Change, Innovation and Distribution

KA-30-08-682-EN-C
Change, innovation and distribution

Social, political and economic trends and threats
Conference organised by the
Bureau of European Policy Advisers of the European Commission
on 3-5 December 2007
in Genval
EUROPEAN COMMISSION
Cover photo: © Pamanes - Fotolia.com. European Commission
Change, Innovation and distribution. Social, political and economic trends and threats
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3–5 December 2007
Genval
Márton Benedek and Myriam Sochacki (editors)
Change, Innovation and Distribution 1

About the Bureau of European Policy Advisers (BEPA)
The mission of the Bureau of European Policy Advisers (BEPA) is to provide timely, informed, policy and
political advice to the President of the Commission and its Services on issues relevant to the President’s agenda
and the future of policies in the Union.
Due to its special position, working directly to the President, BEPA can lead inter-service groups on specific
policy issues and participates in horizontal work within the Commission. In order to achieve its mission, BEPA
aims to produce research and policy analysis up to high professional standards. It is on the basis of this strong
conceptual and empirical work that BEPA contributes to effective communication not only within the Commis-
sion and the EU Institutions but also with academia, markets and the public in general.
BEPA’s activity is complementary to those of other Commission Services since it concentrates on the early (stra-
tegic) stage of the policy cycle, thereby contributing to shaping policy options in the medium and long term.
BEPA interacts with academia, research institutes and, in general, outside professionals in order to ensure that
in making policy the President and through him, the Commission, are informed by the best analysis available.
CHANGE, INNOVATION AND DISTRIBUTION
A BEPA Policy Advisers’ Conference
Genval, Belgium, 3–5 December 2007
Editors
Márton Benedek and Myriam Sochacki

May 2008
The editors would like to thank all those who contributed to, or commented on, this docu-
ment, including Tassos Belessiotis, Vasco Cal, Marcel Canoy, Maria da Graça Carvalho,
Jonas Condomines Beraud, Catherine Isler, Vítor Gaspar, Agnès Hubert, Frédéric Lerais,
Suzanne Speer, and Reinhilde Veugelers.
DISCLAIMER
From 3 to 5 December 2007 BEPA organised in Genval a joint conference of the three special-
ised groups of external advisers in BEPA — Political Analysis (GPA), Societal Policy Analysis
(GSPA) and Economic Policy Analysis (GEPA) — enlarged to include prominent academics
and representatives of Brussels-based think tanks. The conference was entitled “Change, in-
novation and distribution: social, political and economic trends and threats”.
The opinions expressed in the proceedings of the BEPA Policy Advisers’ Conference are sole-
ly those of the conference participants and do not necessarily reflect those of the European
Commission.
Contents
REMARKS BY JOSÉ MANUEL BARROSO, PRESIDENT OF THE EUROPEAN COMMISSION ................... 9
INTRODUCTION ....................................................................................................................................................................................................................... 10
EXECUTIVE SUMMARY ................................................................................................................................................................................................... 13
CHAPTER ONE: OPENING DINNER SPEECH

Globalisation and public perceptions ..................................................................................................................................................... 16
CHAPTER TWO: PLENARY SESSIONS

1. Comparing welfare between Europe and the US .................................................................................................................. 28
2. Competition, Innovation and Growth .............................................................................................................................................. 34
3. Europe and global governance ................................................................................................................................................................ 38
CHAPTER THREE: WORKING GROUPS

1. New wave of globalisation: characteristics and implications ........................................................................... 42
2. Sources of growth in the global market economy........................................................................................................... 44
3. Globalisation and the nation state in the 21st century .............................................................................................. 46
4. Inequality and social models in Europe ......................................................................................................................................... 48
5. The future of Europe: investing in youth .................................................................................................................................... 50
6. The transformation of democracy and the Europe of the future ................................................................ 52
References ........................................................................................................................................................................................................................................ 53
Programme....................................................................................................................................................................................................................................... 57
List of participants ................................................................................................................................................................................................................ 58

8
REMARKS BY JOSE MANUEL BARROSO
PRESIDENT OF THE EUROPEAN COMMISSION
The core question concerning globalisation today is how Member States of the Eu-
ropean Union can address the key challenges of our time, including climate change,
energy security, terrorism, poverty and migration.
I do not think that they can do so alone: an EU dimension is therefore needed. Our
largest partners, including the United States, China, India and Russia, also realise that
they cannot address these challenges alone, therefore they prefer to act with us in con-
cert. At the same time, we are currently seeing the gradual adjustment to a new phase
of multi-polarity: China, Russia and even Africa are more confident today than be-
fore.
How can the European Union respond to today’s challenges? First, the EU’s global re-
sponse must be linked to its internal policies. Second, speaking on behalf of 27 Mem-
ber States gives the Union more leverage in international fora. Our size matters in
trade, finance and aid, as well as in terms of projecting our values.
European economies must grow in order to retain popular support for globalisation.
There is still a great deal of backing for the EU among Member States; however, Eu-
ropean leaders must do all in their power to ensure that this continues to be the case.
They spelled out the Union’s ‘offensive interests’ in globalisation at their December
2007 summit. According to their declaration, the Union’s goal is to shape globalisation
through a combination of the following instruments:
• Lisbon Strategy
• Climate change and energy policy
• Financial market stability
• Free trade
• Development aid
• Global security and stability
• Migration management
The Union is a major beneficiary and advocate of open societies and economies. It
should emphasise its ability to meet external challenges that have a large impact on
European citizens, such as climate change or high energy prices. Taking the global lead
in the fight against climate change is something of which we can all be proud.
While the EU is already a global power in regulation, trade and aid, it will have to
strengthen its defence identity. Today’s rising powers compare themselves to the Unit-
ed States, a traditional nation state, rather than the EU. The 21st century will be about
defence, energy and migration. I earnestly believe that each of these challenges will
become the driver of more, rather than less, integration.

INTRODUCTION
From 3 to 5 December 2007 the Bureau of European Policy Advisers (BEPA) organ-
ised in Genval a joint conference of the three specialised groups of external advisers
in BEPA — Political Analysis (GPA), Societal Policy Analysis (GSPA) and Economic
Policy Analysis (GEPA) — enlarged to include prominent academics and representa-
tives of Brussels-based think tanks. The BEPA Policy Advisers’ Conference was enti-
tled “Change, innovation and distribution: social, political and economic trends and
threats.”
Three main plenary sessions — “Comparing welfare between Europe and the United
States”, “Competition, innovation and growth” and “Europe and global governance: to-
wards a cosmopolitan order?” — provided the basic framework of the meeting.
In addition, two sessions with three parallel multidisciplinary working groups allowed
for in-depth interaction in smaller groups. Their conclusions were presented in a gen-
eral discussion with the participation of the President of the European Commission,
José-Manuel Barroso.
Although the word globalisation did not appear in the title of the meeting it was an
important underlying presence repeatedly referred to in all the sessions.
Globalisation has many dimensions. Social, political and economic trends are co-
determined and co-evolutionary. This justifies a joint approach by the BEPA’s three
specialised group of advisers.
Globalisation is the most significant shaping phenomenon of our times. Many think
of it as an unstoppable force driven by ever deepening capital mobility, trade integra-
tion and a huge increase in labour supply in the industrial world. The role of the EU is
seen either as being to “shape” globalisation or to “protect” Europeans from its nega-
tive consequences.
But can globalisation be shaped? Political changes have driven globalisation, and
future political choices are crucial in determining whether globalisation will be sus-
tained. Specifically, the question of the effects of globalisation on income distribution
within and across nations need to be better analysed and understood, and is crucial to
the dynamics of public and political support for open and freely competitive markets.
This raises a number of questions for the EU. What are the implications for political,
economic and social trends and their consequences for policies in the EU? What are
the implications on (some/all of) the internal policies? How might the EU’s external
role be developed?
Vítor Gaspar
Bureau of European Policy Advisers
10
EXECUTIVE SUMMARY
The BEPA Policy Advisers’ two-day conference made for lively and fruitful exchanges
on some key complex issues.
Lorenzo Bini Smaghi, member of the Executive Board of the European Central Bank,
set the tune with his keynote speech at the conference’s opening dinner. He addressed
the issue of perceptions of globalisation, and argued that perceptions must be taken
seriously because they shape reality and are relevant for economic, social and political
developments.
In Europe, globalisation is perceived with some concern, notably because of the effects
of globalisation on income inequality and the welfare state. However, when reviewing
the empirical evidence on the relationship between globalisation and income distribu-
tion Bini Smaghi stressed that this relationship is controversial. Moreover, the evi-
dence in favour of the inevitable erosion of the welfare state is not convincing either.
Comparing welfare between Europe and the US, Robert Gordon of the Northwestern
University, US, considered that the rise in female labour force participation had played
an important role in the employment growth in Europe since 1995. He assigned a
lesser role to other factors such as falling tax rates. Reacting to Gordon’s presentation,
Charles Wyplosz of the Graduate Institute of International Studies in Geneva argued
that, in the absence of a structural model, the interpretation of the empirical findings
— especially for policy purposes — remained difficult and contentious.
Reflecting on competition, innovation and growth, the conference participants were

confronted by the same complexities and problems of interpretation. Clearly, innova-
tion responds to incentives to accumulate knowledge which subsequently stimulates
growth. But, the relationship between competition, innovation and growth is obvi-
ously a complicated one and raises a number of difficult questions. Ramón Marimon
of the University Pompeu Fabra in Barcelona and Cécilia Garcia Peñalosa of the Uni-
versity of Marseille tackled some of them: how far to go; what are the consequences for
distribution, should we be concerned and how can we act?
A point of consensus that emerged clearly from the discussions is that the EU should
play an important role in shaping globalisation, and this can be achieved only if we are
united.
André Sapir from the Brussels-based think tank Bruegel underscored that today the
EU’s main challenge is to be an open and full player in the global world, which means
to contribute to creating a new and better world order and to help Europeans to pros-
per in the global world. Horst Siebert of the Kiel Institute for the World Economy
emphasised the need for a new rules system in today’s cosmopolitan world
Addressing the conference, President Barroso stressed that the global challenges we
face require global answers which have to be linked to our internal policies. He em-
phasised that the EU is in a good position to propose solutions because we ourselves
apply supra-national regulations. Indeed, what we need for Europe to fully realise its
potential in shaping globalisation is more European integration, not less.

