My latest Critical Quarterly column was written in the immediate aftermath of the Catalonian independence referendum, and is available here.
As we get closer to the important EU Council meeting the amount of coverage on Brexit has increased significantly. Of course more noise does not necessarily equate to more content – there is a lot of uninformed opinion around.
There are some fundamental issues that need to be understood.
While we are talking about the border between Ireland and Northern Ireland, we are also talking about a future external border of the EU. That means the issue of the Irish border is very important to the EU and our EU partners and all have the same objectives – to avoid a hard border. Thus, the negative commentary directed at Ireland by Brexiteers and the Brexiteer press, apart from being mostly factually wrong, is badly misdirected.
Of course the impact of a hard border would be felt more by Ireland than in any other Member State (you can find analysis on this here), but the nature of the border is a crucial determinant of the integrity of EU Customs Union and Single Market, and is thus of crucial importance to the EU. This latter point appears not be understood by everyone. To illustrate the significance of the EU external border, and the Irish border will be that post Brexit, it is useful to consider an example:
The UK wants to sign trade deals with other countries, which presumably will give other countries access to the UK market on different terms than are available in the EU. This is why the UK wants to leave the Customs Union. If the UK allows beef from a third country into the UK at a lower tariff than the EU would charge and/or subject to less regulation than applies in the EU (as part of a trade deal), then this beef could enter the EU if there is no hard border. Of course with lower tariffs in the UK than in the EU exporters would move their product through the UK (Northern Ireland) into the EU.
This would mean that the UK would effectively determine EU external trade policy. The EU will not allow such a situation to arise – and neither should Ireland as such a situation is likely to have significant negative impact on Irish businesses and consumers (remember the regulations are there to protect consumers).
This means that the apparent offer by the UK, that there will be no regulatory divergence at least for Northern Ireland, will not avoid the need for a hard border as the issue of different tariffs is not covered by that offer. A hard border will only be avoided if the UK, or at least Northern Ireland, stay in the Customs Union and there is no regulatory divergence – there is no way around this! An offer to avoid regulatory divergence is not enough to move to the next phase of the negotiations.
Even a special status for Northern Ireland, where the border runs through the Irish Sea and where UK authorities ensure that third country products do not end up in the EU market, is problematic as it would be difficult for the EU to enforce the proper policing of that border, given that it is located outside the EU in a sovereign country.
Another important point relates to opinions about the use of existing or yet to be invented technological solution to police the border. A lot of the legitimate routine trade is already processed electronically, and could easily continue to be processed that way. But that does not remove the need to check that what is being transported is what had been declared, and more importantly border checkpoints are there to stop illegal activity. It is hardly credible that criminals are going to be declaring their trade via an online system!? Importantly, once the UK is outside the Customs Union illegal activity will not only encompass the usual things like drug smuggling but will also encompass shipments where the tariffs and duties due in the EU have not been paid or where the goods do not meet EU regulatory requirements. In the event that the UK is outside the Customs Union (tariffs) and Single Market (regulations), Ireland is obliged to police this border adequately, which means physical checks.
This brings me to my next point. It would be very easy for the UK to guarantee that it will not introduce physical border checks, but given the arguments I put forward above, what the UK would needs to guarantee is that the EU will not need to put in physical border check in response to changes introduced by the UK in the wake of Brexit, namely deviations from regulations, tariffs and tariff-quotas.
Finally, there is talk about some form of words being found that would allow negotiations to progress to the next phase. Again given the facts, what is needed are very concrete undertakings that would be legally binding and would avoid the need for a hard border i.e. that the UK will not leave the Customs Union and there will be no regulatory divergence. Without such undertakings the negations should not proceed to phase two. Importantly, this is the point where Ireland holds all the cards, and it would be great mistake to settle for anything less than such an undertaking.
My latest Critical Quarterly column, on the political upheavals of 2016, is available here.
I gave the economics lecture at the recent national conference at NUIG commemorating the centenary of the Easter Rising. I had three main messages. First, the economic history of post-independence Ireland was not particularly unusual. Very often, things that were happening in Ireland were happening elsewhere as well. Second, for a long time we were hampered by an excessive dependence on a poorly performing UK economy. And third, EC membership in 1973, and the Single Market programme of the late 1980s and early 1990s, were absolutely crucial for us. Irish independence and EU membership have complemented each other, rather than being in conflict: each was required to give full effect to the other. Irish independence would not have worked as well for us as it did without the EU; and the EU would not have worked as well for us as it did without political independence.
