Is it legitimate to say that we’re out of the woods as far as the crisis in the eurozone is concerned?
Things are certainly looking better. The initial crisis is over because the risk in banking system is gone. The European Central Bank’s actions – aggressively easing monetary policy and at the same time tightening fiscal policy – finally seems to be getting traction.
The more fundamental question, however, is how do we sustain European economies in going forward? You still have Greece with over 20% adult unemployment and 40% youth unemployment. And you have other economies that have been doing very well on exports. But exports always depend on someone else’s demand. What happens if the global economy goes into recession at this period? Then the exports take a hit and those very fragile southern economies slip back into recession. So while we’ve had some good data over the past 6 months and while there also some positive political news – in a sense that the center is holding ground against the extremes of the left and right, particularly of the right – we’re not out of the woods yet.
Only recently it was reported that the attitude towards the euro and consumer sentiments among Europeans are getting better even in countries such as Greece. That means people believe their future looks brighter than it used to. Is that a sign that the economy is actually healthier, or are these emotions not grounded in economic reality?
Well, it’s certainly real. But the question is what exactly we should read into this information. In some cases we have had ten years of economic stagnation and things are finally a little bit better, which leads to an uptake in consumer sentiment. Does that mean that we’re going to have 3% growth for the next 5 years and Europe’s going to turn into an economic powerhouse? I’d like to think so, but we simply don’t have enough data to figure out exactly where all this is going.
Usually, economies run on 10 year cycles. The ECB policies have effectively suppressed the business cycle for a long time. So, if the ECB starts scaling back its program at this point, that optimism could disappear very quickly.
I really hope that things are going great. I’m not a pessimist and I do not want to people to suffer any more than they do already. But we’re celebrating over six months of data. We should be careful about that.
The economic structure of the EU and the eurozone in particular has not changed that much. Many economists, for example Joseph Stiglitz, claim that eurozone is like a half-built house and therefore is unsustainable in the long run. It needs a fundamental reform – either a real integration of these economies or dissolution. Would you agree with that?
Here’s a very simple way of thinking about the EU economies. You have one half of continent – of which Poland is also a part – which is based around Germany and its exports to the rest of the world. Around 1/3 of an export from Eastern Europe goes straight to Germany. And of that 1/3 again, 1/3 again is of a single type – vehicle body parts. As long as German industry is doing well because someone else is buying, then Eastern Europe – or more generally the supply chain nations for the German export complex – are doing great.
Europe lives under one common set of rules with one common currency. And in the simplest possible terms if someone is running as big surplus, as Germany, then someone else in the system has to be running a deficit. But at the same time, we have a set of rules that say no-one is allowed to have deficit, that deficit is verbotten. And yet we’ve being living in a kind of lie for the past few years by allowing countries to actually have deficits. What happens if you again tighten things up in the countries that can’t play export game? It seems to me to be politically untenable. An exactly a type of thing that populists would love to seize upon.
You just said you were not a pessimist…
Because it’s entirely possible that things are going in a positive direction. Ironically because of brexit. The Brits would always veto further European integration and with Britain gone the EU might have just moved to a place where this type of political consolidation became possible.
What exactly do you mean by political consolidation?
For example, a common fiscal budget, common unemployment insurance, types of mechanisms that would make euro more stable. That, however, critically hinges upon on how well Emmanuel Macron does over two next years. He’s dealing with the French public and French labour markets. But that’s exactly a scenario in which the split I’m talking about could be avoided.
Macron’s surprisingly won in French presidential and parliamentary elections and now Angela Merkel is on her way to her fourth victory in Germany. Yet Merkel has always been a very cautious politician. Do you really think that the so-called French-German engine could start running again and push the EU into the direction you suggested?
They are already doing it. The problem is that politicians need to be a little bit more honest with their voters. When the banking union was created, we also created a €50 billion pot behind it which needs to be filled by the national treasuries. We already contribute to the common project. It shouldn’t be too difficult to do this. We just need political will to do it.
How plausible is this?
Let’s start with Germany. Giving the appalling state of the German left and center-left, and their inability to act together, you know that the next coalition will not be with the SPD but probably with parties to the right of Merkel. That may bring back the whole Schwabian-housewife version of economics, which has been so destructive to the eurozone in the first place.
Now let’s turn to Macron. We should not forget that during the second round of presidential elections 12% of all ballot papers were spoiled and the turnout during the parliamentary elections was at an all time low. So we are celebrating this guy, as if he’s coming on a tidal wave of 60% Frenchmen who are thoroughly behind him, but it’s simply not true. The gloss is already coming off in terms of his popularity and he hasn’t really done much yet. Let’s wait and see how well he does, when he starts to get into the thorny issues of labour market.
