The lord, who pays attention to György Matolcsy

One of Great Britain’s most famous economic policy legislators recommends a combination of economic and financial interventions to Europe, similar to the one that the president of the Hungarian Central Bank outlined. Lord Robert Skidelsky is a stalwart member of the international political and economic elite, who became well-known for being a supporter of John Maynard Keynes’ crisis management method. In the interview he gave to alapblog.hu, he thinks positively of the Hungarian economic policies, even though he admits he has limited knowledge of the country.  He sees it as an advanced Keynes model. He also thinks that the official European recipe, which is based on austerity and ECB quantitative easing, is faulty. According to Lord Skidelsky, Great Britain leaving the EU is not likely; however, he anticipates the separation of Western and Eastern Ukraine.

Péter Zentai: It seems that the debate on whether deflation is coming or not has toned down among the world’s leading economists and politicians. However, in your recent publications and your speeches in the House of Lords, you think that deflation is still very much of a threat indeed. Don’t you believe the data showing that the European economy is recovering?
Lord Skidelsky: I am sceptical about the possibility that current European policies can reverse the deflation process, and stop prices and wages decreasing. I believe that the fiscal austerity, once again, did not serve the right purpose; on their own, never have they led to the desired results. We can see that the European economy is withering due to the austerities.
The inadequate management of the Greek problem will have a negative feedback on the capital markets. Greece’s unresolved issue will eventually result in extreme uncertainties which will negatively affect the bond market and stock exchanges in general.
I am afraid storm clouds are gathering over Europe.

It looks that the major players, along with millions of Europeans have gotten used to the uncertainties of the recent years.
The best scenario that could happen in the current economic and financial environment would be everything staying the same – for years: I am referring to a long and slow withering process. Indeed, high unemployment rates remained, but they would not increase further. Productivity may increase, but only very slowly. In the meantime, slowly but surely, banks may be cleansed and start lending.
However, I do believe, this stagnant state is the best of the possible circumstances; certainly it causes the least stress.
The worst scenario would be the breaking up of the Eurozone. This would definitely bring chaos to Europe.
All in all, it is important to remember that big European banks have stacked Greek Treasury bonds. If Greece goes bankrupt, many vital financial institutions would be in big trouble.
Another source of uncertainties in Europe are the Russian position, Russia’s Europe-policy, and that we do not know how stable – if stable at all – the growth of American economy is.

I assume, a further discouraging factor is that we don’t know whether Great Britain leaves the EU or not…
This is a medium-term problem. It is unlikely that there would be a referendum on this issue before 2017. However, I suspect, there isn’t going to be a referendum at all. But if it does happen, I think, the EU supporters will win. By the way, I think a more interesting question is who will form a government in the next term. If the power goes to the Labour Party (the current opposition), and Scottish nationalists gain more power too, then these events would result in a short-term shock in the European markets.

Isn’t it contradictory, that you, someone who supports the increasing government’s role in economy, and follows John Maynard Keynes, the politician who founded this policy, have negative feelings about the possible win of the ‘keynesian’ Labour Party?
I haven’t taken a stand against or in favour of the Labour Party. I simply predict the reaction of the markets, which will certainly be negative. We can expect a left wing party – in this case, the Labour Party – to be a follower of Keynes; so it will try to regulate market powers, and increase the economic role of the government. Even the possibility of the change of government generates negative attitudes in the market.
Of course, it is crucial to note, that economic and financial policies must not be based on extremities, they are not ‘either-or’ questions! They should be neither absolutely ‘keynesian’, nor absolutely restrictionary…
They should be an appropriate mixture. Politics has to be intelligent and flexible.
I must say, in this regard, the words of Mr Matolcsy (current governor of MNB). He gave a speech at that conference in London, which I chaired. He convincingly presented, that they apply the required structural reforms in Hungary, and the government engages in these processes on the Keynesian basis. They reduce the tax burden of the public and the entrepreneurs, even though they have to cut back on welfare expenditures. By doing so, they can create new jobs from the savings. The main goal is that people should not rely primarily on social network, but to engage them in the job market. To me, this is a clever mixture of economic policies.

So, did Mr Matolcsy convince you?
I am not an expert on the Hungarian economic and financial policies, but he made me clear that with such a clever mixture of policies, and by eliminating the IMF, a 3.5 percent GDP growth can indeed be achieved. The fact that the two-thirds of Hungarian jobs are created by the private sector, and the increasing number of investments is also noteworthy. Mr Matolcsy said that the secret of the Hungarian success is dividing the burdens intelligently.
I think, what I heard was the proof that big economic-financial challenges can be managed cleverly. Fiscal austerity can be compensated by increasing the number of new investments, and creating new jobs with the government actively intervening. It looks like they accomplished it in Hungary – at least this is my impression; however, I did not haven’t thoroughly studied the Hungarian economy.
I share the view that Europe cannot avoid big structural reforms. However, I think that the most crucial is that the states – primarily financed by the European Investment Bank – start big infrastructural developments, and do everything to involve private capital. So the government has to make private capital interested.
I also think that the current form of welfare is not sustainable; they are not free from misuse either. They must be reformed, and some resources must be withdrawn from them. However, the social drawbacks that result from this can be compensated by starting new investments.

Germans are aware of the need for these, and still, everyone criticizes them for wanting nothing but curtailments…
They do want that and nothing else. Whenever I talk to German decision makers, it is obvious that they think that the sources of every problem – especially the Greek – are irresponsibility and extravagant spending. However, if they discipline themselves now, so never again will they want to spend more than they can produce, then a lively situation can be achieved, where people and decision makers will be motivated by the need of staying in competition.
I do not know whether Germans do not want to or simply cannot hear the realistic and well-founded arguments against it. My impression is that they treat the whole European economic problem on some kind of dogmatic ideological and abstract moral basis. Anyway, chasing the severity-curtailment ultimatum, along with the ECB money extravagantly to counter it, will certainly make things worse; surely it will not result in significant economic growth in Europe. Quite the contrary: social and other tensions will increase. They will not be able to stop deflationary processes.

You included the position of Russia and its unknown intentions in the great European problems. In regards of this, what is your opinion about Gyorgy Soros’ suggestion, that EU should flood Ukraine with money?
This is not going to happen. The European Union cannot be so foolish to ignore that the money would be stolen in Ukraine. No matter who was the head of state in the last two decades, he and his clientele would take advantage on the enormous foreign supports to get richer. It is no doubt, that the situation is still the same.
Russia is very well aware of, and acts according to that the EU cannot afford to make Gyorgy Soros’ suggestion happen. Taking it into account, Russia will conquer Eastern Ukraine – economically, financially, and politically -, but Western Ukraine has better chances to become closer to the EU, than to Russia. Ukraine will be split.


Original date of Hungarian publication: 9 April 2015