The world is awash with populists. From Ireland’s independents to President Duterte of the Philippines, from Germany’s anti-immigrant AfD party to Norbert Hofer of the far-right Freedom Party of Austria, from Ukip and Jeremy Corbyn in Britain to Donald Trump in the US, populists are on the rise. And we’re not talking just a few random demagogues here, though personality does go a long way. (Trump-related Pulp Fiction pun intended, by the way.)
We are seeing a rise in populist parties getting and holding onto power in several European countries including Finland, Hungary, Latvia, Lithuania, Norway, Ireland and Switzerland. Iceland is about to elect the Pirate Party (no really) to power. The French Front National may well take power in France, riding a wave of anti-immigrant sentiment there.
Populists come from both sides of the political spectrum: Greece’s Syriza party and Spain’s Podemos party consider themselves of the left, while Germany’s AfD and France’s Front National are on the far right.
So it’s a problem. Old, established, centrist parties have lost their grip on power – spectacularly so in Greece – while newer parties are standing mostly on a basis of what they are not – Corbyn is not a Blairite, Marine Le Pen is not Nicolas Sarkozy, and so forth. The 32nd Dáil contains 19 TDs who are nominally ‘independent’, with 12 more in left or far-left groupings. Ireland does not produce far-right TDs that often, though it does produce some very right-wing policies from time to time.
Our text for today is Graham Gudgeon’s piece in the Irish Times, which makes a number of questionable claims.
First, he argues that
An accurate version of Ireland’s economic history is important. This is because, contrary to what we are continually told, EU membership does not seem to have had a noticeably beneficial impact on Ireland’s economic growth, even if this seemed to be the case during the great construction boom occasioned by overly low interest rates inside the euro zone.
I don’t think any economic historian or economist believes that the EU has not been massively good for Ireland’s economic growth: just compare our experiences pre- and post-1973.
Maddison’s numbers show per capita growth of 3% p.a. 1950-73, and 4.1% p.a. 1973-2008. 4.3% p.a. 1973-2000, in case you want to strip out the Celtic Bubble years and the first year of the crash. That’s before we even get into the important issue of what was happening to the number of capitas. GDP grew by 3.2% p.a. 1950-73, and by 5.1% p.a. 1973-2000. 5.0% 1973-2008. And there is an even more important point to be made. The period from 1950-73 saw extremely rapid growth throughout Western Europe: our growth rates then were disappointing in that context. Growth slowed everywhere after 1973: our growth rates since then have been very strong in that context.
Our whole development strategy has been to serve as an export platform for multinationals selling into the EU market. You might think that we should be diversifying, and I might agree, but everyone accepts that the strategy has worked, massively, to date.
From the text, it seems that Gudgin may be confusing EU and Eurozone membership. I’m one of those who thinks that the Euro has been a damaging failure, but let’s not confuse the EU, and the Single Market’s four freedoms that have worked so well for us, with a flawed monetary union.
Gudgeon then goes on to say that
In fact, as Ben Kelly has usefully reminded us, unless the British decide to stay in the EU customs union either permanently or as an interim measure (or, most implausibly, succeed in negotiating a free trade agreement with the EU within two years of Article 50 being triggered) there will have to be tariffs between Ireland and the UK. There will be no choice in the matter: for the EU not to impose tariffs on UK exports would leave it in breach of its WTO obligations. And unless the UK has zero tariffs on everything from everyone, WTO rules would similarly oblige it to impose tariffs on EU exports.
Unfortunately for us, it seems likely that the British are intent on leaving the customs union, as Robert Peston points out here. There is therefore a fairly strong possibility that we will see tariff barriers between the Republic and Northern Ireland in the not too distant future (unless the North can get a special dispensation to stay in the customs union, and the tariffs are imposed across the Irish Sea instead).
There are those who would like to see Ireland leave the EU. Expect them to argue in the years ahead that any border controls between the Republic and the North are arising because of “pressure” from the Continent. Expect them to further argue that this shows that our true friends are in London rather than the European mainland. On the contrary: any border controls that arise will be as a result of British decisions, and British decisions alone. And to date there is no indication whatsoever that those decisions are taking any heed of Irish interests.
I have a post on this subject at VoxEU, available here.
