Last year, one big topic dominated economic discussions globally: inflation. Will inflation, in your view, be equally important in 2023?
It will remain on the top of people’s minds and of the economic policy agenda. But in pure numbers, it will not be as high as it was last year. Inflation has actually peaked globally at about 8 percent last year. And it is now expected to come down to more normal levels gradually, over this and next year. But this is in the context of a really weak growth performance. The main news of this year may be how difficult it is. A very recent forecast for global growth is 1.7 percent. That’s a big deceleration. Only the global financial crisis and the pandemic crisis were worse globally than what we are looking at for next year. And that’s because, of course, the war in Ukraine is having its full impact. At the same time, in Europe, we need to already replenish energy storages. All of these topics are going to be very important for this year, as well.
Is there currently too much focus on inflation? Should there be more focus on growth?
We have not seen inflation for almost 30 years. Looking back historically, we will say that this inflationary episode was the end of the great moderation and of an era of low inflation and high stability. This was not expected by markets, by households, and by central banks to come with such a force. And therefore, it is absolutely right to focus on it. It is absolutely right that central banks have a laser focus on bringing down inflation, as fast as possible, before it starts spilling into longer-term inflation and wage dynamics. Therefore, it’s right: Inflation is very important and it’s back.
Speaking of inflation in Switzerland: The official figure for 2022 has been at 2.8 percent. It’s about a third of neighboring economies. How do you explain this almost non-existing inflation in Switzerland?
Well, of course, Switzerland is different [laughs]. But it is different for at least three reasons that we actually understand. One has to do with the energy composition. Switzerland has a larger share of renewables and of hydropower, which is homemade. The country is less dependent on gas than Germany, for instance. And it was the gas and electricity prices Europe-wide that really spiked enormously. Second, electricity prices only adjust once a year in Switzerland. Therefore, they have not been passed through into consumer prices as quickly and as much. Similarly, because of agricultural policies that insulate Swiss food prices from external shocks. This means we have a component of administered prices. And last but not least, the third important difference is that Switzerland has its own currency. And the Swiss National Bank has allowed it to appreciate. This lowers the cost of import prices and dampens inflation.
How do the Swiss financial marketplace and investors in Switzerland benefit from this lower than usual inflation?
Well, the financial marketplace and foreign investors benefit because of the appreciation of the exchange rate, which means that Swiss assets appreciate in value. And this is exactly reinforcing the reputation of Switzerland for stability but also for being an effective safe haven in times of crisis.
You have co-authored a blueprint for the reconstruction of Ukraine. Do you currently expect that the reconstruction in Ukraine can even start in 2023?
It has to start. Ukraine has areas that have been destroyed and where the Russian army has withdrawn—areas that need to be rebuilt. The Ukrainian people have to be rebuilding and repairing every day what is being destroyed. And this was the work of myself and my co-authors: All the actual rebuilding and repairing should already be embedded in a plan for the eventual reconstruction and follow its principles for rebuilding and also modernizing Ukraine. And it needs to be financed, as well. The partners of Ukraine, of which Switzerland is one, need to be able to provide the finances to start this rebuilding. Eventually, Ukraine is bound to, and has to become, a modern economy, fully integrated into the West.
The dominant issue of the last couple of years was the pandemic. It is no longer in the headlines. Is it over, also economically?
The health side of the pandemic is pretty much over in the West. Some of the supply-side bottlenecks have already been resolved. In fact, the economies have proved to be relatively flexible in adjusting to these supply-side shocks, although with the cost of higher inflation. But it’s not over in China. In a way, we could say, it’s almost only starting there. With the opening up of China and the end of lockdowns, Omicron is now really going through the population at a fast pace. And since China is such a big economy that has an effect on the rest of the world, the pandemic in China will remain an important topic of this year.
All these issues have kind of pushed away the topic that had been dominating for years: decarbonization and climate change. How will this issue evolve in the upcoming months and years, in your view?
It’s not my impression that decarbonization has been pushed away. Certainly, in Europe two things happened: On one hand, one discovered that the assumption that being integrated in trade with Russia and the rest of the world, that this business model, as it sometimes has been called, is no longer valid. And therefore, energy security and much more a short-term securing of the next winter has been the absolute highest priority. With the consequence that gas and even coal is now being used again. But gas was purchased at any price, with the gas prices spilling squarely into prices everywhere. In the short-term, this may have created the impression that there is no concern for decarbonization. But I don’t think that’s the right interpretation. Because with energy security, what has become extremely clear is that Europe needs to have its own sources, and that they need to be clean. In other words, what I expect to happen is an acceleration of the deployment of clean energy sources. And at the same time, the European commitment to reduce emission rights and expand the cap-and-trade system is already there. Which means that my concern is less about Europe and Europe’s will to eventually decarbonize. The question is whether the rest of the world, whether the planet, can actually get to this goal and limit the total number of carbon emissions to a certain level. And just let me mention this number: If we, as a world, want to stay below 1.5 degrees, then it’s only 300 gigatons of carbon emissions that are left. We are, however, spending this budget at the rate of about 40 gigatons per year. Now, you do the math.