Focus: Will the Politics or Economics of Deflation Prove More Harmful?

Abstract

INTERNATIONAL union rights Page 3 Volume 22 Issue 2 2015 FOCUS ❐ FINANCE, AUSTERITY AND TRADE UNION RIGHTS Will the Politics or Economics of Deflation Prove More Harmful? The politics of collective action under inflation are clear, but deflation is different and it produces different political and economic pressures MARK BLYTH is Eastman Professor of Political Economy and faculty fellow at the Watson Institute for International Studies at Brown University tries this, given the aggregate effects on consumption . The same is true at the country level: all countries should not simultaneously attempt to become ‘more competitive’ if they are each other’s trading partners and exchange similar goods in a shared currency. Given this, deflationary periods produce an opposite politics than inflationary ones do. Rather than investor-friendly policies that seek to ‘bring the market back in and keep the State and labour out’, deflations, especially when they begin in already deeply depressed economies, produce broad-based cross-class debtor coalitions that directly challenge creditor interests and their supporting institutions. In such a world, we should expect existing political forces, especially those on the left, to lose vote share and be challenged by upstarts from the left and the right that seek to ‘bring the state back in and push market forces back out’, which is bad for the EMU project and all that flows from it. Seen in this way, the core creditor countries that are not deflating still operate in line with creditor politics, in which mainstream parties form coalitions to maintain the status quo, even in traditionally majoritarian states such as the UK and Sweden. The debtor countries of the periphery , those to a greater or lesser extent at risk of locking in deflationary expectations, are beginning to operate in accordance with debtor politics , which seeks to challenge the anti-inflationary , pro-creditor policies of the past 30 years. The alternative to such a political shift would be acceptance of the forced economic adjustment through unemployment and prolonged stagnation advocated by the core creditor countries. Syriza in Greece, the National Front in France, Sinn Fein in Ireland, UKIP in the UK, the SNP in Scotland, and Podemos in Spain are then more similar than different. They are all, regardless of leftist or rightist political stances, at base anti-creditor , anti-market populist movements. They constitute a threat, not just to macroeconomic stability , but to the very idea of Europe as it has been constructed over the past 30 years. When the National Front and UKIP on the right say they want out of the euro, they are not kidding. And while Syriza and Podemos say that they want to remain in the eurozone, the policies of the creditor bloc, which assert that ‘you must pay your debts even if you are insolvent’, may well push these leftist parties towards the exit, too. Given all this, what Greece represents is not an economic threat to the euro so much as a political threat. First of all, the eurozone leadership has effectively told the Greek people that more of the same policy is the only tonic available, regardless A lthough growth has returned to the periphery of Europe, with Spain, Ireland, Portugal and even Greece posting positive numbers, the rate of growth in their debts still outpaces their rate of GDP growth. That means, for example, that Portugal would have to run a current account surplus at Chinese levels for over a decade to get unemployment down to single figures, and that is simply not going to happen. Indeed, the most recent ECB unemployment projections predict double-digit unemployment out to 2017, regardless of the incipient recovery. Standard macro theory imagines that fiscal contractions are recessionary in the short run, but in the long run the supply side determines the trend rate of growth. What the eurozone has recently shown us is that you can contract so severely on the demand side that the supply side of the economy can be permanently damaged, which may have lowered inflationary expectations to a deflationary equilibrium point. This is extremely dangerous – more so for political than economic reasons. The politics of periods of inflation and deflation are radically different. Inflation is a class...