Evolve or die, they say. But what if the world is regressing?

The history of the world is marked by plenty of gloryful, but also very bloody events. Since the beginning of written history, and we are sure even before humans started to carve events in stones, humans didn’t shy away from protecting their interests through war and combat.

Luckily, humanity has since then discovered that there are more instruments one can use to reach one’s goal, from diplomacy to trade, cooperation, public relations and affairs, or by just exchanging bottles of whiskey every now and then, to only name a few.

But oh boy did we forget that history always repeats itself. Starting with the fall of the Soviet Union and the end of ideologies, in which regard Francis Fukuyama coined the expression “the end of history”, this quarter of a century out of the norm for Western democracies abruptly ended with the annexation of Crimea — and eventually the invasion of Ukraine. In the blink of an eye, aggression, war and geopolitical tensions were again on the table.

It was in light of these developments that the 16th Journée de l’Economie took place on 17 April 2023 at the Luxembourg Chamber of Commerce. Inspired by the keynote speeches and panel discussions, this blog aims to answer the question, “what needs to be done to keep Luxembourg’s and Europe’s economies stable and secure in this geopolitical tsunami?”.

Values have a price

Let’s surf a bit on the nautical metaphor wave for a second. During his ten-year-long trip from Troy to Ithaca, Odysseus certainly must have felt pretty overwhelmed and hopeless from time to time. And while one cannot admit it was the most direct and effective way back home, he probably wouldn’t have made it at all would it not have been for his wit, unbreakable spirit and irrevocable values.

For sure, letting values take over in times of uncertainty is never a bad idea. And many economic actors, with European Union (EU) policy-makers at the forefront, seem to be in favour of promoting values-driven economy and trade policies. In fact, even Director General of the Chambre de Commerce Carlo Thelen stated that it’s the Chamber’s official position that commercial trade has to be open and fair and should only be promoted when supporting sustainable and responsible values. So far, so good.

However, the concept of values is still very much detached from economics: those who defend ecology, diversity, human rights, equality, stability or security do so in the name of their moral understanding of what’s good, but they don’t link how these values influence the economy — and how economic power is a tool to promote and consolidate these values.

In his book “Le prix de nos valeurs” (engl. The price of our values), Augustin Landier, economist and professor at HEC, discusses an interesting phenomenon: our societal discourse on values ​​rarely includes discussions on the price we need to pay to defend them. And when speaking of price it’s meant quite literally: consumers need to pay more for a sustainable product, companies need to spend money to align their sustainability commitments with their rentability without compromising their (global) competitiveness, and the EU and Member States need to pay for their green and technological transformation. Everyone wants values, but no one dares to speak about the price tag.

It seems, the public and private sectors secretly hoped (and still do) for a correlation between what is good and what is profitable. If it’s profitable, like cheap gas from Russia, it means it has to be good.

There is even a slogan to back that up: “Wandel durch Handel” (engl. change through trade), which justifies abandoning political interference as long as stability and a minimum rule of law are guaranteed for investors and economic actors. In his opening speech at the Journée de l’Economie, Minister of the Economy Franz Fayot condemned the doctrine, which was at the heart of Europe foreign economic policy for decades, as “naive at best, and cynical at worst”.

To complicate things even more, there are also some undeniable profits linked to “Wandel durch Handel”, especially from a socio-economic perspective.

Let’s take the gas example mentioned above: since losing the price stability that came with “Wandel durch Handel”, the energy prices in Europe exploded, resulting in a high inflation and the loss of purchasing power for Europe’s population. And as we know, the cost of inflation is much more burdening for low-income households.

But efficiency and maximising it, one of the core principles of our economic systems and a driver for growth, simply can’t consider values enough. We need to actively advocate for them. And businesses really have a role to play here (go watch our CEO John Parkhouse speaking about the role of businesses in times of crisis).

To bring more light on how to overcome this dilemma, Augustin Landier conducted a survey with 6,000 people from France, Germany and the United States. The results show that people are generally willing to pay to defend or uphold their values, but they aren’t insensitive to the price.

Adopting a values-driven economy goes beyond utilitarianism, consequentialism and deontology, to name a few economic theories and philosophies that explain human behaviour. Balancing worth against the price of a value is the ultimate dilemma for economists, policy-makers, companies and consumers.

As always, there’s no definite good or bad, no black and white. The solution is to find the right balance between the price and the worth of a value (and let’s not forget that not every value is equally shared around the globe).

Numbers don’t lie, right?

Now, how do you find a balance in a game where there can only be one winner and one loser? That’s precisely the question asked by Andre Sapir, economist and professor at the Solvay Brussels School of Economics & Management and Senior Fellow at Bruegel.

The goal of trade and economy is to reach a positive sum game. The outcomes of geopolitics on the other hand, are—at best a zero and at worst a negative—sum game. And while it’s obviously impossible to predict the future, macro and microeconomic numbers do help to give an outlook of what could happen and why economic and geopolitical powers are so heavily linked to each other.

Let’s take the US-Japanese economic rivalry as an example, which took place during the second half of the 20th century. With a relative percentage of 6% in 1955 compared to the US GDP, Japan experienced rapid growth and reached 73% of the US GDP in 1995. With its highly sophisticated electronic products, it was even forecasted that Japan would surpass the US economy and that everything would be “Made in Japan” at some point.

Today, we know this didn’t happen: in the 1990’s, Japan’s stock market crashed and the country entered the so-called “Lost Decades”, a period of economic stagnation which became one of the longest-running economic crises in recorded history.

