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Forward Thinking on war in Ukraine, inflation, and cooperation in a fractured world with Jean Pisani-Ferry

In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Janet Bush talks to leading French economist Jean Pisani-Ferry. He holds the Tommaso Padoa-Schioppa chair at the European University Institute. He’s a senior fellow at Bruegel, the European think tank, and a nonresident senior fellow at the Peterson Institute for International Economics in Washington, DC. He’s also a professor of economics with Sciences Po in Paris. And from 2013 to 2016, he was commissioner general of France Stratégie, the ideas lab of the French government. He covers topics including:

  • The three economic challenges triggered by Russia’s invasion of Ukraine
  • How worried people should be about inflation
  • How institutions can cooperate globally to nurture global public goods like the natural world, food, and health in a fractured world

An edited transcript of this episode follows. Subscribe to the series on Apple Podcasts, Amazon Music, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Podcast transcript

Janet Bush (co-host): Michael, in your lifetime have you ever experienced such a combination of worrying elements as we are seeing now?

Michael Chui (co-host): Yes, it is hard not to be concerned. War in Europe, a cost-of-living crisis, a climate emergency—and all erupting at the same time just after a global pandemic. I think it was Thomas Carlyle who described economics as the “dismal science,” and there is a lot of worrying aspects for economists to get their teeth into right now.

Janet Bush: But actually my guest today is far from dismal. He has come up with what looks like a very workable proposal to tackle soaring energy bills, for instance.

Michael Chui: Indeed. I look forward very much to hearing the conversation.

Janet Bush: Jean Pisani-Ferry holds the Tommaso Padoa-Schioppa chair at the European University Institute. He’s a senior fellow at Bruegel, the European think tank, and a nonresident senior fellow at the Peterson Institute in Washington, DC. He’s also a professor of economics with Sciences Po in Paris. And from 2013 to 2016, he served as commissioner général of France Stratégie, the ideas lab of the French government. Welcome, Jean.

Jean Pisani-Ferry: Thank you. Thank you, Janet. Thanks for having me.

Janet Bush: I would love to start by asking you about your background. We always like to know why people got from A to B. So where did you grow up? Where were you educated? And how did you end up doing economics?

Jean Pisani-Ferry: I was educated as an engineer in France, in Paris. I grew up there. Got interested in politics. Got a bit dissatisfied with the way engineers interacted with society. Sometimes I regret. Because sometimes I think it’s simpler. Perhaps you know more about what you actually bring to society.

But perhaps not, because I see many engineers nowadays dissatisfied also, turning to different ways of thinking about their own contribution to society.

Mine was at an early stage to change course and study, briefly, economics, and then find a job in a think tank. And then I grew up basically moving from research to policy and back—different places, different levels. And I never found it boring, especially as I could start being bored, the world stopped being boring.

Janet Bush: Well, the world is certainly not boring at the moment. And in a bad way. Before we go on to what’s happening in the world right now—you say that you never found economics boring. But was it the politics that you found interesting? Or the economics? Or are the two the same things?

Jean Pisani-Ferry: I never actually contemplated being a politician, really. I thought I would be more useful by being an economist, contributing in my own way while being conscious of the political dimension of everything I was discussing—but approaching it with an empirical basis, with a theoretical basis, not as a matter for just opinions, or views that are determined by your political interests.

Janet Bush: Yes. You do need facts.

Jean Pisani-Ferry: Yes. Yes. I remember—I won’t tell you the name, but a dinner with a group of economists and a very, very senior French politician. We were asking him questions. And to each question his answer was, you know, this group is there, that group is there, and I’m here. And after some time, first time, second time, we sort of started being angry.

Because we believe in facts as economists. We don’t believe only in positioning. We thought, at some point you have to get things straight in terms of saying what are the facts and why you believe this is the right policy or this is the right response. It was not that easy, that interaction. And that tells you something about the way economists see things.

