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Introduction

Welcome here in the auditorium of Erasmus University, in a co-production of the Royal Dutch Economic Association, KBS, Studio General and David Dawes. Tonight we will try to make sense of the world around us. War is in Europe and the Middle East, sending shockwaves through the global economy – rising oil and gas prices driving inflation and the risk of recession. Trade wars are shaking up long-time alliances, and underlying all this, an ongoing shift in the global economic and political power balance. What is going on? And are we witnessing, at the backdrop of this world in crisis, the rise of a new economic order?

On this question tonight: in the first half, a public lecture by one of the leading economists in the world, Mr. Paul Krugman. After that, a panel discussion on sustainability, the role of global institutions and the future of Europe with Axel Erbahar, Alana O’Malley and Sandra Phlippen. And at approximately 8.30, after about an hour, we will open up the room for questions or remarks from you, the audience.

Just to get an idea of the crowd tonight – please raise your hands. How many economists are present? How many students – students of economics or econometrics specifically? Any politicians? And who among you has entered this venue in a state of worry, uncertainty, or even panic with regard to the state of the world?

Just for the record: our keynote speaker in the front row did not raise his hand. So he will explain to you why there is absolutely no reason to be afraid in these times of crisis. It is a pleasure to welcome to the stage a Nobel Prize-winning economist, a long-time New York Times columnist – officially retired, yet publishing more than ever on his extremely popular Substack. He taught at Princeton, at MIT, at Yale, and was a visiting professor at the Erasmus School of Economics here in Rotterdam. Please welcome Mr. Paul Krugman.

The World as It Seemed – 20 Years Ago

Thank you. It feels wrong to sit – so let me just stand here.

Let me admit from the beginning that I was a little concerned about having a lecture devoted to the “new economic order,” because I don’t see much order right now, and I’m not sure we’re going to have any order for quite a while. But in a way, that is my theme.

I find that when you’re trying to make sense of the present, it helps to step at least a little bit into the past. So let’s talk for a moment about the way the world seemed to many observers 20 years ago.

20 years ago was the high tide of globalization – the time when it seemed that the shrinking of distance and the integration of world economies was an unstoppable force. My former New York Times colleague Tom Friedman had an immense international bestseller titled The World Is Flat, capturing the perception that anything made anywhere could reach you very easily. That certainly captured the mood of the time.

If you really want to know the history of these things: world trade, as a share of the world economy, reached a peak in 1913. Then in 1914, something happened that rather put that on its back foot, and trade really didn’t recover to its 1913 levels until around 1980. But starting in the 1980s, there was an explosion of world trade to levels never seen before. And the numbers don’t tell the full story – the world became a single economy in a way it had never been before.

If you ask the question – where was this made? [holding up his phone] – the answer is genuinely complicated. The final assembly was probably China, the equipment likely India, and the various components come from something like 15 different countries. That is the kind of world we created.

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A note before we begin.

Welcome to the roughly 110 of you who subscribed after Michael Pettis reposted my piece on Japan on X. I’m grateful you’re here. The piece below is, I think, a natural follow-on: Mark Blyth and Pettis share a structural account of how surplus countries shape the macroeconomic order.

Mark Blyth is a professor of political economy at Brown University. His book Austerity: The History of a Dangerous Idea — winner of the American Political Science Association’s Best Book in Political Economy and the Paul A. Samuelson Award — is a natural companion to Pettis: sharp, funny, and one of the few economics books that makes you angry in a productive way. More than a decade after publication, its central argument — that cutting public spending during downturns deepens the downturn — keeps being vindicated, mostly because policymakers keep ignoring it.

For a more advanced treatment of the domestic coalitions that sustain global surpluses and deficits, Diminishing Returns: The New Politics of Growth and Stagnation is where Blyth goes deeper on the structural politics behind the models.

And if you’re not sure who Pettis is, read his book Trade Wars are Class Wars. It’s the best entry point into understanding why the contemporary global trading system is organised the way it is, and who benefits from keeping it that way.

It is also widely read by policymakers, including in the Trump administration.

Fifteen months later: a quick scorecard

This interview was conducted on 11 February 2025 and originally published in Dutch. This is the first time the 10k word interview has been converted to a readable English version. Unfortunately, the content is as relevant as ever. I’ve updated it where events have moved on.

The Draghi report, which Blyth called Europe’s obvious blueprint, has had only 15.1 percent of its recommendations fully implemented.

At the one-year conference, Draghi himself said every challenge he had identified had worsened.

Germany is the partial exception, but nowhere near satisfactory.

Merz pushed through a €500 billion infrastructure fund in March 2025, breaking with the debt brake he had campaigned to defend. But by early 2026, the ifo institute was reporting that 95 percent of the new debt earmarked for 2025 had been used to plug regular budget gaps rather than fund net new investment.

A hollowed-out state can’t just decide to invest at scale overnight, which is precisely what Blyth would have predicted.

On to the interview.

The mechanics of self-harm

I start where most readers will: with the standard finance-minister script.

Growth is slow, revenue is down, so spending must be cut.

In the Netherlands, where I’m based and where this script is delivered with particular conviction, the Liberal finance minister had spent the year before our conversation insisting that low growth necessitates austerity, and that deficits leave bills for future generations.

It’s the same script you’ll hear in Berlin, London, Brussels, and depending on whether you follow rhetoric or action, Washington.

“They keep doing it,” he sighs when I tell him the book is, depressingly, still relevant.

Blyth has heard it a thousand times.

“Start with the basics. When you’re in recessionary or quasi-recessionary conditions, and the government spends around 40 percent of GDP, significant cuts produce two predictable outcomes.

“First, your debt stock increases due to the denominator effect. GDP shrinks, so the same amount of debt becomes a larger share of the economy. Then you say, ‘Oh no, look at all that debt, we need more cuts,’ and you spiral further.

“Cutting spending during a recession effectively creates the recession. That worsens the deficit because less tax revenue comes in. Then policymakers point to the deficit and call for more cuts. They lock themselves into a cycle of self-harm. This happens every time.”

This is the canonical Blyth point, and it has the slightly tedious quality of a conclusion that has been demonstrated empirically many times — the post-2010 eurozone, post-2010 UK, the IMF’s own internal revision of fiscal multiplier estimates — and yet keeps having to be re-demonstrated, because the political economy of who benefits from the script keeps reproducing it.

The euro as a straitjacket

There is, Blyth concedes, a kernel of something real beneath the bad arguments, at least in Europe, and you don’t need to be a Modern Monetary Theorist to see it.

“If you get to print the cash, you can never go bankrupt, because you can just say, ‘how much cash do you want?’ That shows up in devaluation, in falling asset prices if foreigners lose faith, but ultimately you can offset it. Your deficit is a fiscal control valve rather than a death trap.”

The euro removed that valve by design.

The upside was scale, lower volatility, and imported German monetary credibility.

The downside was that when everyone’s trading partners simultaneously decide to save by cutting deficits, the whole bloc manufactures its own stagnation — which is, more or less, the story of the past decade.

“Look at Europe over the past ten years. Many economies have basically failed to grow. Surprisingly the periphery, particularly Spain, has done the best, because they had more room to grow and benefited from immigration, which powers growth. An economy is nothing more than the number of people, the number of hours worked, and the quality and quantity of capital. Spain grew through people. Everybody else stagnated.”

The corollary is uncomfortable for the surplus-country consensus: the periphery wasn’t bailed out by core austerity discipline; it grew despite it, on factors — demographic absorption, productive capital, hours worked — that have nothing to do with the deficit-cutting morality play.

The export model and its discontents

This is the part of the argument that readers of Pettis will recognise immediately. The Dutch and German preference for austerity isn’t a cultural quirk or a Calvinist hangover. It’s a structural feature of the growth model.

“When you’re set up as an export platform, you care about two things. First, an undervalued exchange rate — which you get by being in a currency union with lower-productivity countries. Second, you suppress consumption and wages to maintain cost competitiveness. You achieve that through fiscal retrenchment, through trade unions that know pushing wages too high might move jobs elsewhere.”

“In this context, austerity is baked in. If wages rise and people spend more, you lose cost competitiveness. A BMW that costs $20,000 might now cost $25,000, and you lose your export edge.”

The follow-up I wanted to test was the explicitly Pettis-style framing: are these policies beggar-thy-neighbour?

Blyth responds: “I don’t think finance ministers wake up and say, ‘Let’s screw the French.’ But the effect is the same. In a currency union, if one country runs an external surplus, someone else must run an internal deficit. Initially the euro allowed balancing through varied growth models — France and Italy on consumption-led growth and higher deficits, the UK on financialisation. Since the 2012 reforms to the Stability and Growth Pact, everyone has been pushed toward export-led growth. Domestic consumption is now suppressed across the union. It’s not strategy. It’s outcome.”

