that, I just wanted to ask you to take the temperature of where Europe is now. How is it handling what are very worrying and troubling times? Globally, how is Europe doing?
Marco Buti: Europe is dealing with crises, which are almost existential in nature. So they question very much the way we do policy coordination, the way the European institutions are built. I mean, my latest book—not the one you mentioned at the beginning but the one that was only published in Italian back in April—asks whether Jean Monnet was right.
Jean Monnet, one of the founding fathers of Europe, famously said that “Europe will progress through the crises and will be the result of the sum of the solutions given to those crises.” This is partly true. At the same time, not always do the responses to the crises satisfy what I called in the book “the Monnet compatibility test,” meaning coherence in economic terms, in institutional terms, and in political terms.
What we have to do now, really, is to deal with the present crises, remembering the mistakes or the good things that we have done in handling the previous crises. And it is clearly difficult, but the common challenge in handling these crises is, to put it like this, to lower the political discount rate of politicians.
What does it mean? It means to basically lengthen the time horizon, so to be less worried about the very immediate and take a broader view. And if they take a broader view, they will soon realize this is handling the war, in handling the energy crisis, as well as COVID; that the national dimension is far too small to provide an effective answer.
Janet Bush: You have written about the breakthrough, in that sense, that happened during the pandemic. The EU recovery plan had a large supranational element to it. And it seems to me that you believe that was a useful breakthrough, and that there’s a new acceptance of responses having to be on that larger scale, the European scale.
Marco Buti: Absolutely. I mean, the book you mentioned at the beginning has a subtitle that, you recall, is the Journey Through Two Crises. And the two crises are the global financial crisis following the collapse of Lehman Brothers in 2008, which then morphed in Europe into the sovereign debt crisis of 2011, 2012, 2013, basically until the de facto “whatever it takes” of Mario Draghi in July 2012, which I think was the most effective response to the crisis.
And then in 2019, 2020, then with the COVID crisis, the answer was substantially different. I think there is one element, which is fundamental in understanding why the response was a different one. And it is that the nature of the crisis was different. I mean, during the global financial crisis and sovereign debt crisis, what prevailed in Europe was what has been called the moral hazard paradigm. What does it mean? Essentially, that crisis was seen as arising from policy mistakes in the financial regulation sphere, in fiscal policy, et cetera.
The moral hazard paradigm is that, if you provide help, then countries will make the same mistakes later on. And it is a very costly paradigm. And we risked our neck, actually, with that. When there was a proposal back in 2015, you remember the debate on Grexit was to throw Grexit [Greece] out of the eurozone. That would have been a terrible mistake that would have, I think, led to calling in question the integrity of the single currency.
Now, that paradigm was not applicable to COVID. With COVID, it was an exogenous shock. It was not the fault of anybody. One can always think about, capitalism should be better not to create those problems. But clearly, it was an exogenous external shock. Not imputable to policy mistakes.
So that helped to devise a much more substantive policy response, and it went through the vaccine coordination purchases, and in particular in the economic sphere to the next-generation EU, and what was called, even before that, the SURE program [Support to mitigate Unemployment Risks in an Emergency], which is support of the Union to the labor market.
The European dimension clearly dominated there, and it was an extremely successful response. I mean, the markets, which feared a literal disintegration of Europe, were immediately reassured. I mean, at the end of the day—and I have talked and I continue to talk to portfolio managers, market participants, and investors—when it comes to the crunch, they are looking for political leadership.
So that’s what Europe showed in the response to COVID. They are not looking for the clever technical solution. They need to see that there is a collective leadership and there is a collective pilot in the plane. That’s what we did with the response to COVID.
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Janet Bush: Just talking about the pandemic, there was a stuttering start to the vaccine program. The decision was made in Europe that the European Commission should run the program, run the procurement, and it was slow. And some of the member states got very frustrated, and they went their own way. And so that European solidarity, to an extent, broke down. Is there a speed problem with Europe and with the European governing institutions?