A fortnight after the British referendum on EU membership, Britain is still in turmoil. Some of the negative lessons are all too clear: don’t try to solve party political problems by invoking existential issues; referendums are volatile and uncertain; if you must have one, get a crack team together first. But, as weary politicians are fond of saying, we are where we are.
So what is likely to happen now?
There are different views about what course of action the referendum requires; but there are also very different views about what it might mean to ‘take back control’, which was the core theme of the campaign.
Reading this article by Fintan O’Toole got me thinking about my other country, Denmark. The Kingdom of Denmark isn’t just Denmark proper, it includes two other autonomous countries as well. Only Denmark is in the EU.
Update: a researcher in Aalborg who actually knows something about Greenland had much the same thought as I. And they are practical people up in northern Jutland.
The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash. We argued this based on late 19th century evidence, but opinion poll evidence (citations here) suggested that something similar was at work in the late 20th century as well, a hunch confirmed in the early 21st century by the 2005 and 2008 French and Irish referenda.
What was missing from all this was an analysis of what, if anything, governments can do about this. Which is where Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in. Dani’s interpretation is that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks. In a series of articles, and an important book, Michael Huberman showed that this correlation between states and markets was present before 1914 as well: countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.
Anti-immigration sentiment was clearly crucial in delivering an anti-EU vote in England. And if you talk to ordinary people, it seems clear that competition for scarce public housing and other public services was one important factor behind this. If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it: if these had been elastically supplied, that would have muted the impression that there was a zero-sum competition between natives and immigrants. It wouldn’t have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes. But of course the Tories were never going to do that, at least not with Osborne at the helm.
If the English want continued Single Market access, they will have to swallow continued labor mobility. There are complementary domestic policies that could help in making that politically feasible. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states. Too much market and too little state invites a backlash. Take the politics into account, and it becomes clear (as Dani has often argued) that markets and states are complements, not substitutes.
Britain has voted to leave the European Union (EU), or more accurately, England has voted to leave. The majority in Scotland, Northern Ireland and Gibraltar voted to remain. The opinion polls, the bookies and the markets did not predict this outcome. The mood of the nation, it would seem, is becoming increasingly difficult to measure. Or is it?
There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens, alongside Germany and Denmark.
According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave. Some have referred to this category as ‘those with lower education’. But let’s be honest, it’s called social class.
Another predictor as to whether someone was more inclined to vote leave was age. Younger, more liberal voters, were much more supportive of remaining in the EU. The only problem with this category of voter, is that they failed to turn out en masse to vote. According to the data, electoral turnout among 18-25 year olds was fairly weak. Older conservative citizens were much more inclined to vote.
The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts in England overwhelmingly voted to leave the EU. Or to get at it another way, according to this report, those areas with the most stagnant wages are the same communities with the most anti-EU attitudes.
What can we infer from all of this? What should EU policymakers infer from all of this?
The core inference is that England is a deeply class divided society, and that the poorest in England are increasingly venting their anger at immigrants and the EU. Further, and not captured in the Brexit data, right-wing political parties are now mobilising working class England.
Those same electoral constituencies most likely to vote leave, and with the most stagnant wages, are the same constituencies most likely to vote for the far-right populist UKIP party. In addition, they are the same people most likely to be discursively conscripted into the anti-immigrant lies of England’s infamous red-top tabloid press.
Class politics in England increasingly overlaps with enthno-nationalism, whereby identity and immigration, rather than economic self-interest takes precedence in shaping electoral behaviour.
In political science, there is a large literature on economic voting. One of the core findings of this literature is that in times of crisis and economic austerity, voters punish incumbent governments. This is partially what happened in the UK. Disenfranchised working class voters punished the Tories, liberal elites, the EU and the city of London.
However, the economic voting literature, whilst useful in describing why voters punish government, tells us very little about who these voters turn to, when expressing their social grievances.
In theory, those voters most affected by austerity, unemployment, underemployment and precarious work, would turn to parties on the left and those parties committed to reducing economic inequality. Most research, particularly within Europe, however, suggests, working class voters are turning to the ethno-nationalist right.
To put it simply, those affected by austerity and right-wing economic policies don’t necessarily vote in their class interest; they increasingly vote in their ethno-nationalist interest. UKIP’s economic policies are aggressively libertarian, not social democratic.
Economic liberalisation, rising inequality, and the complete free movement of peoples has social and electoral consequences. Societies will react to this disruption in different ways. Nationalism provides a sense of meaning, community and belonging, to those most affected by liberalisation. Far-right parties, such as UKIP, know this.