And I think many, many people see economists as too political. Some, the politicians, see the economists as not political enough. Perhaps I’m comfortable with this state of being in between.

Janet Bush: I think we have to talk about real life, the facts and what’s going on, because we are in a turbulent period. In a recent paper with Olivier Blanchard, you say that the war in Ukraine is a first-order economic shock. And you outline three macroeconomic challenges.

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First, how best to deter Russia while limiting the negative impact on the European economies. Second, how to deal with real cuts in income. And third, how best to deal with inflation. These are three big things. And you note that these objectives are in conflict with each other, and that public policy needs to find a way to do that. So, my question is: how can you balance those three imperatives?

Jean Pisani-Ferry: Well, the first thing perhaps is to recognize that there is a tension because people usually focus on one particular aspect. So you have those who worry about inflation, those who worry about purchasing power, and those who worry about the impact of whatever you do on the Russian export revenue and its war capacity. But all three are important.

All three have significant consequences. You would wish to find a way to balance all three. And there is actually a way out of this tension, which we allude to in the paper.

But then we wrote another piece in French where we go one step further, saying that it’s essentially dual pricing. Basically, you would say each and every household has the right to purchase a certain quantity of energy for the house. For heating, for electricity, you know, what is the bulk of your energy consumption.

Car fuel, that’s very different because it depends enormously on the way of life. Some people spend enormously, some people much less, or zero because they basically take the metro. But there’s the house that’s the core for everyone.

What you can do is to say, “OK, why not say that each household—depending, obviously, on the composition, the size of the household—has a right to buy a certain quantity of energy at an administered price?” And then the rest should be bought at market price.

First, it will be equitable because the higher your income, the more you consume, the larger your flat, so it would be in proportion. It would be much larger support for low-income people or working-class people.

Second, it would, at the margin, keep the market price where it is. So basically people will be facing the signal of the market price.

And third, and this is more subtle, when you talk to statisticians and you ask them, “What can you take into account in the consumer price index?” they tell you, “If it’s a general rebate on the price of energy, whatever the form, we take it into account. It’s our duty to take it into account.” But if it’s a transfer to certain categories of households, depending on the income of the household, it’s a transfer. It’s a means-tested transfer.

If a transfer, it’s not part of the pricing. But if a general system, it’s part of the pricing. So basically that would be giving people a voucher. The voucher gives you a right to purchase energy at a certain price. Having purchased from your energy supplier, you can pay with the voucher.

And if you consume more, you would pay at the market price. If you consume less, you would get a refund. So basically, each household would be facing the incentive. So we think that is a way out of this conundrum.

Janet Bush: Do you think that it’s an idea that will gain any traction with politicians in Europe?

Jean Pisani-Ferry: I don’t know. We’re back to the first question, economists and politicians. But I think it’s our duty to draw the attention of politicians on this particular set of incentives. And I would say also, the more you let inflation increase, the more painful it will be to reduce inflation down the road. We know by experience, the politicians may have forgotten, but to reduce inflation you have to go through a painful episode of a low-pressure economy—to put it this way, higher unemployment.

Janet Bush: Yes. Of course. And it is a shocking thing for all of us that we have a first-order economic shock, which is the war in Ukraine. But we've just come out of a first-order economic shock, which was the COVID pandemic. Now, as you well know, inflation was already rising because this pent-up consumption sort of exploded as people were allowed to go out again, et cetera, et cetera.

So we were already worried about inflation. And then the energy shock came. How worried are you now, with the inflation issue? We have hit a 30-year high in the UK. I don’t know what the figures are for Europe. I guess it depends on the longevity of this war, it depends on the whole Russia resolution. I don’t know. How worried are you?

Jean Pisani-Ferry: Well, it depends on something else also, which is the state of the energy market. And the more we look into it, the more we realize that the energy market is being disturbed deeply by the green transition. And it’s not going to go away, and it’s probably going to worsen. The EU has drawn the conclusion from this war that they need to accelerate the transition.