Marco Buti: You are absolutely right. It was a slow start. It was a stumbling start. However, if one looks in retrospect, it was eventually a stunning success. I mean, just as the economies that we tend to research in terms of counterfactuals, so “what could have happened if.”
And then, if one tries to rehearse the handling of the crisis with every single country in Europe going its own way, clearly the large countries could have probably managed reasonably well. But many others, I think, would have been in very deep trouble, with the risk of fragmentation in real terms, in financial terms, et cetera.
Janet Bush: Going back to this issue of speed of action, MGI is looking at competitiveness all the time. And we’ve been looking at European competitiveness. And one of the issues that inevitably comes up with business is that regulation is slow, processes are slow. It’s difficult to get things done. There are innovators, there are fantastic companies, but you just cannot commercialize, because the regulatory system is ponderous. Do you think that that is a real issue?
Marco Buti: It is a real issue, for sure. OK, let me make a little qualification on this. I think speed is of the essence, but sometimes excessive speed leads to mistakes. So let’s take, for instance, the example I gave before of the Grexit debate, whether Greece should remain part of the eurozone.
Had the European Union, the European Union Council—the leaders and the ministers—decided on a speedy way at that time, probably they would have decided to let Greece go. I think that would have been a mistake. The issue here is certainly speed, but in a robust manner.
At the same time, what I think you indicate is absolutely key. And there is an issue of speed, and there is an issue of combining regulatory decisions with money. When talking about the response to the IRA, the Inflation Reduction Act of the US, I think there was a business leader who indicated that the US has a business case, and Europe makes a law.
I think the regulatory element is important. I think it becomes a standard throughout the world. Let’s go back to vaccines. I mean, the Green Pass [the EU Digital COVID Certificate] that we devised at the time has become a standard throughout the world. The soft power of Europe shaking the rules of the game is an important element and should not be disregarded or belittled.
Actually, there had been some books a few years ago saying that “Europe rules the world via its regulation.” At the same time, when you come to artificial intelligence, to new technologies now, speed is the name of the game. European companies tend to lag behind by themselves, and it’s also because of the industry structure that we have in Europe. Helping them to speed up, I think, is key. And here we have to combine the regulatory budget with the real budget.
Janet Bush: MGI looked at European competitiveness in technology last year, and we looked at ten, what we call, transversal technologies. They permeate across sectors. They’re increasingly making the competitive weather. And Europe is only ahead on two of the ten, and falling behind. China is forging ahead. The US already had a very strong position. How can Europe play in that race?
Marco Buti: Let me formulate the question like this: is Europe’s business model sustainable? And the answer is, not in the medium term. What does it mean? I broaden the question a bit from what you put on the table. I think there are essentially three elements, which make the European economy business model not sustainable looking forward.
One is a macroeconomic issue that we have in Europe, apart from the latest developments, but if you look at the developments over the past several years since the global financial crisis, which is heavily dependent on external demand. So we have a persistent current account surplus, 2 to 3 percent of GDP.
So it means that a large economic area in the world economy that is Europe is systematically subtracting demand from the rest of the world. This is not the way a large economy should be run. It is fine for a small economy, but not for a large player. This is the first point.
The second point is demographic. Europe is demographically stagnant. And we tend to, in a sense, throw the ball to the medium to long term on this. But in reality, this demographic stagnation is already with us. If you look at the developments over the past ten years, the 65-plus share of the population has increased by five points. And the share of the population between 16 and 49 has decreased by five points. This is a large change in only ten years. I don’t have to project to 2100 to see the effect of demographics.
And the third dimension is precisely what you put on the table. Europe is drifting away from the technology frontier. It is strong in a number of technologies, but essentially on a more mature technology. Advanced but mature. Those more forward-looking, it is clearly drifting away from the US and China.