The distinction matters less than it might seem. From the perspective of the deficit country on the other side of the imbalance, the question of whether the suppression of German and Dutch demand was intended to suppress French and Italian growth is academic. The growth got suppressed either way.

Milei, or: when does austerity actually “work”?

I asked whether any case had made him reconsider his hostility to austerity. He surprised me.

“Milei is genuinely interesting. I never thought it would be possible, but it actually works, for a specific reason. Argentina wasn’t in a recession. It was in an inflationary death trap and had been forever.”

In Argentina, the richest 20% had dollar accounts. So when the peso tanked, they simply bought more with their dollars. Trade unions were equally insulated: wages indexed, costs covered by the government. The Peronist settlement, in other words, worked fine if you were inside it. But more and more Argentines were neither in the dollar-account class nor in the Peronist coalition, just facing “impossible losses in their purchasing power, month after month, year after year.”

“What Milei said was: ‘This is just all the crap that we’ve got here’, whether it’s the middlemen at every level of the economy, whether it’s the fiscal profligacy of the government. None of this has to be true. It just has to be convincing.”

He built what Blyth calls a deflationary coalition: a third of the poor, a third of the middle class, a third of the rich, all united by the shared conviction that killing inflation would make their assets and purchasing power better. And as a side effect, it destroyed the cronies’ network entirely.

The results: poverty above 50%, brutal cuts to public expenditure, a shrinking deficit, positive growth, collapsing inflation.

“What he’s shown is that when you’re not in the European situation — where the problem is essentially a manufactured micro-recession — but in a genuine inflationary crisis, you can burst it. High interest rates, spending cuts, and people willing to absorb the pain because they hate inflation more than they hate deficits. I didn’t think it was possible. We need to acknowledge it.”

The framing he insists on is crucial: “He’s not cutting budgets in a recession. He’s cutting budgets in an inflationary period. The effect and the goals are massively different.”

Whether Argentina’s strategy is sustainable, whether the promised investment shows up before the coalition exhausts itself, remains an open question fifteen months on. Inflation has continued to fall through 2025 and into 2026; poverty has begun retreating from its peak; the Milei coalition’s electoral durability is the next test.

The deeper point, and the one I want readers to sit with, is this:

“Who is benefiting and who is losing. That’s really what matters.”

This is, in two sentences, the entire methodological commitment of political economy as a discipline. It’s also the question that the technocratic vocabulary of optimal management is engineered to bracket.

European governance: the unfinished project

On the Stability and Growth Pact, Blyth quotes Romano Prodi, the former Italian prime minister: “The stupidity pact is stable.”

Prodi also gave him a metaphor he loves. “He said: think of Europe like a Vespa. Two-stroke engine. One piston Germany, one piston France. When one went up, the other went down, and it powered Europe. Then you needed more cylinders.”

The Kohl–Mitterrand generation, scarred by the war, saw monetary union as a prelude to political union. “Then Merkel switches. Blair shows up, very transactional. Chirac in France. You get a generational shift — the people who came out of World War II replaced by post-boomers. ‘Globalisation, let’s do this, whatever.’ The whole impetus for political union, federalism, fiscal union just died because the people who took up the reins didn’t care enough to finish the project.”

The euro was supposed to be a beginning. “But nope. Sorry, that’s the end, and that’s going to be your doom.”

This is the diagnosis that makes the Draghi-report scorecard so painful. Draghi’s recommendations — common debt for common projects, completion of the capital markets union, strategic autonomy taken seriously — are exactly the federalising moves the original architects of the euro assumed would eventually have to be made. Fifteen months in, with one in ten recommendations delivered, the project remains exactly as unfinished as Blyth described it.

Why nothing changes

If you had dictatorial powers over EU economic governance, I asked, what would you do?

“First, I wouldn’t give myself the job. Or anyone.”

“Let’s talk about the big problems. The United States doesn’t care about you anymore. You’ve got zero security provided by yourselves. You’re 27 countries with 27 agendas, and you all think China’s coming to eat your lunch — when in fact China might be the last trading partner you have, because the Americans are about to tariff the hell out of you. Economic governance is way down the list.”

This was February 2025. By August, the EU had signed exactly the asymmetric trade arrangement with the Trump administration that Blyth’s framing implies: hundreds of billions in committed US energy and chip purchases, with European leverage roughly where he said it was — minimal.

“The institutions Europe built in the 1990s were based on a fantasy. A world where history doesn’t matter and tomorrow looks like today. Why 3% deficits? It sounded nice. Why 60% debt-to-GDP? Could’ve been 40 or 80. Then the financial crisis blew that world up. Central banks reversed their mandates, flooded markets, put everything on life support. You got loose money and tight fiscal, not enough to sustain growth. The ECB stayed too tight even after Draghi. Fiscal policy didn’t fill the gap because exporters dominate governance, and exporters don’t do fiscal expansion.”

His prescription, broadly: the surplus countries need to rebalance toward domestic consumption. Debt mutualisation. Confront the fact that “the Netherlands is essentially a giant tax haven, parasitic on others. Germany makes cars nobody wants anymore, and their solution is another round of structural reforms. Good luck with that.”

The Draghi report, he says, nailed it. “Just read it. He’s 100% right. Chance of European governments actually doing it? About the same as me becoming the next Pope.”

Why? “Because the top 20% in places like the Netherlands, the ones making decisions, are fine. They don’t want to rock the boat.”

Populism is the symptom

“It sounds like we’re sleepwalking into a slow economic death,” I said.

“That’s exactly what’s happening,” responds Blyth. “Populism, right or left, is the reaction. Twenty to thirty percent of voters in every major European country are saying ‘burn it all down.’ They don’t believe the elites anymore. Their communities and lives have gotten worse while the top gets richer. And frankly, they’re not wrong.”

The historical link he draws is direct. Imperial Japan: “Largest austerity programme in human history at that point. A third of GDP out in budget cuts. The economy collapses, they turn on the military, the military eventually cuts everyone’s head off, and off we go to imperial expansion.”

Weimar Germany: “Everyone tells you it was the inflation. The inflation was over by 1923. Hitler wasn’t in power for ten years. What killed Weimar was 1929 onward: tightening, cutting, tightening, cutting, mass unemployment. It had nothing to do with inflation. But it’s a good story, and it tells us we should care about inflation. Why? Because inflation hits financial assets. That’s why the people who own them don’t like it.”

A statistic he likes citing: a UMass Amherst paper estimating that US carbon majors in 2022 made $220 billion in excess profits, 51% of which went straight to the top 1% of Americans. The ECB later found that around 40% of European inflation in 2023 was driven by firms hiking prices because they could. “I’m not outraged. If I owned a firm I’d do it too. It’s called capitalism.”

The point isn’t that inflation is good, it does hit the poor hardest, as Blyth acknowledges. The point is that the political economy of who cares about which macroeconomic problem, and how intensely, tracks pretty cleanly to who owns financial assets. That’s not a moral failing. It’s the model behaving as designed.

The household fallacy

I asked him, finally, how to explain to ordinary Dutch and German voters — proud of their frugality, intuitively convinced the state is just a big household — that this analogy is wrong.

His answer was three sentences.

“Do you get to issue long-term liabilities denominated in the name of the family, with secondary markets? No. Do you get to print the thing you pay your bills with? No. Start there.”

What we can’t quite see

The conversation closed where it had to: with the question of how anyone — economist, voter, journalist — is supposed to figure out what’s true when the technocratic vocabulary has absorbed all the political questions.

“We’ve turned political questions about distribution into technical questions of optimal management. ‘Don’t worry, the central banks have got this. There’s a perfect interest rate that’ll bring the whole economy into balance, if only we can find it.’ The people who say this don’t even believe it themselves.”

“Europe has basically decided it can’t do anything and shouldn’t do anything. The rules say they can’t, and they shouldn’t. Anyone who says otherwise is obviously talking nonsense. Let’s have another round of cuts. That’s where they’re at.”

The rules, in his telling, are a shortcut for thinking. They smuggle a set of beliefs about how economies work — monetary neutrality, real rates, equilibrium — into the everyday vocabulary of fiscal policy, and once they’re there, the question of whether those beliefs are true never quite gets asked.

“At the end of the day, their house is still worth 800,000 euros.”

The full transcript of this conversation — roughly four times the length, with longer detours on Japan, Weimar, greedflation, and the limits of paradigm critique — is to be read here.

I am currently working on a piece that explains how theory is more fundamental to the way we understand the economy than most people realize, and how that in turn affects the economy. Stay tuned!

