I am prudently optimistic. Economic recovery is proceeding globally. But the impact from the fiscal stimuli has continued to fade and growth of global trade is likely to continue losing momentum. So the pace of recovery will ease somewhat in the coming months. Global economic output is likely to grow by 3.4 percent, compared to 4 percent in 2010.
Europeans are still concerned about the Euro. Is this still a major risk?
The European sovereign debt crisis will be a major risk in 2011. But it is a manageable one. First of all, the crisis-ridden countries have embarked on credible budget consolidation and economic reform programs. Consequently, the public's trust in the ability of governments to return to sustainable public finances will be strengthened. This will support sustainable growth.
Secondly, the reform of the EU's economic governance, despite some shortcomings, will strengthen the existing framework for fiscal and macroeconomic surveillance. The faster the plans are implemented, the sooner it will dawn on financial markets that the new regulations carry important changes. On this foundation, the euro can look forward to a promising future.
What are other important economic and political risks in 2011?
Besides the European sovereign debt crisis there are three other major risks that could cloud the economic and financial market outlook: A strong surge in commodity prices, sharp exchange rate swings, in particular a strong depreciation of the US Dollar, and finally, a renewed flare-up of the banking crisis.
Last but not least, one should not forget permanent geopolitical risks that have been highlighted recently by the revolutions in Tunisia and Egypt. While more democracy will be a big benefit in the long term, the present social unrest can cause economic damage in the concerned countries and can spill over into other regions.
Global governance failures are a major risk. Where are the weaknesses and strengths of institutions like the G20?
Those institutions are able to provide a regular opportunity for frank and open debate and a platform for policy formulation on the important topics concerning, for example, the global economy. Hopefully they result in greater consensus and stability.
In the case of the G20, the process seems to be moving very slowly. Unanimous agreement is hard to achieve, decisions are not binding, and it does not have independent implementation powers. It worries me that these global institutions haven't brought about major change since the financial crisis. The question is: how effective are they in the end?
Do we need more global regulation or less?
It's not so much a question of needing more or less, it's about making sure that what we have is fit for the purpose and in the global context more harmonized than it has been up to now. We have developed a global market place over the last 20 years, but by and large it still relies on national governance regimes to police it, with obvious shortcomings.
What would a functioning global governance system look like?
Looking at the International Monetary Fund and the G20, we must admit that neither of them is perfect but better than nothing at all. To improve global governance, we need to establish a common regulatory framework for related sectors. Europe is on the right track and could become a global role model but unless the U.S., China, and Japan agree to join a global regime it can hardly be considered global. A bureaucracy that disrupts competition and the efficient allocation of resources, however, must be avoided at all costs.
Globalization seems to level the playing field between nations but widen disparities within countries. What needs to be done?
This is an issue, especially in fast-growing emerging markets. During a growth cycle, living standards are improving and the middle class is prospering. In industrialized countries, where globalization has put downward pressure on sectors with labor-intensive production, the situation is different. With low or virtually no growth, a widening prosperity gap creates winners and losers, threatening to undo the fabric of the society.
Apparently, two things are necessary: growth and education. It is quite telling that Germany's inequality has not worsened in recent years. However, the prospects of clambering out of the low income segment into the middle class have tended to decline. Efficient education systems are needed to equip the workforce with the necessary skills for a globalised world. Given the looming challenges of demographic and climate changes, our societies can ill afford to produce a growing class of "globalization losers" who cannot contribute to income generation.
Risks are also a source of innovation and opportunity. What new developments could spring from the risks in 2011?
Take the current debt crisis as an example: One of the lessons learned has been that in a monetary union, closer cooperation in terms of economic policy is absolutely necessary. European integration could benefit from this.
The reform of the Stability and Growth Pact will allow earlier and stricter surveillance of member states' fiscal policies. Macroeconomic imbalances can also be evened out on a broader basis. Undoubtedly, without the current crisis, the recent reforms would not have materialized.