From that viewpoint, I think the Europe business model, looking forward, is not sustainable. So we would have to tackle these issues in a very comprehensive manner. In this, there is no silver bullet.
I think proper regulation to make sure that there is a level playing field, and security, predictability that’s essential for business, combined with investment—public and then fostering private investment to make sure that there is speeding up of the adoption of these technologies.
We know that there are many conditions that are needed in order to ease that process, starting first and foremost with the adaptation of the human resources to that, to the completion of the banking union and the capital markets union.
And I think what is key in this is to understand that Europe has set itself the goal of the green transition and the digital transition. Unless we do this, we are not going to succeed, neither in one nor in the other.
Janet Bush: And it’s not just a question of speed. I mean, businesses talk about the fact that it’s so much more difficult to scale in Europe. And that’s partly a function of the fact that the single market is made up of different nations. And there are antitrust rules, et cetera. Is there a path forward that would allow companies, particularly in these fast-moving technological spheres, to move faster, to scale faster?
Marco Buti: We have in Europe an industry structure that I referred to before, which relies much more on small and medium-size enterprises than in other parts of the world. This reflects also some social preferences. What you have in firms, which adopt these type of technologies, is a portfolio, which is high return, high risk.
You have in Europe more conservative bankruptcy regimes than in the US precisely because the social preferences in Europe are more risk averse than in the US. But this I don’t think we can afford any longer. And I think, again here, it is important to review the bankruptcy laws within the single market to make sure that the current differences are overcome.
I think we will need to move away progressively from the bank-centric nature of the European economy. Typically, the kind of investments you are referring to are long in ideas and short in collateral. So it would mean that normal banks don’t usually finance this type of investment.
So, you need equity, you need capital markets, and we here in Europe are only a fraction in terms of the importance of the capital markets that you have in other parts of the world, particularly in the US. The capital markets union is stagnating, so we need to not only complete it but also make sure that it works properly. And unless we do that, I think it’s going to be very difficult to make sure that this scaling up takes place.
Janet Bush: You have been the cosignatory of a new manifesto for Europe, which has seven elements, but essentially it’s about a step change in European integration and a bigger role for the European Commission and the supranational institutions. Could you explain the thinking behind that? I’d like to explore how that might affect the competitiveness issues that we’ve discussed.
Marco Buti: The manifesto was published at the beginning of October. We take, essentially, an economic approach to this. And it tries to spell out precisely what I was trying to outline before, namely the unsustainability in the medium term of the European business model and the need to make sure that policy makers realize that—and here the manifesto says it explicitly—they can be individual followers, or they can be leaders by sharing sovereignty at the European level.
And if you look at the crises we have gone through and what we are going through now, there is no solution for which the national dimension is the appropriate one. We talked about the COVID crisis and the need to respond to that, the energy crisis again, the response to Putin’s war, and now the crisis in the Middle East, with the ramifications that we are still not seeing.
On all this, it would be very important that Europe finds its soul and provides the proper answers. There are a number of recommendations in this, and the recommendations span from reviewing substantially the EU budget to make sure that it is not a relic of the past but locates the money where the real priorities are, calls for the completion of the capital markets union, banking union, with the issuance of a safe asset, calls for the completion of the negotiations on the new Stability and Growth Pact. That’s also very important.
And so, a comprehensive agenda, which is going to be key for making sure that Europe is well equipped to respond to these challenges.
Janet Bush: In the manifesto, you talk about something more akin to a fiscal union, certainly a bigger budget, and the need for much larger automatic stabilizers, which the US has. And you’ve talked about the US being able to cope with exogenous shocks better than Europe because it has those transfers. That has always proved politically difficult in Europe, so far.
You also talk about private risk sharing, as opposed to public risk sharing, which goes to your point about the banking union, capital markets union, and bolstering the financial side of things. If there is not a move towards the fiscal policies that you want and larger automatic stabilizers, is action on the private risk sharing going to be enough?
