Reflections on Davos 2013 by Daniel Sachs

March 11, 2013

The corridors of the conference centre at Davos were full to brimming this year, as they are every year, but the nature of the conversation had changed. Gone was the negativity of every Davos meeting since 2008 and in its place a newfound optimism. Martin Wolf, chief commentator at the Financial Times described this year’s meeting as “a sigh of relief”.

Where did all this optimism come from? The sad fact is that it came from things that did not happen rather than from things that did. It came from the fact that Greece did not crash out of the European Union, that the Euro did not implode, that there was no hard landing in China and that the US economy managed to avoid stumbling off the fiscal cliff.

It is a reflection of the parlous state of the global economy that things not happening are seen as reasons for optimism. So as I walked the corridors, listening to all the arguments about the benevolent position we now find ourselves in, I am afraid I found it difficult to participate in the optimism. For some, it was the most optimistic Davos since the crisis began. For me, it was little more than a conspiracy of optimism. I agree with Axel Weber, chairman of UBS, who said at Davos: “The mood has been good – too good to be true.”

Why? When I look around I see that the US fiscal situation looms just as large as it ever did. In the EU, there remains a pressing need for fiscal consolidation and reform of the EU itself. Geopolitically, there are enormous challenges associated with the situation in the Middle East and North Africa. At the same time, there are the hurdles presented by tackling resource related issues. In short, it may be tempting to try and talk our way out of the crisis, but it is unrealistic and not based on a clear understanding of the facts.

Let me explore this theme a little further by looking close to home in Europe. It does seem that for now an acute Euro crisis has been averted through powerful monetary policy actions and a marked path towards greater financial integration in the form of stability mechanisms and greater banking union. But what does continued integration look like? Deepening financial and monetary integration increases the pressure for political integration and a common fiscal policy. These are enormous challenges. Do they lead to a two speed Europe or closer political integration or disintegration?

Associated with this is the question about competitiveness in Europe – both in terms of Europe's overall competitiveness and how to reduce diverging competitiveness between North and South Europe. When this is discussed, all we usually see are graphs of unit labor costs – the differences in wage levels and wage inflation. But competitiveness is about so much more than the cost of labor. It's about product quality, innovation, research, education, quality of life, an open society and a transparent legal system. The nature of the debate in Europe needs to be broadened to encompass these essential areas. Not doing so means the real issue will not be addressed. And, in my mind, all these aspects of European competitiveness would benefit from further integration.

There are other existential issues. First, there is the discussion about the legitimacy of the EU itself. The EU needs to be a project with a broader base – not just an elite project. It also needs to be a less polarized debate. These days it seems as if you are either a Europhobe or a Europhile. I am perhaps a Eurosceptic, but this does not mean that I am anti-European. To be Eurosceptic is to support the European idea but to constantly call it into question so that it can be improved. What we need is a constructive discussion based on the assumption that we are going to integrate which addresses the need for reform, the changes required to the institutional model that embraces the common market and a common foreign and security policy.

In summary, I would say that the considerable intellectual resources of the Western world are trying to find ways to maintain our previous standard of living, conveniently underestimating demographic changes, resource and environmental constraints and liabilities for future generations. Instead, we should be discussing what a new model might look like.