Even before yesterday's election win of the Greek left, when it became obvious that the incumbent prime minister Antonis Samaras (Nea Dimokratia) would not be reelected, the consequences of a government led by Alexis Tsipras (Syriza) were speculated in politics and the media. The predictions swung from sinking to salvation. Both of them share the expectation of a change in the financial and economical course that currently forces Greece and its southern European neighbours to make savings, a policy which is also known under the term of austerity. The Scottish economist Prof Dr Mark Blyth recently wrote a controversial book on austerity politics which he considers as a failure. We asked him our questions.
"Debt may be 'Schuld' in German, but it's 'belief' in Italian and 'faith' in English"
Interview with Mark Blyth on the historical origins and current politics of austerity
Schon vor dem Wahlsieg der griechischen Linken Ende Januar 2015, als sich abzeichnete, dass der bisherige Ministerpräsident Antonis Samaras (Nea Demokratia) nicht wiedergewählt wird, wurde in Politik und Medien über die Folgen einer Regierung unter Alexis Tsipras (Syriza) spekuliert. Die Vorhersagen reichten von Untergangsszenarien bis zu Erlösungshoffnungen. Gemeinsam haben sie die Erwartung einer Abkehr vom bisherigen finanz- und wirtschaftpolitischen Kurs, der Griechenland und seine südeuropäischen Nachbarn vor allem zum Sparen zwingt und der unter dem Begriff Austerität bekannt ist. Der schottische Wirtschaftswissenschaftler Prof. Dr. Mark Blyth der Brown University in Provodence (Rhode Island, USA) hat unlängst ein kontroverses Buch über Austeritätspolitik verfasst, die er als gescheitert betrachtet. Wir haben ihm dazu unsere Fragen gestellt.
"If we all save and don't spend, all at the same time, our economy shrinks"
L.I.S.A.: Professor Blyth, you wrote a book about austerity and its history. The title of the German version is: “Wie Europa sich kaputtspart” which basically means: How Europe destroys itself by its saving policy. What is wrong with the politics of saving money?
Prof. Blyth: It's not the politics. It's the practice. When any one person, or firm, or state saves, that's individually rational. But if we all do it at once, that's collectively suicidal. Someone has to spend for there to be an income generated from which someone else can save. If we all save at once, especially in an environment of indebtedness, the our collective balance sheet of spending and saving (our economy) moves to a position where everyone is trying to run a surplus. That's mathematically impossible. For a surplus to exist somewhere there has to be a deficit somewhere else such that it all sums to zero. Moreover, if we all save and don't spend, all at the same time, our economy shrinks and the same amount of debt (the numerator) gets bigger as the denominator (the economy) shrinks.
Now scale this up to a set of countries that are all each other's trading partners and all share a common currency and the result is a disaster and a collapse in growth. Germany got away with it for a few years because of Chinese demand (which is living off someone else's spending) but now China is slowing down and the Ukraine mess continues, the policy of 'erst sparen, dann kaufen' now proves itself individually rational and collectively disastrous.
"Begin to imagine a 10-15 year long recession"
L.I.S.A.: How old is the history of austerity? Where are the historical roots of austerity thinking? Who are the ideological fathers?
Prof. Blyth: It's as old as liberalism itself. It runs from Smith's and Hume's worries about public debt, to Ricardo a century later, to the Austrians of the 1930s and their neoclassical contemporaries today. The short version is this. For a government to sell a bond it has to offer a rate of interest sufficient to induce investment. That has to be the same as the real rate of return in the real economy. But given that Bonds are much safer, real investment falls and government securities 'crowd out the market,' thus lowering growth and making it harder to pay back the debt until the entire Ponzy scheme collapses. Nice idea, but there is very little evidence that it ever happens.
Demand for government bonds goes up in economic booms, as for example, banks look for safe assets to fund themselves and anchor their balance sheets to lend more, as well as in slumps when private investment sits on the sidelines, since its irrational to invest in a recession (which bring about the recession - again - individually rational and collectively disastrous). The alternative is that we 'let the markets take their course' and let things fall apart on the grounds that they will soon be put back together again. As parts of Europe begin to imagine a 10-15 year long recession it's worth reflecting on the weakness in that 'creative destruction' notion, too.
"Germany runs an export surplus against the rest of the Euro Zone"
L.I.S.A.: A German proverb says: “Save money in good times for bad times”. Today Germany is well known as role model in austerity measures. Does the German economic success not clearly prove that saving is the recipe for the growth and reduction of debts?
