Economic Consequences of Neoliberalism: Coping with Financial Crises

John Maynard Keynes: “The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.“

While the world is facing another flare-up of so-called “Greek crisis”, which is essentially a European crisis, a crisis of neoliberal ideology and a historical clash between established yesterday’s elites shielding themselves and grassroots uprising of labor and middle classes — could not be more appropriate timing to recall, and reread, these first sentences of Keynes’ scientifically prophetic The Economic Consequences of the Peace. Then in 1919, contrary to all European leaders, Keynes clearly saw that economic dictates forced on German people, are too harsh and could lead to dangerous consequences for Europe. His analysis was rejected. The “logical” ideas and consensus prevailed. But history proved that Keynes was right: the Treaty of Versailles entailed the seeds of the World War II.
As well, could not be a more appropriate timing to feature “Coping with Financial Crises: Explaining Variety in Regional Arrangements“, an enlightening special issue of Contemporary Politics edited by Arie Krampf and Barbara Fritz.
This Special Issue aims to identify the key factors that shape regional and international responses to financial crises, providing a comparative and historical analysis of various institutional financial and monetary arrangements. Especially in recent crisis events, regional financial arrangements have played a major role both as causes of financial instability and as resolution mechanisms of financial crises. But this Special Issue does not purport to provide a coherent theory that explains the variations in regional financial arrangements. Rather, it aims to address the question of why regions adopt different arrangements from different theoretical perspectives. Therefore the included contributions focus on the cases of the Eurozone, Latin America, South East Asia during the last two decades and a historical look at US federalism as a long-term regional integration process.
In recent years, there has been a growing interest in the power of ideas in institutional and policy change, while in times of crisis ideas play even a more significant role. In the most interesting paper (open access) in this issue “Perhaps this time it’s different: ideas and interests in shaping international responses to financial crises“, Arie Krampf asks: What are the factors that determine the choice of key donor countries and international financial institutions? This article traces the processes by which the USA and the International Monetary Fund designed the crisis management strategy in respect to the Asian crisis (1997-8), and how Germany and the European Central Bank designed the response to the eurozone current crisis, in order to understand how ideas regarding the causes and solutions of a financial crisis interact with the interests of key donor countries.
Krampf compellingly argues that in both cases ideas and interests are mutually constituted, but in each case the mechanism that linked ideas and interests was different: whereas in the Asian case the US interests led to policy innovation and experimentation and to a change in the crisis management strategy, in the European case ideas played a greater role in shaping German interests. The article explains this difference on the basis of the lessons learned by IFIs from the Asian crisis, which were then implemented in the Eurozone case. Although the article presents a quite optimistic view regarding the capacity of the international community to learn, Krampf rightly concludes “that an effective response to a policy problem can take place only when good ideas meet the right powerful actor.”
Do the GOOD ideas prevail in the current Eurozone crisis? It is still early to determine…
Anyway, this insightful special issue calls for a more pluralistic epistemology to tackle crises. This call should be widely shared.
I started this piece with Keynes’ opening words in The Economic Consequences of the Peace, thus could not be more appropriate to end it with Keynes’ final words from the same book which are relevant indeed: “The true voice of the new generation has not yet spoken, and silent opinion is not yet formed.”