Chapter One
1 OPENING DINNER SPEECH

Globalisation and public perceptions
SPEAKER
Lorenzo Bini Smaghi
Member of the Executive Board,
European Central Bank
Lorenzo Bini Smaghi, Member of the Executive Board, European
Central Bank, delivered a keynote speech on globalisation and public
perceptions at the conference’s opening dinner
Ladies and gentlemen,1
It is a pleasure for me to be with you tonight to talk about a fascinating subject — glo-
balisation, which will be the main subject of this conference.
In accepting this invitation a few weeks ago, and having just read Ed Leamer’s wonder-
ful survey of The World is Flat in the Journal of Economic Literature, 2 I tried myself
to fully exploit the benefits that — according to economists — globalisation offers
us: I sent an e-mail to Bangalore (India) asking someone to draft a dinner speech on
globalisation. The following morning, a well-written piece appeared in my inbox, with
an invoice for little more than €100 (Bangalore also seems to have started invoicing in
euros!). I was happy. After all, the time it would have taken for me to write a 30- minute
speech on globalisation would certainly exceed €100! But then I asked myself if you
would have been happy with such a speech. Would you invite me next time? Maybe
next time you would call Bangalore directly, perhaps even Bollywood and hire an ac-
tor to deliver the speech. My anxiety increased in such a perspective, and I started
working hard on my own speech, together with my collaborators in the ECB, to try to
maintain a competitive advantage. In the mean time I understood why — when your
own job is at stake — the public perception of globalisation is somewhat less enthusi-
astic than that of economists.
I then decided to look at the issue of globalisation from the perspective of public opin-
ion. For economists, who focus on overall economic performance, it is difficult not to
be enthusiastic about globalisation: the world economy has rarely grown as strongly as
in the past decade, despite several shocks. In emerging economies, hundreds of mil-
lions of people have been lifted out of poverty; and most noticeably in China, a middle
class is appearing. Since the fall of the Berlin Wall, the number of people engaged in
market activities, no longer trapped in a subsistence economy, has practically doubled,
from 1.5 to 3 billion.
Globalisation is, however, not only an economic phenomenon. It has many facets: the
socio-economic dimension, the environmental aspect, questions of national identity,
and, of course, the highly sensitive issue of migration. Nevertheless, the economic as-
pect of globalisation remains the most pressing one in public opinion. I will try to look
more deeply into that perspective.
1
The views expressed reflect only those of the author. I thank R. Anderton and L. Stracca for input and comments, as well as
A. Mehl and R. Straub for providing background analysis.
2
See Leamer (2007).
16
I should say from the outset that these reflections will not lead me to call for a halt to
globalisation. None of us wants to see a repetition of the 1930s. However, the chal-
lenge of minimising the costs so as to increase acceptance by our societies remains. I
will not try to offer definite prescriptions. Instead, I will try to raise some issues that
I see as problematic or still unresolved, and hope to stimulate a debate at tomorrow’s
conference.
I would like to touch upon three issues: first, public perception of globalisation; sec-
ond, the costs and benefits of globalisation, with particular reference to the euro area;
and third, the opportunities and challenges presented by financial globalisation. In my
conclusions, I will also elaborate on the role of Europe in this process.
Perceptions of globalisation
How does the public perceive globalisation? I would like to underline four ‘stylised
facts’ that can be drawn from existing analyses.3
First, Europeans are more inclined than others, in particular Americans, to view glo-
balisation with concern. Taking the EU as a whole, public opinion is evenly split be-
tween supporters and opponents of globalisation. The situation varies considerably
across countries. Anxiety about globalisation is very noticeable in France (but also in
Greece), in particular in relation to globalisation’s impact on jobs. By contrast, support
is high in Scandinavian countries, such as Denmark and Sweden.
Second, cultural competence, i.e. the ability to interact effectively with people of differ-
ent cultures and education, is inversely related to the degree of concern about globali-
sation. Support for globalisation is strongest among high-skilled workers in mature
economies. The relative lack of support for globalisation among lower-skilled workers
and the least educated could indicate that they may be uncertain about the general
costs and benefits of globalisation, but see the individual costs more clearly, perhaps
more rationally. Concerns about the economic costs of globalisation for certain groups
in society have led to the creation of the European Globalisation Adjustment Fund, an
EU initiative that seeks to enable workers who have been made redundant as a result
of changing global trade patterns to find a new job as quickly as possible. This confirms
that Europeans are more inclined than others to support redistribution, which is in
line with the recent literature that found that Europeans care more about inequality
than Americans.4
Third, there is no prima facie evidence that measures of reported happiness or ‘life sat-
isfaction’ are negatively affected by globalisation. In fact, regression analysis suggests a
positive relationship between ‘life satisfaction’ in OECD countries and the ranking of
each OECD country in a Globalisation Index.5
3
I draw here on a range of opinion polls, including Eurobarometer (2007), CCFR (2006) and WorldPublicOpinion & CCFR (2007).
Note that the methodologies are not necessarily directly comparable.
4
See Alesina, Di Tella, and MacCulloch (2004). They show that concern about inequality is high among the poor and leftists in Europe,
while it is restricted to rich leftists in the United States.
5
This is the A.T. Kearney/Foreign Policy Globalisation Index, which tracks and assesses changes in four key components of global integra-
tion, incorporating measures such as trade and investment flows, movement of people across borders, volumes of international telephone
traffic, Internet usage and participation in international organisations. The data used refer to 2006.

Globalisation and life satisfaction across OECD countries
Data refer to the mid-2000s. Data on Life Satisfaction from the

World Values Survey, fourth wave. The globalisation ranking
is the ranking of countries in the A. T. Kearney/Foreign Policy
Globalisation Index.
This might mean that globalisation makes people happier, but also that happier coun-
tries tend to become more globalised.6
Fourth, and this an important issue to which I will return later in my speech, EU citi-
zens think that globalisation is influenced far more by the EU than national govern-
ments. Indeed, it is unlikely that any European country, by itself, can have sufficient
weight to influence the course of globalisation and the ‘rules of the game’ of the global
economy. Only the EU as a whole can have enough of a ‘punch’ to turn things in the
direction that European citizens want. This creates a ‘demand’ for more ‘Europe’ in the
globalisation process, to which Europe does not seem to be responding. I will return
to this later.
In my opinion, policy-makers (including central bankers) have to take these percep-

tions seriously. In economics, perceptions shape reality. It is therefore important to
understand how globalisation affects the behaviour of households and firms.
Let me refer to an example provided by Robert Shiller.7 Suppose that a young person is
uncertain whether to pursue a career in which she has real talent, but which is fraught
with risks — say a molecular biologist — or a less risky career, with lower value added.
A highly uncertain economic environment, with rapid technological progress and the
looming prospect of off-shoring, increases risks. If such risks are perceived as falling
entirely on the shoulders of individuals, a worse equilibrium may be reached, whereby
high value-added jobs that require long-term investment, such as a molecular biolo-
gist, are shunned; while jobs less threatened by off-shoring — say hairdressers or res-
taurant owners — are in greater demand.8
The hypothesis is therefore that economic uncertainty and higher competition may
have an adverse effect on jobs that require long-term investment. This may lead to un-
der-investment in society. This hypothesis has to be fully tested. I raised this issue with
Ned Phelps a few days ago, when we met at a conference. He looked at me a bit puzzled
6
There is also evidence in the literature that trade openness positively contributes to life satisfaction: see Bjornskov, Dreher, and Fischer
(2007).
7
See Shiller (2003).
8
See Mukoyama and Sahin (2004) for similar considerations in an agency context.
18
and said: “It sounds like a very European way of thinking!” I guess I should turn the
issue back to you.
Mobility is another issue that raises concerns in our societies. In the global economy,
being mobile definitely provides a competitive edge. In the European Union, only a
tiny fraction of workers live in another EU country due to the many obstacles to mo-
bility, not least the portability of the pension regime.
Another issue that is present in the public mind is the share of wages and profits in
total income, which shifted in favour of profits over the past decade.9 As a result, glo-
balisation might be seen by the public as benefiting the corporate world (and their
top managers). Again, these are issues that policy-makers, including central bankers,
have to recognise and take seriously. We need to acknowledge, in particular, that glo-
balisation produces both winners and losers, at least temporarily. Moreover, as I will
argue, even winning in absolute terms, but losing in relative terms, might be an issue
and create a powerful backlash against globalisation. An efficient system that protects
individuals from the negative fallout of globalisation, and encourages them to become
entrepreneurial and risk-taking, is therefore essential.
Let me now turn to the economics of globalisation and, in particular, the existing em-
pirical evidence.
Globalisation, technological innovation and income distribution:

the evidence
In the euro area, globalisation has clearly stimulated external trade as well as the flows
and stocks of foreign assets and liabilities. The trade openness of the euro area has
increased markedly over time, especially since the early 1990s, and is growing more
rapidly than that of either the US or Japan.
Globalisation has certainly been a major driver of the strong growth of extra-euro-
area imports, with outsourcing to low-cost countries and the internationalisation of
production playing an important role. Over the past six years, the share accounted for
by low-cost countries in extra-euro-area manufacturing imports has increased from
just over one third to almost a half. Among those countries, China and the EU’s new
Member States have been the main contributors, with their shares roughly doubling
since the mid-1990s. Those developments have contributed to dampening euro-area
manufacturing import prices by about two percentage points between 1996 and 2004.
Despite the significant upward pressure of globalisation on oil and other commodity
prices, there is evidence that the joint effect of all the various globalisation-related
impacts on prices has been mildly disinflationary so far.
At the same time, some of the effects of globalisation, particularly on labour markets,
are causing concern. For instance, as competition from low-wage countries has in-
creased, the bargaining power of domestic workers and unions may have weakened,
as a result of the fears of a potential relocation of production abroad. This may have
fostered wage moderation in industrial economies and may partly explain the rise of
inequality in many developed countries.
Labour market adjustment to globalisation seems to be occurring mainly via a reduc-

tion in the relative wages of the lower-skilled in the flexible labour markets of the US
and the UK, and via a reduction in low-skill employment in the more rigid labour
9
On the global nature of the rise in the profit share, see Ellis and Smith (2007).

