WOLFGANG MÜNCHAU

You hear it all the time: we need to defend our liberal, multilateral economic order. If you want to get a roomful of people in places like Davos to keep nodding their heads to exhaustion, this is what you say.

I disagree vehemently with that statement. I believe that we are facing a fundamental choice between solving the problem and solving the crime — between addressing the issues or playing a blame game. The G20 Eminent Persons Group on Global Financial Governance argues that our multilateral institutions need repair. This is no doubt true but I would go further than proposed suggestions for greater efficiency and more inclusiveness.

Politicians like Donald Trump, Viktor Orban and Matteo Salvini have risen to power because of the deep malfunctioning of our systems of global capitalism. Brexit is not the result of Russian meddling or an alleged reporting bias of the BBC, but of a long series of unresolved political conflicts and the rentier business model the UK chose to pursue inside Europe’s single market. The global financial crisis and our policy responses exposed how the system had become unsustainable.

The eurozone is a perfect example of a liberal system that has become complacent and unstable: since it was plunged into crisis, European authorities have made persistent attempts to paper over the cracks. Contrary to the advice of the IMF, the EU keeps pretending that Greek debt is sustainable, and bases its judgment on growth forecasts that are plainly ludicrous. EU member states do not address the issue because they do not wish to recognise losses in their bilateral loans.

The political shocks in Italy stem from a dysfunctional monetary union and
an unsustainable immigration regime. I fail to see how Italy and Germany can remain locked in the same monetary system unless we have reforms that both countries reject, whether it is a political union or a single safe asset, or reforms to align economic and judicial systems.

The EU’s legendary tendency to kick the can down the road has left us with a situation in which it makes no sense to talk about the eurozone crisis in the past tense. Greek and Italian debt are less sustainable today than they were in 2010 when the crisis began, and Germany is less willing to support the eurozone today.

Ideally we would fix the system. But instead we are procrastinating and hoping that something comes up. Emmanuel Macron, the French president, had ideas of how to reform the eurozone, but his proposals have deflated to almost nothing. The chance to reform came and went.

As in the early 1930s, libertarian economic systems were self-destructing because of their inbuilt tendency to produce financial and social instability. We are doing better than we did 90 years ago at stabilising gross domestic product. But the observation that many advanced countries have had more or less robust GDP growth and low unemployment misjudges the underlying political dynamic, which is much more influenced by variables such as income inequality, lack of housing and fears of job insecurity among the middle-classes.

Another parallel with the 1930s has been a tendency for the stalwarts of the liberal order to double down — through pro-cyclical austerity, bonus payments for bankers, a monetary policy that drives up asset prices or through free trade agreements that limit the independence of national courts — on harmful policies.

The tell-tale signs of the demise of liberal democracy have been visible long before the more recent electoral upsets. You know you are in trouble when you cannot impose a financial transaction tax because your banks threaten to shift their transactions to a tax haven. Or when countries cannot increase corporation tax for the same reason. Or when large car and chemical manufacturers can engage in persistent criminal behaviour and get away with it. What corrupts liberal systems is a breakdown of checks and balances in our economic life.

But political extremism is only one response to failing liberal systems. You may dismiss cryptocurrencies as just another bubble. But I would not bet my hard-earned bitcoins on our ability to preserve the money-issuing monopoly of the state indefinitely. As the aftermath of the financial crisis demonstrated, that monopoly is critical for liberal financial systems to secure basic macroeconomic stability. It is the one and only policy instrument we have that arguably still works. Saving the liberal world order will become progressively harder the weaker that instrument becomes.

If you really care about the liberal multilateral order, free trade and the EU, the least helpful thing you can do is to defend the status quo and hyperventilate about populists. Our problem is not the other team, but our team.

munchau@eurointelligence.com