N° 3 - Beyond the “Davos Consensus”: A New Approach to Global Risks

A new consensus has recently emerged among analysts: we label it here the “Davos consensus” since it has been reinforced by analyses and contributions presented during the 2006 annual World Economic Forum. 
Based on these views, the current benign economic environment is jeopardized by persistent geo-political risks and new global threats such as pandemics, international terrorism, and climate change.
The recipe for policy-makers would be to focus their efforts on global strategies to cope with these risks as a way to minimize the impact of potential shocks to the economy.
 
In this paper we take a different view: we argue that the most likely scenario for political risks is one where it is efficient for countries to adopt muddle-through behaviours, while hidden economic vulnerabilities are building up in many economies, carrying with them the risk of disorderly unwinding of existing financial imbalances.
As global risks are on the rise, including in areas where markets have clear failures (e.g., climate change), actions are needed. 

The main conclusion of the paper is therefore that increasing global risks call for more action on the part of economic agents, not just governments. In particular, insurance provision is key to mitigating the impact of severe risks, while underinsurance leads to suboptimal conditions for both households and enterprises.