These three graphs make a convincing statement about how the Brexit vote changed UK politcs. Comparing the two election results it is clear that the breakdown of the 2017 results by age was an almost exact clone of a similar breakdown of the referendum result. Basically younger voters voted Remain and switched to Labour, and older voters voted Leave and switched to the Tories.

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It’s ten years since the the financial crisis started in 2007 when some key interbank credit markets froze setting in motion a cascade of failures in the credit system and eventually the insolvency of many large financial institutions. The resulting financial crises not only precipitated the Great Recession, which caused the economies of the developed nations to sharply contract, but also saddled various governments with huge debts as they rushed to prevent a generalised collapse of the financial system. Governments were also forced to take on even more debt as the economic contraction reduced tax revenues just as social and welfare costs soared.

The diagram below shows what the financial repercussions of the bank bailout have been for the governments of various countries. The hight of each horizontal country bar shows the relative size of that country’s GDP. The pink sections shows the total size of the bailout in that country as a proportion of GDP. The dark pink section is costs that have not yet been recovered and the hatched pink section shows the costs that have been recovered to date.

Some points of interest revealed by the graphic:

  • The US government has not only recovered all the money spent on the bailout but has actually made a small profit. US banks have paid back their loans with interest and the mortgage giants Fannie Mae and Freddie Mac (which were nationalised at the hight of the crisis) hand more of their profits to the US Treasury each quarter. A very significant advantage that the USA had was that its banks and financial sector were a much smaller proportion of GDP than, for example, the UK financial sector and so proportionately the bailout costs in the US were smaller.
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  • The UK bailout was big and less than half has been recovered. The UK has sold the last of its stake in Lloyds, but it still controls Royal Bank of Scotland. As the UK’s National Audit Office puts it: “It is likely that a substantial proportion of these schemes and investments will be with us for some time.”
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  • The debt burdens of Greece and Ireland, as proportion of their GDP, are huge, and only a small proportion has been recovered, although Ireland recouped €3 billon more by selling part of the nationalised Allied Irish Banks this year.
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  • The German bailout is surprisingly large, bigger absolutely and proportionately than the UK bailout. This was because in Europe a key driver inflating credit bubbles in the eurozone periphery, as well as fuelling the Greek government’s spending spree, was exported German capital accumulated via Germany’s vast trade surplus. When the bubbles in the periphery popped and Greece went bust the German banks faced massive losses. The costs of the bailout of German banks should have been much higher for the German government, at least twice as big, because so many German banks would have been driven into insolvency if Greece had defaulted on its debts. Instead the EU, under German leadership, insisted that Greece should not declare itself bankrupt and that the EU and the IMF would give Greece the biggest loan in history in order for it to pay back the German banks. This had two effects. One was to spread the costs of bailing out the German banks all around the EU, thus making the bailout much, much cheaper for Germany. The second effect was to burden Greece with an impossibly vast debt burden, thus blocking the option of defaulting on its debts and thus utterly impoverishing the Greek people and driving Greece into a deep depression in which it is still trapped. There was perhaps one final effect of crushing the Greeks with debt and in the process dissipating the German bailout costs around the EU, the CDU of Chancellor Angela Merkel won their best result in the 2013 election since 1990.
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    Ireland is the Stakhanovite of the Troika. The accepted narrative is that the Irish, unlike those untrustworthy Greeks, realised the errors of their ways, accepted an EU/IMF Programme of Financial Support and implemented difficult reforms, and have since been rewarded by a surge of economic growth.

    Ireland began to post impressive figures for GDP growth not long after the crash and became the star of the eurozone recovery. Then last year (2016) Ireland posted an astonishing GDP growth rate of more than 26 per cent which is nearly three times the highest level recorded during Ireland’s Celtic Tiger boom years in the early 2000s. At this point many economists became deeply sceptical, “Leprechaun economics,” tweeted Paul Krugman, the Nobel Prize-winning economist. Tom Healy, director of the Nevin Economic Research Institute think-tank, said: “I don’t know if even Soviet Russia in the 1930s exceeded these figures.”