Some people in Poland argue that the country should join the eurozone. Obviously with the current right-wing government there is very little chance of doing that. But do you think that this is the only way for countries like Poland to go? There’s an argument saying that after brexit the eurozone countries will produce 85% of the EU’s GDP and that the eurozone will virtually become the only true EU.
You guys have your own currency. That’s fantastic, because it means if there is ever a crisis you can devalue your currency. What’s the advantage of giving that up? You remain in basically the same club as everyone else, but you are already there. Poland will be fine. It’s not like the investments are going to stop going into countries outside the eurozone. You just have to convert it from one currency to another. It happens everyday, there are trillions of dollars traded in foreign currency markets.
Now you already have all the advantages of being part of the EU and you have the insurance policy in case something goes wrong. Why would like to cancel it?
I would say we want to replace it with a better insurance policy. Joining the eurozone makes the country safer politically, which is very important given hostile Russian actions all around the world and the political change in the US which makes the country less reliable than it used be.
That’s a good idea, but let me turn it another away. You can have the same currency as the rest of the eurozone. You know there is a wonderful line Stalin once said about the Vatican; how many divisions does the Pope have? How many divisions do the Germans have and are willing to join Poland in your defense? At the end of the day all you’ve got is a piece of paper, congratulations!
Moreover, isn’t this type of elite politics precisely what brought Hungarian politics to it’s current point? The incumbent prime minister, who has won two elections with a large popular vote, did so because he was able to point at the liberal technocrats at the central bank and elsewhere insulating their countries from politics, which actually means subverting democracy. In the end, your solution Lukasz looks exactly like the type of thing which is engendering the type of nationalists reactions we are seeing. Don’t you think that’s a problem?
So in your view if we go that way and do join the euro people will feel that they have no influence over the policy their country takes, because it’s directed from some other place. But one can imagine the EU moving forward with the integration and at the same time changing the political system to be more democratic, for example by introducing direct, popular election of the European president or giving more powers to the European Parliament. If we don’t follow the path of a closer and better integration, what’s the alternative?
Perhaps Europe’s biggest problem is that for too long it’s been a technocratic project. The thing about technocratic projects is that people don’t mind them as long as they deliver the goods, but when they began to deliver the goods very asymmetrically – the North wins and the South loses – or they don’t deliver them at all, then people quite rightly begin to ask: Why are we doing this? Why are we giving all this power to this bunch of people over whom we have no effective control? That’s a democratic tension. European integration has always been antidemocratic in it’s core. Now we are at the moment when the project reached its limits. A little bit of growth seems to have pushed back the populists, but what happens when that growth falters? We go back to where we started.
What do we do about this populist tide then? At a rally in front of the Louvre in Paris, just after he won the presidency, Emmanuel Macron said that one of his main goals is to win over people who voted for Marine Le Pen. He said that in 5 years time he wants them to have no reason to vote for populists. How do we do that?
It depends on the type of populism. People focus on the right-wing populism, but most European populists are on the left. Think of Spanish politics. Podemos may never form a government but they have a lock on 25% of the vote and thus radically changed the political system. It’s the same with the Five Star movement in Italy. It may be populist, but it’s got a fair share of the votes. European politics is already being transformed, in a way that we are not really willing to accept yet.
Macron has every ambition to tone down the tide, but first he needs to ask himself a question – why are people pissed off? They are pissed off in Europe, but not only because of European problems. They are also fed up in America. Why is this? Because one of the downside of the policies we’ve been doing for the past 30 years has been a massive skewing of the income distribution to a very small number of people. For years we’ve seen generalized economic stagnation particularly in richer western countries. People are not stupid. They see it.
I’ll give you an example from Great Britain. As you remember a few months ago there was a fire in London in Grenfell Tower in which about 80 people died. The average rent in that area of London in the private sector is 95% of the average wage! Let’s just think about that for a minute. We have effectively created an economic segregation in the heart of our capital city. The vast majority of people cannot live there. What does that say about the elites? What is that saying about the people who constantly repeat: “Hey, we have full employment, things are growing, stop complaining, populism is dead”. To a lot of people it just sounds like more of the same that they hated in the first place. So unless Macron and the politicians like this begin to realize that it is a deep-seated structural problem that requires at its base a commitment to changing the shares that are going to capital and labor to a more equitable balance, those forces for reaction on the left and on the right are going to stay there.
From your perspective the decision taken by the British citizens to leave the EU – which was motivated by migration, but also economic issues like income inequality – was a good decision?
I think it was the stupidest decision in British history. Here’s why, and that also explains why I think Poland should keep its currency. The Brits have a strange economy – it is a big economy, relative to their neighbors but 60 percent of the economy depends on those neighbors. So you need to be close, you need to be a part of market agreements.
