‘The European Policy is wrong, that’s the problem’

9 October 2015

‘The European Policy is wrong, that’s the problem’

David Hollanders interviews Dutch economist Joan Muysken.

To combat unemployment we must increase government spending and the buffers which banks are obliged to carry. Prior to this, broad public debate is needed, argues Joan Muysken. Below are the sections of the interview which deal with European issues.

DH: In your valedictory address you stated that free market thinking leads to unemployment and inequality. What did you mean by this exactly?

JM: By market thinking I understand the propagation of markets as standard solution, without many reservations. Along with that is an inadequate recognition of the fact that markets can fail. First of all, parties are unequal. General Practitioners have less power than do health insurers and self-employed people with no employees of their own have less power than do postal companies. The implicit thought that there are no differences in power – or that they don’t matter – is dubious.

Secondly, there are negative external effects: annoying side-effects of market transactions, which affect third parties not involved in the transaction. A macro-economic example of a negative external effect is a slump in demand as a result of a fall in wages. A fall in wages or a lagging rise is not only disagreeable for those whom it affects, but total spending in the economy can fall as a result, and then the baker in the corner shop will suffer. Neoclassical economists don’t take account of Keynesian demand effects. They think that lower wages ensure that demand and supply will adjust to each other, and that will mean that unemployment will disappear. But through the negative external effects a fall in wages can go on longer than is reasonable. Certainly when combined with differences in power this can become a race to the bottom of lower wages, with exploitation the end result.

Can you say more about this drop in demand?

A fall in demand in an economy can be traced back to four developments. Firstly, many households are suffering from negative equity: their house is worth less than their remaining mortgage debt. Secondly, there have already for decades in the Netherlands been lags in wage growth, known as wage moderation, which exacerbates the drop in demand. Meanwhile there’s even an EU-wide obsession to force down the share of wages in costs. Thirdly, investment in firms is also lagging, partly as a result of the drop in demand. The government must have grasped all of this, but is seized by a passion for austerity and allows it to fail. That’s the fourth factor. Nobody then is spending more. Eventually wages in the Netherlands, and in Germany, will have to increase in order to stimulate domestic demand, even if that comes at the expense of exports. The IMF and the OECD have, moreover, argued just that.

To what extent can the Netherlands, in addition to increasing wages, conduct its own economic policy itself, and to what extent is this determined by the Economic and Monetary Union (EMU)?

That’s awkward, because from an economic point of view it’s extremely important that the Netherlands is a small, open economy. So you can’t get too far out of step. Around 50% of exports go to Germany. So in the past you could run a ruler along the guilder-mark exchange rate. The EMU agreements formalised what had long been de facto going on. European policy is wrong, that’s the problem. European institutions are conducting the wrong policies, for example the 3% norm for the budget deficit, the 60% norm for national debt and the passion for austerity which grows from these. It’s almost Calvinist self-punishment: we must suffer, it seems.

How do you assess the attitude of the EMU in relation to Greece?

The problem in Greece has everything to do with the banking sector. Northern Europe had – and has - a gigantic balance of payments surplus. This results from exports to the South. Banks wanted nothing more than to finance the South’s balance of payments deficits and left themselves with major exposure to Greek debt. Then the banks were able to sell these debts to the state. So the state became an extension of the banks, which had to keep their profits. And so the banks had the best of both worlds. So for Brussels now to demand the return of the money from the moral high ground is indeed hypocritical. Central Bank independence therefore makes no sense.

Another aspect is that in Greece the rich get away scot free. Up to now Syriza hasn’t succeeded in tackling this. There should be an explicit exchange: debt relief for Greece, that at the same time reforms. Every economist is now calling for debt relief. The North, however, doesn’t want to make that explicit and Greece doesn’t actually want to reform. In the end both will happen, but implicitly. I don’t know Greece well enough to be able to say what reforms must be carried out there.

You advocate Keynesian demand stimulation. Should such a policy replace so-called reforms or be carried out in addition to them?

All structural problems resolve themselves in a boom. But in all economies things of course go wrong. Problems are now mostly sought in the labour market, but that’s not where the problems are. You shouldn’t be paying your greatest attention there. Unemployment has many other causes besides the ‘frictions’ to which the reintegration sector looks. The problems lie in the banking sector and on the housing market. If you want to reform, that’s where you should start.

What sort of reforms should be carried out in relation to the banking sector?

In the banking sector there’s a major problem that the buffers are too low. Banks take big risks and if it goes wrong, then the state has to step in. The banks’ lobbying power is massive. Banks know how to put their mark on all of the rules. That’s fatal. Something has to happen. Banks have few feelings of social responsibility, for example when it comes to bonuses, but also when it comes to Greece. The rules have in truth long not been altogether effective. This has to be improved through awareness of standards, moral awareness and social control. In many places, for example, nobody sees anything wrong with tax dodging. Prior to any regulatory moves, therefore, we need a social debate. That would pass on standards, the awareness that there are certain things you don’t do.

What sort of reforms should be carried out in relation to the housing sector?

In the past banks were handing out mortgages like lunatics. They knew damned well that it would go wrong. A price explosion was created, but along with it came a debt explosion. That was of course facilitated by mortgage relief. That had disastrous consequences. Three things have to happen now, though I’m no expert in this area. Firstly the rate of mortgage relief must of course be reduced. Secondly, the amount - expressed as the percentage of the price of the house that serves as security - that people can borrow must be lowered. Thirdly it must become possible to make tax free donations if these are directed at reducing a mortgage.

Professor Muysken then answers a number of questions relating purely to domestic policy, before a final comment on the behaviour of European institutions:

Above all, everyone should have a job. (ECB president) Draghi pumps billions into the economy via banks, but that could be done via bank guarantees. You would then put a floor under the labour market and create demand. The objection that this would lead to inflation I don’t find relevant as things stand.

Joan Muysken is professor emeritus in general economics at the University of Maastricht in the Netherlands. This interview was first published, in the original Dutch, in the SP monthly Spanning, September 2015.

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