This realisation, however, does not seem to have seeped through to policymakers in the EU or Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness.
Most political science research in the aftermath of the great recession increasingly suggests that not only are electorates losing trust in the EU, but that the support for national democracy, in general, is in decline. When the politicians change, yet the policy remains the same, voters lose trust in the institutions of liberal democracy.
The question for national leaders in the European Council, and policymakers in the European Commission, is whether they need to wait for the election of Trump in the US, Le Penn in France, or the Five Star Movement in Italy, to realise that their economic policy response to the crisis has failed, and must fundamentally change?
Polities disintegrate when they begin to loose control of their external borders and their internal legitimacy. Or, as W.B Yeats poignantly wrote in 1919, “things fall apart; the centre cannot hold; mere anarchy is loosed upon the world“. The UK and the EU are now faced with the potential for disorderly disintegration. Political scientists are accustomed to thinking that ‘more EU integration’ is inevitable. This is wrong.
Yeats wrote this after WW1, which coincided with the end of the first wave of free-market globalisation, when economic inequality peaked, much like today. In many ways Brexit can be interpreted as Europe’s Polanyi moment. It was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.
It would be naive to assume that the popular reaction to rising inequality, precarious work, economic uncertainty, liberal elites and fear of immigration will lead to something politically progressive. The wave of anti-immigrant, nationalist sentiment, sweeping England, clearly shows that it won’t. France could be next. The EU should not wait to find out.
Ireland needs to play its hand deftly and aggressively during the EU-wide Brexit negotiations. Irish interests in the Brexit process, post-vote, differ from those of other EU states. For EU enthusiasts in states with limited UK trade, a tempting strategy for preventing a NEXT-IT (Netherlands, Austria, Denmark, etc.) is to punish the UK via a spiteful exit deal. That would be a disaster for Ireland due to spillovers. Ireland needs to fight hard to let the UK be allowed a smooth and minimally-disruptive exit, not face a mini trade war. Ireland would be hit very badly in the crossfire.
I see that everyone is now arguing that globalisation has distributional consequences, and that losers may eventually decide they have had enough. Which is something that I and others have been writing about since at least the 1990s.
I don’t expect anyone to take much notice of a bunch of academics, but how can we be surprised at the Brexit vote when we have had practical, political experience of the class divides surrounding European integration (viewed and experienced as a regional manifestation of globalisation) since at least 2005, when the French rejected the so-called Constitutional Treaty? And here is my very first ever Vox.Eu column, on the Irish Lisbon 1 vote.
And so my question is: when this has been so obvious for so long, how come nobody has done anything about it? Where are the enhanced safety nets, or the more elastic provision of public housing and other services that would surely have made a difference in the English debate? It really is quite extraordinary.
Although I was a member of the Centre for European Reform’s Commission on the UK and the Single Market, I declined to sign a resultant letter to the newspapers on what the UK ought to do, as well as similar subsequent efforts. There were two reasons for this. First, I’m not British, and I know how irritating it is to have foreigners tell you what to do at times like this. Second, it wasn’t at all clear to me that economists’ letters were particularly helpful. On that score at least, I think I was right. But Thursday’s vote is going to have implications for all of us, and especially for Ireland, so we all need to start thinking about what happens next.
Oxford vote 70% to 30% in favour of remaining in the EU, and I have lots of colleague who are absolutely devastated this weekend. It’s hard for people outside Britain to understand just how sad so many people are at what has happened. This isn’t just about economics, or even mainly about economics: it’s about identity, and a great many English people feel, profoundly and sincerely, that they are both European and British. Both identities are under threat today.
Of course, a healthy majority of English people are happy with the outcome, including some friends of mine, and I’m pleased for them. And presumably we all wish England well. But it’s also true that the English voted without paying the slightest heed to what was in the interests of Ireland, including that part of the island which remains part of the United Kingdom. It was ever thus, for perfectly understandable reasons having to do with the relative sizes of the two countries, which is why Irish independence was always both inevitable and desirable. But that is another matter.
One of the truly extraordinary features of the British political landscape today is that neither the Leave campaign, nor apparently the British government, knows what it wants to happen next. But it is perfectly obvious what we in Ireland should want to happen next. England and Wales have voted to leave the European Union, and hence the Single Market. The reality therefore is that, as things stand, the UK is headed out of the Single Market that it was always such a keen supporter of. And that would be bad for Ireland in a whole host of ways that are by now well understood.
