The spring meetings of the International Monetary Fund (IMF) and the World Bank offer a great opportunity to listen to policymakers explain their views on the evolution of the world economy. For those of us interested in Europe, the focus at this year’s meetings was on the double feature of German Finance Minister Wolfgang Schäuble and Greek Finance Minister Yanis Varoufakis at Brookings last Thursday. It was a good match-up that offered few fireworks. Both sounded reasonable without departing from their basic positions. Schäuble wants Greece to honour its commitments; Varoufakis wants Greece’s creditors to embrace of new set of priorities for reforms. Both also claimed to speak in the interests of Europe writ large and neither accepted the possibility that interest could coincide with Greece leaving the euro. Hence it would be easy to come away with the impression that whatever the status of the negotiations things are unlikely to fall apart over Greece. And I suspect that was the goal — to convince investors to view the latest setbacks in negotiations as a reflection of ‘normal’ European politics.
That said, I am unconvinced. Despite the insistence that everything is under control, there was something in the speeches that I heard last week that suggests a different interpretation. I want to frame that difference in terms of two notions: the politics of conviction and conviction as policy. These notions are not symmetrical and the contrast between politics — as a way of influencing collective action — and policy — as a way of using collective action to change conditions around us — is important. Moreover, I think we should focus on a different pairing of speeches, replacing the former French Finance Minister and current European Commissioner for Economic and Financial Affairs, Pierre Moscovici, who spoke at the German Marshall Fund Thursday morning, for Schäuble. And the argument I want to make is that we have entered a period in the evolution of the European crisis where ideas matter more than underlying economic fundamentals in the political arena and where our policymakers are leaving too many hostages to fortune. In short, we face a very real prospect of things spiralling out of control.
The argument about ideas is an uncomfortable one for me. I believe policymakers are essentially rational, that they are intelligent, and that they really want to make the world a better place. Hence, I like to think that policymakers respond to events in the real world rather than listening to the siren song of ‘some long defunct economist’ (which was John Maynard Keynes’ dismissive phrase for ideas that have no relevance to current events). Early on in this crisis I wrote a paper that posited an empirical test to show how we would know whether ideas or events were driving the policy response. On the basis of that analysis, I concluded that policymakers were responding to events in a flexible and experimental manner. Ideas matter, of course, but not as much as rationality, intelligence, and good intentions.
Now I am not so sure. Part of my doubt stems from Varoufakis’ response to a single question. After complimenting his analysis of the situation, my colleague Matthias Matthijs asked the Greek Finance Minister if it was more important to be ‘right’ or to be ‘persuasive’ in a political context. Essentially the question is whether it is more important to understand what is ‘really’ happening to Greece (and to Europe) or to persuade politicians and voters in creditor countries to do something — anything — to ameliorate the Greek situation. This is hardly the first time Varoufakis has received that question. John Hancock (Manulife) chief economist Megan Greene — a friend of Varoufakis — has often teased him about the distinction between being right and being political. Hence it is no surprise that Varoufakis was ready with an answer. He referred to it as ‘the standard question’ and then launched into a story about how he cannot promote ideas he doesn’t believe and if that makes him a ‘bad politician’ then at least he has the courage of his convictions. It was a great populist line and for a moment I thought the audience at Brookings was going to break into applause. (It is times like these that I remember Brookings is a progressive institution committed to the use of knowledge in the public interest.)
The problem with Varoufakis’ response is that it assumes that we all subject data to the same interpretation and that conviction — both his conviction and anyone else’s — derives exclusively from ‘the facts’. Of course he knows that belief has many origins and that rational expectations can result in perverse outcomes. He said as much in reference to the possibility of a Greek exit from the euro. Even countenancing such a possibility could court disaster, he argued. To explain he said ‘talking about Grexit is like worrying about being hit by a comet in a universe where comets are attracted to you when you worry about being hit by them.’ This analogy is important because it shows how ideas and causal mechanisms interact. Inadvertently, it also shows the limits of a politics of conviction. Because the more you are convinced in the truth of an argument the more easily you find confirmatory data. That is how ideas work in this universe: the more you believe them, the more they appear to be true. Hence, so long as they remain wedded to their convictions, Varoufakis and his political opponents will be divided by this dynamic.
The use of conviction as policy is even more problematic. This is another dimension of Varoufakis’ comet analogy and it echoes in Schäuble’s denial of the prospect of a Greek exit from the euro. It was Moscovici, however, who gave the notion of ‘conviction as policy’ its clearest expression. He started his speech by pointing out that he is part of the ‘the Commission of the Last Chance’ (or ‘Last Chance Commission’) because developments are so bad in Europe today as to require immediate and decisive action. That makes an attractive frame for an ambitious policy agenda. But it does leave you to wonder what European voters are to think if the results of this Commission are inadequate to the task. Should they give up on Europe like you would give up on getting concert tickets for the last show of your favourite group? I don’t think that is the message Moscovici wanted to project. A new European Commission is not as certain as death and taxes but I suspect that this is hardly the ‘last’ Commission we will see whatever its measure of success. There will always be a crop of national politicians willing to give us another ‘chance’ to fix Europe. Moreover, I say this without a hint of cynicism. Given that I believe most politicians are rational, intelligent, and well-intentioned, I am actually relieved by that fact.
When Moscovici spoke about the possibility of a Greek exit from the euro, he left an even greater hostage to fortune. He insisted that there is ‘no plan B’ because ‘the day you start thinking about a plan B, you stop believing in plan A.’ There is a certain logic to that position but only if you accept the view that Greece can be kept in the single currency no matter what happens. That is not the view that Moscovici expressed. Instead he argued that a Greek exit from the euro ‘would be a catastrophe’. In other words, it is unthinkable and not impossible. The single currency exists because it is irreversible, he explained. ’If one country gets out, it is no more a single currency . . . it is a fixed-rate zone, which is weaker.’
This is a sensible argument. I have made this argument a number of times in class and to more public audiences. I have probably even made this argument in writing. To be honest, I cannot remember. Then again, I am an academic and not a European Commissioner who will be responsible for helping to hold the single currency together after a Greek exit. Therefore, I won’t have to face the consequences of having told market participants that a euro without Greece would not be a single currency but a fixed exchange rate regime that is weaker for having experienced a Greek exit.
Moscovici also insisted that Greece could not exit ‘by accident’. I think he was trying to reassure the audience that the ‘Last Chance Commission’ would not make any mistakes. Inadvertently, he suggested that a Greek exit would necessarily require some kind of political decision. Presumably it would also need to be planned. Here again we are confronted with a future that is unthinkable rather than impossible. Greece will never leave the euro because European policymakers would never choose that option, and they would never choose that option because they refuse to accept it as an alternative.
This is the essence of conviction as policy. You change the future by refusing to consider scenarios you find unattractive. Hopefully this formula will work out in the end. But in this universe mistakes happen and comets can hit you even when you don’t worry about them.Follow @Erik_Jones_SAIS