markets of continental Europe. Between 1990 and the early 2000s, some measures
of income inequality, such as the Gini coefficient, have indeed increased, though the
picture varies substantially from country to country and does not appear to be a gen-
eralised phenomenon — with an increase in the UK, China and the US; no change in
India; and falling inequality in France and Brazil. However, the finding of a generalised
increase in income inequality in the last decade is not uncontroversial in the litera-
ture. In any event, the simple bivariate cross-country evidence, at least among OECD
countries, suggests that the more globalised countries have less, not more, income
inequality. Again, I should stress that this is just prima facie evidence. I am not sure
that these correlations survive in a multivariate setting and when subjected to rigorous
econometric tests.
Globalisation ranking and Gini coefficient of income
inequality across OECD countries
Data refer to the mid-2000s. The globalisation ranking is the rank-

ing of countries in the A. T. Kearney/Foreign Policy Globalisation
Index. The Gini coefficient data are OECD.
An important issue to consider is that it is quite difficult to disentangle the effects of

globalisation and outsourcing from other factors, such as the impact of skill-biased
technological change. Indeed, most of the empirical work suggests that the main rea-
son for the decline in demand for less-skilled labour in advanced countries is technol-
ogy rather than the trade-related impact of globalisation. Nonetheless, while globalisa-
tion and technological progress go hand in hand, the public at large finds globalisation
an easier concept to grasp and criticise.
Public concern about a link between globalisation and income inequality can explain
two stylised facts in public perceptions of globalisation. First, it can explain why glo-
balisation is viewed with scepticism in advanced economies, especially by the less
well-off. In fact, there is substantial empirical evidence to indicate that, in developed
countries, people pay more attention to relative income than absolute income. Those
who lose out from globalisation in relative terms may resent it, even if they gain in ab-
solute terms. Second, it explains why support for globalisation is higher in developing
countries, where concern for absolute (rather than relative) income is arguably greater
(as income is just above, and in some cases still below, the subsistence level).
Globalisation has raised concerns about a ‘race to the bottom’ between countries
putting pressure on governments to reduce job protection, welfare benefits and social
insurance. At the same time, there are also concerns that globalisation and the liberali-
sation of trade and factor mobility may erode the tax base.
20
Much of the empirical work finds no strong evidence of globalisation-induced changes
in either the level or composition of public spending. If anything, there is evidence of
a slightly positive relationship between social expenditure as a share of GDP and the
degree of globalisation in OECD countries.
Globalisation ranking and social expenditure as a share of
GDP across OECD countries
Data refer to the mid-2000s. The globalisation ranking is the rank-

ing of countries in the A. T. Kearney/Foreign Policy Globalisation
Index. Data on social expenditure are OECD.
Scandinavian countries, for example, are in the top league on all measures of globalisa-
tion, but are also characterised by very high social spending (though this ‘model’ has
recently been under some pressure).
In spite of this evidence, the issue of labour getting its fair share of the gains of globali-
sation is on the table of political discussions. Restoring the purchasing power of low
wages — affected in particular by recent increases in oil and food prices that, to some
extent, are also by-products of globalisation — is a pressing political issue in several
countries.
Economists have to take these discussions and debates into account and influence
them appropriately so as to avoid making the wrong decisions. Indeed, there are good
and bad ways to support the income of those who are more directly exposed to the
impact of globalisation. The bad and unsustainable way is to consider wage income
as an exogenous ‘independent’ variable, as was the case, for instance, in Italy in the
mid-1970s. This approach might lead to supporting the income of some individuals,
but also to an increase in inflation and to a general loss of employment. Under current
circumstances, keeping inflation under control remains a priority for monetary policy.
Suggesting that inflation is not a problem, and that monetary policy should care for
growth rather than inflation, will not help. It will only lead to a loss of credibility be-
cause, for the public, inflation is indeed a problem. The lessons of the monetary policy
of the last 30 years should not be forgotten! A good way to increase disposable income
is to act on the variables that affect it in a structural manner. The following avenues
can be considered:
First, deregulate and increase competition in the non–traded sectors so as to reduce

the prices of goods and services not open to competition. Europe, especially conti-
nental Europe, has a lot to do in this area. This may mean, in some instances, giving
up ‘historical champions’. One should realise that having national champions in some
areas comes at a cost to the public at large, in terms of higher prices.

Second, reduce public expenditure so that tax cuts for low-income people can be sus-
tained over time without jeopardising fiscal sustainability.
Third, link wage increases to productivity, especially at the firm level, so as to create
incentives for all managers and workers to increase and monitor productivity. This is
still not the case in several euro-area countries.
Last but not least — although this is more of a long-term goal: increase investment
in human capital, which is an objective we all share, and for which academics have a
particular responsibility.
Financial globalisation
Let me also touch briefly upon financial globalisation. One of the most impressive
aspects of globalisation has been the spectacular rise of cross-border financial flows.
Between the mid-1980s and 2004, the sum of mature economies’ foreign assets and
liabilities as a share of GDP grew three-fold. In theory, this should have resulted in an
improvement in the global allocation of capital, enhancing risk sharing across coun-
tries and consumption smoothing. As you know, not all financial globalisation has
worked in a textbook manner. While FDI flows are generally in the right direction,
that is ‘downhill’ from developed, capital-rich countries to emerging, capital-poor
countries, this is not the case for portfolio flows, which tend to move ‘uphill’. This has
created a rather paradoxical situation where the world’s richest economy maintains a
large current account deficit, largely financed by poor countries.
Research has revealed that not all countries benefit from financial globalisation in the
same manner: to fully reap its benefits, a country must have strong institutions; in
particular, a sound legal and supervisory system.10 This is all the more so as financial
globalisation is inevitably associated with financial innovation, at a time when the two
phenomena overlap and are often hard to distinguish. The rising importance of certain
non-bank intermediaries, such as hedge funds and private equity, and new financial
instruments, such as structured products, has taken place on a global scale. Moreover,
financial globalisation makes individual financial markets and systems more vulner-
able to cross-border contagion, and we have a sobering reminder of this in the current
market turmoil.
The combination of globalisation and innovation in finance has contributed to a grow-

ing asymmetry of information in capital markets.11 This is the case in particular for
structured products that often originate in one country, are repackaged in another, and
sold in a third. It is fair to say that not only retail investors, but often bank and financial
managers, lack the necessary financial education, resources and time to understand all
the risks inherent in these types of product.
Asymmetric information entails two types of risk. The first is that the informed party
takes advantage of its information lead at the expense of the less-informed. This has
obvious implications in terms of income and wealth (re-)distribution from the less-
informed party (the retail investor) to the more informed one (financial industry man-
agers), a risk that is certainly heightened by the complexity of the financial product in
question. The second risk is that, once this re-distribution occurs, a strong backlash is
created, with the public turning against financial globalisation.
10
See Kose, Prasad, Rogoff and Wie (2006).
11
Financial globalisation and innovation have also contributed to creating new safe assets, notably for savers in emerging economies,
thereby alleviating the problem of asymmetric information.
22
Financial turmoil, such as the one we are currently experiencing, exposes financial
globalisation to criticism. In particular, some observers criticise the fact that certain
policies are implemented to support the financial system in the face of the current tur-
moil, while similar policies are denied to other sectors when they face similarly critical
moments. The reason for such support is that the financial sector is special because of
the asymmetric nature of the information it processes, which requires regulation and
supervision. However, this reasoning is based on two principles. First, supervisory
authorities should be able to distinguish between sound and unsound institutions so
that only the former are supported in the event of turmoil. Second, the unsound insti-
tutions, and in particular the managers responsible for unsound decisions, should bear
responsibility for their own mistakes and should not be bailed out.
One can question whether these two basic principles are being fully respected in the
current turmoil. Indeed, it has proven very difficult for supervisory authorities to ap-
propriately assess the soundness of institutions. Authorities have basically relied on
the self-assessment of financial institutions’ balance sheets and their publicly disclosed
accounts, without the possibility of really questioning them. In fact, financial institu-
tions themselves seem to have had, at some point, little awareness of their own situa-
tion, and the assumptions underlying their own disclosures have not always been fully
transparent. Market participants are evidently still full of doubt about the soundness
of their counter-parties, as reflected in the current large credit spreads in the money
market. It appears that supervisory authorities may not have much more information
than those available to other market participants, to assess the creditworthiness of
major institutions.
Furthermore, those responsible for wrong investment decisions do not seem so far to
have been substantially penalised in a way that would discourage similar behaviour in
the future. Several top managers have stepped down from their positions with huge
payment compensation. Broader responsibilities for internal risk management and
control, in particular within financial institutions’ boards, do not seem to have been
fully scrutinised. It might be too early to judge, but one of the causes of the recent
turmoil has certainly been poor internal governance. Unless this issue is properly ad-
dressed in the future, the risk of creating moral hazard cannot be underestimated. Fur-
thermore, it would be difficult for the public at large to accept that those who suffer the
most from this phase of turbulence will be those who put their trust in the advice of
financial institutions, while those who provided that advice and made investment mis-
takes could walk away with only their bonuses affected. This could validate the con-
cerns that exist already about the effects of financial globalisation on the concentration
of financial wealth worldwide, which is much more unequal than that of income.12
A final lesson from the current turmoil is that the complexities of finance in a glo-
balised world call for more financial education, especially among poorer members of
society. Based on current evidence, the level of general financial literacy raises con-
cerns about people’s ability to reap the benefits of globalisation. These are matters that
central banks and other policy-making authorities should have a keen interest in pur-
suing.
12
See Davies et al. (2006).