Thank you for reading. I write this between deadlines, on my own time, without pay. If it was worth yours, buying me a coffee would mean a lot. Also consider subscribing.

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[This interview has been edited for the sake of brevity]

At the opening of Helsinki Geoeconomics Week that took place in the second week of August, one striking fact went unmentioned: exactly fifty years ago, on the Finnish archipelago, the Helsinki Accords were signed. The treaty raised hopes of greater cooperation between the Soviet Union and the West, and for a moment the Cold War yielded to a diplomatic spring.

Now, 50 years later, the Scandinavian summer sun is burning, the holiday from geopolitics is over, and the temperature is rising. Just three hundred kilometres from St. Petersburg, peace is no longer the subject of discussion — war is. The economy, as one participant remarked, has become “the prefered theatre of war.”

It is in this atmosphere that we sit down in an art deco room of the Helsinki Stock Exchange with Henry Farrell and Abraham Newman. Farrell, a professor at Johns Hopkins University, and Newman, a professor at Georgetown, are best known for coining the influential concept of “weaponized interdependence” in a 2019 article that reshaped debates on globalization and power. In their recent book, Underground Empire, they expand this argument, showing how the very networks on which Europe’s prosperity depends can also be turned against it. Farrell likens the European Union to “a prehistoric fish with gills in a world that demands lungs.” He is not talking about evolution, but about survival.

“Many people in small, open economies like the Netherlands don’t yet realise the shock that’s coming,” Farrell says. “This will have enormous consequences for the daily lives of ordinary people. The only thing the Netherlands can be glad about, is that it is not Ireland.”

Russia’s war in Ukraine, a more assertive China, and a volatile Washington retreating from unipolar dominance have all underscored how vulnerability is built into interdependence. Farrell and Newman’s concept of “weaponised interdependence” – the use of privileged positions in global networks for surveillance and coercion – has travelled quickly from academic theory into geopolitical practice.

For trade-dependent states such as the Netherlands and Ireland, these are not abstractions. “If big countries decide not to play by the rules anymore,” Farrell warns, “they will be in trouble right away. They need to start rethinking what it means to be an open economy in this new world.”

Let’s start with the core of your argument. What does ‘weaponised interdependence’ mean?

Farrell begins.

We started thinking about this when Abe and I were looking at the SWIFT network, a crucial part of the global financial system. Little people seemed to be paying attention to it, even though political fights were happening around it. We began asking how these apparently boring infrastructures of globalisation were increasingly being used – weaponised – by great powers such as the US to achieve control and coercion through the back door.

That contrasted with the dominant view in the 1990s and early 2000s, made famous by Thomas Friedman, that globalisation created a “flat world” where geopolitics barely mattered. Once globalisation was entrenched, coercion – economic or military – didn’t make sense. In that world, if two countries had McDonald’s, they wouldn’t fight, because their economies were too intertwined. Interdependence meant peace.

What we saw was geopolitics re‑entering through the back door – via systems no one was watching. What looked like the unglamorous plumbing of globalisation had become political.

You talk about the ‘boring plumbing of globalization’. Can you give me a concrete example?

Newman takes this.

To start, there was this image — very much in the Thomas Friedman worldview — that globalization would decentralize economic activity. The idea was the “Etsy nation”: anybody could participate, everything would be diffuse, and that would make great power conflict unlikely because the system was so decentralized.

What we argue in the article and in the book is almost the opposite. Increasingly, key areas of the global economy are centralized, not decentralized. Think about your phone: Apple or Google run the operating system; TSMC or Samsung make the chip that powers it. If you make a global financial transaction, it’s likely cleared by one of about ten banks worldwide. So the first step is simply describing the reality of economic activity today.

In the book we use the example of Ashburn, Virginia, just outside Dulles Airport. If you drive north instead of heading into D.C., you’ll see endless data centers. That’s the physical embodiment of the internet — a highly concentrated hub. And it’s precisely those kinds of central nodes in the global economy that become the places where governments can intervene.

So our argument has two steps. First, economic activity is increasingly centralized. Second, governments can access those choke points — either as a “panopticon,” gathering information on adversaries, or as a lever of exclusion, cutting actors off from vital nodes in the global economy.

Describe the panopticon in this context.

Newman: The utopian philosopher Jeremy Bentham developed the perfect prison, naming it the panopticon. It was a circular prison with a single tower at the centre. The guard could see every inmate, but they couldn’t tell when they were being watched. In today’s economy, Google, JPMorgan, or TSMC sits in the centre. Governments don’t need to monitor everyone individually; they tap the hub.

Farrell: SWIFT is one such example. After 9/11, Washington went to Brussels: we want to know what the terrorists are doing, and you hold the payments data. There were secret subpoenas; SWIFT complied. In the early 2000s, about 90% of world internet traffic passed through US territory thanks to hubs like Ashburn. Upstream collection meant you could dip into that stream. In the Cold War you needed expensive, risky operations to plant a bug. Now our phones are wiretaps. The problem today isn’t access, but sorting through the flood of data to find the few specks of gold.

That image leads nicely to data analytics company Palantir. As a government contractor they play a key role in global surveillance. Do they make that sifting easier – and is that a bigger threat?

Farrell: Palantir is, in a sense, “DOGE done right” – unlike early start‑ups staffed by well‑meaning twenty‑somethings who thought government IT was an easy fix, Palantir is highly sophisticated. Former staff describe how good they are at mapping both the formal and informal routes by which data moves inside an organisation, then integrating disparate streams to make them usable. If you’re a government, that’s high‑value.

But that also means it can be used to do all sorts of bad things. Palantir has helped make the US Department of Homeland Security more efficient, something that’s provoked discomfort even among alumni. Their marketing now leans on the line “software that dominates”. In this environment, you have to ask: will you be among the dominators, or the dominated? I don’t think European governments have confronted that question. And beyond Palantir there’s a bigger story about “power platforms”.

Newman: And these networks are sticky. We have a whole chapter on the Snowden revelations. People are shocked at what happened – even though it’s all from public sources – but Europe still did little to alter its technological dependence.

For younger readers: what exactly did Snowden reveal?

Newman: He was an NSA contractor who leaked slides on its post‑9/11 surveillance systems, upstream and downstream. That meant tapping fibre‑optic cables at those hubs Henry mentioned, and serving subpoenas on big platforms like Yahoo. It showed the US could capture not just traditional government targets but fine‑grained data on ordinary people’s habits and economic life.

That was a shift in both scale and scope. Governments and companies realised that surveillance extended far beyond leaders and diplomats. Yet the reaction in Europe was muted. Ten years later, US and Chinese firms still dominate Europe’s data infrastructure. And that dependence is not just economic — it’s also a national security risk. A striking example came when the email account of an International Criminal Court prosecutor went dark after US sanctions. Whether the decision was made by Microsoft or by the ICC itself, the effect was the same: compliance with U.S. power. Leaders like Spain’s Pedro Sánchez now say openly: it’s about democracy.

Let’s rewind to how we got to this point before discussing what situation we’ve gotten ourselves into.

For years the assumption was that trade reduced tensions and brought peace – Germany’s Wandel durch Handel (change through trade) is one. How widespread was that belief, and why did it collapse?

Newman: The strong version of liberal triumphalism – like Wandel Durch Handel –said: economic integration will transform our political adversaries into partners. Economic interaction would create larger middle classes who would push for liberal reforms. That clearly didn’t happen in Russia or China. They learned to be open economically while keeping political control.

In political science, the idea that interdependence will cause political change rests on very little evidence. It was more narrative than proven fact.

Farrell: The notion goes back centuries. Albert Hirschman called it the “doux commerce” thesis: commerce pacifies.

As part of the ideological package of liberal triumphalism, it made intuitive sense because open markets and democracy often co‑exist. But the consensus blinded many.

When our article came out in 2019, people already sensed, under Trump, that the system was weaker – but the instinct was to lament “how do we get back?” We offered a coherent alternative lens, and people took it up.

Newman: And let’s be honest: there was also some neo‑colonial hubris – the idea that we would change them, they wouldn’t change us.

You stress asymmetric interdependence, rather than the symmetric assumption underlying liberal theory. How does that manifest?

Newman: In balanced trade, both sides are hurt if ties are cut. In asymmetric structures, the hub can cut without proportionate self‑harm. That’s a bully dynamic. It can be the US, China – or even Europe. Look at the Russia sanctions: the ECB froze €300 billion in Russian central bank assets. Europe likes to act as if it’s never the bully – but it holds plenty of cards.

Export controls are everywhere now. For my Dutch readers, ASML comes to mind immediately. How do you view that shift, and who holds the cards?

