Friday, January 04, 2019

Thoughts from Heald Green, England: 4.1.19

Spanish life is not always likeable but it is compellingly loveable.
- Christopher Howse: A Pilgrim in Spain. 
The UK
  • I mentioned yesterday that the incompetent British government was in a blind panic over a miniscule 'wave' of economic migrants. In the Times today, Davis Aaronovitch poses the question: Why take calm action when you can panic? We have recalled two Border Force cutters from patrolling the Med, where more than 100,000 migrants crossed by sea last year, to help deal with our own “major incident” of 230 people attempting to cross the Channel last month. To put it in context, this is slightly fewer people than Essex police arrested on suspicion of drink-driving in the three weeks before Christmas. You may have missed the headlines.
  • Changing times. As here's no conscription in the UK, the British army has to advertise for recruits. Here's their latest efforts, which some might see as clever and others as bizarre. Desperate, even.
The EU
  • There's a devastating report/article below by Ambrose Evans Pritchard - a knowledgable, Brussels-experienced commentator who turned against the EU and the euro. I can't see how any europhile Remainer reading it can maintain their stance. The least they could do would be to present some counter-arguments.
  • If that's not enough, there's a second article after it by another sceptical economist . . .
The UK/Brexit
  • Richard North today: There are too variables for any sound predictions to be made. This could be a question of head over heart, and if people are reacting emotionally, then they seem more inclined to accept a no-deal scenario. To borrow a phrase though, if they are now ringing the bell over the advent of a no-deal, soon they will be wringing their hands.
  • Another fascinating article: As everybody who has studied English as a foreign language knows – English is a relatively easy language to learn, up to a point. It is easy and quick for most learners to reach intermediate level, as the basic grammatical structures are straight-forward, and the vocabulary is simple and often has traces in students’ own languages. But then, when students aim for a higher level, things get more difficult. But this is not the hardest part at all. The real difficulties in mastering English to a proficient level are, firstly, all the phrasal verbs and strange sayings that natives use and, secondly, pronunciation. So, why is English so difficult to pronounce? Click here for one answer to this.
Finally . . .
  • I talked yesterday about the marketing of water. Right on cue comes this article from the Guardian.
  • I have it on good authority that the '2019 colour' is living coral. Your guess is as good as mine.
© [David] Colin Davies


1. The euro has failed, threatens democracy, and should be abolished: Ambrose Evans Pritchard

To be charitable, you could say the euro has proved itself merely by surviving until its 20th birthday this January. That is a low bar.

Monetary union has otherwise failed as an economic and political endeavour. The evidence of Europe's 'Lost Decade' is that it can only ever be made to work under a regime of technocrat Caesaropapism, that is to say by stripping elected parliaments of their lifeblood control over taxation, spending, and the core economic policies of the nation state.

“One day, the house of cards will collapse,” says Professor Otmar Issing, the founding chief economist of the European Central Bank and the chastened prophet of the euro project.

The London School of Economics has assembled package of papers by illuminati from Europe and North America to mark this week’s anniversary, published by the journal Comparative Political Studies.

Mark Copelovitch, Jeffry Frieden, and Stefanie Walter do not pull their punches in the prologue. The calamitous EMU saga has led to the “most serious economic crisis in the history of the European Union”. It has done “more lasting damage” to swaths of Europe than the Great Depression of the 1930s, and pitted eurozone states against each other in a bitter struggle for control over the levers of policy.

The political dynamics have become poisonous. Years of rolling crisis “entrenched and amplified the power and influence of creditor countries such as Germany”, working through the ECB and the European Council.

In other words, EU bodies became debt collectors for the creditor bloc, and enforcers of a German-imposed strategy of debt deflation and fiscal contraction. The burden of adjustment fell on the weaker states, leading to a contractionary bias for the whole system. The Nobel fraternity have watched this display of pre-modern and pre-Keynesian illiteracy with a mixture of horror and despair.

