Europe is Another Japan

15. 3. 2017

An interview with Martin Wolf by Maciej Nowicki

The austerity policy, instead of limiting the crisis, only exacerbated it—says Martin Wolf in conversation with Maciej Nowicki

You wrote recently that austerity policy in the European Union had turned the “beginnings of an economic rebound into stagnation.”What are the proofs for that?

In 2009, the economy in the eurozone grew by 2 %. The specter of a “great recession” has receded for a while. And then everything came to a standstill: in 2010–2013 the European economy will have grown by just 0.4 %, although in 2010 the prognoses were much better, it is enough to look into the newspapers.

What has happened? The answer is simple: the austerity policy, instead of limiting the crisis, only exacerbated it.

For me there is nothing surprising in that. Combining cuts in the (already weakened) private sector and the public one had to result in the very rapid fall of demand, complete stagnation in the eurozone and something close to stagna- was seeking the support of other drunks. Is it believable that such a structure composed of a dozen staggering drunks will be stable? It was much worse than a crime, it was a mistake. Of course the austerity policy was not the only reason of Europe’s economic weakness. But it was this policy which made the fight against the recession all but impossible.

So why did everybody think that it would tion in Great Britain. It is as if a staggering drunk work?

First, the countries, which had experienced the most severe crisis, that is Greece, Portugal and Ireland, simply had no choice. If they wanted help—and they desperately needed it—they had to tighten their belts. Otherwise, no one would lend them money. Second, the Germans were intransigent in that matter and they are the main payer in the EU.

It was decided that without the cuts everybody could follow in the footsteps of Greece?

Yes, Greece was regarded as a warning to all. This story is incredibly sad, for this whole masochism, which ended in an economic standstill, was simply unnecessary. It is true that it initially seemed that it was to some extent sensible, you were entitled to assume that the Greek crisis was the first sign of a European fiscal pandemics. But it soon turned out that even the countries with all-time low interest rates stopped reaching for new loans. Those who had to tightened the belts but also those who had no reason to do it went the same way. Entire Europe was dominated by a certain ideology: everything which smacked of Keynesianism was denounced as evil and accursed. The result was that economic growth in Europe came to a halt for three years. It will definitely leave a permanent mark. Let us assume that in near future the Spanish and Italian economies will develop at an annual rate of 1.5 %. This is certainly an optimistic assumption, euphemistically speaking. But even then these countries will achieve their GDP level from 2007, that is from before the crisis, as late as 2017 or 2018. In short, they will have wasted ten years.

And in which point do we find ourselves today?

There is a chance for a very, very feeble rebound in the eurozone. I do not expect the growth level in the immediate future to reflect our potential. It is true that monetary policy has been loosened, the European Central Bank is finally doing things until recently considered a complete heresy. And this is what makes growth possible at all. But on the other hand France and Spain continue the policy of budget cuts and they will probably not abandon it in the next few years. This is important, for we are talking about very large economies. Their weakness is spreading on the rest of Europe. This is why in countries under pressure, that is Spain, Portugal, Italy, Greece or Ireland, the situation on the labor market will continue to be dramatic and people will have to emigrate. We do not have much room for maneuver. The only way to increase competitiveness is a rapid growth of productivity but an increase of productivity results in bigger unemployment, and certainly nobody wants that. To sum up, I think that the EU has reached the bottom. Things will not get any worse. But those who believe in a quick rebound can only count on a miracle. Or that all countries will show an incredible determination in fighting the crisis. I believe in neither.

What is more, you claim that we are witnessing an economic war between particular countries of Europe.

I have always stressed that a vision of Europe as one big Germany will not produce anything good. And this is becoming more and more apparent. The Germans believe that they owe their success to the reforms undertaken by Schröder’s government and encourage everyone to follow their example. But this is nonsense. First, Germany has always been an economy founded on strong exports; as early as the 19th century it had a wonderful industrial base. Nobody can create such a base overnight. Second, what kind of exports are we talking about? Today in almost all EU countries domestic demand is feeble, you have to recover your losses somewhere, you have to make money, which you cannot find at home. As a result everybody is trying to wrestle the shallow markets from each other, which in practice means a beggar-your-neighbor policy. Will Germany suddenly start to buy things in other European countries, because these countries have been buying from Germany? I would not count on that. The economic policy pursued in the eurozone is leading to another global crisis.

You have written that we are faced with an era of “global japan.” What leads you to such a conclusion?

The situation in the EU is almost the same as in Japan (except for the deflation). The similarities are really striking. We have very low interest rates, very unconventional monetary policy and a permanent budget deficit. We want to bring it down but because the economy is weak, we decrease it at a lower rate than we would have wished. In Japan, it was the same: very low interest rates, unconventional monetary policy and a permanent budget deficit. And, just as in today’s Europe, very low growth, almost stagnation. In the last twenty years, the Japanese economy has been growing by 1 % a year. This is a very low level if we compare it to historical standards.

In the EU it will also last for twenty years, as in japan?

I am not saying that. But we are certainly faced with a quite long period; I would bet on ten years of weak growth, with all the political and economic side-effects. For some time we will be experiencing what my friend Mohamed El-Erian calls “new normality.”

Are you sure it will last no more than ten years?

No. When you say that the epoch of rapid growth is perhaps coming to an end, you are treated as a madman. But how do we know that growth has to go on indefinitely? For the last two centuries today’s developed countries have been taking advantage of a wave of innovations, which brought them previously unknown wealth and great power. Today we do not have so many innovations and those which do come up, concern a relatively narrow sphere of technology, connected with communications and entertainment. This has nothing to do with the “second technological revolution,” which brought a huge increase of productivity from late 19th century until mid-20th century. Later things were progressing at a slower rate. The last spectacular productivity leap in the developed countries took place in the 1990s. But its effects have already evaporated.