Farrell: ASML is illustrative. Under Biden, the US still applies pressure, but there’s negotiation with The Hague and with ASML, and an effort to frame it as partly serving Europe’s interest. Trump would be more likely to go straight to 70% tariffs until ASML yielded.

Two things matter: do you control chokepoints, and do you have institutions to use them? Europe has the first, often not the second. The EU was built for market‑making – the Four Freedoms internally, common trade policy externally – with national security in member‑state hands. The two spheres hardly connect. That mismatch leaves the EU ill‑suited for an era where economics and security are fused. The EU is like a prehistoric quasi-fish trying to get onto land, while it’s breathing apparatus is still adapted to water.

Has any part of the EU adapted better?

Farrell: The Directorate-General of Trade has. Its current leadership began early to map EU pressure points. That led to the anti‑coercion instrument. But member states built in brakes: coalitions can block it, and deployment is so slow and legalistic it’s hardly credible as deterrence.

Newman: Indeed. They develop this anti-coercion instrument and athe same time, the Commission repeatedly says they do not want to use it. What detterence is a weapon if you say you’ll never pull the trigger?

The same happened when “strategic autonomy” became “open strategic autonomy” – softening the concept to reassure everyone the EU would never act alone.

Why the reluctance?

Newman: It’s the EU’s internal rules‑based DNA. The EU is great at tackling economic issues and making markets, but it is ill-equipped for power politics. Using raw economic power to coerce isn’t rules‑based. Internally, letting a big member do that would be dangerous. For decades, the global order matched that mindset; now it doesn’t.

Farrell: Brussels is designed to move slowly, to build consensus. In a fractured environment, with members easily picked off, turning is hard — it’s like the Titanic, vast and cumbersome, with the iceberg already on the horizon.

Newman: And remember: until recently, many Europeans saw Russia as a stable energy partner, China as a market, and the US as aligned on security. All of these things are now gone. The mental shift Europe has had to go through is very recent.

Europe is under pressure from the US, China, Russia; the Netherlands is among the most globalised economies. What does this mean for us?

Farrell: Small, open economies that doubled – or tripled – down on globalisation will be most exposed. They’ll have to rethink openness, maybe embrace “adversarial interoperability” – interoperable systems designed not to require full trust.

Newman: I would say politicians have to be honest with their publics that they’re going to face large costs in the coming years. For the last 80 years, the United States subsidized European economies — both through the direct security guarantee and through the stability that guarantee created for the trade system. The entire rules-based international order was able to exist because the US essentially said: nobody is going to use coercion against each other, because we will protect everyone from that.

Now the US is saying: we are no longer going to do that, and we want to cut back on these commitments. So whether the discussion is about European self-sufficiency in defense or about Trump’s tariff system, we are talking about costs amounting to several percentage points of GDP. European governments will have to spend that themselves — either to build up their own militaries, to absorb new tariffs, or to protect themselves against Russian aggression. That is not a rounding error in budgets. It is a significant cost. And I think European officials will have to be open to ideas like Eurobonds, to finance massive increases in military spending and domestic technology investment in order to diversify their economies.

But I would also stress the opportunity here — why this isn’t just a bad thing. For trading nations like the Netherlands, and for the EU as a whole, so much ground is being given up globally. Europe now has the chance to become a leader of what I would call an alliance of trading nations — countries that commit to reciprocal trade and encourage liberalization. The Commission is negotiating agreements with India, with Mercosur, and others. These are not just commercial agreements; they are also national security agreements.

There has been a lot of debate around Mercosur — for example, French farmers’ concerns, with France threatening to block the deal. But that is not just a French problem. It’s a Dutch problem, it’s a German problem. If necessary, governments will have to be willing to compensate French farmers, because ultimately Mercosur is part of Europe’s future. It’s about whether Europe is cowering in the corner, or whether it is leading in the world — in a place where it can truly prosper.

Farrell: All of this points toward a world in which there is not just “more Europe” in the sense of greater collective decision-making and spending, but also a different kind of Europe with a different strategic focus. And this, I think, is necessary for Europe’s long-term ability to survive in a very different world.

When I get nervous about Europe, I think about the history of Poland — specifically the liberum veto. Under that system, unanimity was required among different interests in parliament in order to make decisions. In the extremely messy political environment of early modern Europe, that proved disastrous. For a long period, Poland effectively ceased to exist as an independent entity.

I think Europe faces a milder version of that liberum veto challenge today. European countries need to recognize that — just as Benjamin Franklin said at the time of American independence, “We must all hang together, or we will most assuredly hang separately.” Europe faces much the same dilemma now.

Thank you for reading. I write this between deadlines, on my own time, without pay. If it was worth yours, buying me a coffee would mean a lot.

Buy Me a Coffee!

Read the condensed version of this interview here.

Mark Blyth is a renowned economist and professor of political economy at Brown University. He is best known for his work on the politics of austerity, globalization, and economic crises. Blyth’s influential book, Austerity: The History of a Dangerous Idea, won widespread acclaim and earned several prestigious awards, including the 2013 Best Book in Political Economy from the American Political Science Association, the 2013 Paul A. Samuelson Award for its contribution to economic thought, and a spot on the Financial Times and Goldman Sachs Business Book of the Year Award longlist. His research continues to challenge conventional economic wisdom, particularly in relation to austerity policies.

Elias Rutten: Hello, Mark. Is it okay if I call you Mark?

Mark Blyth: Of course.

Elias Rutten: Great. I feel like I’ve already met you because I’ve watched many of your interviews. So, I feel like I can call you Mark since you tend to care less about formalities.

Mark Blyth: That’s one way of putting it.

Elias Rutten: You have a great sense of humour, that’s for sure. I’ve finished reading your book, Austerity, and I really appreciate your perspective on economics. It’s still relevant, unfortunately—for you, I guess, or for the world.

Mark Blyth: They keep doing it *sounding slightly disappointed*

Austerity in the Netherlands

Elias Rutten: In Austerity, you criticize government spending cuts during periods of low growth and recession. Currently, the Dutch government is doing exactly that. We’ve always leaned toward austerity—the Netherlands is basically an austerity paradise. You mention Germany in your book, but in many ways, we’re like a mini-Germany in that regard.

Mark Blyth: Yes, and you’ve gotten away with it for a long time because of your financial sector. The Netherlands has an outsized financial sector, similar to London. That sector creates money, credit, liquidity, and profits, which have provided a few points of extra growth, even while macroeconomic policies have been consistently contractionary.

Elias Rutten: That’s fascinating because I’ve wondered about how we manage decent economic growth despite constant austerity. We’re even doing better than Germany now. I have a question on that later.

Mark Blyth: I interrupted your flow—go ahead.

Elias Rutten: In 2023, the Dutch Liberal finance minister argued that low economic growth necessitates austerity. He said, “If there’s no money coming in, we can’t spend it,” and predicted €10–20 billion in budget cuts. In December, he defended €1.2 billion in education cuts, claiming that deficit spending creates bills for future generations. This seems reminiscent of what you criticize in your book.

Mark Blyth: I’ve heard this argument many times before. If we start with the basics: when you’re in recessionary or quasi-recessionary conditions, and the government spends around 40% of GDP, significant cuts lead to two predictable outcomes. First, your debt stock increases due to the denominator effect. As GDP shrinks, the same amount of debt becomes a larger share of the economy. Then you say, “Oh no, look at all that debt; we need more cuts,” and you spiral further into economic decline.

Fiscal rules don’t help either. This is what the British are learning. Cutting spending during a recession effectively creates the recession. That, in turn, worsens the deficit because less tax revenue comes in. Then policymakers point to the deficit and call for more cuts, locking themselves into a cycle of self-harm. This happens every time.

Regarding the argument about future liabilities for the next generation, leaving them a smaller economy, less growth, fewer opportunities, and the burden of an aging population is far worse. That’s self-defeating austerity—a textbook case.

Elias Rutten: That’s a strong argument and exactly why I invited you. We hear this rhetoric constantly in Dutch politics: “We have to cut, and if it didn’t work last time, it just means we didn’t cut enough.” It’s like a gambler saying, “99% of gamblers stop before they hit the jackpot.”

The Euro as a straitjacket

Mark Blyth: Look, so the issue is that there is actually something here, and you don't have to go the sort of full MMT (Modern-Monetary Theory) route to see this, right? Which is not to say that it's wrong, but you don't even need to go there to get this.

Holland—what's the Dutch currency called now? It's no longer the guilder, right?
So, it's pretty straightforward—you don’t get to print your own cash. That means you actually have a kind of balance sheet constraint that’s more similar to a firm than it is to a country because the bonds that are paid out are paid back in cash.

