REACHING BREAKING POINT

The strongman and his guest nip at their water. They are talking, listening, joking even. At least they pretend to be. It is June 2013 and Germany's Angela Merkel and Vladimir Putin of Russia are sharing the stage at Russia's premier economic forum in Saint Petersburg, the country's great Window on the West. The setting is sublime. The stucco-fronted Neva embankments glow in the pink orange hue of the midnight sun, leaving the city frozen in a no man's land between day and night. It is a world that inexhaustibly fuels encounters in cafés, parks and restaurants.

In reality, the encounter between both leaders is less enjoyable. A row is brewing over German artworks looted by the Red Army in 1945. The relationship has been bad tempered for some time: frustrating, infuriating and sometimes barely manageable. A sense of foreboding ought to have filled the Saint Petersburg air. Instead, light-heartedness prevails. People have become used to Western and Russian politicians squabbling. Plus ça change.

But as summer slips into autumn, and autumn into winter, something does change. It happens where it always would happen: in the borderlands of Ukraine. The casus belli is an ordinary EU trade and partnership deal, about to be inked by Kiev. It is a bilateral agreement in the standard Brussels mould, part of its neighbourhood strategy towards the east. Yet the agreement triggers a chain of events that ends Europe's post-Cold War security architecture and claims over 13,000 lives.

What we witness in Ukraine is more than a shooting war; it is Europe's ethos of rules sparring with Putin's ethos of strength, specifically its proviso that special areas and “spheres” exist – forbidden space – where a duellist may not strike, compete or interfere. The domestic affairs of states, in particular elections, most obviously belong to this forbidden sphere. However, as observed already, for the duellist the ban on interference by rivals often extends beyond his own borders and into the strongman's neighbourhood.

THE AGE OF THE ENCOUNTER

Donald Trump leaned back in his chair and demonstratively folded his arms before his chest. Fixing his glaring eyes on hers, he impatiently listened to her pitch. It wasn't the first time he had heard it, nor would it be the last.

He had rebuffed her petitions on countless occasions and was determined to continue to do so for as long as it would take. Yet this time, in the stately Manoir Richelieu in Charlevoix, Québec, things were different. They had used the summit to gang up on him, the gesticulating Emmanuel Macron, the softly pleading Theresa May, his boyish Canadian host Justin Trudeau and Japan's Shinzo Abe. Their aides swarmed around him like flies. They had set a diplomatic trap worthy of the great French Cardinal himself. And he had walked right into it.

Worn down by their persistence, Trump bitterly signalled his assent to the summit's final communique. He had heard enough. Slowly he rose from his chair. Then he stopped, reached into his suit pocket, and nonchalantly threw two Starburst candies on the table. “Here, Angela”, he said. “Don't say I never give you anything.” He had never placed great stock in the art of losing.

Hustling his way back to the safety of Airforce One, Trump regained his poise. He weighed his options, and decided to rescind his agreement after the fact. “I have instructed our US Reps not to endorse the Communique”, he tweeted, before launching another angry missive calling his host Trudeau “very weak and dishonest”. Not so bad for a day's work.

It was June 2018 and over a year into Trump's presidency. For the Europeans, the G7 summit was a fiasco. Since his election in November 2016, they had fought to keep Trump inside the global club of democracies, papering over the deep fissure that had opened up across the Atlantic.

Latin American social movements have often been romanticized. Emiliano Zapata, Che Guevara, Mothers of Plaza de Mayo, the piqueteros and Zapatistas: all well publicized, if not necessarily well understood. There is a sense – not entirely misplaced – that Latin America has been a laboratory of social mobilization and struggles for a better life. While state politics change political complexion and their policies, the social movements are always there in the background and on the streets.

There have been many interpretations put forward to explain the seeming “rise and fall” of the progressive or left-of-centre governments in Latin America since 2000. There has been much talk about “tides” (pink or other colours), which supposedly ebb and flow according to the phases of the Moon, and of “cycles”, which also come and go according to some underlying mechanism, never fully explained. Concrete political analysis gives way to some sort of natural rhythm acting in mysterious ways.