Britain was one of the Big Three in the EU. If there was anything coming their way they really did not like, they could get an exemption, an opt-out, or they could simply veto it. So they had real executive power. They have their own currency – which is a pretty big currency for a small country in terms of depth and liquidity of its markets. They also have a giant financial market built on the back of this, which generates a lot of wealth skewed towards London. That’s basically British business model. And since you have your own currency, when there’s a financial crisis you can deal with it through a devaluation channel, which effectively means defaulting on foreigners who hold your assets rather than being forced to choose austerity.
That was the best deal ever! David Cameron set some processes in motion that forced him to negotiate a “better deal” than the best deal ever – which is impossible. Then they had a referendum and now the British government needs to negotiate an exit from the best deal ever, while pretending to everyone this is the best way to go. All this is incredibly stupid.
Brexit and the current negotiations between Britain and the EU are being used in Polish public debate as a proof that the EU can be tough on the countries which repeatedly challenge it. That is why I said before it might be wise to join the eurozone. In Western Europe there’s a lot of talk that after brexit the core of Europe should be getting closer together and I’m really afraid Poland can be left behind.
So if you say that leaving the EU was the stupidest thing to do for Britain – a country with much bigger economy and a stronger army – then for Poland it would be a disaster. That’s why I said that we should join the eurozone despite economic costs, because politically it may cost us even more if we stay out.
The question is not about leaving the EU but about giving up an important tool of macroeconomic management, your currency. Over the last decade the EU transferred to Poland 60 billion euros in structural investment. There’s no way the EU is going to walk away from this money. Yes, the current government is annoying but let’s look at equity investment from Germany going to Hungary. It has not stopped, it accelerated despite the politics. So yes, the rhetoric is getting nasty, but I prefer to follow the money. And the money tells me, there are huge investments and therefore, whether you adopt the euro or not, Poland is not going anywhere.
Let’s take your point of view – Poland should join the euro and get in as far as it can in order not to be pushed out. You can do that, but the next time there’s a bump on the road, you will have populist and nationalists come and say – “Once again there’s a recession. If we had kept our own currency and autonomy we could have devalued and thus protect our ordinary working people. Instead we have to protect this bloody currency nobody wanted in the first place”. So you play right into their hands.
You speak like there were no advantages of having a common currency.
Let me throw it back to you. Tell me, what the real advantages of having the euro are?
It lowers transactions costs.
And you really believe people lay awake at night thinking – “My goodness, I’m so glad the transaction costs are lower”? I get paid in US dollars, Donald Trump is the president and yet I know the treasure bills are going to be here in 10, 15, 20 years, as well as the US economy. I don’t know that about the euro.
But then again we come to the conclusion the euro project should not be abandoned but rather finished, which means going further with the integration and creating new institutions which would make sure the currency is more stable and the differences between the countries do not lead to yet another crash.
That’s one of the solutions but you have to get everyone on board. They have to want more Europe at a time when – particularly in the South – the call for more Europe is the best way to lose the election.
It’s a vicious cycle.
No, it’s not a vicious cycle. It’s all about careful management, a long period of growth, a lot better wages for the bottom 60 percent of people across Europe and everybody will be fine. You just need to be brave enough to tackle these big economic issues rather than skirt around the question, trying to do everything in the form of some technocratic fix, whereby the top 10 percent of the population does extremely well and everyone else is saying “What the hell has just happened”?
Where do we go from now? You say we need to rethink our economic model, reduce inequalities, transfer more money to poorer people. But how do you do that in a globalized economy? Even if Macron does his best, even if he has full support of Angela Merkel, let’s say Britain decides to become Europe’s tax heaven and this plan might go to pieces.
It’s a pretty big problem isn’t it? Once you globalize the labour markets there are going to be radically different rewards and losses. You have these countries which have improved over the last 10 years thanks to massive equity investments from Germany, brought in supply chains and rising wages. Let’s take Romania. It was in a dismal state before the crisis. I was there over the summer and it’s now a boom time economy – they’re building infrastructure, people are confident, wages are rising. That’s because elsewhere they are not. It’s pretty much a zero-sum game at the end of the day.
There’s this nice story which says we all rise, we all get wealthy and we all specialize. We don’t and this is something which brought Trump to power. If you look at the Midwest of the United States, you’ll see it’s a hollowed out, poor place. Meanwhile in the coastal cities a two-bedroom apartment costs million dollars. So there’s been this random re-assortment of assets and incomes into the hands of very few people. The rest turns around and asks: “Why are those guys keep telling me everything is fine, when clearly it’s not”?