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Last week, according to the Financial Times, Germany’s economy minister warned that a court ruling might “doom” government plans to deal with Germany’s energy crisis and green the German economy. This is just one of many controversies over how to pay for adjusting to and mitigating climate change. Good Authority contributor Henry Farrell asked Mark Blyth, the William R. Rhodes ’57 Professor of International Economics at Brown University, to explain the underlying politics.
Henry Farrell: You’ve written a very influential book on economic austerity and why Europe embraced it. Your work helps explain why Germany introduced a “debt brake” into its constitution that minimized government borrowing except under emergency conditions. Last week, the German Constitutional Court said that the debt brake prevented the government from borrowing money to finance green measures. What does this mean for Europe’s transition to a post-carbon economy?
Mark Blyth: Well, it’s not very good for it. The real question is, why do countries keep introducing pro-cyclical fiscal rules that make crises worse? In Germany, it allowed the Greens, who wanted to spend lots of money on heat pumps in every house, and the liberals, who wanted to spend no money, to join together with the social democrats to form a government. They compromised on doing the spending through what are called “off balance sheet vehicles,” which are like the “special purpose vehicles” that banks used in the run up to the financial crisis. The Court said they couldn’t do this.
Politicians don’t want to acknowledge what the carbon transition will cost. What could possibly go wrong when you hide debt from your voters, not acknowledging it as part of your balance sheet, taking the risk that interest rates go up and your asset values go down? It isn’t just German rules that demand this kind of budgetary rigor, but E.U. rules. The E.U.’s Juncker Plan back in 2015 pretended that a little government spending will leverage private sector investment, but two-thirds of what we need to do in climate change – e.g., building seawalls – has no obvious profit model. If you won’t issue long-term debt because it violates your fiscal rules, you’re saying that it’s the rules that are in charge and not the elected politicians. It’s no wonder that people lose faith in democracy.
Moreover, as Lucy Barnes, Björn Bremer, and others have argued, voters are far less worried about debt when it’s presented, rightly, as trade-offs. When people are asked if we should cut spending on health care to reduce the national debt, they don’t want it. People really want proper investment after a decade of austerity thinking, and there are plenty of things that could be taxed properly – self-employment, the incomes and assets of the super-rich, international corporations – to pay for it.
Given all that, why are countries like Germany so committed to austerity?
Lucio Baccaro, Jonas Pontusson, and I edited a book setting out what we call the “growth model framework.” Crudely put, we ask: What is the business model of an economy? And we find that the business model shapes political choices. So for example, Germany, as a massive exporter, could never absorb its own surplus of cars and machinery. That means that Germany must suppress wages and consumption, and have an undervalued currency to stay competitive. The business model creates austerity politics.
Do other countries’ growth models affect the green transition?
Absolutely. One reason why U.S. politics is so contested is because a battle is taking place between two rival growth models. One growth model is represented by the economies of the two coasts – software, media, government, finance, real estate, and the like. The other model is found in the part of the country going from Alaska down the Dakotas through Appalachia, Texas, the panhandle, and so on. This has a growth model based around the transformation, excavation, and derivatives of carbon: farms, fertilizer, and fuel.
These two growth models are in fundamental conflict. The coasts would love green energy, but the more that the U.S. turns green, the worse it is for parts of the country that are heavily invested in carbon assets. As Jeff Colgan, Jessica Green, and Thomas Hale have argued, this gives rise to “existential politics.” Getting to cheap green electricity would effectively devalue or defund North Dakota and Shell. This existential fight is reshaping the Democratic and Republican coalitions.
Which is likely to win?
It’s on a knife edge. If the Democrats win next time around, they can keep on putting facts on the ground – building battery factories and associated technology plants in states like Georgia and turning them blue, or breaking off part of the Texas vote with benefits and infrastructure for wind power. But it’s enormously fragile. If Trump and the Republicans win, it may be the end of the green transition in the U.S. I don’t think people have woken up to that yet.
Does that doom the carbon transition elsewhere?
I don’t think that’s true. There is an incredible conceit among U.S. international relations thinkers that climate change is a collective action problem, and the U.S. is the only leader that can get everyone to agree to face up to it. That’s not what we have seen before. When Bush walked away from the Kyoto protocol, climate cooperation accelerated. The same thing happened when Trump walked out of the Paris accord. There’s a lot happening anyway: Microsoft putting up a $100 million prize for molten salt nuclear power at scale; firms using super deep boring technology in old coal mines to produce superheated steam driving turbines. China’s installing more solar this year than the rest of the world. India is addressing its neuralgia about 1991, when they nearly ran out of currency for imports because they didn’t have oil in part through decarbonization. There are microgrids all over the place getting electricity to villages that never had it. Indonesia is undergoing the same transition.
So much of it is outside the West’s hands. I’m glad, because we’re really shit at it. If Trump wins and the U.S. goes big on the carbon growth model, people there will get a massive short-term return on investment, because the world is carbon short right now, and it needs American liquid natural gas. But as the rest of the world decarbonizes, you know what it won’t need in a decade or so? Very much oil.