RevDem assistant editor Giancarlo Grignaschi in conversation with Dóra Piroska, assistant professor at CEU in Vienna at the department of International Relations, about her chapter on financial nationalism in the Elgar Handbook of Economic Nationalism, edited by Andreas Pickel.

Giancarlo Grignaschi: I would like to start from a high level of abstraction with a definition of “financial nationalism”. What are the necessary and/or sufficient dimensions of the concept of financial nationalism? How is it different from or similar to economic nationalism?  

Dóra Piroska: The definition of financial nationalism that I use in this chapter comes from an influential article written by Juliet Johnson and Andrew Barnes in 2015. Their definition goes very simply:

“financial nationalism is a subset of economic nationalism that focuses on using monetary and financial policies as instruments to pursue a nationalist agenda”.

(Johnson and Barnes 2015, 538)

However, going a little more into details, the definition is composed of two aspects: how financial nationalism is defined in relation to economic nationalism, and a more substantive conceptualization. Thus, at a very abstract level financial nationalism, just like economic nationalism, is a manifestation of a political strategy which on the basis of a nationalist ontology defines a set of financial policy scripts along a politically marked binary division of insiders and outsiders. Importantly, this conceptualization of financial nationalism is helpful in that it allows for a large variety of financial policies to fall into the category of financial nationalism; they can be protectionist measures but also liberal measures, as long as they are based on and justified by a nationalist agenda.  

Going to the more substantive definition of what exactly financial nationalism is, Johnson and Barnes develop five interlinked policy activities of financial nationalist governments that they find to be the most typical of their practice. The first one is the defense of the national currency: financial nationalists are keen to ensure an exclusive use of the national currency. But this monetary sovereignty is not only about using the national currency domestically, for it can also entail promoting the national currency externally in foreign trade relations.

The second characterizing policy is monetary autonomy, whereby financial nationalists seek to establish and preserve autonomy in the conduct of monetary policy. Third, and very interlinked with the latter, central bank independence is regarded as dysfunctional for financial nationalists. For financial nationalists, autonomous monetary policy means that the central bank should be an ally of the government and placed under the control of the nationalist politicians. Therefore, a financial nationalist government will seek to undermine central bank independence. It is going to point out that an independent central bank is an outlier in the state apparatus, that it is controlled by technocrats who are primarily serving outsiders’ interests, and this is why it has to be brought into the state apparatus.

Fourth, financial nationalists are also banking nationalists, which means that they prefer national control over the banking sector and will seek out policies that increase domestic ownership vis-à-vis foreign ownership in banking. And, finally, financial nationalists tend to be very skeptical about international financial institutions, notably the World Bank and International Monetary Fund, but also generally any other international organization that they perceive to be a threat to their policy autonomy. 

Based on the definition above, is financial nationalism on the rise today? If so, what are the potential reasons for this rise, from a political economy perspective, and what is financial nationalism’s geographical reach? 

Well, yes, financial nationalism is on the rise. Countries like the United States, Russia, China, Taiwan, but also Germany and Hungary embrace financial nationalist policies, although to varying degrees. I would say that the historical development leading towards this state of affairs started in 1998 with the East Asian financial crisis. This was a warning to emerging markets that global financial interconnectedness might be very dangerous due to the high volatility of global finance. Therefore, since 1998 we can observe a slow and cautious decoupling from global financial markets in Russia, Brazil, China and India, with increasing domestic reserves, an important reduction of foreign debt, increased bilateral currency arrangements, and the promotion of national currency in trade.

I would also say that the global financial crisis gave the additional push for financial nationalist policies. This time not only in emerging markets, but also in the Western core states. These have been especially legitimized by the important costs of saving banks that taxpayers had to provide – which further increased the political will and demand for more control over finance in general – but also because the global financial crisis brought about an ideational turn with normative consequences for banking and banking policies.

While pre-global-financial-crisis policymakers generally trusted the efficiency of financial markets to create the best conditions for economic growth and stability, following the crisis many states have sought to develop a more assertive external and internal financial policy.

Today an active state is seen as a viable option to markets in directing credit to developmental projects. 

Moreover, I would say the COVID crisis gave further impetus to reconsider the importance of national interest, both in the economy in general, but also in finance. Thus, in the economy we have intensified talks on friend-shoring and on-shoring global value chains from foreign markets, and we have seen an important increase in domestic ownership of financial institutions. I would also say that the Russian war against Ukraine pointed in a very similar direction, prompting policymakers to increase national controls over national financial markets. Therefore, what we see today is that financial nationalist proposals are not only to be found in emerging markets but also in the global core, in large countries and in small open peripheral countries. 

The fact that financial nationalism is on the rise comes as a surprise to me in light of the political economy literature on finance and financialization. What does political economy tell us about financial power? 

Yes, I agree with you. Political economists looking at financial nationalism were certainly surprised, but also hopeful. They were surprised precisely because what we learned about financial power in the last couple of decades was usually pointing to the heavy hand of financial markets in influencing financial policy formation. Indeed, starting from Susan Strange who first pointed out the structural power of finance due to its high interconnectedness and high mobility, as well as the capacity of moving incredible amounts of money geographically, many political economists have thought that states are losing out: states are losing their power to control and their autonomy to define financial economic policies.

But in the 1990s, political economy analyses quickly corrected the view of broad, overarching, and all-powerful financial markets, and many comparative studies are starting to show how the liberalization of financial markets was also domestically motivated and was leading to very different solutions – from Spain, to Italy, to Germany and Japan. Thus, we understood a variation in how global financial markets are domesticated, but nevertheless none of this scholarship has documented an activist turn against the power of finance. That is why political economists were absolutely surprised to see a very clear populist and financial nationalist turn against financial markets – from Brazil, to Hungary, to the United States. 

At this point, political economists started documenting the conditions under which small, open economies can safely turn against the global banks while at the same time maintaining the stability of their financial markets; for instance, by mitigating the threat of liquidity absorption from their economies. The scholarship is documenting this because there is hope in the attempt to regain policy autonomy vis-à-vis global finance, in that this may allow for the better tackling of inequalities and also more independently designed developmental policies. 

However, I find the current take of political economists to be a little bit problematic in their analytical separation of economic development and economic-policy formation from the democratic oversight of these policies. Indeed, in the chapter, I suggest a correction to this general take and

I recommend that we should analyze the various and often very positive effects of financial nationalism on economic development together with their possible impact on politics. 

What you have just said is well linked to what, according to me, is one of the most interesting aspects of the chapter in the Handbook of Economic Nationalism, namely the interactions between financial nationalism and the quality of democratic oversight, since financial nationalist policies have an impact on politics too. For instance, dealing with the Hungarian case, you argue that “financial nationalism [..] severely harms democratic institutions, provides financial resources only to well-connected businesses and unevenly integrates the society into the benefits of the financial nationalist policies”. Could you tell us more about the impact of financial nationalism on democratic institutions and the specific case of Hungary, where the combination of bank domestic ownership and control over the central bank is functional to the goals of financial nationalists? 

This is, indeed, the chapter’s core argument. Here I must clarify that I am not arguing that financial nationalism, by its inherent qualities, has to undermine democratic politics, but it might well do so, as I showed in relation to Hungary. In particular, you refer to two of the case-studies that I present in the chapter, namely the case of increased domestic ownership and the case of the control over the central bank. In both cases, I show that the financial nationalist Orban government was indeed capable of achieving financial nationalist goals, even in a small open economy embedded in both global financial structures and the liberal European market. This means no retaliation for pursuing financial nationalist objectives. On the contrary, the policy goal of the increasing national banks ownership, for example, was facilitated by the global financial crisis strategy of large banks that started deleveraging in Eastern peripheral markets. Banks were indeed for sale, and Orban took the opportunity to buy them. 

In both cases, I also show that

the financial nationalist Hungarian Government could use the re-gained policy autonomy to serve the national interest or, to be more precise, the interest of the politically-defined national insiders.

Thus, in the case of domestically owned banks, I point to the political economy literature that argues that they may potentially better serve domestic constituencies than foreign-owned ones – especially in times of crisis.

Orban successfully increased domestic bank ownership from 20% in 2010 to over 50% in 2015. In the case of the central bank, I also show that although it completely lost political independence in 2013 when Matolcsy became its governor, some of its programs were very much serving the interest of small- and medium-sized enterprises. Most importantly, this is true with the funding for growth credit scheme, which is a credit provision to small- and medium-sized enterprises (SMEs) at 0% interest rate around 2013, because after the global financial crisis the banks in Hungary were not willing or able to provide credit for them. Accordingly, the stepping-in of the central bank, which was taking on a new function like a development bank by providing 0% interest rate credit, was very beneficial and growth inducing for SMEs. 

However, in both cases, I also show that in pursuing financial nationalist policies, the Orban government severely undermined democracy. In the case of the domesticated banks, I point out the non-transparent nationalization process, which included an important amount of taxpayers’ funds without disclosing how much money – and for what purpose – it was used. Moreover, I point to the credit provisioning of these newly domesticated banks to Orban’s related businesses. Here, I find it problematic that these loans often serve the purpose of the political ambitions of Orban. For example, one of these banks provided a large amount of credit to an Orban-associated businessman to buy one of the then-independent TV channels, which further allowed this Orban-connected businessman to turn that channel into part of the propaganda apparatus of the government. In that sense, the domesticated banks were not really serving the interests of the nation’s economy, but, in a Gramscian sense, they were providing the economic base for the political ambitions of Orban’s authoritarian policy goals. 

The case of the central bank is very similar. In addition to providing this generous funding for the growth credit regime, a controversial program of the Central Bank established foundations for all kinds of educational and other purposes. In total, six foundations were created. The public was absolutely unaware of how much funding these foundations would receive. Indeed, it took the work of a number of civil society organizations, political parties, the Hungarian Academy of Sciences, and EU officials, especially from the Statistical Office, to force the government and the central bank to reveal how much money had been allocated. Only after three and a half years was it revealed that roughly 4% of the GDP – equivalent to the NATO state defense budget – was used in an incredibly untransparent way. This is clearly something very harmful for democratic oversight. 

In light of the above, I argue that it is possible to pursue a financial nationalist agenda which may be very effective in promoting some forms of economic development, yet might also be undermining democracy. 

Financial nationalism does not characterize only Hungary, but also other countries in Central Eastern Europe, such as the Czech Republic, Poland, and Slovakia. The chapter we refer to in this interview is just one of your works dealing with the political economy of finance. In particular, I believe this chapter is well linked to another recent analysis of yours, co-authored with Yuliya Gorelkina and Juliet Johnson (JCMS 2021). There you compare a number of Dependent Market Economies on the background of macroprudential policy. Put simply, the latter is aimed at financial stability, and it is generally coordinated at the EU level. Comparing Hungary and Poland (among other countries) which are both outside the Eurozone and the Banking Union, you argue that Hungary is a case of “macroprudential measures as financial nationalism” while Poland is a case of “macroprudential policy against financial nationalism”. Could you clarify the relationship between macroprudential policy and financial nationalism in these two countries? 

Thank you for referring to another work of mine. Indeed, I have conducted quite a bit of research on macroprudential policy, especially with Katalin Mérő. In general, I was interested in macroprudential policy because I felt that it has a very narrow understanding in core countries – mainly about mitigating financial stability at the macro level. Looking at Central and Eastern Europe, what I found is that Poland, Czechia, Slovakia, Hungary, and even Romania are using macroprudential policies not necessarily with the sole aim of maintaining financial stability of domestic markets, but more specifically as market-correcting instruments to mitigate the uneven distributional effects of financial globalization and economic integration. Therefore, even though the instruments of macroprudential policy in the semi-periphery are the same as in the core, their purpose is different when used in the open markets dominated by foreign banks. 

Comparing and reviewing macroprudential policy tools in these countries, we asked to what extent the tools were used: were they general market correcting instruments or rather instruments that correct markets with the view of the politically defined national insiders? We found that it depended upon to what extent financial nationalists were in power. In the country sample that we have – Poland, Turkey, Slovakia, Hungary and Romania – Poland and Hungary stood out as the two countries in which we found financial nationalists in power. However, the two countries differ in the degree to which the central bank was brought into the financial nationalist agenda and the degree to which the central bank lost independence. 

In the Polish case, we found that the central bank regained its policy autonomy and could develop financial policies regardless of the government’s financial-nationalist policy agenda after 2000. Whereas in Hungary, the governor of the central bank, since 2013, is the most important advocate of financial nationalism, meaning that financial nationalism is inside the central bank. In particular, we found Poland to be a case of macroprudential policy against financial nationalism. Indeed, when the PiS government proposed imposing an obligatory conversion of all foreign-currency loans into Zloty, at a very unfriendly rate vis-à-vis the banks, the central bank and the FSC – which is the committee that defines macroprudential policy in Poland – found this proposal to be a threat to the stability of the national financial market. They cautioned that such a conversion could lead to solvency problems for the banks: it might produce legal risks as well as weakening the Zloty and ultimately financial and macroeconomic stability. Therefore, the central bank and the FSC decided to create a legal and regulatory framework that would incentivize a gradual and voluntary conversion of these foreign-currency-denominated housing loans into Zloty. This is an instance of using macroprudential tools to counter the financial-nationalist agenda. 

In Hungary, on the contrary, we found that not only were those measures labelled as macroprudential by the central bank — which are everywhere else in Western Europe counted as tools to preserve macroprudential stability — but also a number of other tools were brought into this agenda which are ambiguous. In particular, these other tools were dubious in their capacity of securing macroprudential stability, yet they were very much capable of favoring national insiders vis-à-vis outsiders. This was the interesting finding of the paper you mentioned:

overall, in Central Eastern Europe, macroprudential policy is used with a very different perspective than in Western Europe – or the US. However, to what extent those tools are infiltrated by the financial-nationalist agenda eventually depends on the local institutional context. 

Before concluding, I believe it is worth touching upon some of todays’ challenges (beyond inflation), namely the impacts of COVID-19 lockdowns and the Russia-Ukraine war on Hungarian government’s financial nationalist policies. How do these events impact the choices of financial nationalists?

