It can’t have escaped many by now that what we are living through is entirely unprecedented. Despite the novelty of these uncertain times, a great many lessons can be learned from those well-versed in historical disaster. Adam Tooze towers above the fray as arguably the most informed of them all: Professor of History at Columbia University, former International Security Studies director at Yale and author of the best-selling book Crashed: How a Decade of Financial Crises Changed the World, among much more. Today, as the impact of the coronavirus seeps well beyond a traditional epidemic and wreaks economic havoc, the global community has sought refuge in his work, garnering him renewed attention as a prophet in the apocalypse. On April 17th, Professor Tooze was kind enough to join Room for Discussion via weblink to the UvA Radio podcast studio and share some of his wisdom. If anyone is qualified to make some sense out of all the noise, it is undoubtedly him.
Straight away it becomes clear he is not your “classic”, stereotypical historian, reconstructing the far flung past by pouring back through dusty old manuscripts. He believes history is in the making on a daily basis and should be treated as such. This approach entails great risk, as without sober hindsight misinterpretations are bound to occur, but it is a risk worth taking. Such perils are ever more present as this coronavirus outbreak hijacks the narrative, making all previous stories anachronistic.
Chaos and confusion in the present invariably lead many to seek out lessons from the past. Wartime analogies are undoubtedly flavour of the month, yet Professor Tooze remains dubious. The associated positive nostalgia for the victors is obviously handy, but in practical terms this is not wartime at all. Quite the opposite in fact, as we’re comprehensively demobilising the global economy. The wartime mode of thinking is by nature strategic and confrontational. Once we figure it out our viral foe’s inherent logic, we’re merely faced with an optimisation problem. That isn’t to say the costs won’t be immense: the unified decision to close Earth down for business is unprecedented. Whereas the 2007-08 financial crisis could be likened to a standard boom and bust cycle rectification, this catastrophe conceals many more layers.
The inherently volatile financial system needs the stable hand of a competent central bank. However, when unduly leaned upon by desperate governments, they cannot exercise this function. Presently this is the case for the European Central Bank: they are now having to hold the fort together because the political decisions are too difficult (as evidenced by the funding spat between the Netherlands and Italy). According to Professor Tooze, the situation is toxic, as Dutch and German decision-makers won’t have to bear the brunt of their rulings themselves. Monetary policy alone cannot solve the conundrum we face, and the central bankers themselves know it. There are no depths to which interest rates could be lowered to attract investment in today’s climate. All central banks can do is stabilise the financial markets to prevent a collapse, and pave the way for necessary expansive fiscal policy.
Accepting a widening of debt pockets is vital. Professor Tooze laments that a Japanese future is wrongfully framed as untenable and dystopian: an ageing population with high GDP per capita is our destiny. Resistance is but political futility. Now is the time to spend for the greater good, not the time for austerity. In 2010, the Sovereign debt crisis ostensibly pitched Germany against Greece. However, today as back then, Italy is the real underlying problem. Greece’s small size allowed all options to be on the table, even avenues as radical (at the time) as a Grexit. Italy, the fourth largest sovereign debtor and eighth largest economy in the world, is too big to bail or let fail. With 130% debt to GDP, Italian markets are in constant panic and critically vulnerable to any change in spreads. The principal shortcoming of the Eurozone has been not recognising that nominal GDP growth should be the target, so as to bear down on public debt ratios, not an inflation rate that appeases The Hague and Berlin. Germany has ostensibly been more cooperative this time round, with widespread credit guarantees despite little direct spending.
Across the Atlantic, the contrast in labour markets has never looked so stark. Often lauded for its flexibility and low unemployment rate, in a crisis like this the US model has proven disastrous, as more than 22 million signed on for benefits in the space of 4 weeks. Professor Tooze shudders at the news of 25% of Michigan’s workforce signing on for unemployment. As if the economic affliction weren’t enough, due to healthcare being tied to employment millions of Americans now find themselves going without in the midst of a health crisis. The US has tried too little too late to implement a European style of coverage and short-term contract assurances. For now, their focus has been on extending credit and preserving the system so crucial for small businesses.
Can banks bear this burden? Professor Tooze goes on to highlight the cruel twist of fate that was Italy being struck first in the West, as amongst the fragile banks of Europe they are home to the weakest of them all. Banks will suffer and potentially become a serious problem down the line, as the implications of them failing are systematic. Despite their complaints over the restrictiveness of the buffers imposed on them by the Basel Accords, nobody is willing to risk another banking crisis. So far, the catastrophe remains a financial one, with a focus on the supply side of assets. Protectionist interventions are occurring daily to ensure the supply of bare necessities and medical equipment: this could prove to be the perfect storm that dismantles global trade as we know it.
The situation is no better in emerging markets: never before has there been a simultaneous shock of this magnitude to their home economies and export markets. Despite many adopting sophisticated lockdown measures, their meagre healthcare systems mean their populations remain critically vulnerable. As if that weren’t enough, now the American consumer, still claiming the lion’s share of global consumer demand, has all but disappeared for the first time since WWII, sending a huge shockwave up value chains.
Professor Tooze asserts that the conception of a global economy as a well-oiled machine has never been so flagrantly undermined. Transnational organisations like the WTO aren’t able to provide sufficient guidance. The US Federal Reserve however, has reacted surprisingly quickly and decisively. The swap line scheme gradually implemented during the 2007-08 crisis (bilateral currency holding arrangements between central banks) was re-enacted within 2-weeks. Indeed, the pragmatism of the Fed alone underpins our world, despite the latter becoming increasingly multipolar. In fact, evidence suggests we are already in a tripolar world comprised of the US, EU and China. The sheer size of these blocks makes them more or less self–sustaining and less reliant on each other.
The buzzword of the day, Corona-bonds, also needed addressing. Professor Tooze bemoans that European politicians are plagued by a misunderstanding of debt and have proven ineffective at explaining it to their public audiences. The conception of debt as a curse is indeed damming. The coalition of 9 countries proposing Corona-bonds, likely led by French president Emmanuel Macron, was, in his estimation, risky but commendable. Nevertheless, the proposition lacked the total commitment required to stare down resistance. The line to the more frugal EU members should have been “We are doing this with or without you” to prove a credible threat. The ECB has come out and supported the idea, so they should put their money where their mouth is. The real question remains whether the French are willing to defy decades of post-war foreign policy and stand up to Germany.
In parting, Professor Tooze shared some words of wisdom for the road ahead. Our central reality today is that of radical uncertainty. We desperately need a beacon to guide our future in order to maintain consumption, investment, growth and, more poetically, hope. From somewhere, be it governments or commercial entities, we need a clear and compelling vision of a bright future. He confesses that although a Green New Deal would be ideal, at the moment any old future will do.
Check out the interview in its entirety on Room for Discussion or UvA Radio’s Facebook page, or simply click on the link below.