What has also prevailed is a rigid analytical distinction between the various types of progressive movements/governments that is less than helpful, as it is based on binary oppositions. From a conservative perspective we have seen a persistent bid to distinguish between a “good” left – respectful of liberal democracy and not seeking radical change – and a “bad” left – “populist”, undemocratic and often articulating irresponsible objectives. Ironically, some left commentators mirror this binary scheme, positing a “hard” left that seeks radical change, builds socialism and confronts imperialism, and a “soft” left that respects liberal democracy too much, does not make ambitious promises and lives within the international rules of the game. Even at a quick glance, we can see these are impoverished schemas that do not help us understand the complex interplay of political and social struggles over the last 20 years.

In the chapters that follow, I will not assume any model along these lines. I will foreground, instead, concrete politics and not assume a position of exteriority that interprets, judges and corrects the actions of others. Against any schema that posits binary oppositions, we will see that politics is always complex and certainly cannot be analysed the way meteorologists analyse the tides around our coasts (and, even here, complexity rules).

THE STRONGMAN's TWO CONTRACTS

He did not wear a fake beak, a newspaper later joked. But he was dressed in baggy white overalls, big black goggles and black gloves. The birds, robed in their own white and black plumage, needed to recognize him as one of their own. They were to follow his lead as he, Vladimir Putin, president of the Russian Federation, took to the skies in a motorized hang-glider.

It was autumn on the Siberian steppe. The skies were leaden. The first snow would be falling soon. The plan, concocted by the president's image-makers: to lead the flock of cranes, hatched and raised in captivity, into the air and start their natural migration cycle to warmer places further south. They only had to follow the big bird. He knew where to go.

The stunt was pregnant with political symbolism, an attempt to highlight Putin's prowess as the nation's leader. And that proved to be its undoing. Because when Putin took off, the cranes stayed put. On his first attempt, one bird followed. Later, five. The other birds looked on in bemusement. Strong winds, an ornithologist explained apologetically. But it could not stop people from mocking the publicity stunt as a spectacular failure.

Inadvertently, Putin had underlined something pertinent about the nature of power and strength. While, obviously, there are mechanisms for coercing compliance in all states, the power of a leader also depends on his ability to secure uncoerced compliance. Putin's aides on the ground could have scared the cranes into the air by flapping their arms around. His security detail could have fired their handguns into the air or unleashed a pack of dogs. But while this would surely have chased all birds in the air, such force would have profoundly altered the meaning of the stunt. The use of force would have merely accentuated the limits of Putin's power.

A globally recognized facet of the “new” social movement wave is, of course, the environmental movement(s). Against the resource extractivism that prevails across Latin America, the ecological social movements call for a new environmentally aware development strategy. Brazil's plans to build a series of hydroelectric dams across the Amazon by 2020, flooding conservation zones and displacing indigenous peoples, is symbolic of what they are struggling against. The environment transcends politics, certainly class politics, and it is beyond left and right, at least in theory. Environmentalism in Brazil has taken a more explicitly socialist flavour, however, ever since the killing of Chico Mendes, environmentalist and rubber tapper, in 1988, which received global attention and became iconic for the global environmental movement. The articulation of ecology and socialism has meant that the trade unions are heavily involved, as are many indigenous and peasant movements. Thus, this particular articulation of what is perhaps best seen as an “empty signifier” – the environment – has become a paradigm for other social movements across the global South.

International NGOs have been particularly important in the creation and sustaining of environmental social movements. During the neoliberal era they were encouraged to bypass the state to deliver services. They also sought to encourage what they saw as “civil society”, although local understandings might have differed. They played a central role in promoting indigenous rights and sustainable development. They advocated for environmental legislation and promoted ecologically friendly small-scale community economies. Thus, environmental social movements inflected by international NGOs have a very distinct politics, which has often brought them into conflict with the progressive governments of Ecuador and Bolivia, for example, especially when ecological concerns and oil or gas exploration have clashed. A very different ecological politics was practised by the progressive governments with their far-reaching political philosophy of Buen Vivir (Living Well), which promoted an ecologically sustainable approach to development based on the cosmology of the Amerindian peoples.