    In July 2017 came the announcement that most economists were expecting, that because GDP was no longer an accurate measure of Irish economic activity (for reasons explained below) the size of the Irish economy had been recalculated and it was now estimated it to be 30% smaller than previously claimed. Oops!
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    You cannot rescue a bankrupt by lending them more money. The only way to move beyond bankruptcy is to default on existing liabilities, push losses onto the creditors and thus reduce significantly the debt burden. This basic reality has been ignored by the Troika (the EU, the ECB and IMF) in its dealings with Greece because at the time of the first bailout in 2010 there was a pressing need to stabilise the euro system and above all to stabilise the German banking system which trumped all economic common sense. So a fiction was created, the fiction that if the Greeks underwent a big enough dose of painful ‘reforms’ the Greek economy would grow fast enough to allow the debt mountain to be paid off, a process planned to stretch beyond the middle of this century. Once the Troika had concocted the original Greek bailout it has had to twice supply further bailout packages and meanwhile the ‘reforms’ had shrunk the Greek economy by over a quarter, caused mass impoverishment and a huge humanitarian crisis and still could not generate a budget surplus capable of denting the debt mountain. It is politically essential for the institutions of the Troika, especially the EU, to maintain the fiction that with enough restructuring Greece will be able to pay of its debt mountain. And so as each bailout programme has failed to deliver a large enough Greek budget surplus to allow sustainable debt repayment so new bailout programs were implemented, each promising even more rigorous reforms that would allow Greece to end its dependency on Troika funding.

    Greece and its creditors were quick to hail the country’s recent return to the sovereign bond market as an important milestone as it prepares for financial independence once its current bailout ends just over a year from now. For Greece to escape dependency on the Troika then it needs to be able to issue and sell bonds in the market place, like all the other governments in Europe. Until recently that was impossible because because in order to attract buyers the Greek Bonds would have had to offer crippling high interest rates. The recent successful auction of a tranche of €6.5 billion worth of bonds at 4.5% (compared to the ruinous 63% yield on Greek bonds at the height of the Greek financial crisis in 2012) was hailed in Athens and Brussels as a first step back to financial normalcy and the beginning of the end of dependency on Troika funding.
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    Anthony Barnet has published a brief extract from his forthcoming book “The Lure of Greatness: England’s Brexit and America’s Trump”. Its entitled “I’m Not English. Oh, yes you are!” and is a critical reply to an article by Paul Mason entitled “As an English person, I would like to declare up front: I do not want to be English”. Barnet is wrestling with the central issue for the Left and for Labour – the question of what is England.

    “Today, it is remains excruciatingly painful for many on the left who are the inheritors of the workers’ movement to abandon their special something-or-other for, well, for Englishness. Instead, in the Labour party, Britishness has been embraced with even greater resilience than on the Tory right. But Scottish nationalism has not just become an indelible part of the UK. Its political expression, the SNP, has expelled Labour from its Scottish redoubts. While Scottish Toryism was an addition to the English Tories, the Labour party was co-created by Scottish and Welsh leaders alongside English ones. From the start, ‘Labourism’ was always British; just as the island’s working class was formed by Clydeside and the Welsh valleys as much as the Black Country and the London docks. The profound grip of this experience means that even after the end of New Labour, when the SNP has clearly displaced the party in Scotland, Labour leaders such as Ed Miliband and Jeremy Corbyn – both Londoners – found the idea of Labour becoming an English party unimaginable. A visceral shudder went through them and their supporters at the thought. To become what they clearly and obviously are remains intolerable.

    There are political reasons for Labour’s resistance to recognising itself as an English party. It points towards abandoning an absolute commitment to governing alone, which is built into winner-takes-all Westminster politics. Labour is very tribal and party members hate the idea of electoral alliances. There is also a cultural imaginary getting in the way. A good look in the mirror without their British make-up would tell them they are English. But they fear the perception that they will be seen as narrow, Farage-like, bigoted and altogether dreadful – “bogus” is Mason’s word – and go to the most extraordinary contortions to deny it, one being a direct leap into internationalism.”


     

    Unpicking the surprising election result continues. “The Brexit election? The 2017 General Election in ten charts” contains lots of newly released data from the British Election Study (BES) which shows that, in the minds of voters, the 2017 election was the ‘Brexit election’ despite its absence on the campaign trail. The Tories were seen as a party of Brexit but so was the Labour Party.


