Heiner Flassbeck - Against the Troika: Crisis and Austerity in the Eurozone

Paul Mason,

Author and economics editor of Channel 4 News in the UK

The OECD wont spell it out themselves, but fifty-year projections by their economists in 2014 carried a dire implication: for the developed world, the best of capitalism is over. Long-term growth rates are likely to be suppressed by low productivity, high ratios of elderly people to young workers and an overhanding debt problem that, in turn, demands greater wage austerity and inroads into the welfare state.

For the immediate future the crisis has created an oversupply of workers and capital, and an undersupply of profits, wages, inflation and growth. And this changes the macroeconomic game. National economic strategy has, for the whole neoliberal era, been premised on the assumption that the global game was winwin and the best way to play it was through collaboration.

But, in the seventh year of post-Lehman austerity, that is no longer true. Recession has turned into a long stagnation for the developed world; and with each of the BRIC countries now facing a structural crisis, it is time for policy makers to take a long stare at that fifty-year horizon and rethink.

If growth is dwindling, the imperative for any country becomes, first, to secure a fair share of it and, second, if possible more than that.

And that, effectively is what three out of four major players in the world economy have begun to do: America, through its fiscal deficit, bank bailouts and quantitative easing policy, has cornered most of the growth available to the West; and Japan and China are now locked in an undeclared currency war, each using loose monetary policy to maintain growth.

Only Europe refuses to compete. Its national elites, and the supranational elite around the EU institutions, can only repeat the broken mantras that have led the continent towards stagnation.

The European Central Bank (ECB) has consistently acted late, and conservatively, in the use of monetary policy to mitigate the stagnation crisis. Only in 2012, faced with an existential bond crisis, did it begin to use policy tools unconventionally. Even now, as this book goes to press, it is not clear whether it can bring itself to deliver full quantitative easing.

With fiscal policy, the entire continent is locked in at Germanys behest to a damaging and needless austerity: policy-created output gaps at 2 or 3 per cent of GDP even for the healthiest economies will look to our grandchildren like madness. We are facing a century of stagnation so we impose stagnation some more to meet rules designed in a previous era.

The barometer of policy dysfunction is now clear: political discontent. The party political systems in Japan, China and even for all the shouting America remain intact. But in many European countries there is now a right-wing conservative nationalist opposition with double-digit support: UKIP, the Front National, the Sweden Democrats. In Spain and Greece, almost out of nowhere, there are radical left parties with a serious chance of winning elections.

In the face of mass unemployment and now the political threat from outsider parties, the complacency of the European elite is striking. They were always the embarrassed underachievers within neoliberalism: the EU was the only free market project in the world saddled with a high-cost welfare state and an overt social contract with its workforce. They believed in neoliberalism more than they were allowed to practise it.