Two renowned economists carry animated and well-managed debate on several hot issues
On 5 November 2014, Bruno Colmant, doctor in finance and professor at several Belgian universities, and William De Vijlder, group chief economist at BNP Paribas and professor at the University of Ghent, duelled it out on some pressing questions facing our economies, including the merits of the US vs European corporate funding model, the impact of geopolitical factors and the threat of deflation. The debate was moderated by Sylviane Delcuve, senior economist at BNP Paribas Fortis.
Renaud Vandenplas, head of BNP Paribas Securities Services in Belgium, kicked off the event, hoping that this third annual ‘Duel of Economists would be as inspirational as the two previous annual editions.
Which funding model for companies?
The first key question was about whether the US model of highly disintermediated corporate funding through the bond market was superior or inferior to the eurozone model, where bank credit is predominant.
William De Vijlder argued that during a recession, credit shrinking in the US may be even more severe than in the eurozone, whose banking financing model is, all in all, more stable in volatile times. On the downside, fixed-rate bank lending may be more expensive than bond issuance. At any rate, the US model is too distant and the eurozone market too fragmented for Europe to bridge the gap.
Bruno Colmant said that in the aftermath of the financial and economic crises, banks tend to be more risk averse and the Basel III framework requires more capital for the banking activities that entail greater risk, resulting in lower returns on equity for bank shareholders. As a result, banks tend to reduce their balance sheets (or will be forced to do so) by ‘downloading’ big chunks of their corporate loan portfolios to the market.
Political unrest in the world
A second topic was about the impact of geopolitical risks on capital markets, which is extremely variable, being either ignored by investors or having a significant impact on investor sentiment and actual market movements. William said that the negative effects induced by geopolitical factors are mostly short-lived as far as global markets are concerned. “Markets get used to political unrest. And as far as falling oil prices are concerned, why should we bother as global supply tends to rise?”
Bruno believes on the contrary that geopolitical risks are underestimated. Looking at the impact of climate change (not only for insurers but for the economy as a whole) and ageing populations, to name just a few, “we are on the verge of big economic change”.
Deflationary spiral looming
The debate then centred on a very hot topic. In recent months, the ECB and European governments have been focused on what is generally portrayed as a worst case scenario: that the eurozone or in particular peripheral eurozone economies could fall into a deflationary spiral, prompting consumers to hold off purchases and companies to postpone capital expenditures in the expectation that prices will go down even further. Falling prices would entail a vicious circle of lower production, more bankruptcies and even more unemployment.
In an attempt to fend off outright deflation, the ECB cut its benchmark interest rate to a historical low and recently launched a ‘light’ version of the US Federal Reserve’s ‘quantitative easing’ (QE) programme, under which the central bank basically prints money to buy bonds on the market. In William’s view these measures don’t certainly come too soon for the eurozone. “In the US, the Fed’s successive QE waves paid off in the end, sparking the moribund economy.”
Bruno countered that he wasn’t convinced that the Fed got its QE right because “artificially keeping the financial markets buoyant primarily benefits the wealthy.”
He added that the threatening deflation reflected a blatant lack of confidence of both consumers and investors. In his view, the austerity policies of the EU countries in recent years, focused on reducing public deficits, proved to be counter-productive. To pull the continent out of its economic malaise, national governments should put much stronger emphasis on raising consumers’ purchasing power to fuel internal demand.
William argued that while trying to stimulate the economy, governments should certainly not back off on austerity because lowering the public debt burden for the younger generations in a context of ageing population should be seen as a priority. Bruno replied that some debt rescheduling is unavoidable and the only acceptable way-out in the medium-term.
The two expert economists agreed on at least one point: we should avoid at all cost a Japan-like nightmare, with banks rolling over bad debt for decennia, leaving them with nearly no fresh money to lend to new or expanding firms.
Throughout the debate, Sylviane Delcuve good-naturedly teased the speakers, digging in deeper on specific aspects, and summarised their viewpoints in order to create a most engaging and appealing experience for the audience. The latter engaged with the jousters by voting on various economic scenarios and asking questions via electronic devices.
Wrapping up the lively and most interesting debate, Herwig Van Camp, head of Corporate Banking Belgium at BNP Paribas Fortis, warmly thanked the duellists, ‘two great economic minds’, for outlining their ideas. At the same time, he wondered why economic forecasting is so hard but obviously, some unpredictability is unavoidable…