Extractivism is widely seen as the principal mode of economic domination in Latin America. It is rooted in the colonial logic of the Americas as a source of gold and silver. Colonialism – and, after colonialism, dependent capitalist development – placed Latin American economies as providers of raw material.

FROM FRIEND TO FOE

The need for a new European demeanour was never greater, nor may it ever be greater, than when, in the small hours of 9 November 2016, Donald J. Trump ascended from the gilded catacombs of his Manhattan tower to claim the presidency of the United States.

It was a moment that defied the odds. When, deep into the night, ashenfaced pundits of the US cable networks called the election for the construction tycoon and television star, they looked as if they had seen pigs fly. Something of tectonic significance had changed. Something that theoretically could not have happened just had. What had shifted was history itself. For if history was supposed to bend towards anything, it sure as hell was not Donald Trump.

It was the start of a new “Machiavellian moment” for Europe, a true confrontation with its temporal finitude, one which would force the continent, as the Florentine consigliere might have predicted, to reassess the metaphysical core of its politics and assert its own sovereign strength. Europe's assumption had always been that the threat to its liberal order would come from the marauding strongman Putin, from China's new economic might or from religious fanaticism in the Middle East. In fighting it off, it would stand shoulder to shoulder with its more muscular sibling across the Atlantic.

But it now appeared that the greatest danger hailed from the United States. The continent's mortal enemy resided not in the red-brick Kremlin but in the White House. And from this lair, right at the heart of the Western world, Trump could hurt Europe in ways that Putin or Xi or Erdogan could not even begin to imagine. The US had been chief guarantor of the rules-based international order and the awesome sovereign power that underwrote Europe's security after saving it from itself. If Trump wanted to obliterate that order and feed Europe to the lions, who was going to stop him?

Not long ago, the world's strongmen were only tinpot dictators of tinpot countries. Parts of the world, we knew, remained in the doldrums of despotism. But this formed no particular threat to the West and its ideals. Liberal democracy seemed unassailable in its appeal. Strongman politics, the consensus was, thrived on social and intellectual torpor. Sooner or later the rest of the world would wake up and follow our example.

Today, history looks far less certain, less linear. Bullish confidence in the Western model, commonplace once, has become a curiosity. The strongmen are on the rise in Asia, Africa and even in the West itself. And rather than tinpot countries, they now run some of the world's wealthiest and most powerful states. The technological and military resources the strongmen command collectively, and in some cases individually, exceed those of European and other liberal states by far. The time when strongmen needed to pose as democrats to gain international acceptance is over. It suffices to win the respect of other strongmen.

For Europe, the repercussions of this new balance of power are vast. Since the Second World War, Europe has stood for an idea of global order, on which it also staked its future. According to this idea, multilateral rules can be found that serve the interests of all people, and peace and prosperity come about when those rules are upheld by global institutions of governance. It remains a powerful vision, one that has bought the continent the security and unity it needed. But as a conception of order, rules are no longer the only game in town. The strongmen have their own idea about how the world should be organized. And at the heart of this language of politics and order lie not rules but an idea of strength.

Coming to terms with the politics of strength, with the “grammar of power”, as French President Emmanuel Macron has called it, is one of Europe's biggest trials. It is also the central objective of this book. For while the politics of strength continues its rise in the world, our understanding of it lags behind. Dictators, tyrants and despots have always existed, of course.

Research on Latin American social movements has, on the whole, not been transparent in terms of its methods or the craft of gathering or constructing data and then analysing it inductively or deductively. As Benedicte Carlsen and Claire Glenton put it, “Transparency and accountability are key elements in any research report not least in qualitative studies. Thorough reporting of methods allows readers to assess the quality and relevance of research findings”. We cannot simply take on trust the robustness and relevance of the research methods deployed. Whereas in the past – at least in sociology and anthropology – the question of methods, be it participant observation or ethnographic methods, practically dominated, today there is more focus on the politics of epistemology than on the “how I did it” angle. Being methodologically reflexive and self-critical is essential, I would argue, to be a good researcher (and, yes, that does need to be defined, of course). Our starting point is the rather startling discovery, based on a systematic trawl through Latin American social movement studies, that even with a fairly minimal definition of transparency only a miniscule proportion were transparent or structured, or “provided the information that a serious reader would require for even minimal interpretation”.