To sum up, the recent financial turmoil is not likely to make financial globalisation
more popular. Unless public authorities, starting from those in charge of financial su-
pervision, draw the appropriate lessons and have the courage to recognise what went
wrong and how their task can be improved, they risk losing citizens’ confidence and
ultimately their own independence. In Europe, further reflection is needed on how
far the current Lamfalussy framework can be pushed to accommodate strengthened
cooperation between national supervisory authorities, and whether more drastic in-
stitutional change is required.
What can Europe do?

To summarise, policy-makers and economists should acknowledge the European pub-
lic’s negative perception of globalisation. In addition to uttering the ‘globalisation-is-
good-for-you’ mantra, policy-makers should be aware of the painful adjustment costs
faced by workers and firms confronted with increasing global competition. Policy-
makers need to ensure that the necessary policy steps are taken to help those individu-
als and groups adjust efficiently to their new circumstances.
What is the role of Europe in all this? As I said, European citizens are aware that the
challenges of globalisation can hardly be tackled at the local level. Therefore, European
institutions seem to have an important role to play in the governance of globalisation.
So why is this not happening?
There may be two, related, reasons.
The first is that, for Europe to be more effective at the global level, it has to act in a
united manner. Such unity requires that actions conducted at the national level are
more coordinated or even subsumed by a European actor. In many areas, national
policy-makers object to the creation, or strengthening, of a European actor. “Turkeys
don’t vote for Christmas” is a dictum that would apply to this case. Over the last few
years, national political or technocratic players have developed a resistance to the con-
tinuous strengthening of the European policy role and increasingly defended their
national prerogatives, opposing further devolution of power to the European level.
The argument — which is related to the second reason — is that such a devolution is
not supported by the people of Europe. This argument does not even take into account
the fact that national policy-makers never pass up an opportunity to blame Europe, or
the euro, for any problem, including those that arise from domestic policy failures. The
‘blame Europe’ game has become a favourite sport in some capitals.
No wonder — and this is the second reason — that Europe, and its institutions, are
seen as too distant by the people of Europe. Europe is not seen to be addressing and
solving the problems that globalisation poses to its citizens. This largely stems from the
fact that some of the tools to address globalisation and its consequences are not in the
hands of Europe, but those of national policy-makers. Structural policies, including
those affecting education, welfare, research and development and labour markets, are
largely within the bounds of national policy. The Lisbon agenda only sets benchmarks
and best practices, but it is up to the countries to implement the actual policies. Other
tools, such as those related to world trade and global finance, are instead in Europe’s
hands, which still need to be firmed up.
24
We seem to have entered a vicious circle. European citizens fear globalisation and want
it to be managed so that the poorest and most fragile receive help in the process of
adaptation to a global economy. EU countries alone can hardly become global play-
ers and interact with others, such as the US, China, India and the emerging world. A
stronger, more united, Europe would be required. The Member States are not allow-
ing this to happen. On the one hand, they do not want to deprive themselves of their
remaining — largely illusory — powers. On the other, they tend to blame Europe for
not being able to solve the problems posed by globalisation. Citizens perceive Europe
to be powerless, and blame it for being so weak.
What is the way out? A stronger Europe and one that is also closer to its citizens: this
is what seems to be missing. This is ultimately a matter of leadership. Only leaders can
have the vision of providing Europe with the necessary powers while making sure that
it remains close to citizens’ needs. Here is another catch. The leaders of Europe are
chosen not by the people of Europe but by national representatives. So long as those
national representatives fear being overshadowed by their European leaders, we will
have no European leaders. Thus, European citizens will continue to fear globalisation,
much more than others around the world.
Thank you for your attention!

Chapter Two
1 PLENARY SESSION
Comparing welfare between
Europe and the United States
Presentation
Robert J. Gordon
Northwestern University,
National Bureau of Economic Research
Discussant
Charles Wyplosz
The Graduate Institute, Geneva and CEPR
Robert J. Gordon examined welfare interpretations of the decline in
European hours per capita relative to the US. While Europe’s level of
productivity almost reached the US level in 1995, its income per
person never exceeded 75% and has since fallen below 70%.
How could Europe be so productive yet so poor?
Gordon’s presentation drew on recent data showing a dramatic deterioration in the

distribution of income in the US, both in terms of its own history but also in interna-
tional comparisons.
For example, the income share of the top 0.1% reached a low of 1.9% in 1973 then
steadily increased to a peak of 7.3% in 2000, the previous peak was 8.2% in 1928. A
similar pattern but with lower peaks can be observed in Canada and the UK, while
in France and Japan, the share of the top 0.1% has hardly changed at or below 2%,
respectively.
Complementary evidence suggests that the Gini coefficient has risen more sharply in
the US than elsewhere, but the data show that there is considerable heterogeneity in
country experiences, including the fact that labour’s share has been shrinking in most
countries in Europe by six to ten percentage points, while it has remained constant in
the US. No unique explanation can account for these changes, but Gordon offered a
combination of three:
skill-biased technical change favouring those at the top;
regulations and social norms that make possible the generation and appropriation
of efficiency gains;
and the growing ability of US business managers to collect extra rents at the expense
of shareholders.
Gordon noted the stylised facts of European and US productivity and income experi-
ence since the war: while there has been a rapid convergence of productivity levels,
reported as output per hour worked, throughout the years following the Second World
War, this convergence came to an end in the mid-1990s. In 1995, the ratio of EU to US
productivity was 97.5%, but by 2004 it had declined to 89.7%. Moreover, the dispar-
ity of income per capita between the two regions has remained wide. The ratio of EU
to US income per capita has stagnated since 1970 at between 70–75%; rose to 75% in
1995; then declined to 69% by 2004.
The time series of hours per capita, hours per employee and
the employment/population ratio
The key question is not just how to interpret this gap, but how to explain the fact that
the EU is very productive but also relatively poor when compared to the US.
28
Income per capita is equal to a string of constituent variables: hourly productivity, av-
erage hours worked per person employed and the employment/population ratio. The
core explanation accounting for the relative poverty of the EU is that these variables
have been declining in Europe, while they rose in the US. Gordon’s data showed that
hours per capita in the EU fell from 119.8% of the corresponding US figure in 1960 to
77.2% in 2004. The EU hours per employee were 102.4% of the US variable in 1960,
then declined to 85.4% in 2004. The EU employment population ratio also fell from
115.9% of the US level in 1960 to 91.7% in 2004.
Ratio of Europe 15 to the United States, Hours per Capita, Hours per Employee,
and Employee per Capita, 1960–2004
Gordon provided additional pertinent information to explain this phenomenon. The

employment/population ratio consists of the employment rate and the rate of partici-
pation of the labour force. During the post-war period, the employment/population
ratio in the US rose to 47.5% in 1990, reflecting the entry of women into the labour
force. In the EU, the employment/population ratio was 42.2% in 1960, declined to
39.3% by 1983, recovered somewhat by 1994, then rose to 43.6% in 2004. Since 2005,
there has been a further recovery of the employment/population ratio.
The impact, on the EU employment rate, of the increase in the number of women in
the labour force was limited or offset by the rise of unemployment. Finally, recent data
have shown that the EU employment/population ratio has picked up in the period af-
ter 2005, which coincides with the implementation of the Lisbon Strategy. Of the pos-
sible factors that may have contributed to this, Gordon stressed the importance of the
rise in female labour force participation and assigned a lesser role to falling tax rates.

The employment/population ratio,
Europe 15 and United States 1960–2004
Leading interpretations for the decline in European hours per capita

The principal explanations for the relative decline in European hours worked per cap-
ita in the EU are:
Prescott’s (2004) proposition of labour taxes;
Alesina, Glaeser and Sacerdote’s (2006) hypothesis of politically powerful labour
unions restricting working hours to benefit union members;
Blanchard’s (2004) argument of a free choice;
Ljungqvist and Sargent’s (2006) argument that the welfare state, financed by high
taxation, functions as a safety net for those that experience unemployment result-
ing from high taxation, but also as a vehicle that provides incentives for staying out
of employment. Hence, reforming European welfare systems should raise hours
worked per capita.
According to Gordon, none of those four single-cause interpretations is fully consist-

ent with the facts. He argued that a multi-cause nuanced set of explanations might
better fit the facts.
Gordon’s findings on changes in hours per capita