If you get to print the cash, you can never go bankrupt because you can just say, "How much cash do you want?" The way this shows up is in devaluation, because foreigners want more interest for holding your cash as it falls in value. It shows up in falling asset prices if they lose faith in your economy and disinvest. But ultimately, you can offset it by printing. And in that case, your deficit is basically, if you will, like a fiscal control valve rather than a death trap.

Once you move into the world of the euro—and this was by design—that’s all off the table. On one hand, the upside is you get scale, less volatility, and German monetary policy, which everyone thought was a really good idea at one point. I'm not so sure about that now.

You also remove inflation risk and devaluation risk, so your bond prices should go down, which actually happened. The problem is that if the economy slows down and everyone else is trading partners, and they decide to save by cutting deficits, you just create negative growth conditions for everyone. That worsens the overall state of the currency union.

Look at Europe over the past 10 years. Many economies have basically failed to grow. Surprisingly, the periphery—particularly Spain—has done the best, because they had more room to grow and benefited from immigration, which powers growth.

An economy is nothing more than the number of people, the number of hours worked, and the quality and quantity of capital. If you have a monetarily constrained framework, and that's all you've got, then to grow, you either need capital expenditures to go up, hours worked to go up, or people to go up. Spain did this with people. Everybody else stagnated, even those with big deficits, because deficits become structural liabilities.

You can keep cutting, but all you’re doing is making it worse. I said this 10 years ago, and it’s still true.

The German-Dutch Export-led Growth Model

Elias Rutten: You touched on something I was planning to ask about later, but since it’s relevant now, I’ll bring it up.
While preparing for this, I looked at European governments with high debt levels, their current account balances, and fiscal deficits. What stood out to me is that low-debt, low-deficit countries like the Netherlands and Germany run large current account surpluses. In contrast, countries like Italy, France, and the UK are on the opposite end.

I’m not sure if you’re familiar with Michael Pettis’s arguments. He often says these current account imbalances result from surplus countries pursuing beggar-thy-neighbour policies.

I also globally read through your book, Diminishing Returns, and your framework of analysing growth models reminded me of Pettis’s argument.

So, I have two questions:

1. Do you agree with Pettis’s argument that these distortions result from beggar-thy-neighbour policies within the EU?

2. Do the Dutch and German growth models explain their preference for austerity, and how do these models shape intra-European trade relations?

Mark Blyth: To start with the second one. Yes. When you’re set up as an export platform, you care about two things:

1. First, you want an undervalued exchange rate. You get this by being in a currency union with low-productivity countries. Your exchange rate ends up lower than it would be if you were independent.

2. Second, you want to suppress consumption and wages to maintain cost competitiveness. You achieve this through fiscal retrenchment, trade unions that know if they push wages too high, jobs might move elsewhere, and similar strategies. Exporters like the Netherlands and Germany have mastered this. It’s the core of their growth model.

In this context, austerity is baked in. Why? If wages rise and people spend more, you lose cost competitiveness. A BMW that costs $20,000 might now cost $25,000, and you lose your export edge. For decades, these economies have prioritized keeping costs low to sustain exports.

Now, to the first point—are these policies deliberately beggar-thy-neighbour? I don’t think finance ministers wake up and say, "Let’s screw the French." But the effect is the same.

In a currency union, if one country runs an external surplus, someone else must run an internal deficit. Initially, the euro allowed balancing through varied growth models. France and Italy relied on consumption-led growth, higher deficits, and imports, while the UK leaned on financialization. This balanced the surpluses of Germany and the Netherlands.

Since 2012, reforms to the Stability and Growth Pact pushed everyone toward export-led growth. Now, domestic consumption is suppressed not just in surplus countries but across the union. So, while it’s not a deliberate strategy, the outcome is effectively beggar-thy-neighbor.

The Global Comeback of Austerity and COVID-spending

Elias Rutten: Austerity seems to be making a global comeback. In the US, you have DOGO, of course, Elon Musk's departments aiming to cut 2 trillion from the budget. The European Commission has initiated excessive deficit procedures against seven countries. In the UK, you have this “black hole” of 22 billion pounds, and the IMF's managing director recently stated that in 2025, countries will still be facing the legacy of high borrowing during COVID and would need to carry out fiscal consolidation to put public debt on a more sustainable path.

Mark Blyth: All right, so let's start with the last part. COVID spending is important, right? Because it depends on how you financed it. So, let's talk about the Brits. The Brits issued short-dated maturities to finance long-term debt, and what that did was it shortened the maturities on all their bonds overall. Why is that important? Because if you issue something in 2012 at 2%, it doesn't mean that because interest rates are 5% now, that stock of debt becomes 5%. But what it means is every quantum of debt issued now is going to be issued at a higher rate. And if your maturities are shortening, those that come up for renewal are going to be done at a higher rate. Now, if you have a world in which you have pretty moderate inflation, 2-3%, and you've got 2% growth, a 5% interest rate's not a problem. If you've got a world in which you've got 5% interest rates and you've got 1% growth and 4-3% inflation, you've got a problem. And that problem will begin to weigh on your bond market, and it will begin to show up at even higher rates, and you get into a bad position. That is just how bond markets work. That's nothing to do with austerity, that's a fact of COVID spending. Right? That's just done.

In terms of the other ones, what were the other points that you went through there? There's a bunch of them.

Elias Rutten: I was hoping to get your input on what impact it would have if multiple major economies started practicing austerity, like they seem to be doing now. Yanis Varoufakis—you probably know him—recently quipped that Keynes is spinning at 4,000 revs per minute in his grave *both chuckle*.

Mark Blyth: Uh, I don’t know if Keynes is spinning, I think he’s probably just at the bar getting sloshed, saying, "Why did I ever bother?" But, yeah, I mean, if everybody does it all at once, it’s exactly the same as what happened in the Eurozone. Everyone else is everyone else’s trading partner. If you all try and save at once, all you do is shrink the overall economy, which increases the debt, which increases the deficit, which makes everyone go, “Ah, we need to cut the deficit,” and then you do more of it. So we’re just doing more of the same stuff again.

On a global scale, DOGE I pay no attention to. This is not a statutory agency. They can make lots of recommendations. At the end of the day, you’ve got to get through Congress all these spending cuts on key constituencies. Far more likely, what they do is massive civil service reform, which paralyzes government. I think that’s the one that we’re not paying attention to, which is basically austerity by buggering up the machine, right? If you want to put it that way.

On Milei’s Argentina under Austerity

Mark Blyth: The really interesting case is Milei in Argentina, and I think it’s really worth spending a bit of time on this one, right? What Milei is doing is working. I never thought it would be possible, but it actually works, and it works for the following reason. They’re not in a recession; they’re in an inflationary death trap and have been forever. The way the political economy of Argentina was structured was that if you’re in the top 20%, you have dollar accounts. So, if the currency is tanking, which means you’re getting inflation through imports, and then the government has to spend more money for the imports, which then produces a monetary transmission mechanism as well as an import transmission mechanism, you have permanent inflation, right? You’ve got dollars, local currency goes down. Oh, screw you, I can buy more stuff with my dollars. I don’t give a shit, right? If you’re in the trade unions and you have your wages adjusted and indexed and all the rest of it, and the government basically covers your costs for inflation, you’re great, and that was what the Peronists did. But what began to happen was more and more Argentines who were neither in the top 20% nor in the coalition were just facing impossible losses in their purchasing power, month after month, year after year.

And what Milei said was, “This is just all the crap that we’ve got here. Whether it’s the middlemen at every level of the economy, whether it’s the fiscal profligacy of the government.” None of this has to be true. It just has to be convincing, right? And he basically managed to take a third of the poor, a third of the middle class, and a third of the rich and say, “We’re going to form a deflationary coalition. Because ultimately, our assets will become better, and our purchasing power will become better if we get rid of inflation.” And at the same time, what that does is that destroys the cronies’ network. And he put up a coalition that way.

Now, what he’s done is, through massive cuts, he has increased poverty above 50%, he has massively cut back on public expenditures, he has shrunk the deficit, and growth is actually positive. Inflation is tanking. And what he’s shown is that when you’re not in the European situation, which is there’s not that much wrong, what you’re doing is turning a micro-recession into a real recession through bad decisions, right? When you’re in a really bad inflationary place, you need to burst that. And the way that you burst that is basically by doing either a combination of high interest rates or cuts in spending. And if people are so sick of it that they’re willing to put up with the pain, it looks like you can get away with that. And that’s something that I didn’t think was possible and I didn’t calibrate, but that’s where we are, and we need to acknowledge it.

Elias Rutten: Wow, yeah, because that was one of my questions as well. Like, was there any case that made you think, "Oh, austerity can work in some circumstances?"