So more investment into green, less into brown. And the International Energy Agency is telling us that if you look at the distribution of global investment in energy, in the brown, in the traditional energy, we are about where we should be for a transition to net zero by 2050. But in terms of the green investment, we’re not there at all. We’re much below.

There is massive investment hesitancy. The difficulty is that because policy is not clear enough, there’s a massive problem of credibility of climate policies. And because of the technology uncertainty, companies are not investing what they would normally be investing in fossil fuels. But they’re not investing what they should be investing in green technology.

We are in a state of imbalance, and this is creating this paradoxical situation where the price of oil and the price of gas—well, let’s say the price of oil, because it’s a global price. The price of [natural] gas is more regional. But the price of oil is at the level that’s very surprising if you start from the observation that global GDP is three percentage points below the level it should have reached without COVID.

COVID has had and still has a huge impact on global GDP. In level terms, the recovery from COVID was fast, but in level terms, we’re definitely below the expected level. So how can it be that the price of oil, which is not the highest price we’ve seen—everybody forgot that in 2010, 2014, we had extremely elevated prices for oil—but here we have a combination of factors leading to this high price of oil, and the underlying situation in the energy market is a cause.

Janet Bush: Do you think that it is right to respond to the current situation by trying to accelerate investment in green? Initially, one might’ve thought that the response to the invasion of Ukraine was to pump oil, to pump gas, to find other sources, and that the climate transition would be put back. But it may well be that the climate transition accelerates, but only the sector can get that investment.

Jean Pisani-Ferry: You’re perfectly right. The European strategy—well, the British and the EU strategies are basically the same—was to have a fast transition to net zero, so minus 55 percent compared to 1990 for the EU, a bit more for the UK, I don’t have the exact number in mind.

But gas was still expected to serve as a sort of transition technology, because the carbon content of gas is much less than the carbon content of coal. So there was the idea that you could transition and then after 2030, move towards eliminating gas.

Now, what we’re seeing is that the geopolitical shock implies that you have to get rid of gas faster. So basically you want to accelerate. But in the short term, because of this confrontation with Russia, you may have to go for technologies that are more carbon intensive. You have to use, more intensively, the coal plants. So in the short term, you’re doing worse in terms of the climate performance.

But with the goal of accelerating at the two, three, five years horizon, which actually means, for companies, very conflicting signals. We’re telling them, “Invest.” “Build the terminals for regasification so that we can import energy.”

But at the same time, we’re telling them that we’re going to get rid of gas much faster than before. This is also part of this instability we’re seeing. And this also contributes to fueling uncertainty and inflation.

Janet Bush: Jean, how do you see all of this playing out—the response to Russia, the cost of living, the inflation issue? Obviously in the short term there’s lots of turbulence. But do you see the parameters of a response that will help us to contain all this and respond in the right way beginning to emerge?

Jean Pisani-Ferry: There is a debate going on between people who think that the war will be won or lost on the ground—in the military confrontation—and people who think that the economic dimension, the sanctions, have a role and have potentially a strong role.

I’m much closer to the second view, because I consider first that there’s a moral imperative for those of us who are not participating in the fighting.

I don’t think we should be. But second, because the EU, the UK, the West made a choice on the 24th of February, which is to use all the power they have with the control of the infrastructure of globalization, to put enormous economic pressure on Russia.

That’s a confrontation we should be winning. It will be a disaster if the conclusion of this war were to be that we can inflict a 10, 20 percent drop in income to our adversary, but we cannot afford to suffer a drop by 1 or 2 percent of our own income. And that’s a bit what we see. We’re seeing a very strange debate. I wouldn’t minimize what this rise in energy prices implies for people in our countries. But I wouldn’t minimize, either, what the situation implies for those who are much closer to the front line.