Gordon’s analysis of the pattern of changes overtime led him to make three dis-
tinctions that rarely appear in the literature.
First, the time series evidence shows that, between 1960 and 1995, two thirds
of the fall in hours worked per capita reflected the decline in the employment
rate, and only one third the hours per employee. Furthermore, fully two thirds
of the decline in hours per capita occurred because of higher unemployment
and lower labour force participation.
Second, the time series data show a clear turnaround after 1995 in the Europe-to-US
ratio for employment per capita, while the hours per employee continued to fall in
Europe relative to the US, though at a slower rate. Gordon noted that none of the
recent literature on European hours provides any explanation of this phenomenon.
Third, other factors that played a role were the age structure of the population and
rules that governed retirement — the share of those aged 50–55 is greater in the EU
than the US, and the opposite holds for younger cohorts.
30
By how much does American GDP overstate welfare?
Gordon then turned to the numerator of the productivity and output per capita ratios,
namely real GDP itself. Does GDP represent an accurate measure of welfare? In at-
tempting to answer this question, Gordon recounted how larger housing units in the
US, insurance and other costs of metropolitan dispersion and of energy use, the medi-
cal system, insecurity and inefficiency as well as the presence of illegal immigration
and of the black economy have all had an impact on welfare in America.
In Gordon’s view, the welfare gap between the EU and the US is overstated
— rather than the 69% often quoted, the EU–US welfare ratio is likely to be
79%: Europe is much closer to the US in welfare terms than simple GDP
comparisons suggest.
Gordon agreed that almost everything discussed in his presentation was

debatable. It begins the process not just of debating the causes of relatively
low hours per capita in Europe, but also of rethinking the translation of real
GDP into welfare comparisons across countries and regions.
In his discussion of Gordon’s presentation, Wyplosz focused on Gordon’s four
‘strawmen’: Blanchard — ‘it’s in the genes’; Prescott — ‘it’s taxation’; Ljungqvist and
Sargent — ‘it’s the welfare system’; and Alesina et al. — ‘it’s the unions.’
Wyplosz agreed that Blanchard’s argument of a European preference for more leisure
was wrong. Instead, the decline in hours worked per capita stemmed from the declin-
ing employment rate.
Wyplosz also dismissed Prescott’s argument, pointing out that tax rates increased the
most between 1960 and the mid-1980s, while the decline of hours worked per capita
continued until at least 1995.
Focussing on the Dew-Becker-Gordon (2007) argument, he claimed that it could not

explain the pick-up in the EU employment/population ratio after 1995, which in his
view stemmed from the influx of women into the labour force.
Wyplosz identified two important questions in Gordon’s presentation:
Why did the rate of hours worked in the US fall temporarily between 1970 and 1975 to
then stay constant, while the corresponding EU rate kept falling?
Second, why did the employment/population ratio keep rising in the US between 1960
and 2004, while it stayed roughly flat in the EU?
His own answer drew on several European labour market studies. Studies
from the 1970s explained this European phenomenon through high labour
costs; those from the 1980s claimed that it was due to trade unions; those
from the 1990s focused on institutions; while those from 2000 claimed that
it was due to culture, history and religion. He argued that the final answer
was likely to be a combination of all these arguments.

Chapter Two
2 PLENARY SESSION
Competition, innovation and growth
Presentation
Ramón Marimon
Professor, Universitat Pompeu Fabra,
Barcelona, CREi and CREA
Discussant
Cecilia Garcia Peñalosa
Research Director, Université de Marseilles
Ramón Marimon’s argument drew on Joseph Schumpeter’s core
insights that innovation is driven by entrepreneurial investment
motivated by the prospect of monopoly profits, and that new
innovations drive out old models of production in a creative
destruction process.
While incumbents want to protect their existing rents, new firms have an incentive to
come onto the market with new innovations replacing incumbents’ innovations. New
entrants therefore have a higher incentive to innovate. When challenged by new firms,
incumbent firms need to become more innovative as well, to avoid being replaced by
entrants. It is the combination of these insights that makes the relationship between
competition, innovation and growth such a complex one.
The first generation of Schumpeterian growth models predicted that competition

would discourage the very innovations that drive long-term growth. However, the
available evidence seems to contradict this. Recent empirical work (Aghion et al. 2005)
points to a positive correlation between product market competition and productiv-
ity growth and innovation. Moreover, economic historians have documented cases of
competition from a new technology spurring improvements in older technologies.
The ‘new’ new growth theorists

This evidence made theorists rethink their models. The
‘new’ new growth theorists use more sophisticated versions
of Schumpeterian theory, drawing on a variety of channels
through which competition might spur economic growth
(Aghion and Howitt, 1999). One of these channels involves
barriers to entry. As these barriers raise, to outside firms,
the cost of introducing a new technology, they simultane-
ously reduce the incentive to carry out R&D and absorb
new technologies or good organisational practices, thus
negatively affecting growth. The impact of barriers to entry
may be particularly large in the case of economies closer
to the technology frontier, as shown by Acemoglu, Aghion
and Zilibotti (2002). This harks back to Schumpeter’s in-
sight that firm entry spurs innovation, especially in tech-
nologically advanced nations and sectors where firms must
innovate to get ahead in the competition.
Marimon’s presentation was very much in line with these ‘new’ new growth theories,
arguing that firm entry had a positive impact on innovation and growth. He claimed
that free entry creates better conditions for innovation, and competition for human
capital is particularly important in this context.
34
Competition and knowledge investment
Most of the labour literature stresses the negative impact of competition and labour
mobility on firms’ incentive to invest in the training of their employees.
Marimon showed that, even if contracts cannot be perfectly enforced, free entry can
create an incentive for firms to accumulate knowledge, thus stimulating growth. This
is because the entry of new firms increases the demand for skills and creates an outside
opportunity for employee-innovators inside incumbent firms, which they can use to
counter attempts by their current employer to renegotiate promised payments. The
employee-innovator therefore has an incentive to accumulate a high level of knowl-
edge to keep his or her threat value high, which is beneficial for the whole economy.
Competition authorities and regulators need no longer fear that liberalisation might
kill profits: if anything, the ‘new’ new growth theories suggest that aggressive liberali-
sation should be pursued. Marimon’s model suggests that reducing the cost of starting
a new business will have a positive impact on growth. His model also relies on flexible
labour markets characterised by fierce competition for human capital. This compe-
tition keeps the value of knowledge high and ensures that successful innovation is
rewarded.
In her discussion of Marimon’s presentation, Cecilia Garcia

Peñalosa focused on three issues: patents to reward innovation,
barriers to competition, and the relationship between
entrepreneurship and inequality.
She argued that the European patent system was more cumbersome and less efficient
than the American one, which put a damper on the value of European patents.
As concerns barriers to competition, labour and product market regulations and en-
try costs have been fully analysed; however, exit costs, such as the role of bankruptcy
legislation, have not.
Several studies suggest that the ease with which one can file for bankruptcy in the
US (while one’s personal assets are fully protected from firm creditors) has a positive
impact on entrepreneurship. Garcia Peñalosa then raises the question as to whether
reducing firm creation costs would have an effect on its own or would it be also neces-
sary to reduce exit costs?
The relationship between entrepreneurship and inequality is more ambiguous: individ-

uals with greater assets are more likely to become entrepreneurs, yet it remains unclear
whether a more unequal distribution of wealth fosters or hinders entrepreneurship.

Entrepreneurship also implies self-employment. There is extensive evidence that the
self-employed have slightly lower median income than employees. At the same time,
the make-up of top earners differs from country to country: in the US, for example,
the working rich have replaced rentiers at the top of the income scale, while France’s
top earners still derive most of their income from capital and self-employment. Garcia
Peñalosa highlighted some of the difficult questions raised by the close link between
entrepreneurship and inequality: should we be concerned and if so what would be the
appropriate redistributive policy?
36
Chapter Two
3 PLENARY SESSION
Europe and global governance:
towards a cosmopolitan order?
Presentation
André Sapir
Senior Fellow, Bruegel, Brussels;
Professor of Economics,
Université Libre de Bruxelles
Discussant
Horst Siebert
President Emeritus,
Institut für Weltwirtschaft (IfW), Universität Kiel
In his presentation on “Europe and the global economy”,
André Sapir highlighted the main governance challenges
that Europe faces today.
Internally, the EU has expanded from six to 27 Member States, moving from a customs
union to economic and monetary union. If 1989 was Europe’s annus mirabilis, the
emergence of the BRICs (Brazil, Russia, India and China), has been perhaps the great-
est challenge to Europe’s place in the world.
There are two, antithetical, views of the EU: it is an inward-looking, even protectionist,
club characterised by Community preference; or an open player on the global scene,
contributing to Europeans’ prosperity and a better global order.
These sharp differences of opinion are reflected in the following quotes: according
to the 2007 Berlin Declaration, for example, the EU allows Europeans to “shape the
increasing interdependence of the global economy and ever-growing competition
on international markets according to [their] values”. According to former EU Trade
Commissioner Pascal Lamy, “[we] have the ability not only to resist initiatives we don’t
support, but also to set the international agenda”. According to the ECB’s Lorenzo Bini
Smaghi, the EU “has much less influence over international policy issues than could be
expected on the basis of its relative economic weight”. Finally, the Wall Street Journal
once described the EU as “regulatory imperialism”.
Sapir argued that the EU had three agendas: global, transatlantic and regional.
The global agenda is two-fold. It requires addressing the shift of economic and politi-
cal power to the BRICs while responding to the ‘African crisis’. The available policy
instruments include trade, finance and development, as well as the reform of multi-
lateral institutions to reflect the BRICs’ rise.
The transatlantic agenda needs to address the bilateral relationship in the new global
context. The main challenge is to deepen transatlantic regulatory cooperation and
ensure that the export of EU and US regulatory models (through Free Trade Agree-
ments) does not block the WTO. Whether the two partners go about this challenge
in a competitive or cooperative manner will have huge ramifications for the future
of their relationship, and the entire world too.
The regional agenda focuses on the EU as the undisputed regional economic power
situated in a potentially volatile neighbourhood. The main challenge is to promote
stability and prosperity in the neighbourhood. The appropriate policy instruments
in the EU’s dealings with its neighbours ought to include a revamped European
Neighbourhood Policy, as well as common policies in two areas, namely migration
and energy policy.
38
The above three agendas require a coherent approach, but the EU’s foreign economic
policy toolbox makes it difficult to effectively respond to these challenges. It is deter-
mined by history or reflects internal arrangements, but not today’s challenges. There-
fore, changes in governance are needed.
While nobody is calling for the centralisation of competences across the board or a
move to unconditional delegation, broadening the scope of supervised delegation, on
the basis of the trade model, ought to be considered.
The power of representation and negotiation in chosen policy areas could be trans-
ferred to an EU agent, perhaps the European Commission or a ‘double-hatted’ High
Representative, as planned for foreign policy. The contract between agent and princi-
pal, including the degree of autonomy and the term of mandate, can be tailored to in-
dividual policy areas and evolve over time. Member States would retain control rights
and monitor implementation of the mandate.
EU governance models
Model Principe Example
Unconditional delega- Delegation to EU institution, Competition
tion non-binding monitoring by MS & EP
Supervised Delegation to EU institution, Trade
delegation supervision by MS & EP
Coordination No delegation, but commitment IMF matters for euro area
to coordinate MS
© Bruegel (www.bruegel.org)
Which model is used where? Eight policy areas