To address this problem, I have consulted with a number of active researchers on Latin American social movements (see Acknowledgements), who are reflexive in their methodologies and are conscious of the need for transparency whatever the particular method they prefer to deploy, as well as drawing on my own experience as researcher and teacher. This chapter will advance in a few distinct moments, as it were. First, I approach the broad question of knowledge: what is a social fact? Is it given or constructed? What does critical realism tell us about doing research on social movements? What do we mean by “constructivism” and can we think in terms of a “grounded” social theory? How do we avoid the twin pitfalls of empiricism and theoreticism?

We then move on to a more applied domain, as it were, namely the question of engagement.

Call it a prism or a language, an ethos or a narrative, or simply a game, but the strongman believes the world is organized around sovereign power, structured not by rules but by his freedom and ability to act without those rules. He sees order emerge out of dynamism and action, the nurturing of ties of homage and fealty, the projection of strength, and the ethos of the duel. His language of power is based on a loosely cohering set of analytical and normative judgements that highlight the importance of states, borders, spheres of influence, personal diplomacy and rivalry, as well as informal but universal codes of respect and equality that enable deal making with political rivals.

It is a prism that contrasts sharply with how most Europeans regard political and global order, which for them fundamentally is, or should be, organized not around strength but around the power of institutions that apply the same rules to all, the strong and the weak alike. Europe's language of rules renders the separateness of states far less absolute and less political. It maintains that beyond the strongman's code of respect there are more comprehensive values and standards that determine how states are to behave, including towards their own citizens. International conflict, on this view, is structured less around the spatial distinction between states and more around the distinction between those who abide by the rules and those who don’t.

The difference between these two prisms – the language of power and the language of rules – explains the incompatibility of temperament that exists between Europe and the strongman, and why the encounter between them tends to be grating and fruitless. It is those languages themselves that clash in the encounter. For Europe's leaders the confrontation with the strongman is a confrontation with the immoral and the unsavoury. To negotiate and shake hands with a strongman is a soiling business.

AUDIENCE WITH THE SULTAN

On 5 October 2015, European Council President Donald Tusk hosted Turkey's Recep Tayyip Erdogan for a special dinner in Brussels. It was no occasion for pleasantries, even less for lectures about the rule of law in Turkey. Brussels was in full crisis mode. And to conquer the crisis it needed help, the strongman's help.

A torrent of refugees had been making its way to Europe since the start of the year. On the run from poverty and war in Syria and the Middle East, the human convoy passed through Erdogan's Turkey before embarking on packed dinghies and small boats to Greece and the European Union. It was a perilous journey. Thousands perished at sea. Their bodies washed ashore on some of Europe's most idyllic coastlines.

But the many hundreds of thousands who made it to Europe's shores found nothing to stop them. No walls or fences, no border guards, booths or gates, no police asking for papers. The Union possessed no system for guarding its external borders. And so the caravan just trudged onwards, via Serbia, Hungary and Austria to Germany, where most migrants planned to stay. If the Greeks could not guard the Union's external borders, the only practical solution seemed to resuscitate the continent's internal borders. But this, too, was an unappealing scenario.

By the time Donald Tusk and European Commission President Jean-Claude Juncker broached their plan to their Turkish guest, Europe's options had dramatically shrunk. The pressure cooker needed to vent steam or it would blow. Europe needed Erdogan's support in keeping the refugee stream at bay. Might Turkey provide them with shelter, buy the EU some time at least? Turkey would of course be fairly compensated.

That evening it must have been hard for Erdogan, an intensely proud Turk, to fight back a smile of satisfaction. Was this Europe begging for help, his help? As long as he could remember, Turkish leaders had begged for Europe's recognition and acceptance, and the Europeans, infuriatingly, had always withheld it.

A CLUB OF RIVALS

In the end, it took only five seconds to decide he liked him. After decades of deal making in the real estate business it was not difficult. “It's my touch, my feel, that's what I do”, Trump said. “I think very quickly I know whether or not something good is going to happen. And if I think it won't happen, I’m not going to waste my time.”