Yet nothing is actually changing. There has been no Truth and Reconciliation to probe the disaster that was allowed to unfold. Those in control of the EU machinery still think they were right. The ideology prevails.

The LSE papers said EU leaders have responded at every stage with half measures in a “sequential cycle of piecemeal reform”, just enough to stop the collapse of EMU without resolving the core deformities of an orphan currency with no fiscal union to back it up. “What is clear is that the status quo cannot persist indefinitely if the Euro is to survive in the long term,” it said.

I would argue that the spectacle of an EU in such a shambles from 2010 to 2015 led directly to Brexit.  It profoundly shook the moral prestige of the EU, and demolished claims of economic competence.

While EU leaders quibbled over decimal points and debt repayment in Brussels, youth jobless rates reached 57pc in Greece, 56pc in Spain, and much the same across Italy’s Mezzogiorno.  These were levels once unthinkable in a modern developed democracy. They have left a wreckage of ‘labour hysteresis’ that will lower economic speed limits for a generation to come.

Several hundred thousand economic refugees came to work in Britain from the EMU depression belt. A further wave from Eastern Europe came to the UK instead of going to the eurozone as they would have done in normal times. The double surge had maximum impact just before the Referendum.

More subtly, the euro crisis revealed that the pathologies of monetary union cannot be managed by normal democratic means. The elected prime ministers of Greece and Italy were toppled in 2010 and 2011 and replaced by EU  functionaries in soft coups organized by Brussels and the pro-EMU vested interests of each country.

The ECB switched off liquidity support for Greek commercial banks in 2015, knowingly (and illegally?) precipitating a banking collapse that was hard to reconcile with the ECB’s treaty duty to uphold financial stability. When push come to shove, the reflex was authoritarian. It spoke to the character of the EU. That I why I voted for Brexit.

The LSE says the euro crisis was predictable and was in fact widely-predicted. It mimicked countless episodes in Latin America, East Asia, and other emerging markets, where debtors borrowed heavily in dollars that they could not print.

The pattern is for countries to succumb to credit booms while money is loose and the ‘carry trade’ is in full bloom. They spiral into busts when confidence evaporates and the capital flows dry up. This is the classic ‘sudden stop’ faced by states that do not borrow in their own currency.

Europe’s elites imagined that current account deficits did not matter in the magical euro union, even though the deficit states in Southern Europe and Ireland had lost their sovereign policy instruments and no longer had a lender-of-last resort behind them. They were therefore no different from Argentina or Thailand.

The elites also failed to grasp that fixed exchange rate systems (without full fiscal union) switch currency risk into default risk. The rating agencies also missed this elephant in the room and so did the International Monetary Fund, as it confessed later in its devastating mea culpa. Ideological capture drained everybody of their senses.

The illusion that monetary union was risk-free led to epic bubbles, made worse by a one-size-fits-all interest rate set for German needs when Germany was in trouble.

When the storm hit, the Berlin-Frankfurt-Brussels riposte was to misrepresent what was in essence as a cross-border banking and capital flow crisis as if it were caused by fiscal profligacy in the South. This became the ‘morality tale’ version of EMU. It lives on in the policy structure.

It was and is fundamentally bogus - except for Greece under New Democracy - but it served the interests of Northern creditors. Prof Issing says the rescue of Greece in 2010 was in fact a bail-out for French and German banks. The IMF has admitted that the country was in effect sacrificed to save the euro and the European banking system at a delicate moment.

Yes, the South was naive. Nations feasted on the windfall of lower interest rates. They let unit labour costs ratchet up, even as Germany was ratcheting them down through the Hartz VI wage squeeze in what was objectively - if not intentionally - a beggar-thy-neighbour policy. They forgot that they cannot devalue their way back to exchange rate equilibrium.

The EU’s cardinal error was to then try to force the high-debt states to claw back 20pc or 30pc lost labour competitiveness against Germany through ‘internal devaluations’, a euphemism for slashing demand. This was self-defeating even on its own crude terms. It shrank the economic base and drove up debt ratios faster through the denominator effect.