Poland, the Baltic countries, they’re ready to suffer significant hardship for themselves as a consequence of their commitment to supporting Ukraine. By welcoming refugees, but also by cutting ties with the Russian energy system. It’s really something we should be much more conscious of.

Janet Bush: You made a very pertinent point, which is that the suffering in other parts of Europe is going to be very high—is already very, very high. And yet there seems to be only an appetite for modest impact to livelihoods in some of the Western European economies. Rubles appear to be being used to pay for Russian gas. Is there a compromising in the response of Western Europe because of that discomfort?

Jean Pisani-Ferry: What was done initially was very effective. That was to use the fact that Russia had accumulated foreign exchange reserves in the central banks of the G-7 countries, essentially, and in Switzerland, as a way to immediately respond.

And that was completely unexpected on the side of Russia. The shock effect was absolutely major. The disorganization of the Russian financial system was major. This was a sort of demonstration of resolve that was very effective and very supportive for the Ukrainians because it meant to them, “We’re not alone. And even though people in Western Europe and the US are not participating in the fighting, they’re not letting us down.”

I think that was essential. But that was a sort of stock effect, with the reserves. The reserves are stock. But there is also a flow dimension. And the flow dimension is how much income is derived from exporting gas and oil to the rest of the world. Now, if we distinguish between oil and gas, oil is a global commodity. Russia represents about 12, 13 percent of global supply. So it’s enormous.

And you don’t want this chunk to be withdrawn from the market, because it would send prices to the sky. And it could actually benefit Russia, if it succeeds in exporting some, deriving very high income from it.

What you want to do is to minimize the income for Russia. And I think the combination of sanctions, the threat of future sanctions, all that, was effective in this regard. So Russian oil is sold with the 35 percent discount at present on the global market.

On gas, it’s different, because gas is a bilateral relationship between Russia and Western Europe. And here you have a monopoly producer, Gazprom, and you have different buyers.

And so the question is: what can this monopoly producer do? How can it exploit its monopoly position? Being known that this is a strength in the short run, but at this two, three years horizon, this is a weakness because at the two, three years horizon, or even shorter, there’s a much higher capacity for Western Europe to diversify its sources of supply than there is a possibility for Russia to diversify its markets.

We’re in a very strange game, with two sides playing. And again, that’s a question of not going to the extreme, not getting rid of Russian gas immediately, but what we’re advocating, Olivier Blanchard and I, in the paper we published, is a tariff. Because a tariff, that’s a way to signal that there is something called Russian gas and that you don’t want to continue depending on Russian gas. So you can put a tariff at a certain level now. And then you can increase the tariff over time.

Janet Bush: I think in my lifetime, I have never known such a concatenation of worrying events. We were worried about climate change. We had the pandemic. We’ve now got war in Europe. We have other geopolitical strategic issues no doubt on the horizon. In that circumstance, how can we globally cooperate to nurture the global public goods, like climate, like food, like health? How can we do that in a fractured world?

Jean Pisani-Ferry: That’s the most difficult question, I think. Perhaps to start on an optimistic basis, because adding to the gloom would be too easy—during the Cold War, we had this high-level, high degree of confrontation, especially at the start. And then the ability to preserve peace.

And we went through, the US and the Soviet Union went through, a very difficult moment with the crisis in Cuba, with the crisis in Czechoslovakia, in Poland. And they were always able to keep the confrontation at a managed scale, at a scale that it could be managed, which indicates that you can have this combination of confrontation and, in a way, cooperation.

Now, I completely agree with you that the characteristic of the world we’re in is that we have interdependence at a level, to a degree, that we’ve never, never experienced. Climate—it is extreme because wherever you are, the consequences of your emissions are exactly the same globally.

It’s extremely difficult to address. It’s a collective action problem of absolutely unprecedented magnitude. Also because there are all possible incentives to cheat, to free ride, to pretend. And we’re seeing that. So we have that. And we have a fragmented world. We have a world that’s increasingly fragmented, with different preferences, with different views of what the priorities are.