Unconditional Supervised Coordination National
Delegation Delegation matter
Competition Commission
Trade Commission
Environment Partially Partially
Commission
Financial markets Mostly
International macro ECB Eurogroup On G7 and
President IMF matters
Development Commission Not effective Mostly
(20%) (80%)
Energy Attempts Mostly
Migration Attempts Mostly
© Bruegel (www.bruegel.org)
In the field of energy and migration, a good case could be made for the transfer of
competences from Member State level to the EU. Environmental policy, international
macro-economic and finance policy and external financial markets policy would also
be ripe for governance reform. Finally, rationalising Europe’s development policies
could also yield huge efficiency gains.

In his discussion of Sapir’s presentation, Horst
Siebert focused on the issue of rules in a
cosmopolitan order stressing the case of China’s
rise. Siebert argued that we need rule systems
and mediation to respond to shifts in the
balance of power.
The emergence of rules is the result of learning from experience. Negative experiences
that inflict severe hardship on people — historical disasters — become the underlying
origin of a new rule. In such cases, rules are established after the negative experience
has been made. They arise from the attempt to prevent human tragedies in the future.
Ex ante elements can also be present in the emergence of rules, for instance the insight
that existing procedures are inadequate and can be improved. A good illustration is the
evolution of the GATT into the WTO.
A specific avenue towards finding new rules is institutional competition, in which es-
tablished national rules stand side by side and compete with each other. In this regard,
Siebert noted that it is a natural reaction of governments to strive for international
cooperation and institutional harmonisation if it strengthens their position at home.
The EU has a rich experience in institutional competition and in rule setting, and the
world could learn from it.
But how do rules respond to shifts in the balance of power?
Siebert underlined that, in the past, shifts have usually led to wars: the rise of Bismarc-
kian Germany led to two world wars and the emergence of Japan in the 19th century
rewrote the rule book in East Asia.
International rule systems contain mechanisms that play a stabilising role in the insti-
tutional arrangement. They become particularly necessary when the world is in flux,
i.e. when the conditions to which the rules apply change quickly and significantly.
Then the main question to ask is how can these mechanisms be improved?
Today, will the EU and the US be able to develop appropriate policies to accommodate
peacefully China’s rise?
40
Chapter Three
1 WORKING GROUP
New Wave of globalisation:
characteristics and implications
Presenter
Jean Pisani-Ferry
Professor, Université Paris Dauphine;
Director Bruegel, Brussels
Reporter
João Borges de Assunção
Associate Professor,
Universidade Católica Portuguesa, Lisbon
Jean Pisani-Ferry summarised the main lessons of the past two
decades of globalisation. The emergence of the BRICs (Brazil,
Russia, India and China), by doubling the global labour force, has
had a disinflationary impact on global wages and prices. The rise
of these new economic powers has not been the usual story of
comparative advantage: it has involved a huge skills build-up and
technology transfer through foreign direct investment.
Capital flows, including portfolio and FDI flows, have grown fast-
er than trade, and financial integration has reached an unprec-
edented level today. The surge in capital flows has involved both
larger flows between developed economies, with the US as the top
recipient, as well as increasing flows to emerging markets, such as China. Today, the
rise of sovereign wealth funds and the impact of rising capital flows on world interest
rates must be carefully monitored. There has also been a new wave of migrants, with
a significant impact on Europe. Indeed, migration seems to have contributed more to
global welfare than trade. The major question is how Europe can manage migration.
While the past story of globalisation is one of disinflation, global inflation in the future
cannot be ruled out. A return to resource nationalism and imperialism, with upward
pressure on global prices, is quite possible. On the one hand, the big issues of global
concern, such as climate change, financial stability and health pandemics, make it im-
perative that global players, the BRICs included, act in concert. On the other, there has
been an unprecedented shift in economic power from the OECD to BRICs, yet global
governance has not yet reflected that change. Can developed economies rise to this
challenge?
Rising income inequality has been a core attribute of globalisation in many countries,
including the US, UK and Germany. Redistributive policies, such as the ones employed
by Canada, have therefore been crucial. While people at the very top of the educational
ladder have done very well, others have either seen their mean income stagnate or fall.
Human capital has been tremendously important in the context of globalisation.
Globalisation teaches us that there is a pecking order of flows: trade first, capital sec-
ond, migration third. These flows may be complements rather than substitutes. How-
ever, the benign conditions we experienced in the 1990s — high and stable growth
and low inflation — may be a thing of the past. The road ahead is likely to be more
turbulent, with rising commodity prices and low-carbon policies increasing the cost
of production.
In the future, Europe would do well to concentrate on the follow-

ing challenges:
allocate global pollution rights between developed and devel-
oping economies;
figure out how to tax global capital; rebalance global govern-
ance towards emerging powers;
and develop appropriate redistributive policies to mitigate the
adverse impact of globalisation on workers.
It remains to be seen whether the EU can rise to these complex

challenges.
42
Chapter Three
2 WORKING GROUP
Sources of growth in the
global market economy
Moderator
Loukas Tsoukalis
Special Adviser to the President
of the European Commission
Presenter
Klas Eklund
Senior Economist,
Skandinaviska Enskilda Banken (SEB), Sweden
Reporter
Lars Jonung
Adviser, European Commission,
Directorate-General Economic and Financial Affairs
Klas Eklund focused on the drivers of today’s ‘long wave’ or ‘su-
percycle’ of globalisation, which, he argued, stemmed from a
combination of the following factors:
technological breakthroughs in information technology and
transportation;
greater competition and market reforms;
productivity growth;
the fall of communism;
the global labour supply shock;
sounder macro-economic policies;
and lower inflation.
The BRICs will shift the global balance of power in fundamental ways: by 2050, the
Chinese economy will be larger than that of the US and India, and much bigger than
that of the EU.
While productivity growth has been rising dramatically in emerging markets, it has
fallen since 2000 in OECD economies. The productivity boom in emerging markets
has involved greater FDI inflows and higher growth rates.
The above ‘supercycle’ does not exclude cyclical downturns, particularly in developed
markets. In 2008, we may see a cyclical downturn in productivity, tighter labour mar-
kets, central banks moving to check inflation, and continuing volatility in financial
markets.
Emerging Asia will be racing ahead, while the US is far into its cyclical downturn, the
UK is slowing, the Eurozone and Nordic economies are close to peaking, and Japanese
growth will be sluggish. Downside risks include continued volatility in financial mar-
kets, the credit crunch tipping the real economy into recession, a crashing US and UK
housing market, and sky-rocketing oil prices.
Nevertheless, the underlying fundamentals of long-term growth are still strong, China
and India have great potential, and the ICT revolution will continue to exert a large
impact on global growth. The medium-term slowdown is already under way, the US
economy is slowing, and some contagion and further turbulence in the financial mar-
kets seem inevitable.
The longer-term unknowns include a potential return of infla-

tion, a protectionist backlash to globalisation, and the impact of
climate change on economic performance. Policy responses to
combat climate change will either put a damper on growth or lead
to new technological breakthroughs.
44
Chapter Three
3 WORKING GROUP
Globalisation and the nation state
in the 21st century
Moderator
José Cutileiro
Presenter
Volker Perthes
Chairman and Director of Board,
Stiftung Wissenschaft und Politik (SWP), Berlin
Reporter
Jean-Dominique Guiliani
President, Foundation Robert Schuman, Paris
Volker Perthes set out his thoughts on the link between globali-
sation and the nation state. He concluded that the nation state,
albeit under increasing pressure from the forces of globalisation,
is here to stay.
The nation state appears to be attractive. There has been a prolif-

eration of states since the end of World War II: in 1945, the UN
had 51 members; in 2007, 192. Participants argued that an inter-
national system structured around the nation state, as the locus of
identity and political organisation, made citizens feel safe.
However, globalisation undermines the sovereignty and autonomy of nation states.

