We are living through a historical break [interview]

Veronika Pehe: Your most recent book, Europe since 1989, is a history of neoliberalism Europe, but it very much focuses on Central and Eastern Europe. Why is this region so important in the story of neoliberalism and why were these countries so eager to adopt neoliberal policies?

Philipp Ther: Most European histories are written from an Occidentalist perspective, so I thought it was time to break with that tradition. The book is written from a more Eastern point of view – though I should add that the East-West divide is somewhat outdated. New divisions have emerged in Europe, in particular between North and South. If you want to analyse the history of neoliberalism, I argue that it gained global hegemony precisely in 1989 due to the breakdown of the Eastern Bloc.

Thereafter, Eastern Europe served as an experimental field, and Milton Friedman, one of the main proponents of the Chicago school, even said that this was one of the greatest economic experiments in human history. However, I would not say that radical reforms were simply imposed on Eastern Europe from the outside. In the Czech Republic, there was Václav Klaus and ODS, in Poland there was Leszek Balcerowicz, in Russia Yegor Gaidar, so this drive for radical reforms also came from within. In their case, it had to do with their frustrating personal experience with state socialism. This radical drive for reforms, and my sources prove it, came before 1989. The story of why neoliberal policies were adopted is a mixture – to some degree imposition from outside, as well as internal readiness for this particular modernization strategy.

One of the main arguments in your book is that neoliberalism, which has been dominant in the past twenty-five years, is being challenged at the moment. In what ways exactly?

The main challenges have been the failures of neoliberalism, especially the crisis of 2008-2009, which weakened the Western hegemony at large. The elevated status of the West has been damaged or destroyed by the crisis. Critics such as Joseph Stiglitz have criticized neoliberalism’s very basic premises, or what he calls market fundamentalism. It is a critique of the rationality of market agents, who acted completely irrationally during the crisis, but also of deregulation, another cornerstone of neoliberalism, and radical liberalization. If we define neoliberalism based on the Washington consensus, which was one of the early attempts to codify and also implement it, and take austerity, deregulation, privatization, liberalization, and last but not least, the idea of external modernization through foreign direct investment as its key features, then I think the core values of neoliberalism have been under attack and have even been partially discredited. Nevertheless, I would also not like to fall into the trap of making neoliberalism culpable for every wrong. Turning it into a scapegoat for everything is not intellectually convincing.

Historical breaks never boil down to one specific year. If you think about 1989, you have to include 1991 as well. 2014 can be seen as a caesura in many aspects.

But isn’t this challenge to neoliberalism happening only on an academic level? Wasn’t the political response to the 2008 crisis in Europe just more austerity?

 It is an academic challenge, but there is also a policy challenge. Take three examples. In Poland, the partial privatization of the pension system has been redrawn. For bad reasons, on the one hand, to fill the holes in the state budget, but also for good reasons on the other hand: it became clear the fees and financial transaction costs for these privatized schemes were quite high and resulted in co-financing the stock market dividend of insurance companies. Other countries have taken back their flat tax schemes, for example Slovakia. If you look at Germany, similarly to Poland and Slovakia, there was a more Keynesian response to the crisis. I would argue that the countries that could afford this more Keynesian response fared better than the ones that were under constant pressure and had to implement strict austerity measures.

Do you think that retrospectively, 2008 is going to be seen as a major historical caesura?

That is one caesura, but I’m arguing for another caesura in 2014, which is partially continuing to this day. Historical breaks never boil down to one specific year. If you think about 1989, you have to include 1991 as well. 2014 can be seen as a caesura in many aspects. One is the behaviour of Russia, which called the post-1989 order into question.

We need to look at the situation from a longue durée perspective to understand why the countries which were more developed already before the Second World War are much more evenly developed now.

That’s more of an international relations issue, but first the annexation Crimea and then the intervention in Eastern Ukraine are an open challenge to Western hegemony. We can further think about the continuous crisis of the South in Europe, which can’t be nailed down to one particular year, it’s still continuing. And then most recently we had the Brexit, where Western hegemony has been endangered from within. I think that here we have the signs that something has come to an end. If we want to historicize neoliberalism, which is what I try to do in my book, then I would say its peak was after the turn of the millennium, when there was a tendency to privatize everything that could be privatized. Since then – though of course it depends on the country – there has rather been a decline of neoliberalism. In that way, I feel confident that it can be historicized, which of course does not mean that it has ended completely.

Is it possible to trace the current nationalist populist turn in East-Central Europe to the crisis of neoliberalism? How are they connected?

They are connected in various ways. But let’s take the specific example of Poland. On the one hand, you have the traditional Law and Justice (PiS) electorate in the so-called “Polska B” – the rural, less developed part of Poland. This is a pattern that existed before. But on the other hand, the election was also won by PiS, because many young people voted for them or for the maverick Paweł Kukiz and other brands of far-right populism. That happened because of disaffection with the course of the reforms. I think one of the major causes have been insecure “trash contracts” (the so-called “śmieciówki”). In the end, even the government issued those kinds of contracts, and if you have no security at all, then amongst a very large segment of the population, especially the younger generation, this is bound to provoke a counter-reaction. I think that Civic Platform (PO), which was in power previously, although it was not always completely neoliberal and made some Keynesian moves, was ultimately punished for its social insensitivity.