Mark Blyth: Well, it’s not a question of whether austerity can work. What he’s essentially doing is—he’s not cutting budgets in a recession. He’s cutting budgets in an inflationary period. The effect of that and the goals of that are massively different. And the political support for it, because people hate inflation way more than they hate deficits, right? That seems to be a very important part of the story. Now, ultimately, if this just creates a permanent death spiral, the external anchor on the currency never shows up, the new investment that’s promised by a low inflation environment doesn’t show up, and you end up with basically 30% inflation and all the people you promised change to two years from now are even poorer, then it didn’t work. But if you take this as a metric of what you need to do, you need to basically break the way the economy works just now and get inflation down permanently. By that metric, it’s working.

Elias Rutten: OK, interesting. Yeah, I was watching it with a lot of interest as well, and I was having an argument with my friend like, "Will it work?"

Mark Blyth: What do we mean by "will it work"? Right? Will it create even more poor Argentinians in the short to medium term? Yes. Right? Is it sustainable as an economic strategy? To be seen. Does it seem to be achieving its goal of reducing inflation and basically increasing long-term confidence amongst debt holders in the Argentine economy? I have to say, it is.

Elias Rutten: Yeah, I think actually you make an important point, because what I always take away from your teachings in interviews and also your book is that it all depends on context and who is the one benefiting from the policy at hand. What’s being turned, and which numbers are going up for whom? That’s basically what it is.

Mark Blyth: Who is benefiting and who is losing in this. That’s really what matters.

Elias Rutten: And then that comes to another question for me, because you’re a political economist, I’m also aspiring to be a political economist. Do you think economics can be separated from politics?

Mark Blyth: No, no. Just no. Why would anyone think that’s the case? The only way you do this is if you really believe that the mathematical models of formal economics are actual representations of the world, in which case time is reversible, there is no history, there is no culture. There are simply agents which are autonomous and basically have a set of hierarchical preferences bouncing through a timeless time, being hit with shocks and trying to adjust. I mean, maybe that’s a useful way of looking at the world, but I tend to look at who’s got the money and what they’re doing with it.

On rigid and costly European Bureaucracy

Elias Rutten: Good points. It’s interesting that you mentioned Milei because I was recently listening to the radio, like a business radio in the Netherlands, and in the Netherlands, a few economists advocate for higher fiscal spending. Critics often cite inflation risks because we have a tight labor market, and some even suggest that the country could use a bit more of Milei. That’s what one economist said.

Mark Blyth: Laughs loudly. Do you have a massive endemic inflation problem? No? Therefore, you don’t need any Milei. You really don’t.

Elias Rutten: I’m personally not the biggest fan of this economist. But he was talking about cutting the civil servants, the number of civil servants we have in the country.

Mark Blyth: OK, well, you know… Look, is there a case for deregulation or reducing the size of government? Well, what do you get? What does France get for taxing and spending 55% of GDP through the state? They get a lot of programs. Are they growing really well? Nope. Is everyone really happy? Nope. Maybe there’s scope for this, right? Why is it so difficult to do anything? Right? Germany had a house-building target in the last government: 400,000 houses. It’s not a high target. They used to do that all the time. Things have become so complex on a planning level, at the Länder level, the city level, the federal level, that they couldn’t even get halfway to the target. Everything was tied up in planning restrictions. Right? This is a common story across the world. But yeah, I totally agree with that. I think there’s loads of stuff that basically is just a bung, and loads of these things don’t really serve any purpose. And if we can get rid of them, it would probably be a boost to growth. Deregulation is not necessarily a right-wing plot. However, if you think that deregulation on its own is going to return to some kind of economic nirvana from which we fled, that’s not gonna happen either.

Are textbook axioms trustable, and is it useful to critique theoretical approaches to economics?

Elias Rutten: I was watching an interview today, and it was an economist who dismissed the idea of expansive fiscal policy, stating that cutting budgets when growth picks up doesn’t require, I quote, “doesn’t require discussion because it’s first-year textbook economics,” as well as arguing that all Dutch economists think this way. And for context, the Dutch economy grew by only 0.9% last year and it’s projected to grow 1.5% this year.

Mark Blyth: You’ve literally gone below 50% of your post-war average growth rate and you’ve been there for a decade, and you’re saying that everything goes well if we keep doing what we’re doing? At what point does evidence matter?

Elias Rutten: When I was hearing this, I was thinking: I’m a bit skeptical of these textbook axioms.

Mark Blyth: The textbook axioms taught us that we make the financial sector safe by making banks safe, that banks are intermediaries, they don’t really have any effect on the real economy. They taught us that markets sell for calibrated and basically produce the optimal output. They say that inequality is not really a problem because the distribution itself is determined ex ante through free bargaining. None of that’s true. What do you want?

Elias Rutten: I’m going to publish an opinion piece on the dominance of neoclassical economics soon. I read a study that found 86.5% of the subjects in Dutch university courses are based on neoclassical economics. I wonder, what role do you think education plays in shaping the world we live in today?

Mark Blyth: Well, I mean, the whole sort of “let’s go bash neoclassical economics” I find it a bit pointless. It’s a bit like “let’s go bash geology” because it doesn’t really capture how the planet looks, right? I mean, it’s a set of descriptive models and analytic models that may or may not have utility, and basically have enabled the social science that tells us occasionally really interesting things about how markets actually behave. And it’s not completely pointless or stupid. So, I think just ragging on that is just like this kind of big lefty whine that nobody really pays attention to.

The more important point is: do we all think in a neoclassical way? I think that it is the case. And I think it limits options. There’s a very famous paper from the 70s which is called something like “How to Think Like an Economist.” (I was unable to find the paper unfortunately)

It basically maps what happens in a big classroom if you teach people to play prisoners’ dilemmas. At first, everyone cooperates, and then you tell them the dominant strategy is to defect, and they all defect and never cooperate again. So, you basically teach the behavior to affirm the model. Liz Berman has a great book that came out last year, I think it was the year before, on how economics became the language of American public policy. We used to care about fairness, we used to care about equity. Now, we only care about efficiency. Well, once you only care about efficiency, equity and fairness drop because they become kind of like ex ante to the model, and that creates a very particular way of looking at policy—a way that I think has really landed governments across the world, centrist governments, in trouble, and the reaction to which is populism. Because essentially it brackets the question: well, efficient for who? And the answer is usually not the majority, not the masses, but usually it's corporates or someone else.

Elias Rutten: Mhm. Well, maybe I should reconsider my opinion piece then.

Mark Blyth: Yeah, no, if you want to have a big tilt at a giant bunch of theory... The thing I’ve found out over the years is you can criticize economics all you want, but economists don’t care because you’re not one of them.

Elias Rutten: Yes, but I recall that you were also very critical of neoclassical economics in your book, right?

Mark Blyth: Well, the neoclassical thing, I tend not to get hung up on it. What I was really critical of was: how can you possibly have a set of macro theories about how the economy works where banking is invisible and doesn’t do anything? That’s not necessarily a neoclassical thing—it’s part of the way they built the world, given the assumptions they had. But I don’t think that’s the most important part of it.

You can go nowhere near neoclassical economics and say things like: “Should banks have big capital buffers? Why? Well, in case they get into trouble if they’ve got too much leverage.” Let’s say, for example, they’ve got $100 out and only $2 in reserves—50-to-1 leverage. If they go negative $3, they’re technically insolvent. That’s bad, right? So, we calculate in a stress test what the maximum likelihood of this effect is and how big it would be. Maybe they should have 15. Great. So, we give everybody 15, and the whole system still blows up. Why? Because the risk wasn’t there. It was in the shadow banking sector, and we weren’t looking at that.

You don’t have to go anywhere near neoclassical economics for these points. These paradigm arguments—I just find them largely pointless. Some people get really vexed about this, like my friend Steve Keen and others. They get really upset about it. I’m just like, nah. They’re just a set of models. You can derive models from any set of principles. These just happen to be the ones that have been dominant for a while.

You talk to actual economists between my age and your age, they don’t take this stuff seriously. They’re not walking around clutching it to their hearts like a Bible. Most of them are empirical micro people; they just go out and see what works.

Elias Rutten: That’s a good point, and I think that’s actually how economists should approach the issue.

Mark Blyth: Yeah.

Examining European economic governance

Elias Rutten: I wanted to get your thoughts on the Stability and Growth Pact.

Mark Blyth: Stupid idea. Oh, yeah. You know what Romano Prodi (former Italian Prime Minister) said about it?

Elias Rutten: No.

Mark Blyth: He said, “The stupidity pact is stable.”

Elias Rutten: laughs The stupidity pact is stable.