It had not looked quite so easy one year earlier, when Kim Jong-un was busy testing his long-range missile capability over the Pacific Ocean, a projection of his strength and power. In August 2017, Trump still tweeted that North Korea's nuclear threat “will be met with fire and fury the likes of which the world has never seen”. And Kim, who Trump liked to refer to as “Little Rocket Man”, responded by calling the president a “mentally deranged dotard”.

War had seemed unavoidable. But when both leaders met in June 2018, on the island of Sentosa off the coast of Singapore, the turnaround was dramatic. When Kim had first floated the idea of a summit, foreign policy experts in Washington quickly agreed it would be a disastrous move. Trump's secretary of state Rex Tillerson, part of the “axis of adults” in the White House, advised against it. Any deal would need to be minutely prepared by professional negotiators. How else had Obama been able to get the Iran nuclear deal agreed?

But Trump rated himself as the world's number one dealmaker. The Iran deal he considered “the worst deal ever”. Tillerson, previously the CEO at ExxonMobil, was summarily sacked, by tweet. The president had decided to stonewall his foreign policy mandarins. For Trump, what mattered more than professional advice was his personal relationship with Kim. “This is all about leader vs leader”, he explained his motives to White House aides. “Man versus man. Me versus Kim.”

Given the size and importance of its economy, the United States is certainly worthy of study in the context of austerity. In much of the postwar period, and even before, the behaviour of the US economy has shown evidence of the power of fiscal policy, as is documented in Romer and Romer (2010), for example.

American fiscal policy in response to the financial crisis of 2007–08 was initially highly expansionary. When Barack Obama assumed the presidency on 20 January 2009, the budget deficit was huge, approaching 10 per cent of GDP, output was falling, unemployment was soaring (it reached 10.5 per cent) and confidence was at rock bottom. It seemed that economic stimulus was needed. And this was what Obama delivered. On 17 February, less than a month after taking office, he signed into law the American Recovery and Reinvestment Act (ARRA), which provided a stimulus with a headline value of $820 billion, although the actual value was more like $725 billion (see, e.g., Tooze 2018: 279). This was of the order of 5 to 6 per cent of GDP. Part of the stimulus package went into tax cuts, and part into improving programmes such as Medicaid and unemployment relief. The remainder went into discretionary spending, including green energy and improvements to broadband. There was considerable spending on infrastructure items such as roads and bridges.

The consensus of the research done on the impact of the ARRA (see, e.g., Conley & Dupor 2013) was that it was expansionary. It is not easy to estimate the effects of such a policy as one does not know what would have happened had the Act not been passed. Nevertheless, Conley and Dupor estimate that the programme, in its first 24 months, increased government employment by between 156,000 and 563,000 persons. The effect on the private sector was somewhere between a loss of 182,000 jobs to a gain of 1.1 million jobs. The total number of jobs was estimated to have risen by between 82,000 and 1.55 million. This is of course a frustratingly wide range. However, these figures fall considerably short of those made by the Council of Economic Advisors, who estimated job creation of 1.6 million a year for four years.

The fundamental question of fiscal policy is how the authorities should manage the public debt; specifically, what time path should they adopt?

Is there an optimal debt–GDP ratio?

Earlier in the book, we discussed the Barro (1979) result that, optimally, the debt–GDP ratio should follow a random walk. The logic behind this result is clear. Firstly, if we think of the adjustment as taking place through tax changes, it is better that taxes stay constant rather than fluctuate. This is for efficiency reasons, to minimize the distortionary effects of taxation. Secondly, given that it has been established that taxes should stay constant over time if possible, the question arises as to what level to set taxes. The answer is that they should be set at a level consistent with a stable debt–GDP ratio over time. Any other rate would mean either a continually increasing or continually decreasing debt–GDP ratio. This cannot happen indefinitely, so there would have to be tax changes in the future, and this cannot be optimal. It follows that whenever there is a shock to the debt, or an event happens which affects the expected time path of the debt–GDP ratio for current levels of taxation, tax rates need to change so that it is expected that the ratio neither increases nor decreases over time.