Of course, the British may decide to reapply for Single Market membership, as part of the process of negotiation which now has to take place on the terms of their exit from the European Union. They are perfectly entitled to do so. If they do reapply, they should be granted membership of the European Economic Area on the usual terms: Ireland, and Britain’s many other friends in the European Union, should insist on this, and indeed it would be in everyone’s best interests. But only the British can decide if this is what they want. Given that labour mobility will be part of the deal, I would have thought that such a decision would require another referendum on both moral and political grounds. I don’t view that as an insuperable obstacle, since I don’t see why such a referendum could not be won — especially since this may well be the key to avoiding a hard border with Scotland. And if the English don’t want to join the EEA, we need to know that too.
The rest of Europe should resist the temptation of a “fuite en avant”, attempting to move full speed ahead towards a fiscal and political union that nobody wants. (Yes, that has implications for the survival of the euro, at least in the long run. So what? The single currency was always a terrible idea.) Far better to accept the reality of a multispeed Europe, which better reflects the diverse opinions of its many citizens. If the United Kingdom, or England and Wales, were to become firmly embedded in the European Economic Area, while remaining outside the European Union, not only would economic disruption be kept to a minimum, and Ireland’s best interests be protected; this would be an important move towards a looser and more shock-resistant economic architecture for Europe as a whole. And there would actually be a certain upside to that. Too much rigidity, and the entire European project risks implosion. This is not so much a case of “reculer pour mieux avancer”. It is a case of “reculer pour survivre.”
It seems the European Commission are continuing to ask fresh questions of Ireland on the Apple State Aid case with Commissioner Vestager telling a European Parliament committee yesterday that she did not know when the case would be ready for a decision.
The Financial Times have devoted an article in their ‘The Big Read’ series to the case. See here.
I’m writing an economics column in Critical Quarterly, a humanities journal, which is a bit of fun. They are supposedly free to view for 12 months after publication. I already posted a link to the first, on the European democratic deficit, but neglected to link to the second, on migration. The third, on secular stagnation, is available here.
Why is anyone shocked at the political news from France this morning? Everyone is saying that the FN got a boost from the November 13 atrocities, and perhaps they did, but there are far longer run forces at play here.
One is the corruption and sleaze that characterises Parisian politics. But there are also economic factors that are having a predictable impact on attitudes (and if they are predictable, then economists don’t have the right to ignore them). Globalisation creates losers as well as winners, for example, and if no-one really cares about the losers, and we just pay lip service to the problem, then it is predictable that there will be a backlash. The Euro has not only locked in a set of distorted real exchange rates, but a macroeconomic policy mix with a pronounced deflationary bias. If times remain tough enough for long enough, and politicians hear your pain but don’t actually do anything about it, some people will eventually respond by voting for candidates who reject existing constraints on policy making. “Europe” is increasingly experienced as a set of constraints preventing governments from doing what their people want them to do, rather than as a means of empowering governments to collectively solve problems.
So why would anyone be surprised that Mme Le Pen has done so well; and is it not likely at this stage (though 2017 is a long way away) that absent major policy shifts she will come first in the first round of the Presidential election? And let there be no mistake: if she actually won the second round, either then or in 2022, this would mean the end of the EU as we currently know it.
What is so frustrating about all this is that it has been so predictable. Here are some links dating back to 2010, a year that risks being viewed by future historians as a fateful one:
And me, with apologies for the self-indulgence, writing for Eurointelligence.
I am pretty sure Martin Wolf was saying similar things back then, and that many others were too.
The good news is that, as recent Irish experience shows, the populist vote stops rising when the economy recovers. (The decline in the independent vote share is quite striking, and SF have clearly stopped rising. And no, I’m not saying that anyone is like the French National Front, but support for these parties is the closest Irish equivalent to the French anti-establishment protest vote that is benefiting the FN so much.) And 2017, and even more so 2022, are a long way away. But Eurozone monetary and fiscal policy, and social policy too I would think, need to start taking into account the fact that the entire European project, the good bits as well as the harmful bits, is now facing an existential threat.
Update: Paul Krugman weighs in here.
Here are three papers I have read recently.
1. Reinhart and Trebesch on the way that external debts can hollow out local democracies. No need to elaborate on this I think.