Mark Blyth: Actually, there’s an interesting story in this, and it’s one Prodi told me once, which I’ll share with you. He said, when you want to understand Europe, think of it like a Vespa. It’s a two-stroke engine: one piston is Germany, and one piston is France. There may have been another piston called Italy mucking around in the back, but that was it. When one went up, the other went down, and it powered Europe.

Then, of course, there were the Brits—they were always a bit weird—and you had the Italians and Spanish, whatever. But that was the core. Then, we needed more cylinders, so we started bringing other people into it.

There was a moment when you had Kohl and Merkel Version 1, and let’s say John Major, even Thatcher before she became a Eurosceptic. You had a bunch of people in the mid-80s into the 90s who brought together monetary union as a project and saw it very much as a prelude to political union.

Then what happened? Merkel switches. You get Tony Blair, who’s very transactional. The French government goes to Chirac, and what you get is a generational shift. The people who came out of World War II, who came out of destruction, were replaced by a post-boomer generation. They were like, “Globalization, let’s do this, whatever.”

The whole impetus for political union, federalism, and fiscal union just died because the people who took up the reins didn’t care enough to finish the project. It’s a simple explanation, but I think it’s largely true.

Elias Rutten: I think I heard Yanis Varoufakis say something similar, where the euro was meant to be a step toward fiscal union. The thinking was, “This is incomplete; eventually, we’ll finish this thing.”

Mark Blyth: Exactly. “This isn’t the end; this is just the beginning.” But nope. Sorry, that’s the end, and that’s going to be your doom.

The interests behind the stability and growth-pact

Elias Rutten: Yeah. So I think the most efficient thing here is to ask you: what do you think of European economic governance right now? For context, in the Netherlands, only three minor parties out of fourteen support looser fiscal rules under the Stability and Growth Pact.

Mark Blyth: You have to think about why that is. This is where a growth model perspective helps. Who are the winners of the Dutch model? Like everywhere else in Europe, it’s the top 20–30% of the income distribution. They’re the ones who vote the most. They staff political parties unless they’re protest parties or populists, which we don’t like, right? They donate, show up, dominate the media, the professions—they set the tone.

Why? Because running strict monetary and fiscal policy is great for the deflationary coalition with assets. They don’t want inflation and want the export model to continue. From their point of view, things are going fine.

Given that, is it any surprise at all that only dissident minor parties are saying, “Hey, what about us?” The answer is, “No, it’s good for you too, really, even if you don’t think it is.”

The problems the EU is facing

Elias Rutten: If you had complete dictatorial powers and all policy tools at your disposal, and your goal was to improve EU economic and monetary governance, what would you do?

Mark Blyth: There’s no easy answer to that. First of all, I wouldn’t give myself the job—or any single person, for that matter.

Now, let’s talk about the big problems. Right now, the United States doesn’t care about you anymore. You’ve got zero security provided by yourselves. You’re 27 different countries with 27 agendas, and you all think China’s coming to eat your lunch. When, in fact, China might be the last trading partner you’ll have, because the Americans are about to tariff the hell out of you.

Economic governance is way down the list of priorities. Let’s put things in perspective.

The world has changed. The economic governance institutions and policies you put in place in the 1990s were based on a fantasy. A fantasy where history doesn’t matter, time is static, and tomorrow is just like today—basically, the low-volatility world of the pre-financial crisis era.

In that world, central banks were in charge, everything was stable, and fiscal rules like 3% deficits or 60% debt-to-GDP ratios sounded reasonable. Why 3%? Oh, it sounded nice. Why 60%? Could’ve been 40% or 80%, but 60% felt right.

Then boom—financial crisis. That world blows up. Central banks reverse their mandates, flood markets with liquidity, and put everything on life support. You get loose monetary policy combined with tight fiscal policy, which isn’t enough to sustain growth.

The ECB remains overly tight, even post-Draghi. Fiscal policy doesn’t pick up the slack because exporters like Germany and the Netherlands dominate governance. And they don’t do fiscal policy because it’s bad for the export model.

So here we are. How do we cut through this mess? Ultimately, the exporters need to rebalance. They need to consume more. That means shifting from issuing financial assets to fund export surpluses to actually spending on domestic consumption.

But global rebalancing isn’t the only issue. You’ve got to deal with technological change. You’ve got to confront the fact that the Netherlands is essentially a giant tax haven, parasitic on others. Germany makes cars that nobody wants anymore, and their solution is another round of structural reforms. Good luck with that.

Europe’s been in terrible shape since the financial crisis. Monetary and fiscal policies have made things worse, but now the problems are deeper.

So, what would I do, clever clogs? I’d like to live in a different universe. But since I can’t, I’d start with the big stuff. Maybe balanced budget rules in a zero-growth economy aren’t the best idea. Maybe you have to mutualize debt. Otherwise, the EU’s going to blow up, especially since you can’t pay for the defense you need.

These are obvious things, but nobody wants to deal with them or say them out loud.

The Draghi-report

Elias Rutten: You also mentioned mutualized debt, which was something Draghi proposed. Can you elaborate on that?

Mark Blyth: Draghi nailed it. Just read the Draghi report. It’s long and a bit technical, but he’s 100% right. That’s what Europe should do.

Chance of European governments actually doing this? About the same as me becoming the next Pope.

Elias Rutten: That ties into one of my questions. Everyone respects Draghi—he’s held in such high regard—but they just keep doing what they’ve been doing. Why?

Mark Blyth: Because of the self-harm they’ve been engaged in for 15 years. All the major European sovereigns are either fiscally constrained—think about the French and the Brits—or they have rules in place that literally prevent them from spending money.

So, as infrastructure crumbles, bills pile up, and the economy gets worse, they refuse to spend. That becomes the default—the "Spartan culture" taken to an insane level.

Draghi shows up and says, "Here’s the deal: we need to rebalance. Consume more, create a bigger internal market, export less. Liberalize, but also take strategic autonomy seriously."

Everyone says, "Yes, yes, great ideas, Draghi," but then nothing changes. Why? Because the top 20% in places like the Netherlands—the ones making the decisions—they’re fine. They don’t want to rock the boat.

The connection between populism and economic policy.

Elias Rutten: It kind of sounds like we’re sleepwalking into a slow economic death.

Mark Blyth: That’s exactly what’s happening.

Populism, whether right-wing or left-wing, is essentially a reaction to this. It’s predominantly right-wing now, partly because immigration has been weaponized. But look at the numbers: 20-30% of voters in every major European country are saying, “Burn it all down.”

They don’t believe the elites anymore. They see them as self-serving. Their communities and lives have gotten worse while the top gets richer. And, frankly, they’re not wrong.

Elias Rutten: That’s true. In your book, you also touch on how austerity policies fuel populism. You even mention that while you don’t draw direct causality, you argue they contributed to the rise of the Nazis and Imperial Japan, correct?

Mark Blyth: I do draw a direct link. I mean, the Japanese case is quite straightforward. You go through the largest austerity program at that point in human history—you take a third of GDP out in budget cuts. The economy collapses in this insane race for competitiveness on exports, which people are just going to tariff anyway, so it doesn't matter what you do. Eventually, you turn on the military and start cutting their budget, and then they eventually cut everyone's head off. At that point, they're like, "Well, let's do some imperial expansion then because this is obviously crap," and that's where it went.

Nazi Germany was based on the inflation. The inflation was over by 1923—Hitler wasn't in power for 10 years. During that period in the middle, that was the most prosperous time in Germany until the post-war period. What happened was, in 1929, interest rates got raised in the United States, short-term capital left Germany, there was a seniority swap—basically, who gets paid back—which meant the French could come back for reparations. In response, the government tightened, cut, tightened, cut, tightened, and cut, creating mass unemployment.

It had nothing to do with the inflation, but that's the story they'll still tell you. Because it's a good story, and it tells us we should care about inflation. And why should we care about inflation? Because inflation's a real thing, absolutely, and it definitely hurts the poor the most because they have the least cushion themselves. But it also impacts the value of profits and financial assets—that's why they don't like it.

On greedflation

Paradoxically, it depends on what situation you're in. It can actually weaponize your profits as well. Here's a statistic for you from a paper from UMass Amherst that's floating around on their website

They figured this out—clever sort of technical paper—but basically, U.S. carbon majors in 2022 made $220 billion above normal profits. Of that, 51% went straight to the top 1% of Americans, either through direct ownership of the shares of those companies or through dividend payments. That meant that $100 billion went straight to, what’s that, 3.3 million people—1% of the population, right? So any effect that inflation had on their incomes was massively offset by the profit gain. So even there, the story that inflation is bad for everyone? Really? No.

