Paste your Google Webmaster Tools verification code here

Europe has suffered from the euro – just ask the Greeks

Europe has suffered from the euro – just ask the Greeks

One of the entertainments of the holiday period was reading Adults In The Room, the book by Yanis Varoufakis.

It describes his time as finance minister of Greece, and his negotiations with the IMF, the European Central Bank, and the European Commission.

Varoufakis was only in the job between January and July 2015. He had the unenviable task of trying to renegotiate the massive debts of the Greek government.

Reading between the lines, Varoufakis cannot have been an easy person to deal with. Indeed, he was effectively forced out of his position by the far-left Prime Minister Alexis Tsipras.

Still, the academic-turned-politician had many bright ideas. But he could get no traction.

Some of Jeremy Corbyn’s shadow cabinet will undoubtedly have read the book. The more reflective among them will realise that negotiating with international bodies when you have a large burden of public sector debt is not exactly fun. In the end, exactly like the Greeks, you will be forced to adopt policies of austerity which you have spent your political life criticising.

But many of our more ardent Remainers would also benefit from reading the former Greek finance minister’s analysis and descriptions of events.

To them, the EU represents a kind of Garden of Eden, where milk and honey (as well, of course, as sweetness and light) flow in abundance.

The harsh reality is that, in their fanaticism for greater European integration and its crowning symbol of the euro, Europe’s elite are quite unable to get to grips with the fundamental problems which the continent faces.

The financial crisis of the late 2000s began to take hold of the wider economy during the winter of 2007/08. The year 2007 represented for most countries the peak level of output before the crash.

Over the past decade, western European countries in the Eurozone have grown much more slowly than comparable ones which have their own currencies.

Greece, of course, has experienced one of the deepest and longest recessions in the entire history of capitalism. Greek output in 2017 was 22 per cent lower than it was in 2007.

Even leaving Greece out of the calculations, the growth performance of western European economies in the Eurozone has been poor. Their average growth over an entire decade has been just 5.6 per cent.

In contrast, average growth in a group made of the US, Canada, Japan, Australia, the UK, and smaller non-Eurozone countries like Norway and Switzerland has been 16.2 per cent. The UK itself is below the average for this set at 11.4 per cent – still, a lot higher than the Eurozone average.

Towards the end of last year, much was made of the fact the growth in the Eurozone as a whole had slowed from 0.4 per cent in the second quarter of 2018 to just 0.2 per cent in the third quarter.

But Europe’s problems are much deeper-seated. The evidence of an entire decade shows the stultifying impact of the euro. The best decision that Gordon Brown ever made was to keep us out of it. If only Greece had done the same.

As published in City AM Wednesday 9th January 2019

Image: Street Art by Aesthetics of Crisis under CC BY 2.0

Read More

The Ghost of Christmas Past could tell us where the negotiations all went wrong

The Ghost of Christmas Past could tell us where the negotiations all went wrong

In Charles Dickens’ A Christmas Carol, Scrooge finds being haunted by the Ghost of Christmas Past unbearable.

He begs it to stop. The Ghost replies: “These are the shadows of things that have been. That they are what they are, do not blame me.”

It might almost be the Prime Minister speaking about the whole Brexit process.

How might things have been different? And are there any pointers about our future dealings with the countries of the EU?

A fundamental concept in game theory is that of the non-credible threat. This means making a threat in a sequential game – one in which there is a sequence of moves by each side – which a rational player would not carry out because it is not in their interest to do so.

But in order to be effective, the other side has to believe that you will in fact carry it out if necessary.

Donald Trump is a master of making such threats. China and North Korea both respect and fear him precisely because he conveys the impression that he might indeed do something completely irrational.

The UK held – and still holds – two major bargaining chips in the Brexit negotiations: our armed forces (specifically the nuclear deterrent) and GCHQ. But at an early stage, Theresa May ruled out using either of these in the negotiations.

At the moment, for example, British troops are stationed on the border of Estonia and Russia. They have taken part in war games to offer deterrence to Vladimir Putin.

The Baltic states live in fear of a Russian invasion. They all have sizeable Russian-speaking minorities. In 1940, they were taken over by the then Soviet Union, and only regained their independence in 1991.

They may not count for much in EU circles. But Britain could have made it clear that, unless these countries supported us, they would have to rely on, say, the Germans to defend them, and not the UK.

Similarly, GCHQ is acknowledged to be the best cyber intelligence organisation in the EU. The head of the agency said in June that it had played a critical role in thwarting terror attacks in four other European countries in the past year. Letting just one of these attacks go ahead would have brought instant credibility to Britain’s leverage – though it would of course have come with a significant cost.

On a more positive note, a number of EU governments are openly critical, and almost actively hostile, to the European Commission.

Poland, Slovakia, Hungary, and the Czech Republic all have major concerns over migration. Matteo Salvini in Italy has never made a secret of his dislike of Brussels, and since his election has had a fierce argument with the EU over the Italian budget.

But the Prime Minister seems not to have tried to build an alliance with him, nor with these other eurosceptic nations.

