Andreas Theophanous Professor of Economics and Public Policy President, Cyprus Center for European and International Affairs Head, Department of Politics and Governance University of Nicosia
	Yiannos Katsourides Assistant Professor of Political Science Department of Politics and Governance University of Nicosia

PARADIGM SHIFT OR GRADUAL CHANGES?

Since the outbreak of the COVID-19 pandemic many analysts have identified possible changes that will affect politics, the economy and society. These could include changes to a number of fields and areas: the EU, the global economy, employment relations, national welfare systems, national political systems and international relations in general, the role of the nation state, globalization, identity politics, education etc. Some, have even proposed that the extent and magnitude of the changes may be far reaching.  This special issue aims to discuss, among others, these potential political changes and particularly whether a paradigm shift might be on the making.

 

In this introductory note we discuss two of these issues that touch upon the economy (Neoliberalism) and the organization of international relations (the role of the nation-state). The unprecedented conditions that the pandemic has created all over the globe unavoidably affect all aspects of public and private life. Beyond issues of public health and the continuous rising toll of deaths, an economic crisis is simmering anew, just a few years after the huge financial crisis of 2008. Moreover, a number of scholars and analysts fear that the magnitude and the consequences of the boiling economic crisis could be bigger than that of the great depression in 1929-33.

 

During the Eurozone crisis, Neoliberalism, as this was crystallized and institutionalized in recent decades and despite the harsh criticism it has received, remained the dominant paradigm of economic thought and action. However, the COVID-19 crisis has put into question fundamental pillars of this paradigm with the most illustrative example being the advancement of the crucial role of the state not only in areas considered as high politics but in the everyday life of citizens. It is in this context that the analogies with the past are crucial as they help understand the transitional phase we are currently in.

 

Before the 1929-1933 depression, in the USA, the cardinal paradigm of economic governance were the classic and neo-classic economic theories. The basic premise of these theories was the absolute faith in the free and unregulated market that was seen as always leading to full employment and sufficient economic activity. The allocation of resources was basically determined by the price mechanism. Furthermore, the role of the state was limited. Issues of social justice and inequalities were not among the preoccupation of these theories. It was this ‘economic certainty’ that Keynes questioned even before the crisis and went subsequently to establish his own economic theory, thus signaling a major swing in economic perceptions and economic governance.

 

Keynes showed that economic activity could have severe fluctuations highlighting at the same time the importance of aggregate demand. He also emphasized that there could be extended periods of low economic activity and unemployment arguing that the concept of market equilibrium professed by the free market advocates did not guarantee full employment. Keynes believed in an interventionist state particularly in the fields of fiscal and monetary policies.

 

Before 1929 Keynes was considered heretic. The 1929-33 economic crash overturned long-established perceptions and beliefs and led to a sweeping change of the economic paradigm. Classical economists and the then President Hoover insisted that the market would overcome the crisis if left alone. This did not happen and Roosevelt came to power in 1932 endorsing Keynesian economics though his New Deal. The day after in the US and the world was different: the new economic paradigm was based on mixed economy and the role of the state was seen as vital. Keynes ideas although subsequently criticized still inspire a great number of economic theorists and practitioners.

 

Following the golden years of Keynesianism, a new school of economic thought emerged in the 1960s and gained firm roots in the 1970s: Neoliberalism. The neoliberal criticism focused on what they perceived as distortions to economic activity due to state interventionism blaming particularly high government spending, excessive regulation and high tax rates. Supply side economists emphasized how Keynes focused exclusively on demand and ignored supply and all those factors affecting it. R. Reagan in the US, M. Thatcher in the UK and to a lesser extent H. Kohl in Germany were the main political representatives of Neoliberalism.

 

Their theoretical motto was ‘creating opportunities, not providing guarantees’. This first version of neoliberal economics emphasized tax reforms. In particular, they advocated the decrease of corporate tax, personal income tax rates and capital gains tax, increasing at the same time indirect taxation.

 

Keynesian economics were partially restored by Clinton when he came to office in 1992 (Neo-Keynesianism). He maintained though some basic features of Neoliberalism. However, he further led the deregulation of the financial markets, an act that played its part in the global financial crisis in 2008. Both in the US and in Europe the period that followed saw a turn towards ‘lesser state’ and severe cuts in social welfare. This represented a second version of Neoliberalism (II) whose stronger advocate was A. Merkel’s Germany. In the EU, Germany strongly promoted balanced budgets and primary surpluses even in periods of deep recession. This policy increased inequalities between EU member-states but also within states, it shrunk the numbers of the middle class, increased poverty and unemployment and led millions of people to marginalization. Neoliberalism marched through harsh austerity.

 

History though often tends to repeat itself albeit not exactly in the same way as the first time. The pandemic and the socioeconomic consequences it has caused exposed the weaknesses of Neoliberalism II and some of the obsessions of neoliberal elites. Current debates are now concerned, inter alia, with the day after. Probably the main question is whether the pandemic experience will lead to a paradigm shift. In this regard, economic debates are expected to polarize between neoliberal and Keynesian approaches emphasizing issues relating to social welfare and the role of the state. Fueled by the repercussions of the pandemic, Keynesian economics are already resurfacing. In this context, the hegemonic neoliberal narrative will be under a lot of pressure. Whether these pressures will lead to a change or transformation of the dominant economic and political paradigm is largely dependent by the mediation of political actors.

 

In a more political vein, similar discussions are taking place with regard to the repercussions of the pandemic on the organization of the international system. Much like the terrorist attacks of 9/11 have changed dramatically the context and several parameters in the way the international system worked and organized, many analysts expect that the Covid-19 could also have a similar influence. For example, some expect that globalization will cease to unfold the way it has been in recent years, at least temporarily, whereas the EU will be tested once again and its future course will be defined by the decisions taken in the wake of the pandemic.

 

The state, the nation-state, international and regional organizations as well as the process of globalization have been the focus of extensive analyses by various theoretical strands: realists, liberals, Marxists, etc., with each school emphasizing its own assumptions. These theoretically informed debates and analyses have never taken place in Cyprus in order to position our country in the complex international environment. There seems to be a belief among analysts that the nation-state is making a comeback, fueled by this extraordinary crisis. Debates about reverting powers previously given to regional or international organizations have revived, particularly in the EU. In reality though the nation-state was always present and the most important actor in international affairs.

 

In this period, almost all EU states adopted aggressively expansionist fiscal policies. The admittedly generous measures of state interventionism taken, with the encouragement of the EU, reveal a shift away from Neoliberalism II. More cautious analysts though, foresee a rather temporal shift of economic practices. According to this line of thought, the history of economic crises shows that governments and political forces in liberal, free-market democracies tend to enhance the social welfare state during and in the immediate aftermath of economic crises only to weaken it in periods of ‘normalization’. Free markets, crises and state intervention seem to co-exist in a dynamic relationship where, paradoxically, the return of the ‘free-market normality’ is almost always achieved via state intervention.

 

The pendulum between the forces of globalization and those of the nation-state, between the forces of Neoliberalism and Keynesianism represents a very complex ‘battlefield’. The day after could affect changes in political perceptions, practices and structures. However, this is highly contingent on the balance of power between social and political forces representing each camp and the way political actors will act. Taken together, they will determine whether Neoliberalism will recoup or wane. The balance between these forces is yet to crystallize which makes any definite judgement regarding the final outcome premature. The apparent weakness both of national and most profoundly the international systems of governance to provide and guarantee vital public goods, such as health, biodiversity and the climate, necessitates the redesign of national and international arrangements.