Photo: Róbert Hegedüs
Mariann Őry
05/01/2024 18:02
What trends do you see in finance and the economy that show signs of a change in the world order?
Finance is currently at the centre of several important global issues. From my point of view, we can identify in particular two issues that can have an impact on the global order.
The first concerns sustainability of finance: in fact, nowadays, an increasing number of companies refer to environmental, social and good governance (ESG) standards and green finance to make responsible investments and business strategy decisions and, at the same time, the financial services industry is experiencing rapid change across the entire value chain of the business. Sustainability in finance represents a significant opportunity to reposition their business model in line with the customer expectations, evolving economic risks and recent ESG requirements driven by politics and society.
Currently, the topic of sustainability in finance, from the point of view of investment catalysing, involves different geopolitical poles such as the USA, Europe and Asia.
In addition to this, central bank digital currencies (CBDCs) represent an important element of change and a geopolitical competition factor. In fact, the issuance of CBDCs by a country’s central bank is a way of reasserting the country’s digital sovereignty. The current leaders in CBDC development and experimentation include the Euro Area, the UK, Sweden, Singapore, China and several developing countries.
As regards the economy, there are, in my opinion, two important trends: Firstly, bottlenecks in supply chains will continue. When a European company is asked about the factors limiting their production, it points to the shortage of raw materials and equipment as the main problem. Pressures of this kind limit growth and keep prices high. Many analysts identify a possible solution to these critical issues in the implementation of reshoring policies, i.e., the gradual return of all (or part) of the previously outsourced activities to the country of origin. This emerging trend could totally reshape the global economy and supply chains.
More likely, however, the landscape will evolve towards hybrid solutions: Friendshoring, for example, is a concept that indicates the return of business to the more intimate dimension of “doing business between friends”, i.e. between partners who share the same values and geopolitical alignment, minimising vulnerability to economic attacks from rival countries. The key word in this new economic phase is, therefore, reliability. Competitive, stable and lasting reorganisation cannot be achieved without strong and secure relationships. In contrast, in the case of nearshoring, i.e. bringing the production chain back to neighbouring countries, the advantage is clearly of a geographic-logistical nature.
Moreover, at the international level, the race has begun between the various countries of the world to take the lead in the challenge towards the green transition. Many countries, including the US, the EU and Japan, have announced their willingness to achieve net-zero emissions by 2050, while China by 2060. A geopolitical and geo-economic game, but first and foremost, it is industrial and technological. Achieving these objectives requires substantial investment in the reconversion of infrastructure, industrial systems and mobility, but it also enables an industrial and technological advantage over its main competitors, with benefits for long-term growth prospects. The green transition also represents a turning point for the shaping of industrial and trade alliances at an international level.
What steps are being taken to strengthen Eurasian connectivity in the financial sector? Which others are needed?
Let me say, firstly, that Asia matters to Europe as it represents the world’s largest population, fastest-growing economy, and major trade partner of the EU. Recognising this, the EU has promoted already since 1996 the Asia-Europe Meeting (ASEM), an informal platform for dialogue and cooperation between Asia and Europe.
The EU has also established strategic partnerships with four Asian countries: China, India, Japan, and South Korea. In December 2020, EU-Asia relations were also upgraded to the level of strategic partnership.
In November 2017, the ASEM foreign ministers agreed on a definition of connectivity. It involves bringing countries, people, and societies together to develop Europe-Asia ties on economic, financial, political, and security issues, promoting sustainable finance and contributing to the UN 2030 Agenda for Sustainable Development.
Additionally, in September 2018, the European Commission and the Vice President adopted a joint communication on “Connecting Europe and Asia – Building blocks for an EU strategy”, setting out the EU’s vision on how to better connect Europe and Asia. The aim of the strategy was to mobilise and strengthen cooperation with private investors, national and international institutions and multilateral development banks.