     

    Germany is running a vast trade surplus, the largest in the world, and in the process continues to be the most destabilising force in the economy of the EU and a major contributor to global imbalances. As explained here and here, in order for any nation to generate a trade surplus internal domestic consumption has to be suppressed (otherwise there would be no surplus to export). The suppression of domestic demand in Germany takes the form of suppressed wages and, perhaps more surprisingly, suppressed investment. A recent article in the FT entitled “Cracks appear in Germany’s cash-starved infrastructure” explores the decline of domestic German investment, driven by a policy obsession with preventing public deficits, and the dire impact it is having on the state of German infrastructure. German reflation, via increased wages, increased investment, deficit spending and a rise of inflation, are all key to reviving the European economy but are politically unacceptable inside Germany and thus are unlikely to happen any time soon.


     

    In a previous article entitled “Too big to bail – how the banks crashed the eurozone” I explained the ‘doom loop’ created by the single currency that connects sovereign bonds in the Eurozone to public debt. The doom loop has been dormant recently but could (and probably will) return, and the most likely focus of a future eurozone crisis is Italy where nearly two decades of zero growth has left its banking system perilously weak. A pending Basel III reform package will eliminate the equity capital privilege for EU government bonds and in the process threatens to weaken Italian banks even further. This is explored in a recent Wolf Street article entitled “Fears of “Doom Loop” in Italy Resurface”.

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    The Brexit negotiation process is reported in the UK almost wholly via the prism of domestic politics. The impression given by the liberal and left of centre media, who on the whole represent a constituency who are bitterly opposed to both the Tory government and to Brexit, is that the the negotiation process is chaotic, likely to lead to a disastrous outcome for the UK and is unlikely to lead to an agreement within the Article 50 timetable. Generally the impression given is that this is the fault of the UK government and tthat the EU side is a paragon of calm efficiency and level headiness. This is also connected to the notion that a chaotic Brexit would be bad for Britain but that the EU could just shrug it of.

    In fact the chaos and lack of coherency ascribed to the UK side can equally be applied to the EU side in the negotiations and the main obstacles to a formal Brexit agreement are mainly on the EU side. This is because the formal process of Article 50 negotiations places the responsibility for its conduct in the hands of precisely those parts of the EU institutional apparatus who are most likely to come to the table with a political agenda centred on the need to ensure that the UK’s departure should be a painful one. They very much do not want the UK to emerge from the process of Brexit in a benign state, they want the process of exiting the EU to be as painful as possible, primarily in order to deter others but also because of idealogical rigidity and a general arrogance that comes from the habit of exercising power without democratic accountability.

    For those reasons it is unlikely that the formal institutional and administrative process of Article 50 negotiations will deliver an agreement in the time left and that it will require a political intervention, primarily by the Germans (who will have to slap down the French) to come to a sensible and mutually beneficial agreement. The German government will not make a move until after this year’s election and even then will probably let the Article 50 process continue until is is obviously running out of time before making its move. My expectation is that an interim deal of some sort will be cobbled together at the last minute via intergovernmental agreement and that the interim arrangements could run for several years until being formalised. A lot can happen before the Brexit process finally comes to an end.
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    Running out of steam?

    July 1, 2017

    At the beginning of 2016 a lot of observers and economists were expecting a global downturn. The reason a recession was expected was because of shifts in the Chinese economy. The reason that the global recession did not occur was because China changed course and reversed its reform program. Its reform program had been designed to restructure and rebalance its economy because the growth model of the Chinese economy is not viable in the long run. The decision to reverse the reforms deferred a global recession in 2016 but it is storing up trouble for the future, China must rebalance and the longer it delays rebalancing the more painful the process will be.
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    This is an interesting lecture by the political economist Professor Wolfgang Streeck from the Max Planck Institute for the Study of Societies in Cologne, Germany, entitled “Caution: European Narrative. Handle with Care”. The main topic of the lecture is how can one construct a unifying narrative that defines Europe. This is not an academic question. If the EU were to evolve into a functioning transnational democracy, a democracy robust enough that it would be prudent to give it significant powers of taxation and responsibility for delivering a social Europe, then it would require as a prerequisite the construction of a European Demos. Currently there is no such European Demos and hence there is no chance of successfully democratising the EU as it currently exists. If a pan-European Demos were to be constructed then central to it would be the construction of a unifying narrative of what Europe is and where it came from. These are exactly the sorts of narratives of national origin and definition that have been successfully constructed over many decades in any successful nation state, and are one of the main building blocks of the national Demos.