It’s true that it’s not a bipolar world anymore. It’s a multipolar world. Really, the question is: what sort of system should we be having to respond to this type of situation? And in my view, there’s three levels.

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There is one level, which is the level of those global public goods that you mentioned, so climate, biodiversity, health, you named them. There’s an imperative to cooperate. We know all the difficulties, the equity dimension is daunting, but there’s an imperative to cooperate.

Then you have the rules of the road for international trade, international finance, et cetera. And here we have to scale down with respect to the ambition that was, let’s say, 20 or 30 years ago, when there was a view that the world could converge on a level of ambition for those rules that essentially meant everybody would converge on the same system. We have to accept that it’s not the case. Perhaps eventually it will happen. But it’s not going to be the case for the next 10, or 20, or 30 years. The rules of the road have to be simple enough for everybody to find interest in abiding by those rules without considering that on issues like competition, issues like property rights, issues like labor rights, there will be a convergence.

And the third is a deep integration system, which was assumed to be, eventually, the system in which everybody would participate. And we have to accept that not everybody will participate in it, so it has to be viable geometry. There needs to be conditions for participating in it. It’s what specialists call behind-the-border integration.

In some respects, we see things also moving in this field. For example, on taxation, on taxing multinational corporations. The draft agreement—it’s still a draft at the OECD, after the move by the Biden administration—is a very positive development. But we have to accept that it’s not going to necessarily be universal.

Janet Bush: There’s just one other question I want to ask, which seems off beam given the huge issues that we’re discussing. But MGI has just put out a report about Europe’s standing on technology and warning that even with these very, very large issues, it’s something that needs to be addressed.

We looked at ten transversal technologies that spread across sectors. And Europe is leading or just about matching on two of them. And the argument is that unless this is addressed—and the EU and others are doing a lot to address it—then there is a competitiveness concern, and a growth concern down the road. Is that something that you believe is true and is an issue, and an urgent issue, for Europe to look at?

Jean Pisani-Ferry: It’s been an urgent issue for a while. Things are being done, in terms of the capital markets, in terms of innovation policies, in terms of competition, because Europe is a place that values competition perhaps much more than the US currently does.

But the observation is that it’s not enough. We’re seeing limited results. The reason why we’re seeing limited results has in part to do with something we can’t really do much about, which is the fragmentation of the European market.

We don’t have a unified market for services. And we won’t have a unified market for services, because it has to do with taxation. It has to do with consumer protection. It has to do with various dimensions in which we haven’t reached the level of unification that is the level of a single state.

But we all know that Israel is a very, very innovative small country. Basically it doesn’t benefit from a single market but benefits from the very strong connection between the tech sector, universities, and, in this case, the military and that they have been extremely successful in developing innovation.

There is no reason why Europe couldn’t do better. What makes me relatively optimistic is that we’re seeing more and more happening. But at the same time, obviously the scale of the issue is growing because the whole of the economy is getting digital. And, therefore, what looked initially like a sort of sectoral disadvantage is becoming a global disadvantage.

Janet Bush: Well, on a very final note, we’ve covered a lot of ground. And thank you so much. Just leave us with one thought: what is your one piece of advice for listeners to this podcast?

Jean Pisani-Ferry: There’s a sentence I love, which is what Pope John Paul II told the Poles: “Don’t be afraid.”

Janet Bush: I love that.

Jean Pisani-Ferry: “Don’t be afraid,” meaning, you know—or “Yes, we can,” if you prefer. But that’s basically the same. Don’t assume that things are impossible.

Janet Bush: On that happy note, thank you very much.

Jean Pisani-Ferry: Thank you.

The opinions expressed by podcast guests are their own and do not reflect the views or opinions of the McKinsey Global Institute. References to specific products, services, or organizations do not constitute any endorsement or recommendation by MGI.

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