The LSE says the result of so much damage is that the eurozone’s troubles today “appear disturbingly similar” to those of Japan, trapped in deflationary stagnation for twenty years with broken banks. Except that euroland is not Japan. It is not a cohesive society with a monetary and fiscal machinery working in harmony. “Europe’s debt problems look even more serious and threatening,” it said.

Debt-to-GDP ratios in a string of vulnerable countries are far closer to the danger line now they were at the onset of the global financial crisis a decade ago -  up from 68pc to 125pc in Portugal, 36pc to 98pc in Spain, 99pc to 131pc in Italy, 65pc to 99pc in France, 54pc to 96pc in Cyprus, and 103pc to 176pc in Greece (despite haircuts).

A weaker euro, interest rates of minus 0.4pc, quantitative easing (six years too late), and a belated end to fiscal austerity, did induce a modest cyclical recovery from 2015 to 2017 but it is not self-sustaining and is already petering out.

The eurozone risks crashing into next the global downturn with no defences. Rates cannot drop any lower. There is no proper banking union with pan-EMU deposit insurance. The dangers of a sovereign-bank ‘doom loop’ remain. They are on full display again in Italy.

Emmanuel Macron’s grand plan to rebuild EMU on safer foundations has come to nothing. There is no fiscal entity worth the name. Counter-cyclical budget stimulus to fight shocks is prohibited by the machinery of the Stability Pact and Fiscal Compact. The ECB is still unable to act as a full lender-of-last resort.

Berlin has written a ‘debt brake’ into the German constitution, a way of telling the world that it will not take any serious steps to reduce a current account surplus of 8pc of GDP - a much greater threat to EMU survival than anything happening in Greece.

The LSE team takes a long view, comparing the eurozone’s travails to struggles between Alexander Hamilton and Thomas Jefferson over the handling of state debts in the United States. The battle saw disputes over the First and Second National Banks and lasted until the completion of US monetary union in the 1870s - and took a civil war to resolve. “Crafting a functioning economic and monetary union is a long hard road,” they said.

The presumption is that the Europe’s leaders must in the end agree to some form of fiscal union but this runs into the fundamental barrier of democracy. Such a system would eviscerate the tax and spending prerogatives of elected parliaments, forgetting the lessons of the English Civil War and indeed the American Revolution.

It can retain democratic legitimacy only if the EU goes the whole way to a supranational federal union akin to the USA, and for this there is not the slightest popular support in any major country.

The ineluctable conclusion is that a monetary union of budgetary sovereign states cannot be made to work, and should not be made to work. The euro is a constitutional anomaly. It must therefore be broken up. All else is self-deception.

Happy birthday to the euro, destined to stagger on and condemn Europe to further disaster

2. The euro was launched smoothly enough but became a divisive force

“For 20 years, the euro has delivered prosperity and protection to our citizens. It has become a symbol of unity, sovereignty and stability, and we must ensure it continues”. Thus spoke Jean-Claude Juncker, president of the European Commission, in “celebration” this week of the twentieth anniversary of the adoption in synthetic form of Europe’s single currency. Notes and coins were to come three years later.

I have to admit to a sneaking regard for Mr Juncker, whose impish sense of humour – as in “we know what has to be done, we just don’t know how to get re-elected afterwards” – and candour over the EU’s own casual disregard for democracy, marks him out as one of Europe’s more entertaining politicians. Yet his comments on the euro are beyond parody.

It is no surprise that there was little rush to echo them. Most member states have been understandably content to leave the anniversary unmarked, for the big questions about how to sustain this troubled project, and the concessions that will have to be made by creditor nations for it to work in its current form, have yet to be faced up to.

