In the short term, many of the uncertainties obstructing the economic outlook – and especially the manufacturing sector – are man-made – and even one-man made. Contingencies that not so long ago appeared as tail risks, such as the possibility of an escalation of trade tensions or a disorderly Brexit, have become looming threats. But uncertainty also pertains to long-term structural trends. Over the past decade, the world economy has steadily recovered from the global financial  Page 2 sur 11 crisis. But it has not returned to its pre-crisis normal. Interest rates remain at historical lows, due to a historically low level of the natural rate of interest R* ii. In the short run, this analysis – uncertainty as the first trigger of the present slowdown – should guide our ranking of policy answers. Monetary policy plays its role, but it should not – less than ever – be the only game in town. It should not even be the first game in town. The first response would be for government-driven uncertainties to be addressed directly by governments, by removing the self-induced threats to world growth. Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth. iii Wage increases in countries that have long relied on wage moderation could also help in bolstering aggregate demand and inflation. And pro-growth reforms would raise R*. Monetary policy provides a third response.
Completing Europe’s capital markets union (CMU) will be key to financing the green and digital transitions. Equity investors tend to have a greater appetite than banks for high-risk, high-return projects and equity finance tends to increase green innovation. [12] But the full and swift implementation of the Commission’s ambitious CMU Action Plan will be crucial here. Some progress is being made. The Commission has recently put forward proposals on harmonising national insolvency laws and facilitating public listing. It is also tackling issues that have held back the growth of European capital markets, like putting equity financing on an equal tax-footing with debt financing. And Europe’s recent agreement on a minimum level of taxation for large corporates will support tax harmonisation within the EU, the absence of which has often been seen as a barrier to capital market integration. [13]  The third big challenge facing Europe is the high inflation environment. And this, of course, is the challenge that concerns me the most. Inflation in Europe is far too high, partly due to our vulnerability to the changing geopolitics of energy. Decoupling from Russia last year pushed up energy inflation in the euro area to extraordinary levels. But while energy inflation has recently been coming down, underlying inflation continues to rise. As a result, it is vital that inflation rates above the ECB’s 2% target do not become entrenched in the economy. We must bring inflation down. And we will deliver on this goal.