The State is Coming Back

Ukraine and Covid induced crises can no longer be solved by the market

It is interesting that I get lots of e-mail on topics to cover and a few subjects stand out. One is the energy crisis in Europe which is rapidly expanding with EU and national governments belatedly taking action on escalating prices. From the reports that come in, it is clear that many lower household incomes will be served with energy bills that they can simply no longer afford. In The Netherlands the government is pleading with energy providers to not cut-off the non-payers and is investigating how to take over ‘bad accounts’ from private corporations. Maximum prices and clawing back ‘excess profits’ are also on the table. The package of rebates and increases of minimum wages and payments for the elderly which take effect for the Dutch on January 1 are not nearly enough. All benefits coming out of that rescue effort will likely be gobbled up by the local utility bill. But the energy suppliers themselves in some cases are in deep trouble too, in Germany this week it was announced that some gas companies are about to be nationalized. In the year 2022 that is an almost unprecedented move. The privatized energy sector can no longer deal with the devastating impact of what is transpiring as a result of the war in Ukraine, but also Covid.

And it is not just energy. It has been complete chaos on airports across the globe as a post-Covid ramp up was proving too hard to handle for bottom-line driven organizations. Employees from security staff to baggage handlers had disappeared to other better paying opportunities and were loath to return and take a pay cut for what is essentially crappy work. And of course, investigating journalists saw the opportunity to dive into airport operations and the picture of what goes on in terms of pay, working conditions and safety protocols was in some cases not exactly to write home about. Intense competition has created a race to the bottom and airports that were supposed to be dedicated to deliver basic services to its travelling citizens were all of sudden incapable of doing so. Or if they are able to do so, they deliver these with levels of unprecedented discomfort. And it is not just a blip, the ongoing chaos at Amsterdam airport for instance is proving that there are structural and hard to fix issues. Its CEO resigned this week.

We all believed coming out of the 1970s that the government was no longer able to deliver services and what was inspired by Reagan and Thatcher was soon adopted by political parties across the world, left and right. Privatize the utilities, decentralize and let the market do its work, it was a recipe for success it seemed. I enthusiastically took part during my time in project finance where power plants, toll roads, airports, telecoms, hospitals and water were no longer the business of the government, but of a robust private sector. Within a solid regulatory framework everyone would make money and the consumer would get the best possible, ideally lowest, price. At the same time the profit motive would drive innovation. The banks were all too happy to lend and underwrite, and once things got financed it meant growth and then of course an IPO.

Many people at the time warned that even though letting the private sector figure it out would bring healthy benefits, not every utility was made for the free market. Notably railways are hard to privatize and we are now finding out that airports most probably need far more oversight from the state, in exchange for lower profits. Quite possibly an entirely new business model. Energy too may be best provided by a public utility rather than some offshore entity with shareholders who could not care less if some Dutch retirees will have to light a candle to make it through the winter. Governments catching up with chaos on the ground are struggling to fill the gaps that the market can apparently no longer fix.

Yes, there are dark clouds hanging over a political philosophy that has been shaping many countries over the past thirty years. Neo-liberalism may not be sustainable in times of unprecedented crises. Look, I am not advocating the return of the inefficient nanny state, no, but we need to start contemplating a return of the state in some form when delivering certain core services to its citizens. The Germans have started this week, let’s see who will follow.