In your book you discuss that in the countries of the former Eastern Bloc, the Western parts of these countries tend to be much richer than Eastern provinces. Why are there these regional discrepancies?

If you look at regional diversions, most of them happened throughout the 1990s, right up to the EU enlargement. Since then, regional divergence has either stabilized or even partially reversed, like in the case of Poland. EU structural funds and subsidies for agriculture have helped to an extent. But how did this gap it come about? It has to do with the transformation. Throughout the region, there was a drive to attract foreign capital. But due to neoliberal thinking, the state did not want to steer too much where those – mainly external – investments would go. Those countries, by the way, which had less foreign investment and more internal investment, like the Czech Republic and Slovenia, have less of a regional gap. But we also need to look at the situation from a longue durée perspective to understand why the countries which were more developed already before the Second World War are much more evenly developed now. In general, it has to do with the reform strategy and the neglect of the rural and small-town parts of those countries. It was certainly a mistake that such a big gap emerged, and economists such as Paul Krugman teach us that if there is such a gap, it becomes a hindrance for the whole country and slows down growth.

What kind of Europe would we have now if the transformation had been implemented more gradually?

If the Eastern Bloc had broken down in 1979, let´s say because of a fast defeat of the Soviet Union in Afghanistan, then perhaps we would have had a more Keynesian drive for reform. In such a scenario, we might have had a much more social Europe. But Keynsianism had failed to cure the “stagflation” in the late 1970s and early 1980s. And whether it would have created more prosperity is a counterfactual question that’s not easy to answer. All in all, neoliberalism has had many drawbacks, but one also needs to take into account that the countries which hesitated with reforms and saw a continuity between communist and post-communist rule, like Romania or Ukraine, were even worse off.

The radical reforms in the East acted as confirmation for neoliberals in the West.

In what ways precisely did the transformation fail in countries like Ukraine or Russia?

They basically had an insider-driven and very corrupt privatization. I think this was one of the main mistakes. If you look at Russia, the “privatization of the privatization procedure” of the 1990s created huge corruption and economic oligarchy, which led to the creation of political oligarchy. I’m getting a bit worried about the Czech Republic and Slovakia, where managerial oligarchs are now also getting stronger and stronger politically. I really doubt that’s a good solution.

Wouldn’t you say this tendency is precisely a consequence of neoliberalism? Neoliberalism tries to posit itself as a ‘normal’ order in which the market ‘naturally’ deals with problems. Isn’t the logic of managerialism a product of that?

I would agree that the idea of managerialism as a value and the manager as an ideal is a result of neoliberalism. After all, before 1989, in Poland, for instance, you had the kierownik (director), not the manager. One of the weaknesses of neoliberalism as opposed to a more embedded form of capitalism or a more regulated economic policy, like that of the post-war period in the West, is its lack of anti-monopolism. If you have a more anti-trust type of economic policy, you wouldn’t produce such all-encompassing oligarchs with business interests in so many different areas of the economy. It is clear that if you have an anti-monopolist agenda, the trend towards oligarchization would not be as strong, but for that you need to have a strong state. In their anti-etatist drive, neoliberal reformists didn’t think enough about reforming the state, they mainly thought about privatization. And especially in places like in Russia, this weakened the state significantly. When the state is in ruins, it is difficult to build up anti-trust legislation. This is one of the major mistakes of the transformation.

You argue that the introduction of neoliberal reforms not only profoundly transformed Eastern Europe, but that these reforms also had tangible repercussions in the West. In what ways did the story of the East European transformations affect Western Europe? 

“Transitology” concentrated on post-communist Europe only. This focus was justified due to the many problems these countries were facing. But is also perpetuated the mental map of the Cold War, and confirmed Fukuyama’s strange teleology of history. His essay on the “end of history” suggested that the East will be westernized and the whole world will introduce market economies and liberal democracies. The West, the victor of the Cold War has achieved all this already. Indirectly it meant that everything will change in the East, but nothing needs to change in the West. This was also Helmut Kohl´s agenda in united Germany and that of the EU in the enlargement process. I try to move beyond this Cold War container of Eastern Europe and to show how the reforms in the East affected the West. I cannot go in details here in a brief interview, but maybe the most important result was that the radical reforms in the East acted as confirmation for neoliberals in the West.

Using in particular the example of Germany, I also show how the reforms spilled over from the East to the West. One can prove this on the level of discourse with media sources. For example, when Slovakia introduced the flat tax in 2004, it aroused a lot of media attention in Germany and brought about demands to do the same. The partial privatization of the pension system in Germany and labour market reforms after 2001 were driven by the perception that the reforms in the East went much further and had worked. In Sweden, to take another example, there was a feedback effect with pension reforms in the Baltic States. But even though I can show some connections, Western references such as the reforms passed by Tony Blair and the whole concept of New Labour were certainly more important. Nevertheless, there was no one way road between the West and the East, especially Germany was co-transformed, that is my point. After the Eurocrisis, Greece and Italy often received advice to pass reforms exactly like those implemented in post-communist Europe in the 1990s. So there is another connection there.

In general, the reference to external examples is one of the key features of the age of neoliberalism. As we all know, this internationalism used to be a feature of the moderate and the radical Left. Since 1989, the neoliberals have taken over this internationalism, while the Left has closed itself to the weakened shell of the nation state. This is one of the many paradoxes of this recent period of history.