2. Avdjiev, McCauley and Shin on cross-border banking: well worth a read for people not familiar with this stuff. They are talking about complicated transactions, but as we know in Ireland, much simpler transactions (banks borrowing overseas) can have dangerous consequences.
3. Athanasios Orphanides on the highly politicised nature of crisis decision-making in the Eurozone.
From 3, and from everything that we have observed during this crisis, from Ireland in 2010 to Greece in 2015, I infer that a small country is much more vulnerable inside the Eurozone than outside, if it gets into trouble. Outside, you will deal with the IMF on its own, and they have a standard policy template: debts will be written down, currencies will be devalued, and yes, there will also be austerity. Inside the Eurozone creditor countries will sit alongside the IMF at the table and you may find that neither of the first two policies will be feasible, which will make the austerity far more harmful than it would otherwise be, both economically and politically.
From 2, I infer that a small country needs to watch its banks like a hawk, especially if it is inside the Eurozone, because (from 1, and 3, and from what we have experienced since 2010) the political consequences of not doing so are just too damaging.
And from 1 and 3, I infer that government debts are something that small countries inside the Eurozone also need to be very concerned about. Especially in a monetary union without a banking union, like ours.*
So I find myself in agreement with Colm McCarthy. As was the case 15 years ago, we need to worry about the possible real exchange rate consequences of expansionary fiscal policy at this point in the cycle. And to be fair to the Irish economics profession, lots of people did worry about that then. But the main concern for me is no longer about economics, but about the risks to our Republic’s democracy. The price of freedom is eternal vigilance.
*What is a banking union? If Arizona elects a bunch of communists or survivalists to run the state, and the state budget explodes as a result, local banks will still be backed up by the Fed. My money will still be safe. I will still be able to withdraw it if I choose. This is what a banking union looks like, and don’t let anyone in Brussels or Frankfurt tell you any different.
Philippe Legrain points out that, far from creating the sort of European-level democratic space that would allow citizens to choose between political and economic alternatives, closer European political union is likely to place more even restraints on the power of politicians to respond to voters’ demands for alternative policies. This is because ever more rules proscribing what others can do, and made up by Germany, is what Germany wants (not that she has historically felt bound by rules when fundamental national interests are at stake, as inter alia the collapse of the EMS and the scrapping of the excessive deficit procedure inform us; and quite right too in my view).
But why does Germany want this?
Harold James has one view here.
And here is J.A. Hobson:
Moreover, while the manufacturer and trader are well content to trade with foreign nations, the tendency for investors to work towards the political annexation of countries which contain their more speculative investments is very powerful.
1. “We averted the plan of a financial choking and banking system collapse.” (Tspiras)
You are the prime minister Mr Tspiras. Did you not have a plan B to deal with ECB blackmail? If not, why not? Did you really think that the others would back down because of the possibility of Grexit, when it was so clear that you would be willing to do almost anything to avoid it?
2. The new (and conveniently self-interested) German doctrine that defaults are impossible within the Eurozone. Remember the no bailout clause? Ashoka Mody is surely right: these negotiations will kill the entire European project sooner or later. Better to let countries default when that is what is required.
3. Nice to hear Merkel saying that Greece may win back her trust. If I were Greek I might not trust European promises regarding debt rescheduling. Have we not heard those before?
4. How high is Greece’s debt to GDP ratio going to be now? Over 200%? Even if there is some reprofiling, does anyone think this makes sense?
All in all a great day for Golden Dawn. As for the rest of us: I don’t suppose that any other left wing party that may come to power in the future seeking to challenge the current European economic policy mix will be as feckless as the Tspiras government. The lesson that they will draw from this debacle is: negotiating with Germany is a waste of time; be willing to act unilaterally, be willing to default unilaterally, have a plan for achieving primary surplus if you haven’t already achieved it, have a hard default and euro exit (now possible, thanks to the Germans) option in your back pocket, and be willing to use it at the first sign of hassle from the ECB. A deal could have been done today that would have strengthened the Eurozone, but instead it has just become a lot more fragile.
Update: Wolfgang Münchau is well worth reading, here.
Update: this is also well worth a read.
Update: Charles Wyplosz is well worth reading here. Good to see someone pointing out the obvious about this extraordinary programme, and also taking on the (to my mind bizarre) argument that the headline debt/GDP ratio is irrelevant.
Update: Dae Woong Kang and Ashoka Mody offer a historical perspective here.
1. I see that Juncker is saying that it is a shame that the Greeks walked out of the negotiations last week; and yet the creditor negotiating stance seems to have been “give us everything we want, and maybe we will discuss what you want (debt relief) at some later date”. For an account of the negotiations, see here.
2. I see that Hugo Dixon was describing the parties that got Greece into this mess over the course of several decades as “pro-European”, implying that Syriza is anti-European. Come again? Since when does opposing a particular policy mix (in this case one that has failed disastrously over the course of several years) make you anti-European?
3. I see that Martin Schulz is now denying having said that a no vote meant that Greece would have to leave the euro.
4. I can’t count the number of times I have heard French friends tell me that the problem is that the Greeks don’t pay taxes. (All Greeks, you understand.) What about Troika officials?
5. Aside altogether from the immense catastrophe of the last several years, Greece’s GDP shrank 0.4% in the last quarter of 2014, before Syriza got to power. Just saying.
What I found most galling was the argument that Grexit would bring about an economic catastrophe, as though the catastrophe had not already happened.
Some of the crocodile tears being shed on Sunday night about the humanitarian catastrophe that the Greeks were now supposedly bringing down on themselves (as if the ECB’s refusal to ensure financial stability in that country is irrelevant) I found pretty hard to take. Where have these humanitarians been hiding for the last seven years?
7. No comment necessary:
SPIEGEL ONLINE: Herr Fuest, angenommen, Sie wären wahlberechtigt, wie würden Sie am Sonntag beim griechischen Referendum über die Reformpolitik abstimmen?
Fuest: Mit Ja. Nachdem Ministerpräsident Tsipras sein politisches Schicksal an den Ausgang der Wahl gebunden hat, wäre mein primäres Ziel, ihn und seine Regierung loszuwerden.
8. Faymann: “Europe is known for compromises. Renegotiation until the last minute. Greece didn’t do this when it walked out of negotation.” The Greeks have been making compromises for months; where is the German compromise on debt relief?
There, that feels better.
On the bright side, it seems that around 80% of young Greek voters voted no.
Three questions arise. Why would any non-European country be willing to accept another European IMF head? Would it not be better for the Europeans themselves if a non-European IMF head provided us with an “adult in the room” at times of crisis? And why would any European be happy living in a monetary union in which a politicized central bank cannot be relied upon to act as a lender of last resort, and in which their guns could be turned on any (sufficiently small) member state in a time of crisis?
I thought that an appropriate way to celebrate Syriza’s victory was to do what I should have done a long time ago, and finally read Peter Mair’s Ruling the Void on the journey from Dublin to Oxford this morning. It’s a terrifically insightful (and readable, and short) book that had me nodding in agreement throughout, and you could base a whole series of blog posts on it. So let me just pick up, on the day that is in it, on one of the very last points made in the book:
…we are afforded a right to participate at the European level…and we are afforded the right to be represented in Europe, even if it is sometimes difficult to work out when and how this representative link functions; but we are not afforded the right to organise opposition within the European polity. There is no government-opposition nexus at this level. We know that a failure to allow for opposition within the polity is likely to lead either (a) to the elimination of meaningful opposition, and to more or less total submission, or (b) to the mobilisation of an opposition of principle against the polity — to anti-European opposition and to Euroscepticism
Democratic political systems need oppositions which can force policy reversals if voters decide that that is what they want. Kicking the bums out is not enough, we have to be able to kick out their policies as well.
Syriza is opposed to European macroeconomic policy, and won the elections on that basis. They speak for lots of Eurozone voters, not just Greek ones. If the EU have any sense they will not play hardball with the new Greek government, especially since just about everyone agrees that Greece’s debt is unsustainable. Nor should anyone be hoping that the new Greek government will be “pragmatic”, and forget its opposition pledges once in government. The Greeks want fundamental change, and have voted for a democratic pro-European party to express that desire — which, you might think, is a lot more than the Troika deserves. If Syriza doesn’t deliver, for fear of upsetting its Eurozone partners, voters may turn to parties that really are anti-European. In the Greek context, that could be very ugly indeed.
How the EU responds to last night’s election will tell us a lot about the actually existing European project.
“One must prevent the dealings of the ECB from easing the pressure for improvements in competitiveness.”
(Angela Merkel, according to the FT.)