Elias Rutten: I heard something about this as well in your recent podcast by the Rhodes Center, where you discussed the concentration in markets and supply chains, and that greedflation is basically driving a lot of profits in U.S. companies.

Mark Blyth: The ECB published a report that said 40% of European inflation in 2023, I think it was, was down to basically firms hiking prices because they could get away with it.

Yeah, and my answer is, I’m not outraged by this because if I owned a firm, I’d do it as well. If you lose your anchors as to what a reasonable price is, and people can tell a story about how you can’t get eggs anymore—and I’m making eggs, and eggs used to cost $2, and I’m gonna charge you $6 and you pay $6—of course I’m gonna take $6. Why wouldn’t I? It’s called capitalism.

On economic policy and decarbonization

Elias Rutten: Can the economy be decarbonized under austerity?

Mark Blyth: Well, given that it means extra investment above the level you're doing now—no.

Elias Rutten: Then, in what way should economic policy address climate risk in the future?

Mark Blyth: It's not just a question of economic policy. We’ve gotten into this really weird way of thinking about it. When we first got quasi-serious about this in the 2010s, suddenly it was green central banking. All the central banks were going to regulate these assets and do all sorts of stuff, and finance was supposed to drive the green transition. Finance doesn’t do anything. Finance basically makes profits from sitting in the middle of stuff and causing frictions.

Green central banking was a chimera—nothing happened. You want green central banking? Look at the PBOC. The PBOC has done about $2.5 trillion in green financing through its various funds and agencies. How much has the ECB done? A couple of billion earmarked, some funds talked about risk-weighting certain types of assets, and then they figured out, "Look, we won't be market-neutral, so we'll just stop."

So then we pivoted away from finance because that was obviously wrong. And now, suddenly, the state has to do everything. Yes, the state—everyone wants the state, right? Except that we’ve spent the past 40 years hollowing it out, privatizing, hiving off to management consultancies, and denigrating anyone who works in the state. So now we have crap states, and those crap states, to give an earlier example, can't even build 400,000 houses in a country the size of Germany. That’s not going to work.

At the end of the day, capitalism moves when things like the Chinese government and Chinese firms decide to make electric vehicles at scale. Things change because we open up new ways of doing power generation. Ultimately, firms and capitalism shape firms and capitalism.

This grand delusion we have that there’s an optimal set of policies for the green transition—yes, government can help. But even in China, it’s not just about the government; it’s firms that do all this stuff. Europe’s problem is it doesn’t have any firms. It’s got legacy firms that, in the German case, have been around for 140 years, like BASF, whose major market is now China rather than Europe.

Your startup culture is terrible. You’ve got no digital firms at scale. All your tech’s American. If the EU wanted to do something about the green transition, it should focus on creating a capital markets union, establishing full-scale venture debt funds, improving technical training, and integrating universities with firms and markets. All that would probably help. It helped Silicon Valley; it helped China.

Do we do this? No. How much did you cut from your education budget?

Elias Rutten: Yeah, €1.2 billion.

Mark Blyth: So there you go.

Elias Rutten: Yeah, it’s honestly a bit sad to be a European in this day and age.

Mark Blyth: Honestly, mate, it really is. I always used to think it was sort of like the other way of doing things. You know, yes, you could have the liberal model, but there was also a different way. That different way was contingent upon, particularly post-2000, on the one hand, stable finance and, on the other, permanently stable exports. Also, doing things like never spending any money on defence, and later fetishizing saving to the extent you never spent anything at all. So even in Germany, the trains don’t run on time. I mean, come on—could we have a better metaphor for a lack of investment than that? The trains don’t run on time.

Elias Rutten: Yeah, you touched on two questions here, which I also have in my head. I think the first one is very valuable for readers because, in the Netherlands, we often pride ourselves—and just like the Germans—I remember you have a German wife. They often take pride in their frugality. And it’s intuitive for them to see the state as a household where you cannot spend more than you earn. How can you explain to people that’s not how we work? That’s not how the state operates.

Mark Blyth: Do you get to issue long-term liabilities denominated in the name of the family, with secondary markets? No. Do you get to print the thing you pay your bills with? No. Start there.

On the lack of investment in the European Economy & the ludicrocity of hardcore neoclassical thinking

Elias Rutten: So, do you think we should reform the euro before we start being able to spend more?

Mark Blyth: I mean, it’s not just a question of spending more. The problem is that you’re not investing enough, and you’re doing it because you have whacked-out ideas about budget deficits. That doesn’t mean that mindlessly spending money is the solution either. If it just goes on consumption and the consumption is on imports, that’s not doing anything. What you’re really trying to do is raise the rate and quality of investment. And that’s actually more complex than just “spend money,” right? Yes, sometimes just spending money helps. If you’re in COVID and you send 80% of people home, giving them money is a good idea if you don’t want everyone to start burning each other’s houses down. But just spending money for the sake of it—I’d rather you’re spending than not spending, but at the same time, it depends on the context. Your problems—that’s not the same thing as just doing positive fiscal policy. You can spend a lot of money through the state, and a lot of it can be crap.

Elias Rutten: Yeah, because actually, one thing I touched upon in the first question, but didn’t get the opportunity to read out because our governments...

Mark Blyth: Because I cut you off, which is?

Elias Rutten: Yeah, so it was €2.4 billion in tax cuts for wealthy individuals, companies, and petrol consumption. They scrapped a €6.8 billion fund for innovation and economic growth.

Mark Blyth: Right, ultimately, you’ve got to raise the trend rate of economic growth. Now, if you’re a hardcore neoclassical and you believe in what’s called the star models (R star, Y star, etc.), which say there are these anchors and the economy can’t go past them, then policy is pointless. All it will do is increase inflation, and that’s the end of it. I think that’s ludicrous. It’s one of the reasons Europe has low growth—because we think in this framework, both central bankers and policymakers. It’s like saying to China in 1978, “Don’t spend any money because you’ll only ever grow at 4%. That’s just the way the stars are set up.” It’s like, come on—seriously? And yet, that’s how we think about it. A huge part of this is we just don’t think we can do what’s needed, so we don’t do it. Then economic theory tells us we shouldn’t do it, so that confirms we shouldn’t. And then all that’s left is another round of cuts.

How do we know what’s true anymore in economics?

Elias Rutten: Right. And I think the thing that jumps out to me here is, when I was writing this interview and doing research for the questions, I became a bit insecure. I know you’re an expert—you’ve done this your whole life; this is what you’re good at. But even though I’m quite interested in economics, follow the news, read books, I still find it really difficult to figure out what’s true. And I think this is even more true for people who don’t engage with economics. So, how can we navigate these debates when we don’t really know what’s going on, as individuals who are part of it?

Mark Blyth: Part of this is when we’ve turned political questions—about distribution—into technical questions of optimal management, which is what we’ve done. “Don’t worry, the central banks have got this. There’s a perfect interest rate that’ll bring the whole economy into balance, if only we can find it.” The people who say this don’t even believe it themselves. In part because it’s unknowable. Is it really the case that the economy has a speed bump? It’s hard to know. It could be an artifact of the models, or just the theory. Maybe it does work intuitively. Think about it: if you just doubled everybody’s paycheck overnight, what would happen? It’d be a huge party on Saturday, and everybody would go out and buy, and by the end of the week, everything would cost twice as much. So, monetary neutrality isn’t the dumbest idea—it just might not work in certain conditions. If you have economies with productivity improvements, maybe you can use money that way usefully.

Then there’s the question of how to identify these things. Capitalism does it through firms. Loads of firms try different things. Some fail, and something works, and we follow that path. That’s how it works—searching by doing. Would I rather have a planning agency try this? Well, I’d need to be convinced.

So, again, to go back to this: at the end of the day, Europe has basically decided that it can’t do anything, it shouldn’t do anything. Moreover, the rules say they can’t do anything, and they shouldn’t do anything. So, anyone who says they can is obviously talking nonsense and not to be taken seriously. Let’s have another round of cuts. That’s where they’re at.

Elias Rutten: Yeah, this is kind of how it feels when you challenge the status quo in the Netherlands. It’s like you just completely get shut down: “No, the rules say that you have to do this. We have rules in Europe, why are you diverting from them? What are you doing?”

Mark Blyth: Because, you know, the rules are a shortcut for thinking about the complexity you find yourself in. At some point, you’ve seen the rules work, and if you change the rules, you're taking a punt on the future. A lot of the ideas we have about how economies work say you can’t and shouldn’t try this. Ultimately, it’s about monetary neutrality, equilibrium, real rates, etc. So yeah, you’re asking people to take a big punt, and it’s much easier just to please the top 20% by doing another round of cuts. At the end of the day, their house is still worth 800.000 euros.