Ivan Mikloš: Every Eighteen Years a Real Estate Bubble is Popped and Followed by an Economic Crisis

The world economy suffers from short-sighted policies enacted by politicians who only see the next elections, who seek to buy their popularity and pay off the electorate, and are reluctant to enact difficult reforms, says former Slovak politician and economist Ivan Mikloš in an interview with Robert Schuster.

ROBERT SCHUSTER: What is the state of the world economy? Is there another crisis lurking around the corner, as we can read sometimes?

IVAN MIKLOŠ: So far, we are not talking about a crisis but about a downturn, or a pronounced slowdown, if you will. This is evident in the global economy, in the European economy, and specifically in Germany, the powerhouse of Europe. It is set to be growing by a half percent, next year maybe by one percent. When it comes to a crisis, the only certainty is that it will come. We do not know when it will come and what it will entail. I do think, however, that we have been cured of illusions entertained at the beginning of the millennium, which predicted the end of the economic crisis as such, thanks to new technologies and globalization.

We have experienced a long period of economic growth since 2009, yet the pace is slower. Assets, mainly real estate and stocks, have had record growth. The New York Stock Exchange has had the longest and steepest growth in its history.

So, is the theory about the economic cycles still valid?

Yes, in its essence it is, despite the fact that on a different level modern technologies bring different aspects to it. In essence, though, it is certain that sooner or later another crisis will come. There is one more relatively interesting connection, and that is that almost all instances of economic crisis and recession are tied to a burst of a real estate bubble, as was the case in 2009. It is the proverbial exception to the rule when it is not so, like in 2001 and the pop of the dot.com bubble.

There are historical records since the mid-nineteenth century demonstrating that real estate bubbles burst roughly every eighteen years. The twentieth century was an exception, with World War II, but since the 1960s it has been on track. We cannot be certain, of course, but if the eighteen-year cycle keeps going, then the next one could be around 2024, as it was in 2006 when real estate prices stopped growing in the USA, and in 2007 first banks began folding. But then again, there is not a one hundred percent guarantee.

What about the traditional tools that governments have been using to give some momentum to the economy, such as lowering of the interest rates, are they still effective?

Well, now we have a problem. The classical tools of crisis monetary policies will not be available, as they all have been used up before crisis hits again. Central bankers have been trying to stimulate growth using a toolkit for recession times, and they have not been successful. The growth since the global financial crisis has been slower than before. At the same time, all the monetary and fiscal instruments have been used up, so they will not be available. The global debt, private and public, has gone up in the last ten years.

So whatever growth there has been, it has been fueled by growing debt, which has outpaced the economy. When a crisis comes, there will be no room to increase the debt. The situation is actually more complex than in the past. The interest rates are hovering around zero, even below, and there is nowhere to lower them. So when it was no longer possible to lower interest rates, then came the quantitative easing, which has direct and indirect negative consequences.

It made sense in the critical years 2008 and 2009 when it was important to prevent the freezing of financial flows and a further deepening of the crisis. The problem is, it is still being used today, ten years later. There is a strong analogy with treating a disease. When pain killers are used, the pain symptom goes away, yet the underlying cause remains unaddressed. On the contrary, it becomes worse. I do think it is a serious issue, and there is growing resistance against it, be it at the EU Central Bank level or among the Eurozone states.

What is the solution?

To launch real reforms. Quantitative easing is taking time from us, it devalues money, it makes it easier for governments to borrow and it eases the pressure to commit to long term solutions and reforms. What I mean by that are healthy, sustainable public finances—i.e. lowering the deficits and debts, structural reforms—of labor markets, social sphere, healthcare and pensions. Yet the main conflict is between the politics and economy.

Politicians who think only until next elections, buy their popularity and are unwilling to commit to serious reforms seem to be running the show today. That gets us into a vicious circle—growing debt, putting off reforms, and in the meantime, the problems that need to be addressed as soon as possible are becoming too big to tackle.

We can view it through the lenses of economic theory. When John Maynard Keynes came up with his theory in the 1930s, most economists considered his ideas irresponsible. His view was that during the crisis the state should spend more money, and the fiscal and monetary policies should be expansive in order to mitigate the crisis. That was seen as reckless. Keynes says, however, that in order to be able to spend money in a time of crisis, there ought to be a budget surplus when times are good and the economy is growing. Right now we are in a situation when governments are only taking the first part of his advice, and everyone is ignoring the other half, which says one should be creating a surplus. So most governments are running a budget deficit even during growth years.

The recent global crisis was brought under control thanks to joint actions taken by a wide range of players, for example by G20. Can you see it happen today when we are witnessing the erosion of multilateral agreements, and some are bent on pursuing unilateral interests?