And what about the agreement which is now negotiated, intended at creating a huge free trade zone composed of the US and the EU— is it going to change anything?

I am doubly skeptical here. First, I have enormous doubts if it will really be signed at all. We have already dealt with easy issues but when it comes to the contentious ones, hassles will start. Second, even if there is a successful conclusion, I do not believe that the agreement will produce any fundamental changes. In the last several dozen years we have managed to liberate huge areas of our economies. The US has access to the majority of EU markets and vice versa. There are, of course, trade barriers in agriculture but from the economic point of view, they are not very important. And this is the vital thing: the partnership will boost the GDP by some 1 %. In other words, the stakes are much lower than the enthusiasts claim. It will not be a watershed in any sense.

And what do you think about the eurozone? You have never been its admirer…

It is true. It has been twenty years since I wrote that an attempt to tie European countries with a monetary union would only increase the tensions. And the crisis has clearly shown that. The euro split the European nations apart rather than brought them together. Those who finance the EU started to despise the nations which are up to their necks in debt because of their own irresponsibility. And those who are in debt despise the net payers because of their ruthlessness. The euro was a terribly risky idea, it established a union of countries which had completely different economic potentials and sources of competitiveness. Happy marriages are those which the spouses would enter once again if they could start from scratch. And only masochists would join the eurozone this time round.

So you would like to see its end?

No, for its break-up would be even worse. The costs of such an operation are beyond imagination. I will express it with the following metaphor: creating the eurozone, they made a financial and monetary omelette. And it is rather difficult to “turn back” an omelette to its previous state.

But something has to change—or rather a lot has to change. Everybody sees that the existing structures are unstable. In 2020, we will have either a completely different eurozone than today or it will not exist at all. I estimate the chances at fifty-fifty. The countries of the Euroland are in a recession, so the euro is becoming a hated symbol of impoverishment. The United States could perhaps cope with such a political risk, for they constitute a much stronger union. The eurozone may not be able to cope, for it is too fragile.

Many economists argue that when the eurozone breaks up, the member countries will gain a greater room for maneuver, they will be able to devalue their currencies and hence improve their competitiveness.

Let us stop kidding ourselves. In the last decade, labor costs in Greece grew by 80 % compared to Germany. No devaluation will make up for that. In the case of Spain and Italy this figure is between 30 % and 40 %. It is similar with Portugal. Frankly speaking, Greece has to rebuild its entire economy, Portugal has to rebuild almost entire economy and Spain and Italy have to rebuild large areas of their economies.

You mentioned the political risk connected with the continuation of the crisis. How big is this risk? Everywhere we see a growing support for radical parties.

I am a moderate optimist here. Unemployment among young people is terrifying but statistically in Europe there are not so many young people. Countries are old, the average age is very high. It is true that parents are worrying about the future of their children but sixty-year-olds rarely start a revolution. This is not the Springtime of the Nations. Europe is dominated by conservative forces. Of course, extreme parties in many countries gain more and more votes but never enough to assume power. And in Germany, which is, after all, the most important country in Europe, they do not play any role. In short, the risk connected with the extremists is exaggerated. On the other hand, the role of political will is underestimated. Politicians often behave as if nothing depended on them and nothing could be changed. The EU countries are threatened with an implosion, not a revolt. As a result, the young and the most talented will have to emigrate.

The crisis has changed the global economic balance of power. Developed countries have lost, developing countries have gained. It has become very fashionable to bet on their victory. Even the majority of Americans think that China already is the largest economy in the world.

In the emerging economies, there is a view that they can no longer count on the economies of the developed countries. And this is one of the most important changes brought about by the crisis. In 2000 the contribution of developed countries in global GDP was 63 %. This year, as the IMF predicts, it will be about 50 %. If we take the 2005 GDP level as 100, in 2010 the GDP in the US was 105, in the eurozone 104, in Japan and Great Britain 102, while in Brazil it was 125, in India 147, in China 169… The Chinese must have been asking themselves the question what crisis we have been talking about.

What conclusions should be drawn from that? As I have already said, we do not have too many innovations and this is why the development rate of the leading economy of the world, that is the US, has fallen. But catching up has become easier—thanks to globalization. Catching up may serve as the engine of global growth in the immediate future. After all, the average GDP per capita in the developing countries is just one seventh of the American level (if we account for the purchasing power parity). There is a lot of distance to cover.

And one more thing. The crisis produced certain corrections in what people think but the most important problem has not been understood. Developed countries must become exporters of capital. Otherwise we cannot count on stability in the global economy. The truth is that we do not have an efficient way of utilizing resources in our private sector. There is simply nothing sensible to do with the money. We have been able to use this money only in a destructive way, as shown by the subprime bubble, which had finally burst. We face a clear choice: exporting capital or wasting it. And this is what global discussion today should be about. But we do not see any discussion. And therefore, the crisis will definitely come back in a while.

In a very famous book “Breakout Nations,” concerned with emerging economies, Ruchir Scharma has particularly optimistic predictions for two countries: Turkey and Poland. I know that you are very skeptical about Turkey. But what do you think about Poland?

Poland coped very well during the crisis. Today its economy is still growing, although not as fast. Your country has certain problems, such as an aging population. And I do not think that you should rush with joining the eurozone. You are a neighbor of Germany, which makes your position easier. And you are relatively well governed. You still have a lot of catching up to do and catching up is always easier. I do not know if Poland will make up the ground to Western countries, this challenge may prove too difficult. But in the immediate future you will cope quite well, provided you will not do something very stupid.

Maciej Nowicki

Maciej Nowicki is Deputy Editor In Chief of Aspen Review.

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