Latest news with #Keynesianism
Business Times
16-05-2025
- Business
- Business Times
Europe can't rearm its way to security
[LONDON] As Russia's war on Ukraine rages on Europe's eastern frontier, the continent's leaders are finally willing to admit they have the power to revive their ailing economies. After decades of austerity, they are ready to spend again – but not to end poverty, accelerate decarbonisation, or reverse the collapse of essential public services. Instead, Europe's fiscal firepower is being directed towards tanks, missiles and fighter jets. Reorganising the economy around state-supported defence spending is known as military Keynesianism, though John Maynard Keynes – who rose to prominence by condemning the punitive post-World War I peace treaty that was imposed on Weimar Germany, which ultimately helped set the stage for Hitler's rise and another war – would probably not have endorsed the term. The reasoning behind the resurgence of military Keynesianism is not entirely without merit, as the pursuit of austerity policies has left many European economies punching below their weight. European productivity, which has grown at half the pace of the United States over the past decade, declined by 1 per cent in 2023. Real wages fell by 4.3 per cent in 2022 and 0.7 per cent in 2023, following a decade of stagnation. Meanwhile, investment is nowhere near where it needs to be to tackle the twin crises of inequality and climate breakdown. Europe's self-defeating commitment to austerity is epitomised by the German doctrine of 'schwarze Null' ('black zero'). Even when Germany's economic miracle was in full swing, politicians refused to invest in long-term growth. As a result, Germany – like most of the continent – has suffered from chronic underinvestment in physical and social infrastructure, constraining productivity. Against this backdrop, rearmament may look like an easy fix. Unlike social expenditure, defence spending faces little political resistance. It enables politicians to appear tough – a valuable asset in an age of strongman politics – and keeps the arms industry, a powerful lobby with deep ties to political elites, flush with public money. But military Keynesianism is a dead end – both economically and politically. For starters, it's a weak engine of long-term growth. Modern weapons production relies on advanced manufacturing processes that use relatively little labour, so the industry has low multipliers compared to investments in health, education or green energy. It creates fewer jobs per euro spent and contributes little to the broader economy's productive capacity. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Military Keynesianism also deepens Europe's dependence on fossil fuels, given that modern militaries are among the planet's largest institutional fossil-fuel consumers. Expanding defence capabilities means locking in demand for carbon-intensive technologies at a time when Europe should be phasing them out. Worse still, prioritising defence over decarbonisation sustains the very system of petropolitics that gives regimes such as Russian President Vladimir Putin's the resources to wage war in the first place. As the Guardian reported earlier this year, the European Union has spent more on Russian fossil-fuel imports over the past three years than it has on financial aid to Ukraine. If the EU is serious about defeating Russia – not just on the battlefield, but geopolitically – then the bloc must confront the real source of the Kremlin's power: oil and gas exports. Russia, after all, is a petrostate, and its war machine is financed by the revenues that flow from Europe's addiction to fossil fuels. Oil and gas revenues have accounted for 30 to 50 per cent of Russia's federal budget over the past decade and still represent roughly 60 per cent of its export revenues. These industries provide the vital dollars that enable Russia to import military technologies and other critical inputs. Without that income, the Russian economy would quickly collapse under the weight of hyperinflation. The most effective long-term strategy for countering Russian aggression, then, is not to ramp up military spending but to accelerate the green transition. What Europe needs is a real Green New Deal: a democratic, continent-wide mobilisation to decarbonise the economy, ensure energy security, and create millions of well-paying green jobs. To be sure, this would require massive investment in renewable energy, public transit, retrofitting, and industrial electrification. It would also mean reshaping supply chains, restoring public ownership of key infrastructure, and breaking the stranglehold of fossil-fuel capital on European politics. But a Green New Deal would do more to strengthen the EU's geopolitical standing than any number of new tanks and artillery shells. A Europe that produces its own clean energy, builds resilient green industries, and reduces its dependence on volatile global commodity markets is a Europe that cannot be held hostage by petro-tyrants. Europe's political elite faces a stark choice: continue propping up a broken growth model by funnelling public money into the military-industrial complex, or invest in a livable future rooted in solidarity, sustainability and democratic control. In the long run, building an inclusive green economy is the only way to counter the rage and alienation fuelling the rise of far-right forces – the greatest and most immediate threat to Europe's democracies. PROJECT SYNDICATE The writer, a former research fellow at the Institute for Public Policy Research, is the author of several books, including Vulture Capitalism: How to Survive in an Age of Corporate Greed (Bloomsbury Publishing, 2024) and The Corona Crash: How the Pandemic Will Change Capitalism (Verso, 2020)
Business Times
09-05-2025
- Business
- Business Times
Welcome to the new age of geoeconomics