Yes, it would be more difficult, but not only due to the above-mentioned reasons. The main problem is that we are lacking tools that could be used effectively. Interest rates cannot be brought down any lower, and when it comes to quantitative easing and bond purchasing central banks are meeting the limits they had set upon themselves. It is a vicious circle, because one of the main reasons for the upcoming recession is the trade wars, the economic nationalism and the protectionism unleashed by Donald Trump. Economic nationalism can be seen elsewhere as well. It is one of the underlying causes of Brexit. Then there is the rise of popularity of certain extremist parties which prefer economic isolationism.

Europe seems to be between a rock and a hard place, the USA and China. What would be the best strategy for survival?

Europe is on the right path, because it is supporting the free market and it is bringing down trade barriers. The hurdle is not so much in a wrong strategy but that its unified voice, if you like, is relatively weak. There is a legitimacy issue, too many decisions are made on the national level and no quick change is on the horizon. The importance of respecting the single market and of bringing down the trade barriers stands out clearly with a looming Brexit. Europeans have no other choice but to remain proactive. It does bring results. The threat of a trade war between the USA and China did speed up negotiations on trade deals in Asia, and between Europe and Canada. One simply must look for space elsewhere.

How has the economic role of V4 countries changed in the last thirty years? Does it still conjure up the image of a giant assembly line?

We can be absolutely certain that for the countries of our region the thirty years since the fall of communism has been an unprecedentedly successful period. They have reached growth and development that has been simply unimaginable. This does not mean, however, that all is well and rosy. We could still do better. As far as the future is concerned: in Slovakia, you can often hear contemptuous talk about “assembly lines”. We should ask ourselves—what would be the alternatives? As of now I am being active in Ukraine, and there they would be very happy if they had them. We have to focus now on what comes next, and how the V4 countries are able to deal with future challenges.

Right now, we find ourselves in a bit of a double trap. One is the trap of so-called middle income. What it means, according to the World Bank, is that when a country reaches a certain economic level, between 17,000-19,000 dollars per capita to be precise, and wants to maintain rapid growth, it needs to change its character, what it does best. The focus must be on innovations. In order to do so, there are many necessary reforms that need to take place: healthy public finances, ease of doing business, quality of governance, education, research and development. If a country is dynamic, flexible and reformist, it is doable.

And the other trap is?

That would be illiberal democracy. Hungary finds itself there, Poland is on its way, and we can see some symptoms in the Czech Republic and Slovakia. The thing is that V4 countries are on a divergence path. We are successful, on the one hand, in economic convergence—we are growing faster than rich countries and we are catching up with them.

When it comes down to social convergence, or in other words, how this macroeconomic success is projected into the quality of lives of ordinary people, on the other hand, there is still much more catching up to do. And then there is the third level, that of the institutions. This means that the improvement of governance according to the World Governance Index of the World Bank is even slower. This could spell the end of economic convergence as such.

Estonia is leading the pack in the governance progress, and is most likely to be successful in the long term perspective. There is agreement across the political parties about the need for reforms and modernization. In Central Europe, we see populism, buying out of the electorate, a carpe diem attitude, and a weak drive to implement reforms and strengthen institutions.

In addition, we see liberal democracy under attack in Hungary and Poland, along with fair and free competition in the political arena. Encroaching of political freedom will sooner or later hamper the economy and its competitiveness. Russia serves as a prime example of how far things can go, when you have a corrupt system of state capitalism which simply cannot be competitive due to its very nature.

Countries in Central Europe, with their limited experience with freedom, are not alone in this. There are similar trends in the USA or in the UK, because Trump and Brexit are very similar phenomena. Or take a look at Slovakia, where the government party Smer still polls at about twenty percent, despite everything in its past and what we know today. When you add fascist and other populists, the picture is pretty bleak. The fight for freedom and open society is never over, yet I am deeply convinced that there is no better alternative. Unfortunately, history shows us time and time again that humanity has to go down the dead-end road first to learn its lesson.

Would you endeavor to predict where the World or the European economy will be in twenty years?

That is basically impossible. There are unprecedented challenges and threats ahead: climate change, sovereign debt crisis, the ineffectiveness of traditional economic tools. It is true, however, that so far we have always managed to come out on top when crises hit, so hopefully thanks to new technologies and freedom we will be able to pull it off again in twenty years time. The question is what new problems will arise. It is clear now that progress in technology, AI included, will require completely new approaches all over the world.

The cooperation will need to become more intensive in Europe, and globally as well. As far as Central Europe is concerned, I am an optimist in the sense that over time we will come to understand that liberal democracy and a market economy based on equal opportunity and fair competition is the best way forward. This is exactly in the spirit of the words of Winston Churchill, that democracy is the worst form of government except for all those other forms that have been tried from time to time.