IAI Research Papers Challenges for Global Macroeconomic Stability and the Role of the G7 Proceedings of a Conference organized by IAI Rome, 27 and 28 March 2017 edited by Fabrizio Saccomanni and Simone Romano Edizioni Nuova Cultura Proceedings of the international conference on “Major Challenges for Global Macroeco- nomic Stability. The Role of the G7”, organized in Rome on 27-28 March 2017 by the Isti- tuto Affari Internazionali (IAI) with the support of the Italian Ministry of Foreign Affairs and International Cooperation, the Bank of Italy, Intesa Sanpaolo and the Compagnia di San Paolo-International Affairs Programme. _________________________ Series Editor Natalino Ronzitti First published 2017 by Edizioni Nuova Cultura For Istituto Affari Internazionali (IAI) Via Angelo Brunetti 9 - I-00186 Roma www.iai.it Copyright © 2017 Edizioni Nuova Cultura - Roma ISBN: 9788868128593 Cover: by Luca Mozzicarelli Graphic Composition: by Luca Mozzicarelli The unauthorized reproduction of this book, even partial, carried out by any means, including photocopying, even for internal or didactic use, is prohibited by copyright. Table of Contents Introduction “Reduce Policy Uncertainty, Now”. Recommendations from Seven Think Tanks to G7 Leaders Fabrizio Saccomanni .....................................................................................................................7 PART I. T7 POLICY PAPERS 1. Co-ordination in Tense Times: Issues for the G7 Anne-Laure Delatte and Sébastien Jean (CEPII) ............................................................. 27 2. The G7’s Task for Restoring Growth and Stability Stephen Pickford and Paola Subacchi (Chatham House) ............................................ 51 3. A Proposal for G7/G20 Policy Coordination to Strengthen Global Productivity and Output Growth Malcolm D. Knight (CIGI) .......................................................................................................... 61 4. A Coordinated Approach to Foster Sustainable Growth and Financial Stability Fabrizio Saccomanni and Simone Romano (IAI) ............................................................73 Yoichi Otabe (JIIA) ....................................................................................................................... 91 5. Reconfirming the Very Basis of G7 Cooperation 6. Germany Prioritizes the Long-term Goal of Sustainability over the Short-term Goal of Revitalizing the World Economy Rolf Langhammer, Wolfgang Lechthaler, Stefan Reitz and Mewael F. Tesfaselassie (IfW) .............................................................. 95 7. G7 Economic Cooperation in the Trump Era C. Fred Bergsten, Edwin M. Truman and Jeromin Zettelmeyer (PIIE) ..................105 TABLE OF CONTENTS P ART II. COMMENTS BY DISCUSSANTS First Session: Macroeconomic Policy Coordination 1. Menzie D. Chinn ......................................................................................................................125 2. Giancarlo Corsetti ................................................................................................................131 3. Douglas Laxton .....................................................................................................................137 Third Session: Financial Stability 4. Claudio Borio .........................................................................................................................145 5. Luigi Guiso ...............................................................................................................................153 Fourth Session: The Role of the G7 in the Global Governance 6. Iain Begg ..................................................................................................................................161 7. Domenico Lombardi ............................................................................................................165 8. William R. White ..................................................................................................................167 PART III. KEYNOTE Speeches 1. Financial Market Volatility and Global Policy Uncertainty: a Conundrum Ignazio Visco ................................................................................................................................181 2. Priorities for the Italian Presidency of the G7 Raffaele Trombetta ...................................................................................................................191 ANNEX Contributors ................................................................................................................................197 Conference Programme .........................................................................................................201 6 “Reduce Policy Uncertainty, Now” Recommendations from Seven Think Tanks to G7 Leaders Fabrizio Saccomanni Istituto Affari Internazionali (IAI) In view of the Italian Presidency of the Group of Seven (G7) in 2017, the Italian Ministry of Foreign Affairs and International Cooperation (MAECI) asked the Istituto Affari Internazionali (IAI) to conduct a research project on “Major Challenges for Global Macroeconomic Stability and the Role of the G7”. The IAI contacted a major policy think tank in each of the oth- er G7 member countries to participate in the project. The participating think tanks are: Center for International Governance Innovation (CIGI, Canada); Centre d’Etudes Prospectives et d’Information Internationales (CEPII, France); Kiel Institute for the World Economy (IfW, Germany); Japan Institute for International Affairs (JIIA, Japan); Royal Institute for International Affairs (Chatham House, United Kingdom); and Peterson Institute for International Economics (PIIE, United States). As coordinating think tank, IAI has proposed that the project should cover the following three subjects, representing major challenges for G7 policy-makers: macroeconomic policy coordination, international trade asked to prepare a concise paper addressing all or some of the issues fromrelations, the perspective and global financial of its own stability. country, Each outlining participating areas of think possible tank conwas- sensus for joint actions to be achieved within the Group and offering inde- pendent policy recommendations relevant for the G7 deliberations. The 7 FABRIZIO SACCOMANNI seven country papers were presented by their respective authors at an in- ternational conference held in Rome on 27–28 March 2017 and discussed by a broad range of experts from academia and international institutions. The proceedings of the conference are presented in this volume in the following order: the papers of the seven think tanks (T7); the con- tributions of discussants who submitted written texts; and the remarks of two keynote speakers, Dr. Ignazio Visco, Governor of the Bank of Italy, and Ambassador Raffaele Trombetta, G7-G20 Sherpa to the Italian Prime Minister. The Annex contains the list of contributors and the conference programme. In this introductory note, a summary of the main points of the country papers and of the discussion will be provided for each of the three themat- ic sessions of the conference and for the concluding session on the role of project and the policy options recommended to the G7 policy-makers. the G7. A final paragraph will briefly outline the main conclusions of the MAIN POINTS OF THE COUNTRY PAPERS AND SUMMARY OF THE DISCUSSIONS Macroeconomic policy coordination Despite some positive signs of cyclical recovery in late 2016 and early 2017, there is broad consensus among the T7 about the unsatisfacto- ry performance of the world economy from a structural point of view: growth below potential, persistent unemployment and/or underemploy- ment, low levels of investment and declining productivity, rising income inequality, ageing populations, etc. The T7 are unanimous, albeit with investment and a broad range of structural reforms. There are howev- some nuances, in advocating a fiscal stimulus designed to boost public appropriateer significant degree differences of multilateral of emphasis coordination on the nature of such and strategies. content of fiscal actions, on the sequencing of fiscal and structural measures and on the CEPII promote investment particularly in R&D and in technologies to reduce greenhouse advocates emissions. a coordinatedThese are likely fiscal to stimulushave a more by G7substantial economies long- to term payoff and can play a crucial role in the context of climate change 8 “REDUCE POLICY UNCERTAINTY, NOW” strategies. CEPII also considers it important to strengthen G7 coordina- programme launched by the OECD and in the monitoring of tax reforms currentlytion in the under implementation discussion inof memberthe BEPS countries. (base erosion and profit shifting) PIIE, recalling the commitment of the Trump administration to pro- projects, envisages a possible compromise agreement in the G7 to coor- dinatedvide fiscal increases incentives in publicto private investment participation involving in infrastructure Germany and investment countries tax policies, particularly if the US were to introduce a border adjustment with sufficient fiscal space. PIIE also would advocate G7 coordination on IfW and IAI are in favour of initiatives to support public investment whiletax, in orderaddressing to limit long-term its impact growth on trade challenges flows. through structural re- forms. IAI in particular suggests a coordinated approach at both the na- mutuallytional and reinforcing international interactions; level: