Markets vs States in today’s Europe: An Alpbach Keynote Debate

In October 2015, I had the opportunity to debate, in Munich, Professor Hans Werner Sinn on the European Monetary Union and, more broadly, Europe’s economy . On 30 August 2016, at the Alpbach European Forum, I debated Professor Sinn’s successor as President of IFO, Professor Clemens Fuest. [Click here, or the image above, for video of the two keynotes and the debate.] This Alpbach Keynote Debate was organised along the lines of the following proposition/question

“The market economy is the best model. It will also successfully manage the challenges faced in the future.” Would you agree with this statement?

Yanis Varoufakis:  This is an excellent question for the 1920s, and maybe for the 1980s. Today, it is a distraction. An interesting question, academically, but one that is hardly relevant in the face of our current, pressing challenges.

Back in the days when this question of the market versus the state, of spontaneous order versus collective or state agencies, was being debated by intellectuals like Oskar Lange, Friedrich von Hayek, Joseph Schumpeter, John Maynard Keynes, Michal Kalecki etc. von Hayek once commented that the problem with centrally planned socialism is that it can only be implemented by means that socialists would disapprove. The collapse of the USSR and its satellites reinforced Hayek’s dictum.

But since then, in 2008 to be precise, we had another implosion: As the deregulated financial markets were collapsing in the wake of Northern Rock, Merrill Lynch and Lehman’s, so were the neoliberal dogmas according to which financial markets, once liberated from regulation, would find their own stable self-regulating equilibrium. Instead, as governments rushed to bail out banks without nationalising them, we ended up with an absurd inverted Darwinism based on the survival of the worst failures: the more bankrupt a banker proved, the greater his capacity to appropriate parts of the surplus produced by workers and industrial capital. And so, today, in the post-2008 world, to paraphrase Hayek, free market solutions can only be implemented by means that von Hayek would disapprove.

Socialism’s failures are well understood: serious inability to bring innovations to the masses, and a tendency toward authoritarianism tinted with corruption. Free market capitalism’s inherent problem, on the other hand, is that there exist two key markets that cannot reliably work as free markets: One is the Market for Money, the other the Market for Labour.

If you have any doubt that market principles (e.g. the standard arguments about supply and demand interacting to bring about equilibrium and efficiency) are left wanting in the market for money, consider two facts shaping our contemporary reality:

  • Negative interest rates: How can the price of a ‘commodity’ (i.e. money-credit) be negative, unless of course money-credit is the kind of commodity that markets cannot deal with?
  • The ECB’s Corporate Sector Purchase Program; i.e. the fact that the central bank of the Eurozone is now forced, in its losing fight against deflation, to buy the private debt of particular corporations – i.e. to pick whose entrepreneurs’ debt to bolster and whose not to…

Neither (i) nor (ii) above is consistent with the touching neoliberal, free-market, belief that money is just like another commodity whose quantity and price are determined by supply and demand.

The second market which cannot (and should not be allowed to) operate as a free-market is the Labour Market. Just like the money ‘market’, in which currently the price (the interest rate) falls but demand for it (i.e. demand for funds to be invested) fails to be stimulated, so too in the labour market the price (i.e. wages) often falls while demand (i.e. employment) remains catatonic (and in cases, such as Greece, diminishes).

Thus, from a policy perspective, it is not a question of free markets versus collective or state agency. Today, in Europe, we have managed to combine the worst aspects of markets with the worst aspects of state (indeed, supra-state) intervention to produce an existential crisis for the EU and for our democracy. This is a 1930 moment (a short while after the financial sector collapsed, with a Great Deflation raging already, and a few years before Europe goes past the point of no return, headlong into a political and ethical abyss).

Europe is disintegrating because of a mechanism of mutual reinforcement of deflation, low investment, authoritarianism and economic-cum-political fragmentation. The roots of this disintegration are to be found in the EU’s DNA. The EU was created on the basis neither of free markets nor of socialism. It was created as a cartel of heavy and heavily oligopolistic industries, later extended to include large-scale farmers and the banks.

This cartel was nurtured lovingly, in the 1950s and 1960s, by the United States who, as the world’s largest surplus economy, provided Europe’s cartel with the currency and the centralised macroeconomic management that it needed. In short, the US was recycling its surpluses by sending a portion of them to Europe and to Japan. And it kept doing so until it lost its surplus, having slipped into a current account deficit position by the mid-1960s. Consequently, in 1971, the United States ended this global surplus recycling system through what I call EUREXIT – by jettisoning Europe from the dollar zone (i.e. from the Bretton Woods system).

From the late 1970s, through to 2008, again the US provided the global surplus recycling mechanism that rendered Europe’s cartel sustainable, only this time through decentralised financial markets and the burgeoning US current account deficit that was providing, German (plus Japanese and Chinese) factories the effective demand they craved. And how was this deficit being financed? By luring 70% of German, Japanese and Chinese profits to Wall Street to fund the US deficits. On the back of this tsunami of capital flows, financialisation grew and grew leading, inevitably, to… 2008.

Europe’s monetary union could only work before 2008 but lacked the shock absorbing capacity necessary to survive after 2008. From the outset, it reinforced current account imbalances within the Eurozone (as many of us Cassandras were predicting), flooding the deficit regions with loans which would inevitably create bubbles that would then burst ensuring that, in the absence of any mechanism of recycling the losses and the surpluses within the Eurozone (or some rational insolvency procedure), a debt-deflationary crisis was unavoidable – one that takes the form of a Great Depression in places like Greece and of negative interest rates and low, low investment in places like Austria and Germany.

Post-2008 both the United States and Europe have failed to regain their poise and to exit what Larry Summers refers to as their ‘secular stagnation’. However, Europe is faring far, far worse than the United States, and is in fact disintegrating (unlike the US which remains solid, despite the better efforts of its political class). To understand why, it helps to investigate the kinds of questions American and European decision makers asked themselves in 2008.

In Washington, the gathered luminaries asked: “What must we do to stop this crisis from consuming us?” In Brussels, they asked: “What can we do to pretend that the ‘rules’ we devised fifteen years ago, which we now know are impossible to honour, are still being upheld?” The answer to the second question, I submit to you, will only offer a solution to the crisis by a very improbable accident…

To wrap up, I recall a 1980s cartoon where two businessmen were depicted looking down from their NY skyscraper glass window, one saying to the other, “We desperately need a totalitarian government to implement liberal economic policies”. Well, now, in Europe we have a totalitarian troika, overruling Parliaments and governments, which, in the name of liberal economic policies, is causing our money markets to crush pension funds, our labour markets to generate misery, our Europe to disintegrate.

In conclusion, our choice is not between free markets and state intervention. Our choice is more interesting than that: We can band together, from across Europe, to stand up against the insidious combination of the Great Deflation, Authoritarianism and Xenophobia that is, today, going from strength to strength, spearheading Europe’s disintegration and pushing us to a new version of the 1930s. To succeed we need to borrow the best ideas of different ideological traditions as well as the best instruments markets and states can offer. Alternatively, we can waste our energies tampering at the margins of the current mix of failed policies while debating questions better suited to the 1920s.


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  • Great analysis. I had forgotten how penetrating Yanis can be in describing the problems. The solutions, however, are hard to imagine in today´s climate of class warfare in which the rich have essentially won and can therefore resist change tooth and nail. See: Hillary Clinton!