With concerns about Italy’s public debt growing, Italian populists have taken a page from US President Donald Trump’s playbook and threatened to blow up the eurozone if they don’t get their way. The European Union must resist the temptation to engage in a dangerous game of chicken.
In The General Theory of Employment, Interest, and Money, John Maynard Keynes famously worried that, “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Yet even without prescriptive theories, feigning “frenzy” or madness can also be a plausible, powerful, and rather contagious negotiating strategy. In the early 1970s, US President Richard Nixon adopted the tactic to convince the North Vietnamese that he had his finger on the “nuclear button,” and that they had better negotiate a deal to end the war – or else. And in 1986, President Ronald Reagan met with Mikhail Gorbachev in Reykjavik and surprised him by proposing that the United States and the Soviet Union both destroy all of their nuclear weapons.
Whether a crisis is escalating or de-escalating, the madman strategy’s effectiveness seems to depend on the extent to which a political leader’s “insanity” is ambiguous – so much so that even historians won’t know where to draw the line between sincerity and artifice.
With President Donald Trump’s on-again, off-again approach to a nuclear summit with North Korea, along with his bluster over new sanctions against Iran, the madman strategy seems to have made a dramatic comeback. It is now being adopted by many other leaders, and quickly spilling over into new domains, including debates about reforming the European monetary and political system.
Recently, the eurozone debt crisis, dormant since 2012, has looked as though it could erupt again. With interest rates so low, the Italian government’s massive public debt has appeared sustainable. But with financial markets increasingly jittery over political developments in Italy, it is easy to imagine a world in which interest rates rise and remain elevated, in which case the Italian debt could pose a serious threat to the eurozone, and even to the global economy.
Investors’ fear of another eurozone debt crisis have been spiking since the populist Five Star Movement and right-wing League party failed to form a government after months of post-election gridlock. The M5S/League coalition, which won a combined parliamentary majority in the March 4 election, have clearly taken a page out of the Trump playbook, hoping to use Italy’s debt to extract concessions from the EU.
Will it work? The first, and most basic, component of the madman strategy is an ability to introduce a level of uncertainty that is damaging to other countries. This is why the strategy doesn’t really work for smaller countries, as Greece’s new government in 2015 quickly learned after dabbling in brinkmanship with its European creditors.
Assuming a country is big enough to rattle global markets (as Italy clearly is), three other factors determine the success of a madman strategy. For starters, its government must be able to convince everyone else that it is being driven toward “insane” acts by voters. The idea is that it is actually irrational for a democratically elected government to act prudently if doing so means inviting punishment from voters who are committed to myopic but deeply felt positions. In the case of Italy, populists capitalized on voters’ disenchantment with a center-left party whose pro-European stance had failed to deliver results.
There must also be a visible division between “hawks” and “doves” within the madman government. In any negotiation, the other parties will offer concessions to strengthen the doves, knowing full well that a failure to do so will enrage the hawks, who will then move forward with their doomsday plans. With Trump, this dynamic exists within a single personality that is prone to violent, unpredictable swings between openness and anger. But it also exists within Trump’s cabinet, with John Bolton, the hardline national security adviser, playing the role of the hawk.
In the case of the M5S/League coalition, a hawk was needed as a counterweight to Italy’s pro-EU president, Sergio Mattarella. That is why the populists’ choice for Minister of Economy and Finance was Paolo Savona, an 81-year-old economist whom the former Italian economy minister Vincenzo Visco has described as “radically and suicidally anti-German.” When Mattarella rejected the nomination, the M5S/League quit the talks, precipitating the current crisis.
Finally, to succeed, a madman government needs to have a plausible war plan for causing a general disruption. For example, the M5S/League coalition suggested that it might issue a parallel currency, which lent further credibility to its threat of pursuing fiscal expansion in defiance of EU rules.
As more governments, parties, and leaders come to imitate the madman strategy, the scope for agreement in any negotiation will narrow, and will become more likely. In fact, hardline German economists have already responded to Italy’s political crisis by circulating petitions to block any eurozone reform that could be regarded as a concession.
But exposing the dangers of the madman strategy will not be enough to defeat it. Voters also must be convinced that better alternatives are available, and that European integration can still safeguard their interests. In the months before Italy’s next election and the EU parliamentary elections in May 2019, EU leaders will have some – but not much – time to show that European integration is about more than political paralysis and economic stagnation.
Otherwise, we might soon be reacquainted with the madman strategy’s grim side. Before his abdication in 1918, German Kaiser Wilhelm II did not need to pretend to be unstable; he really was. With a penchant for saber-rattling speeches and outrageous newspaper interviews, he had something in common with America’s Tweeter-in-Chief.
In another disturbing historical parallel, he often boasted about his ability to reach agreements with the Russian and British monarchs, to whom he was related. In the event, as the crisis of diplomacy was escalating in July 1914, he suddenly announced a grand new peace initiative. But it was too late. The game of chicken had spread, and the world’s leading powers hurtled together toward catastrophe.
Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.
This article was first posted in ‘Project Syndicate’ on May 30,, 2018.
This is a most unhelpful comment from Harold James. The arrogance is startling, even for an establishment academic. I hope the book is not as bad as the garbage above. If Harold’s views as reported here are translated into Italian he may principate that nation’s departure from the Eurozone.
An interesting outline of the madman theory of negotiation, but it is detached from the facts on the ground in Italy. Italians found that European integration, specifically the Euro which constrains fiscal policy, doesn’t safeguard their interests – viz unemployment above 10%, not to mention the refusal of other EU countries to assist with the 100s of thousands of refugees that have turned up on its shores. That the Germans oppose any reform is not surprising given the benefits a low Euro provides their export led economy, even though they also “defy” EU rules about the level of trade surplus. The author acknowledges the political paralysis and economic stagnation in the EU, but the Italians know that doubling down with existing policies will not work – see the recent decimation of the PD. Italians are more concerned about the madmen in the ECB and EU who haven’t shown they are capable of managing the Euro in the interests of all Europeans.
With due respect to the professor, I believe what Yanis Varoufakis has to say about all of this is more accurate as have been his predictions about the rise of far right extremist parties very much due to the actions of the EU and the IMF.
I hope the author realises that it’s the Eurozone living on borrowed time. It is a dead man walking. You’d be mad not to want to change it.
It was founded as a neo liberal entity and all the disoccupation , even in Germany, is a burden it cannot resolve without dismantling the rules. Germany already disregards them . Neo liberal policies are becoming known as toxic. Move as soon as possible!!
Except it’s the Euro authorities who are the madmen.
The fundamental design flaw in the Euro is to impose the same exchange rate on Germany and the peripheral countries, so Germany gets to sell cheap exports and Greece struggles to sell its tourist and other things. So Germany goes up and Greece goes down, along with Spain, Italy and others, making the problem worse. It’s unstable.
The Euro has been a disaster and the sooner it’s ended the better for all. Too bad so many are blind to this simple problem.