LAST weekend in Washington, near the White House, dozens of economists from universities and institutions such as the International Monetary Fund (IMF) gathered to discuss the state of 'geoeconomics'. Geo-what? some readers might ask. No wonder: until recently, this word was little used, since it seemed at odds with modern norms. That is because the phrase describes how governments can use economic and financial policies to play power games. But in the 20th century free-market intellectual framework – which is the one in which most Western professionals built their careers – it was generally assumed that rational economic self-interest ruled the roost, not grubby politics. Politics seemed to be derivative of economics, not the other way around. No longer. The trade war unleashed by US President Donald Trump has shocked many investors, since it seems so irrational by the standards of neoliberal economics. But 'rational' or not, it reflects a shift to a world where economics has taken second place to political games, not just in America, but many other places too. So universities such as John Hopkins, Dartmouth, Kiel and Stanford are looking to expand their 'geoeconomics' programmes (with the latter using machine learning for that end), along with entities such as the IMF, the Milken Institute and the Atlantic Institute. And Dane Alivarius, a former US Treasury official, is also now urging companies to create a new role of 'CGO' – or chief geopolitics officer – 'to navigate the increasingly blurred lines between commerce and statecraft' where 'referees (meaning governments) have changed the rules'. It remains unclear if companies will actually adopt that idea. But in the meantime, investors and business leaders would do well to note five key points about this geoeconomics debate. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up First, this phenomenon is not simply about one man (Trump), but rather marks a much bigger turning point in the intellectual zeitgeist – of a sort we have seen a few times before. One such shift occurred just over a century ago, when the globalist, imperialist vision of capitalism that reigned before the first world war was displaced by nationalist, protectionist policies. Another came after the second world war, when Keynesian economics took hold. Then, in the 1980s, free-market neoliberal ideas displaced Keynesianism. The fact that the intellectual pendulum is now swinging again, towards more nationalist protectionism (with a dose of military Keynesianism), thus fits a historical pattern – although few predicted that the swing would take quite this form. Second, one important facet of this zeitgeist shift is that governments are no longer 'just' focused on their country's absolute wellbeing, but on their relative positions too. This distinction might sound subtle. But it matters deeply, as a paper co-authored by Aaditya Mattoo, a World Bank economist, along with Michele Ruta and Robert Staige, spells out. That is because an 'absolute welfare' mentality supports trade co-operation, but unravels 'if rivalry eclipses any consideration of own- country wellbeing', the authors say. Trump's angry rhetoric about America being 'ripped off' by competitors, in other words, reflects a bigger mental shift. Third, an (obvious) factor behind this rivalry is that China is now challenging America's incumbent dominance. This pattern has often been seen before, as Ray Dalio, the hedge fund luminary, notes in a provocative forthcoming book. Investors should also note that Dalio suggests such conflict is rarely resolved quickly or smoothly, least of all when there is a debt cycle involved. Fourth, as the US and China resort to geoeconomic strategies, other countries are following suit in response. Just look at how the European Central Bank is racing to develop a digital euro, Saudi Arabia is developing its own tech stack, or Japan is using its Treasury holdings as a 'card' in trade talks. That means that tech, trade, finance and military policies are mingling in a manner not seen during the neoliberal age. Fifth and finally, industrial policy is back. This started in America under President Joe Biden. But Trump is doubling down, with tariffs. To understand this, look at a striking new book called Industrial Policy for the United States by Marc Fasteau and Ian Fletcher, two economists beloved by the Maga crowd. They champion tariffs but also stress the need for other industrial policies too, citing South Korea, Japan, China and Germany as examples to emulate. It is unclear if Trump will follow their advice. But what is evident is that there is rising acceptance in the US that the government should shape commerce in the national interest. This will invariably prod regions such as Europe to follow suit. All of which will horrify many observers, particularly those raised in that neoliberal era. But don't expect the intellectual pendulum to swing back soon – even if the US cuts a few trade deals, as Dan Ivascyn of Pimco notes, Trump's love of tariffs runs deep. For better or worse, we all need to learn to navigate geoeconomics. We cannot just wish it away. FINANCIAL TIMES
The Independent
22-03-2025
- Business
- The Independent
If Rachel Reeves were serious about growth, she would look to the EU