Prof. Blyth: We have been worrying about debt since its invention. As of yet, no one has died of it. The German experience in the 1920s, as I wrote about in my book, was precisely about getting out of debt by defaulting on the French in 1923-4. And it worked. Germany paid back a fraction of what it owed via a deliberate default engineered by a short lived hyperinflation that was over by mid 1924. When Germany had to pay it back again by becoming austere under Brüning, that was when the politics of debt got nasty. Not before. In the contemporary moment Germany is a role model because it runs an export surplus against the rest of the Euro Zone (which is exactly the sum of the rest of the Euro Zones's deficits - odd that) and the rest of the world. But we can't all run a surplus just as we all can't save at once. To say we can all be more competitive is a silly notion since it's a relative term.
L.I.S.A.: On the subject of debts: From an economic and as well from a moral point of view – are debts in general wrong respectively bad?
Prof. Blyth: Simple. When the welfare losses from continued repayment are greater than those that would be borne by the creditors, and that becomes a permanent condition such that the repayments can never reduce the principle, then default is warranted. And it's exactly what Germany did in 1923. Debt may be 'schuld' in German, but its 'belief' (credere) in Italian and 'faith' (credit) in English. There is nothing wrong with debt. Only in associating a false morality with it.
"It was the banks, it remains the banks"
L.I.S.A.: How do you answer the question, why just the Anglo-Saxon countries, especially the United Kingdom and the United States, follow and back a rather expansive fiscal policy, although they are known as bastions of a neoliberal economic policy, whereas the continental Europeans do not consider the state as a catalyst for the business cycle and take him out of the game by measures of debt limits and austerity?
Prof. Blyth: The question is false. European states are larger than anglo-saxon states and yet they refuse to use their fiscal tools. It's a choice. As for fiscal policy being expensive, look at the US today. It didn't cut (the sequester was a $150 billion side show on a $15 trillion economy) and it grew such that its deficit is the smallest since 2007 and its debt is stable. Portugal has cut as ordered and it would have to run and export surplus per capita the same as China for over a dozen years to reduce its debts to the level of the US - and that will never happen. That question is ideological. The UK and the US stopped a stupid policy despite their economic philosophies. The Euro Zone stuck to theirs' despite the evidence and is now in a terrible mess because of it.
L.I.S.A.: In the media and the general use of language in Europe the term debt crisis respectively national debt crisis is predominant. In your book you argue that the current crisis is originally a bank crisis respectively a crisis of private and not of governmental players. How do you come to this conclusion? And how did it come to this reversal in meaning?
Prof. Blyth: Europe tightened too early. It also began to tighten (late 2010) just as the scale of the problems in its banking system was becoming apparent. European bank assets in 2011 were around 45 trillion Euros. The underlying economies were around 15 trillion Euros. The single biggest economy was Germany at around 3.5 trillion Euros. As I put it in Der Spiegel in October 2013 - Deutschland schafft das nicht! European banks used Euro sovereign debt to fund themselves, so they were funding leverage structures bigger than those in the US with impaired assets, just as their underlying economies began to contract. The markets began to price this in, beginning in 2010. Policymakers called it a spending problem. It was a liquidity and lending problem. The proof. Almost all Euro Zone countries debts have gone up since 2011 when Drahgi did the LTRO programs (longer-term refinancing operations) and yet everyone's yields (even Italy which hasn't cut a thing) went down. Debt up - yields down. The opposite of the austerity case. It was the banks. It remains the banks. Cutting public spending is a sideshow that simply aggravates the underlying problem.
"The last bastions of orthodoxy lie in Europe, not in Washington DC"
L.I.S.A.: You suggest that the International Monetary Fund (IMF) has changed its mind. But exactly the IMF (‘Washington Consensus’) is well known as one of the main proponents of the politics of austerity. Where do you see a change of mind respectively a reconsideration?
Prof. Blyth: See the recent paper by a scholar called Cornel Ban in the journal Governance on the change in the IMF's ideas for details. But simply put, their numbers didn't lie. A one Euro contraction in spending in the South was causing a 1.4-1.7 Euro reduction in final growth. It was not the 'expansionary contraction' the European Central Bank (ECB) et al. hoped for and the IMF called them out on it. Since then the IMF has changed its tune on inequality as well as austerity. The last bastions of orthodoxy lie in Europe, not in Washington DC.
L.I.S.A.: What must happen to get especially the southern European economies back on track?
Prof. Blyth: Stop cutting. As I said above, stop cutting budgets since the yield spike if deficits rise is offset by the ECB's current liquidity programs. Quantitative easing (QE), if it happens, would make that foundation even more secure. What matters is liquidity, not austerity, so stop cutting. That way the economies can begin to grow and deficits can fall. Want evidence, look at the US today. It didn't cut (the sequester was a $150 billion side show on a $15 trillion economy) and it grew and now its deficit is the smallest since 2007.
Prof. Dr. Mark Blyth answered the questions in written form.