Economic historian Adam Tooze: Fighting crises at any price

Dusseldorf Adam Tooze is one of the best experts in international economic and financial policy. His book “Crashed” on the European debt crisis has become a standard work. The historian, who was born in Great Britain and grew up in Germany, teaches at Columbia University in New York.

In his new book “Welt im Lockdown”, the 54-year-old tries to learn the first lessons from the pandemic. According to Tooze, the world has entered an age of permanent crisis. He therefore does not see a return to normal for the time being.

Instead, in an interview with the Handelsblatt, the scientist demands that we have to break free of self-imposed financial shackles such as the debt brake or the European Stability Pact. Only then could we master future challenges such as the climate crisis.

Tooze criticizes election promises by parties in Germany that the debt brake could be reintroduced in its old form in the foreseeable future.

Mr. Tooze, you want to throw the debt brake and Maastricht criteria overboard and justify this with a finding by the British economist John Maynard Keynes from 1942: “Everything we can actually do, we can also afford.” A provocation?
It sounds like a provocation. In fact, Keynes was only describing the obvious, and his statement is still correct today. After the experiences of the financial crisis and pandemic, we can no longer pretend that our options for action are limited by financial shackles.

Adam Tooze

“Inflation rates that are too low are now just as much a risk for the economy as they are too high.”

(Photo: Getty Images)

Most politicians in Germany see it differently and have behaved differently in the past ten years.
That’s correct. The debt brake in Germany is just one example of this. The deficit rules set out in the Maastricht Treaty are different. But also in the USA the legal debt limit shows how we have deliberately limited our actions by essentially conservative rules.

Economics is the study of how to deal with scarce resources. Doesn’t that apply to the financial world?
Of course we are limited by resources and if we cross borders we may risk inflation. In the past few decades, however, we have failed to identify where those limits are and what risks we run if we cross them.

Where does this new enthusiasm for experimentation manifest itself in today’s politics?
The US Federal Reserve and the ECB have set a symmetrical inflation target of two percent. This means that inflation rates that are too low are now just as much a risk to the economy as they are too high. That is a major change. Another example is the war on terror. It is wrong to say that we cannot afford it – in monetary terms it is not a problem. What matters is whether we want to afford it for geopolitical reasons.

What is the price for the almost total financial freedom of action?
It means that we can also make wrong decisions. The Austrian economist Friedrich August von Hayek and other conservative liberals knew about monetary freedom, but feared that we would not be able to make wise economic decisions with it. Basically, Keynes’ realization contains an ethic of responsibility, because we now have to bear the consequences of our economic policy actions.

Isn’t it better for us to set rules for ourselves to prevent wrong decisions?
That would be desirable, but in reality we have destroyed all fiscal policy rules. Not because we are irresponsible, but because our financial system is so unstable that in times of crisis it forces us to do things that we thought were impossible. We face so many challenges – from the pandemic to the climate crisis – that we can only overcome if we take Keynes’ insight seriously.

Are we getting the spirit of monetary freedom back in the bottle?
Historically, rules have arisen out of a skepticism about unpredictable human nature. Today you have to be a great optimist to believe that rules can be used to master the crises that lie ahead. I understand the desire to get the old rules back, but we live in a different world today.

Why shouldn’t we adhere to the Maastricht criteria in the euro zone?
Around 60 percent of the population in the euro zone live in countries with a debt ratio of more than 100 percent of gross domestic product. It would be naive to believe that a return to the old Maastricht rules would be accepted.

Adam Tooze: World in Lockdown
– The global crisis and its consequences –
Publishing house CH Beck
408 pages
26.95 euros
ISBN: 978-3-406-77346-4

Conversely, many Germans are currently insisting on compliance with these rules, and turning away from the rules could lead them to turn their backs on Europe.
That is the mistake of conservative politicians who have failed to explain to their supporters the situation we are in now. During the debt crisis, only the unconventional intervention of Mario Draghi saved the German conservatives from having to spoon up the soup that they had brought into themselves with their austerity policy. Not only populists produce “fake news”. The promise to reinstall the German debt brake belongs to the area of ​​”Post-Truth Politics”.

Why are the federal elections important for the paradigm shift in economic and financial policy?
There are some parties in Germany, including the Greens, who demand a policy that is on a par with the times. That’s the point. We are facing challenges that have never been seen before, such as the climate crisis, and politics must show that it is up to it. On the other side of the political spectrum there is the FDP, which promises its voters a return to the old normality of Maastricht rules and the debt brake. I think that’s irresponsible. Neither the Italians nor the French would agree.

What does the “new normal” look like for you after the pandemic?
I think the term is wrong because it is not about normality. We are in a state of permanent crisis and will continue to do so in the face of climate change. The anthropocene age, in which humans have become an important influencing factor for the earth and nature, has long since begun. We still believe that the pandemic was an accident and has nothing to do with structural changes in the relationship between humans and nature. If the Corona year 2020 has taught us one thing, it is that our economy and our society are very unstable. A return there would also be a return to instability.

Are we better prepared for future crises?
The EU’s “Green Deal” is an adequate response to the crisis because it takes into account that economic, social, environmental and geopolitical crises are interlinked.

How can we make our western democracies more crisis-proof?
First, we have to break free of supposed fiscal or monetary shackles and focus on what we can actually do in a crisis. That still takes a lot of persuasion, especially in Germany. One idea could be to suspend the debt brake on investments, as the Greens are calling for. In addition, we need technology realism, i.e. a realistic idea of ​​how new technologies can help us fight crises faster and more effectively. The “world spirit” after the outbreak of the pandemic showed how quickly we can develop vaccines if we pull together. At the same time, he failed when it came to distributing the vaccine quickly and fairly to the world’s population.
Mr. Tooze, thank you very much for the interview.

More: The EU treats all debts equally – that is the greatest weakness of the Stability Pact

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