Size matters in international relations, and there are significant advantages in pooling
sovereignty. The question is how to pool strengths whilst respecting the characteristics
of nation states. The EU offers a very unique response to this dilemma. Yet, there seems
to be a European paradox: the more competences the EU acquires, the more assertive
smaller entities — at regional and local levels — seem to become. Europe has still to
invent a true post-national form of democracy.
Five key dimensions of statehood — following and adapting a framework of Leipfried

and Zuern — are going through significant changes.
The use of force will mostly remain an exclusive competence of the nation state.
However, in a world where threats are increasingly trans-national, EU Member
States have already given up some of that monopoly, for example via Europol and the
Frontex agency, for security gains. Other countries, such as the US, provide a good
example of another major trend: the ongoing privatisation of force.
Taxation will remain an almost exclusive state competence, but the ability of the na-
tion state to tax footloose capital will be greatly reduced.
Welfare will be increasingly privatised.
European and international institutions, as well as NGOs, will become increasingly
powerful as the source of international norms.
Legitimacy will remain anchored to the nation state. While European citizens are
keenly aware that a growing number of core decisions are taken at the supra-national
level, and understand that such a transfer of sovereignty is necessary for Europe
to be able to shape globalisation, they still consider the nation state to be the most
democratic and legitimate form of political organisation.
However, Europe also suffers from a communication problem:

many of the threats and challenges stemming from globalisation
are too abstract for European citizens to understand, but so are
the European policies developed in response.
If the EU wishes to avoid a nationalist/protectionist backlash

against globalisation, it will have to address citizens’ concerns
about the division of competences between the national and EU
levels, as well as their fears about the impact of globalisation.
46
Chapter Three
4 WORKING GROUP
Inequality and social models in Europe
Moderator
Helen Wallace
Centennial Professor, European Institute,
London School of Economics and Political Science
Presenter
François Bourguignon
Director, Ecole d’Economie de Paris (PSE);
former Chief Economist, World Bank
Reporter
Klaus F. Zimmermann
Professor, Universität Bonn; Director,
Institute for the Study of Labour (IZA), Bonn
François Bourguignon’s presentation highlighted the difficulty
of comparing European countries’ redistribution record. There
are methodological difficulties in measuring the size and effect
of redistribution. Despite these difficulties, there has been some
convergence in redistributive policies in Europe in recent years.
The classical trade-off between efficiency and equity character-

ises the relationship between gross and disposable income. This
trade-off explains the difficulty of designing social policies that
provide a safety net for people without putting at risk their will-
ingness to work. In the light of this tension between incentives and redistribution, the
fundamental question that Europe faces is whether it can find a way to rebalance effi-
ciency and equity. This dilemma characterises the design of many social and economic
policies at the EU and national levels, whether it concerns flexicurity, social security,
human capital investment or youth policies.
Different European social models exist, with different ways of financing and organisa-
tion. There is some merit in grouping them together à la Gøsta Esping-Andersen into
‘Nordic’, ‘Anglo-Saxon’, ‘Mediterranean’, ‘Continental’ and perhaps ‘Post-communist’
models. However, there are substantial differences within each model, and there is no
reason to believe that one model is superior to another.
There was a broad consensus among participants that social policies would remain
within the remit of Member States, yet further European involvement was desirable.
First, European policies increasingly affect income redistribution in Member States.
This has political consequences for both Member States and the EU. Second, Euro-
pean economic policies are becoming increasingly intertwined with Member State so-
cial policies, mainly in the labour market. This calls for coordination between the two
policy layers.
The discussion of the role of European institutions in the social area reflected the ‘real’
discussion in Europe: there were very different opinions as to what the Commission
should and should not do. There seemed to be a general consensus that the Commis-
sion should continue exchanging best practices, lead discussions on subjects such a
flexicurity, and use the open method of coordination to develop policy. But other in-
struments appeared more controversial: some believed that the Globalisation Adjust-
ment Fund was rather difficult to establish; others thought that
the Commission should never contemplate proposing a health
services directive; and some claimed that the Commission had
underestimated the social impact of migration from the ‘new’ to
the ‘old’ Member States.
The difficulty of designing appropriate social policies is further

complicated by public perception. Even in those social policy ar-
eas where the role of the EU is clear and uncontroversial, Euro-
pean citizens may feel that EU policies endanger Member State
sovereignty. This is a fundamental problem that goes beyond
communication and probably explains the Commission’s desire
to deliver concrete results for citizens.
48
Chapter Three
5 WORKING GROUP
The future of Europe:
investing in youth
Moderator
Francesco Giavazzi
Professor, Universita Bocconi, Milan
Presenter
Roger Liddle
Vice-Chair (Policy), Policy Network, UK; Visiting Fellow,
European Institute, London School of Economics
Reporter
Julian Le Grand
Professor, London School of Economics
Roger Liddle set out the rationale for investing in youth. Europe
spends a lot of money on its elderly, but not enough on its youth,
while young people represent the future. The interests of the eld-
erly are factored into several social policies, while those of young
people are not. One could make a case for more effective advo-
cacy of youth interests at local, national and European levels.
Children and young people are under-represented in the making of social policies,
yet bear the lion’s share of the burden, given demographic trends. This raises impor-
tant questions about inter-generational equity and sustainability. The EU could seek to
raise this issue by simply putting it in the public domain, exchanging best practices in a
strengthened open method of coordination, creating cross-national social innovation
networks and reforming the European Social Fund.
There is a clear rationale for investing in youth. First, we are building a knowledge-
based society, which requires educational excellence and human resources in general
across the board. Yet, educational performance remains poor in several EU Member
States. Second, while Europe is becoming more educated, fertility rates are falling, and
we need to cushion Europe’s demographic problem. The causal link between the two
is unclear, but further investment in youth policies may be able to reverse the latter
trend. Third, the risk of the social and educational fragmentation of EU societies is
real, with a long-term negative impact on the integration of immigrant communities,
social coherence and social mobility. Finally, investing in youth today may reduce the
cost of future policies, such as those targeting drug and alcohol addiction, crime and
health problems.
Four elements of an integrated ‘youth policy’ were discussed: pre-school care and edu-
cation, human capital development and capital investment. As concerns education at
the pre-school and school levels, the question is how the EU can help equip today’s
children to deal with tomorrow’s challenges. Human resources development must be
at the centre of a modern social and educational system. A crucial component of chil-
dren’s early education is the pre-school care that working parents often rely on. Finally,
the rising median age of teachers, as well as teachers’ lack of mobility, ought to be ad-
dressed to maintain quality and up-to-date schools.
Participants suggested the following innovative social policies for the EU: mainstream
youth policies into European social programmes in the course of the EU budget review
in 2008–2009; establish a social and child care innovation fund; develop the experi-
mental scheme of “second chance schools” for youth who drop out of the mainstream
system; and create a “European Bambini bond scheme” to give
a lump sum to every child at birth, which would mature upon
adulthood. Some of these policies could be financed by a transfer
from the elderly to young people through increasing the retire-
ment age. The EU could also play a key role in managing infor-
mation exchanges on school performance evaluation systems and
pensions. As regards pensions, everyone should have the right to
know what pension he or she is entitled to. These measures should
be seen as financially neutral in the long term, as well-designed
policies would partially pay for themselves through higher em-
ployment rates, improved productive potential and lower costs
of social failures.
50
Chapter Three
6 WORKING GROUP
The transformation of democray
and the Europe of the future
Moderator
Dusan Sidjanski
Presenter
Yves Mény
President, European University Institute, Florence
Reporter
Jonas Condomines Beraud
Principal Adviser, BEPA, European Commission
Yves Mény’s presentation analysed the future of democracy in
Europe. He cited Robert Dahl’s insight that market capitalism, by
creating a middle class, tends to favour democratisation up to a
certain point, beyond which it generates effects that are inimical
to democracy, such as growing inequality and a culture of con-
sumerism.
Mény mentioned two major trends affecting democracy in Europe: secessionism,

which concerns countries and regions as disparate as the western Balkans, the United
Kingdom and Spain; and the fragmentation of economic governance, which can be
detected in the transfer to independent bodies of core governance functions, such as
monetary policy and regulation.
The fundamental values underpinning democracy may differ between different set-
tings: for example, the death penalty is legitimate in America, but not so in Europe.
Rising populism, voter apathy and the rapid alternation of governments also indicate
that the state of democracy is far from perfect in Europe. Politicians are increasingly
incapable of addressing their citizens’ concerns about globalisation, which may con-
tribute to rising nationalism and protectionism.
Andrew Moravcsik and Giandomenico Majone have argued that there is no democrat-
ic deficit in the European Union. Others have claimed that a massive transfer of power
to the EU level has ‘hollowed out’ European democracy. Whatever one thinks of these
arguments, the challenge of our time is to invent new ways of adapting democracy to
supra-national decision-making. If there is no substantive democracy at the EU level,
the legitimacy of the entire European integration project will suffer.
Europe faces the following options:

Politicising the EU could revitalise the integration project. If the Union is only a
Single Market, why does it have such sophisticated institutions and such a large ad-
ministration?
Politicising European elections could do wonders: for example, the Lisbon Treaty
could be ratified on the same day throughout the EU; or major policy proposals,
such as the services directive, could be put to the vote before the Commission acts.
As potential means of politicising the EU, the European Parliament could also ac-
quire the right to nominate individual Commissioners; the Financial Perspective
could be matched to the term of the European Commission;
or perhaps European officials could be made more accountable
through the threat of dismissal.
There are two alternatives to the above course of action.