Most recently, in 2021, the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy, Josep Borrell, adopted, on 16 September 2021, the Communication joint “EU Strategy for Cooperation in the Indo-Pacific Region”. Through this strategy, the EU wanted to strengthen economic and financial cooperation in the Asian region, even considering that the EU is the largest investor, ranks first in development cooperation and is one of the Indo-Pacific region’s largest trading partners. Together, the Indo-Pacific region and Europe account for over 70% of world trade in goods and services and over 60% of foreign direct investment flows.
In my opinion, a new relationship with the Eurasian region must be established at present in the European context by continuing the path taken in the past and realising qualified connectivity between the two areas. Indeed, in light of growing geopolitical tensions, renewed cooperation between Europe and Asia in the areas of finance, infrastructure, energy security and international trade can generate valuable development opportunities. This can happen through a renewed diplomatic approach and the development of new economic and strategic partnerships.
You have also previously focused on the issue of a cashless society. In this area, we are seeing significant innovation in Asia. What would you highlight? What are the lessons for Europe?
Asia, in recent years, has experienced a remarkable transformation in its banking and financial sector. In fact, the continent has witnessed an unprecedented surge in digitalization and technological advancements. Asia represents a hotspot for cashless innovation. As the European House - Ambrosetti, in the context of our Cashless Society Community platform, whose objective is to analyse the evolution of the cashless scenario in the world, we monitored the cashless transition in Southeast Asian countries considering, for instance, the experiences of Indonesia, Malaysia, Laos, Thailand and China. Analyses have shown how these countries (but the trend can be seen throughout Asia), especially in recent years, have exponentially developed the digital economy by introducing various anti-cash measures and consequent modernization of payment infrastructures.
Singapore, for instance, has set up an infrastructure to enable the spread of digital payments. Since 1996, Singapore has been one of the first nations worldwide to introduce prepaid cards through the NETS Cash Card. Malaysia has introduced “anti-cash” measures as part of the “National Transformation Plan 2020-2050”, which includes incentives for the modernization of payments.
Europe, in terms of cash diffusion in the economy, still has a lot to do and can certainly learn from Asia’s experience. For example, the study on consumer attitudes towards payments in the euro area (SPACE) carried out by the European Central Bank in 2022 shows that cash, although slowly decreasing, is still the most widely used means of payment, especially among large European economies such as Germany and Italy, even though its use in the euro area has gradually declined. However, several initiatives have been introduced among European countries to develop the cashless payment sector, such as tax incentives for merchants and digital innovations.
As The European House - Ambrosetti, through our Observatory on the Cashless Society active since 2015, we estimated that in Italy, the development of digital payments generates an important economic impact: in fact, the cashless supply chain generates about 13 billion in turnover, 6.6 billion in added value and 35.1 thousand employees, moving towards a more “cashless society” that brings about economic benefits at large.
How do you see the role of central banks in increasing connectivity?
We are witnessing a fragmentation of the global economy into opposing blocks, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and values as possible.
In this context, central banks across the world play an even greater strategic role. The first and perhaps the most important is the issuance of money: central banks print money, which then goes into circulation in the real economy and is used by people, households and businesses. In addition, central banks have to ensure the stability of the financial systems in their economy, as well as monitor and track economic data. The final (and the most important) responsibility of central banks across the world is setting monetary policy, whose most key tool is represented by interest rates. As it is known, lower interest rates mean easier access to credit for households, businesses and anyone in the economy who needs a loan. On the contrary, higher interest rates mean the opposite: more expensive and limited access to credit.
In today’s economic environment characterised by increasing connectivity but also by considerable fragmentation, the role of central banks, in my opinion, is even more important to promote and ensure economic stability between different areas of the planet. In fact, through monetary policy, and more specifically, the supply of money and the management of credit in the real economy, it is possible to manage complex phenomena such as sudden exogenous economic shocks, financial crises and rising inflation.
As we saw during the pandemic crisis of 2020 and before that with the sovereign debt crisis of 2010, in an increasingly globalised and interconnected world, economic and financial crises resulting from exogenous or endogenous shocks spread extremely quickly, hitting national economies hard. In this context of profound uncertainty, the role of monetary policy in controlling the liquidity of the financial system is crucial.
The author is managing editor at Eurasia
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