R achel Reeves, the chancellor, tried to imitate James Callaghan in an interview this weekend. She told the BBC: 'We can't tax and spend our way to higher living standards and better public services. That's not available in the world we live in today.' The echo is unmistakable of Prime Minister Callaghan telling the Labour conference in 1976: 'We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists.' What Mr Callaghan rejected was called Keynesianism then and would probably be called Trussism now. Ms Reeves is rejecting something that sounds more respectable but is not: the idea that we can have higher-quality public services and higher living standards out of thin air. Half a century apart, they both reject, in the name of realism, the policies urged on them by their party. Ms Reeves argues that, with taxes at a 70-year high, the option of higher taxes still is 'not available'. This is not strictly true. The Independent argues that Britain is still not as heavily taxed as most of our northern European neighbours, and that it may be necessary to consider a rise in income tax as the fairest and best way of meeting the further pressures of essential public spending, including on defence. But the chancellor is right that the tax burden is close to what the electorate will bear, and that some difficult decisions on spending do have to be taken. She is right, too, that she and her ministerial colleagues have to take a swashbuckling approach to needless regulation and waste. We do not advocate Elon Musk's methods, and we are sceptical about the savings that his Doge (Department of Government Efficiency) will actually produce, but a sense of crusading urgency in a British style would be welcome. A British Doge is one way of encouraging growth, which is what the government describes as its first mission. Ms Reeves deserves some credit as the first chancellor for some time to sound serious about cutting unnecessary regulation and relaxing planning law. If she delivers, she will deserve a great deal more. But this cannot be the only means of raising the rate of economic growth, currently not statistically significantly different from zero. She and Sir Keir Starmer are staring another growth opportunity in the face, but dare not mention it. Leaving the European Union has made us poorer, and some of that damage could be reversed by improving the terms of trade between Britain and our former fellow members. It is time that Sir Keir and Ms Reeves stopped being so scared of their pro- EU shadows and started to negotiate a better trade deal with the urgency that it deserves. Yes, that will mean aligning with EU standards. We should not be afraid of that: it would be a common-sense way of reducing the border checks that make trade more expensive. This would make us better off without full EU membership or free movement of people. When Ms Reeves addresses parliament on Wednesday, she should echo another former prime minister and speak, as Margaret Thatcher did when she was pushing within Europe for a single market, of how 'the success of the US in job creation shows what can be achieved when internal barriers to business and trade come down'. It is usual for prime ministers and chancellors to say, with Mr Callaghan's air of hangdog realism, that there are no shortcuts to growth. But in our case today there is a shortcut, and we should take it now: to reverse as much of the damage of Brexit as possible.
The Guardian
13-03-2025
- Business
- The Guardian
Labour needs an urgent history lesson. Its plans couldn't fund a war and won't boost growth
Things could be worse for Rachel Reeves, but not much. The economy is stagnant. Donald Trump has decided the UK will not be exempt from tariffs on steel and aluminium exports to the US. Stock markets have taken fright and share prices are tumbling. Five years on from the start of the Covid-19 lockdown, the scars of the pandemic have proved to be deep and long-lasting. The spring statement on the economy that Reeves will deliver later this month will announce cuts to welfare in order to prevent the government breaking its own borrowing rules. Echoes of the 1920s and 1930s are everywhere. The return of protectionism is but one way in which the years between the first and second world wars are being reprised. Just as the 1920s saw failed attempts to turn the clock back to a world economy overseen by the gold standard, so for more than a decade and a half central banks and finance ministries have been seeking a return to the rapid growth of the 1990s and early 2000s. As in the interwar years, the multilateral system is being weakened by US isolationism. Middle-ranking European powers such as Britain and France are being asked to shoulder the burden of collective security. As then, there is a sense of liberal values being under threat. Ukraine is the new Czechoslovakia and I see Vladimir Putin as the new Hitler – to be appeased at Europe's peril. The peace dividend – higher social spending paid for by spending an ever smaller share of national income on tanks, planes and ships – is considered to be a thing of the past. There has been no repeat of the Great Depression of the 1930s – at least not yet – but there is no real sign that a long period of ultra-low interest rates has resulted in stronger economic growth. But in the past month, a new narrative has developed. Countries such as Britain will, as a result of Trump's reticence about deploying US power for the defence of Europe, have to increase military spending. The boost to the defence budget will help the government's growth agenda because the extra money will provide a stimulus. After all, didn't khaki Keynesianism eventually bring about full employment and the end of the depression? If this all sounds like too pat an explanation, that's because it is. Given that nothing else has worked, it was perhaps inevitable that sooner or later policymakers would eventually alight on arms spending as the cure for stagnation, but the idea that there can be a return to the 1939-45 war economy is a fantasy. For one thing, the evidence of the late 1930s and early 1940s suggests that the current government's plans are insufficient either to boost growth significantly or prepare the UK to fight a major continental war. Defence spending rose from 2.2% of GDP in 1933, the year Hitler came to power, to 6.9% in 1938 when Neville Chamberlain signed the Munich agreement. At its peak in 1944, defence spending accounted for half the UK's national output. Keir