First, the EU could be stripped of some of its major functions.
Second, European politicians could convince their electorates
that big decisions, such as monetary union and regulation, are
technical issues best managed by technocrats.
However, neither route appears particularly desirable as the way

forward.
52
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56
PROGRAMME
Monday 3 December 2007 OPENING DINNER SPEECH
“GLOBALISATION AND PUBLIC PERCEPTIONS”
by Lorenzo Bini Smaghi, European Central Bank
Tuesday 4 December 2007 OPENING PLENARY: COMPARING WELFARE BETWEEN

EUROPE AND THE UNITED STATES
Presenter, Robert Gordon
Discussant, Charles Wyplosz
WORKING GROUPS
1. New wave of globalisation: characteristics and implications
Presenter, Jean Pisani-Ferry
Reporter, João Borges de Assunção
2. Sources of growth in the global market economy
Presenter, Klas Eklund
Reporter, Lars Jonung
Moderated by Loukas Tsoukalis
3. Globalisation and the nation state in the 21st century
Presenter, Volker Perthes
Reporter, Jean-Dominique Giuliani
Moderated by José Cutileiro
PLENARY SESSION: COMPETITION, INNOVATION AND GROWTH
Presenter, Ramón Marimon
Discussant, Cecilia Garcia Peñelosa
WORKING GROUPS
4. Inequality and social models in Europe
Presenter, Francois Bourguignon
Reporter, Klaus Zimmermann
Moderated by Helen Wallace
5. The future of Europe: investing in youth
Presenter, Roger Liddle
Reporter, Julian Le Grand
Moderated by Francesco Giavazzi
6. The transformation of democracy and Europe of the future
Presenter, Yves Mény
Reporter, Jonas Condomines-Béraud
Moderated by Dusan Sidjanski
PLENARY SESSION: DISCUSSION WITH THE PRESIDENT OF
THE EUROPEAN COMMISSION, JOSE MANUEL BARROSO
Wednesday 5 December 2007 PLENARY SESSION: EUROPE AND GLOBAL GOVERNANCE:

TOWARDS A COSMOPOLITAN ORDER
Presenter, André Sapir
Discussant, Horst Siebert
CONCLUSION
Chair, Vítor Gaspar

LIST OF PARTICIPANTS
José Manuel BARROSO President, European Commission
Tassos BELESSIOTIS BEPA, European Commission
Márton BENEDEK BEPA, European Commission
Lorenzo BINI SMAGHI Member, Executive Board, European Central Bank
João BORGES DE ASSUNÇÃO Associate Professor, Universidade Católica Portuguesa, Lisbon; Member,
BEPA Group of Societal Policy Analysis (GSPA)
François BOURGUIGNON Director, Ecole d’économie de Paris (PSE); former Chief Economist World
Bank; Member, BEPA Group of Societal Policy Analysis (GSPA)
Marco BUTI Deputy Director-General, Directorate-General Economic and Financial

Affairs, European Commission
Vasco CAL Commissioner Grybauskaité’s Cabinet, European Commission
Marcel CANOY BEPA, European Commission
Maria da Graça CARVALHO BEPA, European Commission
Jonas CONDOMINES BERAUD BEPA, European Commission
Pierre DEFRAIGNE Director, EUR-IFRI (Institut français des relations internationales),

Brussels
José CUTILEIRO Special Adviser to the President of the European Commission;

Ambassador, Former George F. Kennan Professor, Institute for Advanced
Study, Princeton; Member, BEPA Group of Political Analysis (GPA)
Paul DE GRAUWE Professor, Katholieke Universiteit Leuven (KUL); Member, BEPA Group of
Economic Policy Analysis (GEPA)
Mathias DEWATRIPONT Professor, Université Libre de Bruxelles (ULB); Member, BEPA Group of
Juan DOLADO Professor, Universidad Carlos III de Madrid; Member, BEPA Group of
Sarah DUBRULLE BEPA, European Commission
Klas EKLUND Senior Economist, Skandinaviska Enskilda Banken (SEB), Sweden;

Member, BEPA Group of Economic Policy Analysis (GEPA)
Cecilia GARCIA PEÑALOSA Research Director, Université de Marseilles
Vítor GASPAR Acting Director-General, BEPA, European Commission
58
Francesco GIAVAZZI Professor, Universita Bocconi, Milan; Member, BEPA Group of Economic
Policy Analysis (GEPA)
Robert GORDON Professor, Northwestern University, Evanston, Illinois
Agnès HUBERT BEPA, European Commission
Lars JONUNG Directorate-General Economic and Financial Affairs, European

Commission
Johannes LAITENBERGER Spokesperson, European Commission
Julian LE GRAND Professor, London School of Economics; Member, BEPA Group of Societal
Policy Analysis (GSPA)
Jean-Dominique GIULIANI President, Fondation Robert Schuman, Paris
Paul HOFHEINZ President, Lisbon Council, Brussels
Karel LANNOO Chief Executive Officer, Centre for European Policy Studies (CEPS),
Brussels
Frédéric LERAIS BEPA, European Commission
Roger LIDDLE Vice-Chair (Policy), Policy Network, UK; Visiting Fellow, European
Institute, London School of Economics
Ramón MARIMON Professor, Universitat Pompeu Fabra, Barcelona
João MARQUES DE ALMEIDA Member, President Barroso’s Cabinet, European Commission
Hans MARTENS Chief Executive, European Policy Centre (EPC), Brussels
Yves MÉNY Professor, President of the European University Institute, Florence;

Member, BEPA Group of Political Analysis (GPA)
Ann METTLER Executive Director, Lisbon Council, Brussels
Volker PERTHES Chairman and Director, German Institute for International and Security
Affairs, SWP, Berlin
Jean PISANI-FERRY Professor, Université de Paris-Dauphine; Director, Bruegel, Brussels;

Jitka RYCHTARIKOVA Professor, Charles University, Prague; Member, BEPA Group of Societal
Policy Analysis (GSPA)
André SAPIR Professor, Université Libre de Bruxelles (ULB); Senior Fellow, Bruegel,
Brussels; Member, BEPA Group of Economic Policy Analysis (GEPA)
Dusan SIDJANSKI Special Adviser to the President of the European Commission; Founder
and Professor Emeritus, Département de Science Politique, Université de
Genève; Member, BEPA Group of Political Analysis (GPA)
Horst SIEBERT President Emeritus, Institut für Weltwirtschaft (IfW), Universität Kiel;
Myriam SOCHACKI BEPA, European Commission
Suzanne SPEER BEPA, European Commission
Loukas TSOUKALIS Special Adviser to the President of the European Commission; Professor,
University of Athens; President ELIAMEP, Visiting Professor, College of
Europe; Member, BEPA Group of Political Analysis (GPA) and Group of
Societal Policy Analysis (GSPA)
Reinhilde VEUGELERS BEPA, European Commission
Helen WALLACE Centennial Professor, European Institute, London School of Economics

and Political Science; Former Director, Robert Schuman Centre, European
University Institute, Florence, Member, BEPA Group of Political Analysis
(GPA)
Charles WYPLOSZ Professor, Institut Universitaire de Hautes Etudes Internationales,

Université de Genève; Member, BEPA Group of Economic Policy Analysis
(GEPA)
Klaus ZIMMERMANN Professor, Universität Bonn; Director, Institute for the Study of Labour
(IZA), Bonn; Member, BEPA Group of Societal Policy Analysis (GSPA)
60
Cover photo: © Pamanes - Fotolia.com. European Commission
Change, Innovation and distribution. Social, political and economic trends and threats
Luxembourg: Office for Official Publications of the European Communities
2008 — 59 pp. — 17,5 x 25 cm
ISBN 978-92-79-09848-2
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Luxembourg: Office for Official Publications of the European Communities

2008 — 59 pp. — 17,5 x 25 cm

More information on the European Union is available on the Internet (http://europa.eu).

Cataloguing data can be found at the end of this publication.

Luxembourg: Office for Official Publications of the European Communities, 2008

© European Communities, 2008

PRINTED ON WHITE CHLORINE-FREE PAPER

Conference organised by the

Márton Benedek and Myriam Sochacki (editors)

Change, Innovation and Distribution 1

A BEPA Policy Advisers’ Conference

Genval, Belgium, 3–5 December 2007

Márton Benedek and Myriam Sochacki

EXECUTIVE SUMMARY ................................................................................................................................................................................................... 13

CHAPTER ONE: OPENING DINNER SPEECH

CHAPTER TWO: PLENARY SESSIONS

CHAPTER THREE: WORKING GROUPS

List of participants ................................................................................................................................................................................................................ 58

Change, Innovation and Distribution 9

Reflecting on competition, innovation and growth, the conference participants were

Change, Innovation and Distribution 13

1 OPENING DINNER SPEECH

Ladies and gentlemen,1

Change, Innovation and Distribution 17

Data refer to the mid-2000s. Data on Life Satisfaction from the

In my opinion, policy-makers (including central bankers) have to take these percep-

Globalisation, technological innovation and income distribution:

Labour market adjustment to globalisation seems to be occurring mainly via a reduc-

Change, Innovation and Distribution 19

Data refer to the mid-2000s. The globalisation ranking is the rank-

An important issue to consider is that it is quite difficult to disentangle the effects of

Data refer to the mid-2000s. The globalisation ranking is the rank-

First, deregulate and increase competition in the non–traded sectors so as to reduce

Change, Innovation and Distribution 21

The combination of globalisation and innovation in finance has contributed to a grow-

Change, Innovation and Distribution 23

What can Europe do?

There may be two, related, reasons.

Thank you for your attention!

Change, Innovation and Distribution 25

Gordon’s presentation drew on recent data showing a dramatic deterioration in the

Gordon provided additional pertinent information to explain this phenomenon. The

Change, Innovation and Distribution 29

Leading interpretations for the decline in European hours per capita

According to Gordon, none of those four single-cause interpretations is fully consist-

Gordon’s findings on changes in hours per capita

Gordon agreed that almost everything discussed in his presentation was

Focussing on the Dew-Becker-Gordon (2007) argument, he claimed that it could not

Wyplosz identified two important questions in Gordon’s presentation:

Change, Innovation and Distribution 31

The first generation of Schumpeterian growth models predicted that competition

The ‘new’ new growth theorists

In her discussion of Marimon’s presentation, Cecilia Garcia

The relationship between entrepreneurship and inequality is more ambiguous: individ-

Change, Innovation and Distribution 35

Which model is used where? Eight policy areas

Change, Innovation and Distribution 39

But how do rules respond to shifts in the balance of power?

In the future, Europe would do well to concentrate on the follow-

It remains to be seen whether the EU can rise to these complex

The longer-term unknowns include a potential return of infla-