I would say that these recent developments undermine, to some extent, the possibility for the Hungarian government to pursue financial nationalist policies. One of the conditions under which the Orban government could gain policy autonomy was a very active decoupling of the domestic financial market from global financial structures. Two key policy measures led to this structural condition: 1) a very active reduction of the Hungarian government’s outstanding foreign debt, whereby the government, through the reduction of foreign debt, was actively seeking a way out of the situation in which foreign creditors could dictate certain policy choices, and 2) a forced regulatory conversion of domestically active banks, both foreign- and nationally-controlled, from the use of foreign currencies to the use of Forint. This latter move allowed the Hungarian government also to achieve a very particular state of affairs, in which an increasingly large amount of government debt is now denominated in Forint and held by domestic banks – and the domestic public at large. 

To be clear, the problem with these financial policies, as they are primarily conducive to the interest of very carefully and politically defined national insiders, is that they do not have an overarching developmental prospect. The Hungarian economy was not at all spectacularly growing compared to regional competitors like Slovakia, Czechia, Slovenia, Poland and even Romania – these countries having grown at a faster pace than Hungary. Then the COVID crisis hit, and the Orban government found itself in a particular position, where its increased expenses in relation to the economy and society cannot be covered by increasing its tax revenue. Moreover, the absorption capacity of domestic financial markets to take on loans in this very dire economic circumstance are very low, thus they have to take on new foreign loans. 

My suspicion is that, with an increased amount of foreign-currency-denominated debt, the Orban government’s room for maneuvering is going to decrease. However, within the decreased room, I do not see chances to change the policy course, though they might interact with each other in the future. 

To conclude, in the chapter you argue that financial nationalists have traits in common with other populists. Without stating it explicitly, it seems that you point to the distrust of independent central banks as a common feature between populists and financial nationalists. In your opinion, is financial nationalism a subset of populism? Aldo Madariaga, during an interview here at RevDem, mentioned the distinction between corrective and threatening populism. Your study offers interesting data to substantiate that distinction: it seems that financial nationalism, at the most abstract level, takes the shape of a potential corrective to a kind of neoliberal, hollowed-out democracy, in that it takes back control on tools which may deliver public goods. In fact, this abstract understanding of financial nationalism entails two different potential stances, namely a democratic and an autocratic use of the control of monetary and financial tools. What are your thoughts about that?

This is not an easy question, especially because I am no expert on populism. The little I know tells me that it definitely overlaps with financial nationalism, in the sense that actual policy choices by governments might be classified both as financial-nationalist and populist – although some policies might be only classified as financial nationalism or populism. One thing in which I see similarities is their distrust of technocrats. In Hungary, Orban comes to power in 2010, and there is a three-year struggle to gain control over the central bank. As such, the financial-nationalist view of the central bank in Hungary, when it was still independent before 2013, shows distrust of technocrats, in that they do not represent the national interest but rather the interest of those global networks for which they work. 

What is interesting here, in relation to populism, is that once you completely discredit the technocratic knowledge as being driven by foreign interest, financial nationalists are allowed to re-think economic policy choices. Thus, while the central bank is populated by excellent Hungarian economist who, until 2013, followed a liberal agenda premised on stable financial markets governed by a textbook understanding of efficiency, it is incredibly restricted in what it may or may not do for its policy purposes that are defined in its statute. And when Matolcsy comes into power, we see an incredible enlargement of the potential policy choices, which no one had ever dared to imagine possible given the legal statute and mandate of the central bank. I am not arguing that these are good or bad choices vis-à-vis the Hungarian economy or business sector. Rather, I am just noticing that

the distrust of technocrats increases the policy scope. This is one aspect in which the populist and financial-nationalist distrust of technocrats are similar to each other – both in the dangers and the opportunities that are brought into policy formation. 

With that said, to what extent is financial nationalism a corrective to the hollowed-out neoliberal economic policy choices? It certainly depends on how it is used. We see ample examples across various cases. For instance, the case of Bolivia tells us that financial-nationalist policies might actually be incredibly helpful in pursuing a more developmentalist agenda than what has been pursued by, for instance, foreign banks. Financial nationalism may also justify redistributing economic gains of global finance more equally among different segments of society. Therefore, I would agree with you that financial nationalism’s policy options provide opportunities. However, I also see that the extent to which these opportunities serve social interest at large depends on the kind of political institutions within which they are formulated. Indeed, political institutions can use these financial policy tools just to pursue an incredibly narrow financial or economic interest. 

So yes, to some extent, I agree with Aldo Madariaga that financial nationalism may be corrective or it may be threatening, and I would point to the political economy institutions of the country within which they gain hold to evaluate their potential. 

Contact Us