Marco Buti: The answer is no. I think we would need a move on both fronts. It is true that if one compares Europe to the US, we are not both federations, but we are a currency union, at least for the 20 countries of the eurozone. And the stability and response to shocks in Europe relies more on national stabilizers, in the US more on federal stabilizers.
Forty-nine out of 50 states have balanced budget constraints constitutionally. So that is one difference, but it is true that the major difference is the private risk sharing both in terms of capital flows and in terms of portfolio allocation.
So, it is essential to make progress on that front. The capital markets union would help in terms of capital flows, and the banking union in terms of portfolio allocation. As I indicated before, both issues are substantially stuck, and we are not making enough progress on those issues. And we will have to, I think, restart the negotiations on that front.
Take a banking union. Basically, Italy and Germany painted themselves in opposite corners. They have to find common ground on that front. And the capital markets union is less ideologically charged, but it is still, in terms of working, a lot to do to make a difference.
That will help, but in order to restart both those debates, it is essential. And that will be one of the motivations from the EMU laboratory that I mentioned at the very beginning at the European University Institute, to have a different take.
I think what I have indicated before, namely that unless we complete the capital markets union, we are not going to make a success of the green energy transition. Unless we complete the banking union, there is no way that the euro would be an international currency competing with the dollar, because we do not have a safe asset that solidifies the banking union.
I think there is the geopolitical angle. The double transition angle I think is a better way to convince politicians than appealing to risk sharing and risk reduction. And my initial answer was that it’s not going to be enough to move only in one direction.
Because what we have learned throughout the crises, in particular the global financial crisis, is that private risk sharing tends to dry out under intense shocks. So the two are actually complementary, and it is essential that you have stronger public risk sharing together with stronger private risk sharing, moving ahead on both fronts.
Janet Bush: It was interesting what you said about the business person who said, “In America we have a business plan, and Europe has a law.”
We just published at MGI a piece about Asia being on the cusp of a new era. And one of the hallmarks that we found for what is beginning to be an Asia bloc is that it’s all about trade, it’s all about business. There is no institutional framework. There isn’t even political agreement between the economies of Asia. So it’s a very different model, but it’s proved to be extremely successful. So I suppose my question to you is, is there a different model to the European regulatory model that could work well in this disrupted, very quick, rapidly changing, technologically driven world?
Marco Buti: Let me answer this fundamental question in a broader setting. First, Europe, in the future, will continue to come from Venus. It will not come from Mars. That was said by neocons 20 years ago, and I think it’s going to be the same in the future.
This means that in our European DNA, there is an opening to the rest of the world. We are used to, and pretty good at, positive-sum games. We do not embrace a logic of power, which is essentially the one of zero-sum games or even negative-sum games.
We have, in a sense, that soft power through the regulation, through opening, through a multilateral rules-based system, I think has a lot to give to the world.
It is now unfashionable, somewhat outdated, maybe, because the logic of power is the one that dominates. But if one looks beyond the current issues—think about Africa, for instance, et cetera—I think we need to remain open. We need to give chances and strive for positive-sum games. It is a world that is shifting from being multilateral to multipolar.
And what you mentioned for Asia I think is a development that is a relevant one. At the same time, I think it would be a mistake to compare what is happening there as a division of the bloc, in blocs as we had in the old times in the Cold War.
But I think we still have strong assets, also, in terms of economic policy making. So in this world here, I think in a sense Europe has a lot to do to reform itself to overcome those weaknesses of its business model that I indicated before. Speed is going to be of the essence.
Putting the money where our mouth is, in terms of priorities, is also fundamental. But at the same time, I think we should continue to provide the world with a model that does not embrace a disruptive logic of pure power but strives for soft power and positive-sum games.
Janet Bush: Well, that is fascinating, and thank you so much, Marco, for joining us on our podcast.
Marco Buti: Thank you very much, Janet. It was a pleasure.