Some may argue that these governments are not necessarily in the liberal tradition. They are, however, potential allies. And as the great nineteenth century Prime Minister Viscount Palmerston said: “Britain has no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”

If May had heeded this, how differently things might have turned out.

 

As published in City AM Wednesday 19th December 2018

Image: Theresa May by Arno Mikkor under CC BY 2.0

Read More

Economies of the future will have to engage with the world, not just the EU

Economies of the future will have to engage with the world, not just the EU

The fire and the fury rage from day to day around the outcome of the Brexit process.

The discussion has lost sight of the longer-term context in which both the UK and the EU will operate, regardless of the precise deal which is or is not struck.

In the 1960s, the countries which are now in the EU-bloc represented just under 30 per cent of world output. This has already fallen to less than 15 per cent.

And on any reasonable extrapolation of trends, it will dip under 10 per cent at some point in the next two decades.

This does not mean that Europe is getting poorer. Far from it. It means that the rest of the world, especially Asia, has been becoming richer much faster.

The Brookings Institute calculations released last week were a marvellous piece of news.

For the first time in human history, just over 50 per cent of the world’s population, or some 3.8bn people, live in households with enough discretionary expenditure to be considered either “middle-class” or “rich”.

This has been achieved by capitalism. Until the 1980s, for example, in their own ways both India and China were centrally planned economies. Once they shifted to the principles of market-based economies, they have boomed.

The Brookings authors estimate that in 2030 – just a decade and a bit away – the middle-class markets in China and India will account for $14.1 trillion and $12.3 trillion, respectively.

This compares to their projection of the US middle-class market at that time of $15.9 trillion.

Okay, so their decimal points give an air of spurious accuracy to the forecasts – but the general point is clear. Whether Europe likes it or not, the vast majority of world trade will take place outside the EU.

The second key point to note is that Europe has hardly been a major economic success story. The narrative peddled by Remainers seems stuck in the past.

If we travel back in time to, say, 1970, it becomes easy to believe that the European economies are so dynamic that it is essential for us to have the closest possible links with them.

In the 1950s and 1960s, annual real GDP growth in the economies which then made up the EU averaged over seven per cent. In contrast, the UK barely scraped above three per cent.

Since then, the long-term average growth rate of the original EU countries has fallen more or less continuously to less than two per cent a year.

The UK’s has also dropped, but not by much. Over the past 20 years, our GDP has risen by 2.1 per cent a year. France registers 1.6 per cent, Germany 1.5 per cent, and Italy a mere 0.6 per cent.

Regardless of the eventual Brexit terms, successful economies in the future will simply have to engage with the rest of the world, rather than depend upon the EU.

As published in City AM Wednesday 10th October 2018

Image: Chinese Girls by David Stanley licensed under CC-BY_2.0

 

Read More

The Bank of England’s own data negates Carney’s overhyped house price warning

The Bank of England’s own data negates Carney’s overhyped house price warning

No one can tell them quite like Mark Carney, the governor of the Bank of England.

He appears to have briefed the cabinet last week that house prices could fall by 35 per cent in the event of a no-deal Brexit.

To be fair, the Bank did try to qualify this figure by saying that it was just the worst of several scenarios which analysts had produced in order to stress test the balance sheets of the commercial banks.

But the 35 per cent house price drop has now become embedded in the public narrative about Brexit.

Just how likely is such a massive drop to take place?

We do not know exactly how the Bank did its stress tests. But, typically, the worst-case scenario in such tests is either one which is judged to have a one in 20 chance of happening, or, if you are setting really demanding standards for the test, just a one in 100 chance.

When trying to assess these odds, an important input is what has happened in the past. The past may of course not be a reliable guide to the future, but it is all we have to go on.

An analogy from the sporting world might help. Every year, three clubs from the Championship are promoted to the Premier League. What are the chances of one of them being relegated after their first season in the top league?

We can look at the historical record since the Premier League began in 1992/93, which helps us form an initial view. We might then qualify it, and set the benchmark – a 44 per cent chance of relegation, since you ask.

With house prices, we can go much further back in time, as far back as 1845 to be exact. And the source of this information on nearly two centuries of house prices data is none other than the Bank of England itself.

Over all this time, there has never been a cumulative fall in the Bank’s house price series of as much as 35 per cent.

The closest we have seen was in the opening decade of the twentieth century in the run-up to the First World War. The UK economy was pretty much in the doldrums, and between 1902 and 1909, prices fell by a total of 33 per cent.

Nothing else remotely compares to this drop.

There have been two global financial crises over this period. In the 1930s, house prices fell by only seven per cent between 1929 and 1934.

And following the most recent crash, the reduction between 2007 and 2009 was 13 per cent.

In America, the Case Shiller house price index was 21 per cent lower in 2011 than it was in 2006, but this is the largest fall in that particular database.

The governor is therefore inviting us to believe that, in the event of a no-deal Brexit, house prices may fall by more than they have ever fallen since the Bank’s own data began in 1845.

How did the Bank arrive at this figure? I think we should be told.