Starmer has raided the aid budget to pay for defence spending to be raised from 2.3% to 2.5% of GDP and has the aspiration of further increasing it to 3% of GDP, but these are modest increases. Then there's the question of how the extra defence spending is to be financed. During the second world war, this was done through a combination of borrowing, taxation and rationing. The national debt rose to 250% of GDP, while the need to divert resources into armaments meant there had to be a squeeze on consumer spending. Without higher taxation and rationing, an overheating economy would have suffered runaway inflation. The stance being adopted by Reeves is different. The chancellor is not prepared to break her fiscal rules to pay for higher defence spending, so extra borrowing is not an option. That leaves her with a choice of either further increases in taxation or cuts in spending. It is not just that there is no longer a peace dividend; rather, the peace dividend will go into reverse, with cuts to the peacetime economy paying for additional military spending. Germany is planning to ease its borrowing rules, which means its rearmament will have an impact on growth, but Britain is not. There will be no change to the size of the UK economy or its growth rate, and the government's attempt to suggest otherwise is nonsense. All that said, the debate about military Keynesianism matters because it proves resources can always be found if the need is considered great enough. When faced with a crisis, governments can always come up with the money. There were three chancellors of the exchequer between 1939 and 1945, all peripheral figures, and that's because, first, national survival and then the pursuit of victory meant fiscal rules were ditched and the influence of the Treasury diminished. While Starmer harks back to this era with his talk of the economic benefits of higher defence spending, he is really offering military Keynesianism-lite. What's more, the climate crisis poses a bigger existential threat to this country than Putin does – or ever will, so if money can be found for the military there's no reason why it couldn't also be found to accelerate the drive for self-sufficiency in clean energy. That might really do something for national security. Larry Elliott is a Guardian columnist
Euronews
10-03-2025
- Business
- Euronews
Rearming Europe is the EU's next folly, Yanis Varoufakis tells Euronews
Economist, politician and the former Greek finance minister welcomed the easing of the German debt brake but believes that defence spending will not generate growth where it is needed. ADVERTISEMENT At a time when Europe is trying to regain control of its defence in the face of Russia's war on its soil and the US' apparent withdrawal, some dissenting voices are speaking out against the continent's further armament. Visiting Brussels, Yanis Varoufakis refuses to mince his words yet again. "The rearmament of Europe is the next great folly of the European Union," declared the co-founder of the pan-European leftist DiEM25 movement in an interview with Euronews. The left-wing economist believes expanding Europe's military would "dissolve the social fabric" without guaranteeing security. "It's a way of weakening Europe in the name of making it stronger," he added. Opposed to an agreement between Moscow and Kyiv proposed by US President Donald Trump, Varoufakis instead calls on Europe to put its own peace plan on the table. "We should reject Trump's plan. But we must have our own. The first step will be to reject immediately and without any doubt Donald Trump's land grab, his attempt to seize the underground wealth of part of Europe," he stressed. "We must counter-propose our own peace plan. Rearming Europe and buying more weapons from British Aerospace, Dallas and Rheinmetall won't change anything for Ukraine," Varoufakis argued. "Ukraine needs a peace plan from Europe now." In his view, this agreement should guarantee Ukraine's sovereignty and its connection to Europe while keeping it "outside the two blocs, the Russian bloc and the NATO bloc." According to Varoufakis, if Europe wants to play a role on the international stage during this period of major geopolitical tensions, it needs first and foremost a "political union" to gain "legitimacy", not an army. 'Buying shells and putting them on a shelf is not productive' Faced with the United States' withdrawal, the 27 EU member states are taking their security back into their own hands, giving the green light to a plan to rearm Europe, including a budget of €800 billion. The European Commission has also proposed that member states derogate from the EU's orthodox budgetary rules to finance their defence spending. In Germany, Chancellor-in-waiting Friedrich Merz has opened the door to relaxing the debt brake to allow investment in the country's infrastructure and defence. This is a 180° turnaround for the otherwise prudent country, which favoured strict fiscal rules for Greece during the financial crisis. As the former Greek finance minister who opposed Europe's austerity policy, Varoufakis positively greeted this paradigm shift — albeit with some reservations. "Of course, I welcome the end of the debt brake," Varoufakis said, however noting that Merz "wants to indulge in military Keynesianism." "Instead of investing in life, he is investing in death. From a macroeconomic and realistic point of view, this is not going to generate growth where it is needed," Varoufakis explained. ADVERTISEMENT "When you buy ammunition, when you buy shells and put them on a shelf, that's not a productive investment." Asked whether pacifism might be tantamount to giving Russian President Vladimir Putin carte blanche to pursue his imperialist ambitions and invade other countries, Varoufakis concluded, "Pacifism is never a good response to invasion, but opting for endless war is not rational either."