But what if Japan’s economy would have surpassed the US?

Actually, not much would have changed, you might think.

And what would you answer, if we told you that China has reached 71% of the US GDP in 2020?

China has, within only a few decades, risen from a country with a GDP per capita comparable to Sudan to becoming the first export market and/or the first import source for 56 trading partners, according to Sapir. Undeniably an impressive development.

However, this rise doesn’t come without any distress. Japan is a stable and fully-functional democracy, while China is an authoritarian state, with territorial ambitions in the South China Sea, which happens to be one of the biggest maritime trade corridors in the world, and the second highest military expenditure after the US.

In fact, it’s not the economic losers that will define the winning political and values of the world. To be a hegemon, a moral driving force, you need to be an economic winner as well.

Maybe that’s the reason why the Kingdom of Bhutan, which is measuring the country’s wealth and prosperity through the Gross National Happiness index, hasn’t seen many followers adopting this holistic approach that goes beyond the simple measurement of economic Key Performance Indicators (KPIs). In the end, even the best values need a strong back up.

Policy-makers and economists need to understand that any business decision that includes autocratic states is a strategic decision with very real potential political outcomes.

Do it again, Luxembourg!

How do we translate these learnings to the multipolar and polycrisis-troubled world we live in today and, more precisely, for Luxembourg?

Here’s some advice.

As stated by François Heisbourg, Senior Adviser at the International Institute for Strategic Studies and Special Advisor to the President of the Foundation for Strategic Research, Luxembourg is blessed and cursed at the same time by its small size.

Blessed, as its smallness allowed the country to reinvent and transform itself as a response to geopolitical events of past decades, such as the 1974-75 oil crisis, which led the highly industrialised country to turn away from its steel and metallurgy industry towards a services-oriented economy.

This agility enabled Luxembourg to become the country we know today, one of the richest in the world, with its financial centre and as a flagship of multilateralism and European integration. In this regard, it has to be noted that stability and security has always been a condition for the prosperity and growth of Luxembourg’s economy, recently proven by the fact that Estonia is relying on Luxembourg to store backup copies of its critical data infrastructure.

But being small also means being vulnerable and less influential, and Luxembourg’s prosperity and security is tightly linked to its most valuable partners: the EU at the forefront, but also NATO, of which it is a founding member state.

In this regard, one cannot say that Luxembourg is —albeit its size and lack of influence on the global political and military parquet— a neutral country. And since its security and stability is so highly dependent on its partners, Luxembourg needs to meet NATO’s spending goal of 2% of its GDP. It’s the very least it should do, as stated by François Heisbourg.

In his opinion, Luxembourg should adjust to the new reality —where security and stability isn’t a given anymore— and redesign its economy. As a profiteer of multilateralism, it must do so in strong accordance with the EU, protecting the EU’s single market, becoming a more independent energy consumer and bringing back critical industries, from pharma to the highly discussed semiconductors production, to name a few.

It was a consensual opinion of the event’s speakers that Luxembourg needs to advocate that the participation in these markets should be reserved for the big players, but also for small countries. Diversifying its economy has to be a priority for Luxembourg, and more incentives need to be created to encourage its local firms to commit to the country’s values as well.

This is even more true if you consider that these “strategic tsunamis”, as called by Heisbourg, have very down-to-earth consequences that include housing, purchase power, labour shortages and many more. Companies and policy-makers should think about the long-term attractivity of Luxembourg.

Road to Ithaca

Even in the eye of godly threat, torment and temptation, Odysseus kept true to himself and eventually reached the shores of his native island Ithaca. Not to spoil it for you, but his story did not end there (and it also didn’t end well), but in a way the end of Homer’s Odyssey also relates to the real world, which will always keep moving, and overcoming a crisis means the next is already waiting for you.

And as we can see in almost all western countries, threats don’t only come from the outside: the required changes and challenges in the way we consume and live, is wind in the sails of populists, “to whom we could lose our population,” as stated by Franz Fayot.

There are some values which can’t be measured, and we shouldn’t forget that neglecting and eventually losing them can happen way too easily. The moment the EU and Luxembourg betray their values, we lose our most valuable weapon.

To end this blog with the words of Francois Heisbourg, “Geopolitical upheavals are transformative events whose manifestations play out over time: there is no coming back to the status quo ante after they have unfolded”.

In a way, voluntarily or not, with the geopolitical movements of the past years, we have already moved on from past ways of doing things. By our actions, we have already manifested that we can’t accept an economy without values anymore.

Western societies and their economies won’t have the same relationship with autocratic states anymore, and we will pay attention to prioritise sustainable and responsible trade with countries and partners that share our values. In light of these statements, we at PwC Luxembourg firmly believe that “daily ripples of excellence -over time- become a tsunami of success” (Robin Sharma).

What we think
Guy Brandenbourger, Partner, Partner, Government and Public Sector Leader, Health Industries Leader, PwC Luxembourg
Guy Brandenbourger, Partner, Government and Public Sector Leader, Health Industries Leader, PwC Luxembourg

By understanding as much as we can about what’s happening at the global level, by openly discussing our views, opinions and sharing information with our political and business leaders, we can anticipate the big changes that are already happening around us. A lesson we draw from the Journée de l’Economie 2023 is the importance of friend-shoring with our political allies, whether it is for business or public players. Following this approach and staying true to our values is what we owe the next generations.

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