It is very good to see this sentiment being openly expressed by the German leader, since it is what we believe the German government thinks, and confirmation is useful. But, really, it is intolerable. Where in the treaties does it say that Eurozone monetary policy should be run in a sub-optimal and deflationary manner, thus increasing unemployment, putting the public finances under pressure and worsening economic distress more generally, so as to force other peoples’ governments to do things that the Germans think are good for them, but that have nothing to do with monetary policy?
No democrat should accept a Eurozone run along those lines.
For well over a year now some of us have been pointing out that the Eurozone crisis was entering a very dangerous phase, in which slowly increasing unemployment would eat away at the foundations of Europe’s societies, while short-sighted politicians and excitable journalists proclaimed that the Euro was saved. The invaluable Eurointelligence has been doing a great job recently tracking the apparently inexorable deterioration in the economic fundamentals of the Eurozone, with Germany itself now apparently affected. But for both political and personal reasons I find myself worrying most about France.
Twiddling their thumbs and hoping that something (the economy) will turn up, flawed macroeconomic policy notwithstanding, seems to have been the French government’s master plan up till now. As a result it is hard to see Francois “Say” Hollande, or any other Socialist for that matter, getting through to the second round in 2017.
You may think that Paul Krugman is being too alarmist when he raises the possibility of President Le Pen, and I hope you are right. But Sarokozy’s apparent return to the political fray does worry me. Of course, you may think that if he wins the UMP nomination, the Left will rally round and vote for him when it comes to the second round.
How confident are you about that?
In his press conference yesterday, Mario Draghi said the following:
Within the Stability and Growth Pact, one could do things that are growth-friendly and also would contribute to budget consolidation, and I gave an example of a balanced budget tax cut. Reducing taxes that are especially distortionary, where the short-term multipliers could be higher, and cutting expenditure in the most unproductive parts, so mostly, actually not mostly, entirely, current government expenditure.
There are at least three possible interpretations of this statement.
1. Draghi genuinely thinks that balanced budget multipliers are negative, which I find hard to believe. A balanced budget tax cut under current circumstances would be contractionary, not expansionary; at least, that is what we teach our students.
2. Draghi genuinely thinks that the Eurozone’s problems right now are on the supply side, and that tax cuts will help address these problems. I also find that hard to believe. The major problems facing the Eurozone right now are pretty clearly on the demand side.
3. Despite its nominal independence, the ECB is in fact the most politically constrained of the major central banks. If Draghi is going to push the ECB towards QE, and question the overall fiscal stance of the Eurozone, he has to come out with this sort of stuff from time to time, to appease the Germans.
I find the last of these three explanations entirely plausible, and it helps explain the ECB’s poor performance in the crisis to date. But why should a nominally independent central bank feel that its hand are tied in this way? Ultimately, perhaps, because the Eurozone is not a political union, and because democratic legitimacy resides at the level of the member states. This means that exit from the Eurozone is always an option, even if it is not openly acknowledged.
Another reason to think that monetary union without political union is a bad idea.
European Institutions also face the risk of political capture by the governments of specific member states that could misuse the crisis for local political gain.
Anti-establishment-politician sentiment, certainly, but anti-politics? That depends on how you define politics.
My definition of “politics” is all about choice over policies: citizens in a democracy can choose to fundamentally change their country’s economic and social policies, if that is what they want to do. In 2011 Irish voters voted for change, and got none: the new government faithfully implemented the Troika programme, just as the previous government had done, and presumably would have continued to do had they been re-elected. (And now that they have been let off the leash they are coming up with bubble-era proposals to increase mortgage lending. Not much change there either. And consequently not much real choice.)
Democracy without choice is not democracy. Politics without choice is not politics.
A lot of people in this country, and right across Europe, want real change. Some in Ireland voted for Sinn Féin, the big winner in the election. Some voted Independent. This isn’t anti-politics. It’s anti-anti-politics.
In an otherwise unremarkable editorial about the upshot of the elections, the FT comes up with this quite remarkable statement:
The only viable path for France is to press ahead with tax cuts and spending reductions that can sustain growth.
Is the FT really saying that in a Keynesian short run, such as we find ourselves in just now, the balanced budget multiplier is negative? Really? Or that the spending multiplier is negative? Or is it perhaps denying that the Eurozone currently finds itself in such a Keynesian short run, in which a lack of demand is the key constraint on growth? (Let’s not even get into the debate about the long run relationship between growth and the size of the state in Europe, although I can’t help writing down one word: Scandinavia.)
And is the FT really claiming that continuing with this programme would make all those FN voters switch to the socialists and UMP?