In economic terms, monetary union has arguably been good for Germany and its satellite Northern European states, underpinning the competitiveness of an already formidable export machine. I say arguably, because if the effect of Germany’s success is to impoverish the rest, the model can’t work in the long run. Central Europe’s apparent prosperity would come to be seen as little more than a mirage in any eventual unraveling, imposing massive losses on German savers via cross border defaults.

For much of the rest of Europe, however, the euro has been an unmitigated disaster. Beyond the logistical successes of its immediate introduction – admittedly an extraordinarily impressive exercise in international planning, cooperation and execution – it is indeed hard to think of any redeeming features.

As Mr Juncker points out, he is one of the only signatories to Maastricht, the treaty that gave birth to the euro, who is still politically active. He should therefore be in a better position than most to know quite how destructive it has been. We might perhaps start with Britain, now just months away from leaving the EU altogether.

The EU may always have been more of a political than an economic project; for its founding fathers, the ambition was always a United States of Europe. But Maastricht marked the point of no return. Up until then it was possible to pretend that the EU was just a souped up free trade area, requiring only limited sharing of sovereignty.

Giving up control of the currency to a supranational organisation was for Britain the step too far. The subsequent, defining experience of Black Wednesday, when the UK was ignominiously forced out of Europe’s fixed exchange rate regime, convinced the British establishment that monetary union was not just premature, but also likely to be subject to repeated economic and financial crises. In any case, Britain's opt out from the euro set the UK on a divergent course always likely to bring it into conflict with the integration necessary to support monetary union.

The idea, then, that the euro has proved a unifying factor in Europe is completely spurious. It has been a deeply divisive force which led directly to the British divorce. It has also quite plainly not been good for great tracts of the European economy. Taking eurozone members as a whole, growth has slowed and unemployment risen markedly since the introduction of the single currency, disastrously so for the southern periphery.

Even today, the European Commission clings to the delusion that the debt crisis of 2009-12 was nothing to do with the euro as such, but was a maelstrom spawned in America and amplified by the individual failings of member states. There is virtually no acknowledgement of the destructive dynamic that the euro set in train, creating unsustainable fiscal, credit and construction booms in Italy, Greece, Spain, Portugal, Ireland and beyond, or the role played by eurozone policy in exaggerating the subsequent bust. Denied the natural adjustment mechanism of currency realignment, debtor countries were instead forced into punishing internal devaluations, further raising debt to GDP ratios and decimating public support for the established centre ground in politics.

Brexit is widely seen internationally as an act of economic self harm. Yet set against the hubris of monetary union, it might more reasonably be viewed as simple self preservation. It is hard to think of any self inflicted peacetime policy blunder quite as devastating in its economic consequences and destabilising in its political fallout as European Monetary Union.

And yet it staggers on, sustained more by fear of the economic consequences of leaving as belief in the project’s underlying merits. That, and the political capital that has been invested in it. A whole generation of European politicians and officials, Mr Juncker included, have built their careers around it. They dare not admit they were wrong. Honesty is what’s required, not self congratulation, but that is in short supply.

Every time the euro falters – as with a fast slowing global economy, threatening like a receding tide to expose anew the euro’s compromised foundations – just enough is done to save it. It may seem odd given its obvious failings, but even among voters in the most disadvantaged member states, it is hard to find a majority in favour of getting rid of it. Put yourself in the position of a reasonably well off member of the Spanish middle class and it is easy to see why. They like having a German exchange rate to protect the value of their assets, savings and earnings. They are not likely to vote for a course of action that will overnight devalue their wealth by 30 per cent.

Perhaps that’s what Mr Juncker meant when he talked of the euro delivering prosperity. The dispossessed young, unemployed, and left-behinds, denied the “protections” of the euro’s embrace, can go whistle. Dismal prospect though it might seem, it is as depressingly possible to see the euro surviving the next crisis as it did the last one, condemning the Continent to a state of permanently low growth and politically destructive divisiveness. They make a desert, wrote the Roman historian Tacitus, and call it peace.

[Ironically, that comment of Tacitus was about what had been done in Britain]

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