The Barro result is based on restrictive assumptions, in particular the assumption that there is no possibility of the government ever defaulting on its debt. So there is no critical level of debt, such that default is likely if the debt exceeds it. If there were such a critical level which might provide an upper bound to the debt–GDP ratio, then we probably would not want to go near it. The conclusions of the analysis might be completely changed by relaxing the assumption that the government cannot default. If the critical level of the ratio is 100 per cent, then 90 per cent is perhaps sufficiently close that a few adverse shocks might raise it to 100 per cent. We would also like to have some leeway to pursue expansionary fiscal policies in response either to a shortfall in demand or a major crisis such as the GFC.

The previous chapter considered issues relating to the optimal time path of government debt. In this chapter, we consider the wider policy implications of the fact that the economy may be subject to large negative demand shocks, which may be so severe that even if the central bank reduces its policy rate by as much as is feasible, this is insufficient to restore a satisfactory level of output and employment.

The first set of policies considered below are policies that make the economy less likely to suffer such a demand shock; the second set of policies are policies to be pursued in “normal” times, which make it easier for the authorities to combat such a crisis, should it occur; and the third set of policies are those that might be pursued in the aftermath of a severe demand shock.

Policies to reduce the probability of a severe negative demand shock

Regulatory policies

It is undoubtedly the case that the main way in which a large negative demand shock may occur is through the financial system. The result of a financial crisis may be a severe contraction of lending by financial intermediaries, such as in the GFC of 2007–08. So better regulatory policies, which reduce the likelihood of a financial crisis, should reduce the chances of such a large negative shock to demand. It is scarcely a controversial statement to say that better regulation is needed – the crucial question is how this is to be achieved.

There have been major changes in the way regulation of the financial sector is carried out in most major economies. In the UK, the Financial Services Act of 2012 abolished the Financial Services Authority and established the Financial Policy Committee, the Prudential Regulatory Authority (both part of the Bank of England) and the Financial Conduct Authority (not part of the Bank of England). The Financial Services (Banking Reform) Act of 2013 implemented the recommendations of the Independent Commission on Banking, the main recommendation of which was that banks should “ring-fence” their retail banking divisions from their investment banking arms. The Bank of England is hence much more heavily involved in regulation and in particular there is much more of a focus on macro-prudential risks, which is what the Financial Policy Committee is charged with monitoring, than before the crisis.

This book provides an economic analysis of the effects of austerity policies. It is intended to be comprehensible to advanced undergraduates in UK universities. Hopefully it will be comprehensible and relevant to others too. Its aim is to provide an assessment of what is currently known about austerity programmes, in the light of the considerable amount of literature that has appeared on the topic, particularly since the Great Financial Crisis (2007/08). Austerity has, of course, been a controversial focus of interest, both amongst economists and in the political arena. It is fair to say we are nowhere near consensus on the subject in the profession, and there are several unresolved issues. Hopefully, this book will constitute a modest step towards a better understanding of austerity policies. It should be stressed that austerity is not an easy topic, and some of the arguments are quite complex and subtle. However reaching a better understanding of austerity and its ramifications is vital, given the huge costs that austerity policies have imposed on many poor and vulnerable people in many countries, and the likelihood that further such policies may be implemented in the future. Proponents of austerity policies may argue that there are no viable alternatives to such policies, or that the policies suggested are less painful than the alternatives. Whether or not this is the case, it does seem necessary to analyse such policies carefully and implement them only if it is indeed the case that they are the best options available.

The final draft of the book had almost been finished in mid-March 2020 when it became clear that the emerging Covid-19 pandemic was going to be an event of massive importance for the world economy and, indeed, for all aspects of our lives. Accordingly, I decided to review the draft carefully, and take into account the implications of the pandemic for the message of the book. However, at the time of writing (the middle of May) the pandemic is far from over and it will be some time before we are able to come up with a definitive account of the multifold economic consequences of the crisis.

I have given seminars related to the subject of this book to a number of audiences, including presentations to the Birmingham Economics Department, the University of Manchester, the University of Hull and the University of Cambridge Marshall Society.