    The meaty bit of the lecture starts at around 8.32 but the whole thing is worth watching. Streek also makes the point, worth repeating as often as possible, that the EU is not the same as Europe, that there exists a non-EU Europe, that there can be a non-EU European project and that opposing or criticising the EU as an existing political project and system of institutions does not mean that one is opposed to ‘Europe’.

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    This chart shows the various options and consequences of the different possible Brexits (click on to see a bigger version). I think the ones worth pursuing, which are both politically feasible, are the two options on the left hand side. Unfortunately one gives too much power to the European Court of Justice and the other makes free trade in services difficult. So some tricky choices looming.

    I still can’t see a finalised deal being in place within the two year time limit so some form of ‘kicking the can down the road’ is, I think, the most likely outcome. I agree with Wolfgang Munchau in the FT that the UK needs to have a worked up Plan B so we can realistically threaten to walk away from the negotiations at anytime.

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    What just happened?

    June 17, 2017

    So a week after the election what to make of it all? Here are a few bits of analysis I found interesting. If anyone has found any other interesting alaysis of the election please feel free to post links in the comment section.

    From the BBC the day after the election there was this useful examination of how the Tories ended up campaigning in the wrong places: Election 2017: How the Tory campaign went so wrong.

    The main thing we have learned is that past performance is a poor guide to the future. The Tories were largely using much of the same team as in 2015 and, once again, they were very well funded. But this evidence implies that the Conservative party campaign in England was an absolute catastrophe, and appalling data and analysis drove them to use their resources poorly.

    Osborne’s Evening Standard had a wonderfully poisonous insider account of what went wrong with the Tory campaign: Revealed: How Theresa May’s two aides seized control of the Tory election campaign to calamitous effect

    The Flip Chart Fairy Tales website has an interesting analysis entitled “The end of the Long 90s

    That article also has a link to an interesting short paper by the cultural theorist Jeremy Gilbert from a couple of years ago which looks at the broader cultural context. Its entitled “Captive creativity: breaking free from the long ‘90s’. Here is an excerpt:

    If I were to show you photographs of every seminar group I’ve taught since 2000 or so…the only differences you’d notice, that you’d be able date the photos from would be me getting older. This sense of cultural stasis isn’t mine alone. My students have been telling for years now that no very formally new music has emerged since around the beginning of the millennium, while the music critic Simon Reynolds had a worldwide success a couple of years ago with his book Retromania, reflecting on the absence of real novelty across many fields of contemporary culture. Now before you reflexively dismiss this as just old-man grumpiness, consider for a moment. This isn’t the cliché you might think it is. Middle aged people are supposed to be alienated from and suspicious of, the culture – and especially the music – of the young. But they’re supposed to find it frighteningly new and therefore beyond aesthetic comprehension. They’re not supposed to bemoan its lack of novelty. But here we are.

    That’s not to say that there isn’t lots of great music being made. But for arguably the first time since the beginning of recorded music, there isn’t any that you couldn’t have quite easily imagined being made 20 years previously. Everything has changed, but nothing has changed.”

    Gilbert has a short piece on the election on his blog called “Quick first thoughts on the June 2017 UK General Election result”

    There there is Frankie Boyle’s take on the whole thing.

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    The Eurogroup meeting of eurozone Finance Minister was held last week and the main item on the agenda was the approval of another round of bailout payments to Greece which were conditional on various Troika demands being met. The meeting was considered a success in that a package was agreed but the real winner was, once again, German Finance Minister Wolfgang Schaeuble who got what he wanted. At the crucial meeting Schaeuble ensured that he did not succumb to the International Monetary Fund’s demands for a clear agreement on significant debt relief, while keeping the Fund on board in the Greek programme for the time being.
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    It’s that man again. Varoufakis was a speaker at this week’s FundForum International conference, billed as the the world’s largest investment management event, and here is his presentation entitled: “The state of Europe and the Euro”.