As published in City AM Wednesday 19th September 2018

Image: Mark Carney by Bank of England on Flickr licensed under CC-BY-ND 2.0
Read More

The UK’s capacity to innovate matters far more than panic over consumer spending

The UK’s capacity to innovate matters far more than panic over consumer spending

The debate about Brexit has become mired in a virtually incomprehensible quagmire of detailed and technical negotiations between the UK and the rest of the EU.

Yet the campaign itself in 2016 was dominated by broader questions of political economy.

In addition to the hurly burly of claims about extra NHS spending or Project Fear, both sides took a serious, longer-term view of what was needed to sustain Britain’s prosperity. All this has been lost sight of, but the fundamental issue has not gone away. So does Britain have an economy which is fit for purpose in the twenty-first century?

At one level, the evidence seems to side with the Remain camp. Growth in the UK since the depth of the recession in 2009 has been decidedly unbalanced compared to much of the rest of the EU.

We can break down the growth of the total economy – GDP – into categories defined by who is doing the spending: how much is done by individuals as consumers, how much by firms in terms of capital investment, and how much by the public sector. We also have the net balance between our exports and imports.

Looked at this way, Britain’s growth since 2009 has been concentrated in a seemingly unhealthy fashion on consumer spending. This accounts for no less than 58 per cent of the total growth in the economy 2009-18. Investment by companies takes up another 29 per cent, and there has been a slight deterioration, amounting to just three per cent of GDP, in our net exports.

This is in sharp contrast to Germany. The increase in investment is similar, making up 27 per cent of the total increase in GDP. But consumption is just 32 per cent, and net exports have boomed, accounting for 22 per cent of the increase in German GDP. No wonder President Trump has concerns about German trade surpluses.

This pattern is similar in countries closely connected to Germany. Compared to the UK, increases in consumer spending are only a relatively small part of the total expansion of the economy since 2009 in Austria, Belgium, Denmark, France, the Netherlands, and Sweden.

Surely an economy which relies less on spending by individuals is better placed than one in which they splurge every last penny?

Well, up to a point. For one thing, public spending accounts for a larger proportion of total growth in the Greater Germany group than it does in the UK. The rise in public spending in Britain makes up just eight per cent of total growth. In France, it is 25 per cent.

But the key evidence comes from the US. Here, spending by individuals makes up no less than 75 per cent of the total expansion of the economy since 2009. Yet America remains the most dynamic and innovative economy in the world.

Economic theory has long identified the capacity to innovate as being the key determinant of long-term growth, not who spends what. The debate over post-Brexit Britain should be about how to boost innovation, and whether the European Commission is a help or a hindrance to this.

As published in City AM Wednesday 25th July 2018

Image: Regent Street & Oxford Street by Tony Webster is licensed under CC-BY-2.0
Read More

Mark Carney has bigger things to worry about than meaningless Brexit forecasts

Mark Carney has bigger things to worry about than meaningless Brexit forecasts

The governor of the Bank of England, Mark Carney, is up to his usual tricks.

Last week, he claimed in front of the Treasury Committee of the House of Commons that British households are now more than £900 worse off after the vote to leave the EU.

The figure was obtained by comparing a forecast made by the Bank in May 2016 on the assumption of a Remain victory with the situation as it actually is today.

In other words, the so-called evidence cited by the governor consists of the difference between where the economy stands right now, and a forecast made by the Bank two years ago.

It is no exaggeration to say that this has no scientific standing at all.

Predictions of the economy are notoriously unreliable. The Survey of Professional Forecasters in the US publishes a 50-year track record of one-year-ahead predictions of the growth of the economy. The correlation between the forecasts and what actually happened is – literally – zero, with no sign of it improving during the course of the five decades. And this is just looking one year ahead, not two.

The UK does not have such an impressive body of evidence to assess forecasting accuracy, but the studies which have been published show that the track record of our economists is no better than that of the Americans.

It is worth pointing out time and again that the Project Fear forecasts, also made in May 2016 like the Bank’s ones referred to by the governor, were for the next six months, not the next two years. Yet they were shown to be completely wrong.

Far from the predicted rise in unemployment of half a million by the end of 2016 on a Leave vote, unemployment has fallen almost continuously ever since, and now is lower than it has been since the mid-1970s.

We might usefully recall one of Carney’s first public pronouncements after taking up the post of governor in July 2013.

Interest rates, he said, would not be raised until unemployment fell from its level of 7.8 per cent to below seven per cent. He stated that this process would take three years. In fact, unemployment dropped to below seven per cent just six months later, at the start of 2014.

Rather than grandstanding about Brexit and currying favour with the global liberal elite, there are more pressing issues to occupy Carney’s time.

The primary concern of the Bank of England should be the stability of the financial system. Yet there has been a worrying rise in the amount of debt in the economy.

Figures from the Bank of International Settlements show that total credit to the private non-financial sector – the debts of households and companies in everyday language – peaked at 196 per cent of GDP in 2008, the year of the crash. This had fallen to 163 per cent by 2015. But it has now risen to 170 per cent.

This is by no means yet another crisis, but this – not Brexit – is where the governor’s mind should be focused.

As published in City AM Wednesday 30th May 2018

Image: Mark Carney by Bank of England is licensed under CC2.0
Read More