    His main presentation argues that the economic and political problems of Europe, China, and Japan, and the rise of Trump are all linked to the same basic weakness which is what he describes as a ‘planetary failure of coordination’ which manifests as the largest savings rate and the lowest investment rate since 1950s. So a mountain of savings and only a trickle into investment. He then explores how why this situation as arisen and in particular the role of the financial system in the problem.

    After his presentation Varoufakis was interviewed on stage and made some interesting remarks about the problem of the giant German surplus and why Germans should care about it (at minute 22.37), the UK’s election and prospects for Brexit negotiations (28.33 into the video) and on the prospects for the eurozone and the of Macron presidency (31.45), in passing he also says that he distrusts Martin Schulz and the German SPD immensely.

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    I was wrong about Jeremy Corbyn. I thought until quite late in the election campaign that his leadership would result in electoral disaster for the Labour party. The fumbling and accident prone opening period of his leadership, the apparent collapse of support in the parliamentary party, the vacuous position of the Labour leadership during the Brexit campaign which allowed the referendum to become a debate inside the Tory party, and the terrible results in the Scottish and recent local elections all convinced me that come a general election the Labour Party would be obliterated. It wasn’t and I was wrong about that. Corbyn has changed the balance of power in the UK and I applaud him for that.

    Corbyn actually grew in stature throughout the campaign and managed to galvanise a surge of youthful (and not so youthful) activist enthusiasm. The result was a new form of leftist populism and a tremendous blow to the Tories which has changed the balance of politics in the country. It makes you wonder how Saunders would have fared against Trump. ‘Dare to struggle dare to win’ indeed.
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    An interview of Yannis Varoufakis by Open Democracy.

    The video starts with this: ”The idea that suddenly Brexit, Le Pen, Trump rose out of the woodwork, and that the liberal establishment is the only thing that can stop them – this is just a figment of the liberal establishment’s imagination.”

    At minute 1.42: On the EU deep establishment

    At minute 3.15: On the lack of democracy in the EU, “its unprecedented in history…”

    At minute 5.15: On the the fact that the EU will not actually negotiate with the UK (because it does not want a mutually beneficial outcome) and therefore what is the best Brexit that can be achieved

    At minute 10.22: “Both sides of the Brexit debate were controlled by conservatives”

    I recommend “Adults In The Room: My Battle With Europe’s Deep Establishment” by Varoufakis

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    The critical Eurogroup meeting on the Greek program is this week. I thought it was worth reminding ourselves of what the EU has wrought in Greece, which can be done with a single graph which compares the Greek depression to the Great Depression, the Asian crisis of the 1990s and the Eurozone recession after 2010.

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    After the euphoria wears off….

    June 11, 2017

    Like a lot of people I found election night to be sheer delight compared to the horrors that I was expecting. Watching the looks of horrified disbelief and confusion on the faces of the Tories as they realised that they had just shot their own foot off was something to savour. Corbyn and May defied […]

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    Paris hot air

    June 3, 2017

    So evil Donald Trump is going to kill the planet and even the Chinese are signed up to save it. Not quite. The Paris Treaty commits the USA and Europe to making big changes to their energy production systems at great cost. The result of Paris will be to significantly increase the energy costs of […]

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    Rethinking the European Union: Part Two

    May 31, 2017

      Part Two: What’s wrong with the European Union? In Part One of this series of articles I charted how my general politics had evolved over quite a long period of time, and specifically how my understanding of the European Union had changed. In short how I went from being an active and enthusiastic supporter […]

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    Rethinking the European Union: Part One

    May 28, 2017

      “When the facts change, I change my mind. What do you do, sir?” John Maynard Keynes   Part One: Swimming in Europe Its been a tough decade since the great financial crisis started in 2007. When the Great Moderation came to an abrupt end with the crash of the financial system I think a […]

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    Chinese over-investment: Metro building

    May 23, 2017

    In previous post (see ‘Thinking about China‘ and ‘What is happening in China?‘) I explored how the Chinese growth model was coming to an end. Like previous ‘miracle growth’ episodes the Chinese model was based on the suppression of internal consumption and the use of external demand for exports, and above all very, very high […]

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