“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 with the crash of the financial system I think a lot of people on the Left in Europe, including myself, expected that with the neoliberal project hitting the buffers it was finally time for a more progressive project. Time for a more robust European social democracy, a time for reform, a time when the EU would finally show its mettle and its value as a great progressive social and economic project. Things have not turned out as I thought they would. I think a lot of other people probably feel the same way. The EU has not turned out to be social democracy writ large but instead a place of mass unemployment, stagnation, institutional sclerosis, and rising rightwing nationalist populism. And the the biggest crisis of capitalism since the 1930s has not led to the rebirth of social democracy but its, possibly terminal, decline.

How did this happen? Why did things not unfold as I expected? I have to start by accepting that I was wrong about a lot of big stuff. In recent years I have been doing a lot rethinking about some of these big things, stuff I obviously misunderstood, as I have tried to understand why the EU seems to have gone so wrong, why the nationalist parties have been gaining so much new support and why European social democracy is in such trouble. This meant thinking about things like how the EU really works and what it has really become, exploring the relationship of nation states to progressive politics and to democracy, and rethinking what a European progressive strategic project for taming capitalism in a globalised world might look like in the early 21st century. I have begun to change my mind about all those things and in this article I want to explain how my thinking has developed, the sorts of ideas I am exploring and to invite feedback because, of course, my conclusions are only interim and (as has happened many times before) I might have gotten everything wrong. Really these articles should viewed as me thinking aloud, and I remain unsure about a lot of things to do with the EU.
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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 levels of investment to drive demand in the economy. Although the Chinese model is one that has been used before it is different in both the size of the economy and the scale of the imbalances. Chinese investment levels have been in recent years the highest ever recorded in history and the animated video below depicting the recent metro building program in China is a neat illustration of what is happening.
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The great financial crisis of 2008 had many causes, and a very important one were the great imbalances in global trade that had developed over the preceding years. Those imbalances have not been significantly reduced and in some case they have grown worse. The result is that debt levels are rising and in some cases are beginning to approach the levels seen just before the crash of 2008.
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I found these charts at the FT (full article here). I find it interesting that the FT thinks the final chart is an indicator of psychological state rather than an indicator of material well being. Macron can only deliver if Germany plays ball – the future of French politics now hinges on the German election.

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Something odd and a bit worrying is happening in local government in the UK, and I don’t mean the huge cuts in central government funding. All across the UK local authorities are moving into large scale property development as a way to generate income to compensate for lost government funding. This could be a deeply problematic development.

The squeeze on local government spending which started inn 2010 has been unprecedented in its scale and impact on local budgets. The “formula grant” which is the main grant paid to councils by the government: under it, for every £1 received by councils in 2010/11, they got just 73.6p in 2013/14. This is before the effects of inflation are taken into account. In total the government plans to slash grants to councils by £11.3 billion by 2015/16. More than 500,000 council workers have lost their jobs since 2010.

In this context many local authorities are desperate to fund alternative sources of revenue and income, and it is this desperation that has driven so many of them to embark on a program of property development for profit. All across the UK, local councils have been moving aggressively into the commercial property market or embarking on residential property development, either for sale or for the private rental market. The driving force behind this is the same one that pushed local governments in Japan to buy property in the 1980s bubble and that now prompts China to encourage manic property development from its municipalities: the need to plug gaps in their budgets after years of funding cuts from the central government.
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There is another European single currency, other than the Euro, but it is not widely known about in Europe because it is used in Africa.

France has long been committed to maintaining a zone of interest in Africa based on its old colonial possessions. One of the mechanisms it uses to maintain ‘dependency’ amongst its former colonies is the CFA franc, the collective name of two currencies used in West Africa that are still managed from Paris, guaranteed by the French treasury and pegged to the euro. CFA is the acronym for Communauté Financière Africaine (African Financial Community). The reason that the issue of CFA Franc has come to wider attention is because the French National Front is committed to abolishing the entire system of “Françafrique”.

Marine LePen visited the former French colony of Chad during the final stages of the presidential first round election campaign and while she was there she pledged to break with her country’s decades-old relationship with Africa known as “Françafrique” and abolish the CFA franc currency policy that binds Paris and its former colonies.

Speaking at the end of her two day visit to Chad Le Pen sought to outline her policies regarding the continent, which has long held an important place in Frenchforeign policy. “It was only in coming here and explaining that I am able to get around the lies of my political adversaries who don’t want Africa to hear me,” the National Front (FN) party candidate said at a news conference in the capital N’Djamena. “I’ve come to condemn the policy of Francafrique that they’ve carried out. I have come to say I will break with this policy,” she said. She also called for an end to the CFA franc. “I understand the complaints of African states which consider as a matter of principle that they must have their own currency and that the CFA franc is a hindrance to their economic development. I completely agree with this vision,” she said.
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The French first round

April 24, 2017

Just over 40% of the French electorate voted for a candidate that wanted to leave the Euro. Macron will almost certainly win the second round but then the sparkling young new president will have to confront France’s deep divisions, try to do something about France’s dire economic position while constrained by the straight jacket of the single currency, and govern without a parliamentary majority. A Macron’s victory will not solve the deep divisions in France. Le Pen and the NF have always targeted the 2022 election as the one the think they can actually win.

The two stage French legislative elections process starts on 10 June 2012, and with the collapse of the mainstream parties of the right and the left the result is likely to be a very polarised assembly.

The maps below show the political situation in the country. The first shows how Le Pen’s support comes from the periphery and the old rust belt. The second chart shows that the further a voter is from Paris the higher the chance that they will vote NF.

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While all eyes are on Brexit and the various critical elections looming in the EU the the tragic and cruel farce continues in Greece.

The publication of the International Monetary Fund’s World Economic Outlook (WEO) on Tuesday revealed worse estimates for the Greek economy compared to the upbeat set of forecasts included in its previous forecasts, which were released early last October.

The Fund now expects the domestic economy to grow at a slower pace of 2.2 percent in 2017 compared to its initial forecast of 2.8 percent, which stood at high-end of the estimates made last year.

The fact that the October forecast was wrong and that the IMF has – once again – over estimated Greek recovery should come as no surprise. Since the beginning of the crisis in 2010 the IMF has consistently been wrong, often wildly, about Greek economic prospects, always claiming that recovery is about to start and then it doesn’t. Here is a graph showing what the IMF forecast to happen to the Greek economy prior to the 1st bail out programme (May 2010) and the second programme (March 2012) compared to the actual performance.
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Researchers Sascha Becker and Thiemo Fetzer, are presenting an interesting paper at the Royal Economic Society’s annual conference at the University of Bristol in April 2017 entitled “Does Migration Cause Extreme Voting?”

The paper makes a persuasive case for the argument that it was the special social shock of the post accession low skilled migration from Eastern that caused the surge in UKIP support and eventually the Brexit vote.
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As a follow up piece to my posting about the dangerously delusional views of Mr Dijsselbloem I would like to point readers to a recent article by Michael Pettis who is one of my favourite economists. Pettis is a professor of finance at the Guanghua School of Management at Peking University in Beijing who has written a great deal about the Chinese economy and about trade imbalances in general (check out his books here).

The Pettis article I want to draw you attention to is on the Bloomberg site and is entitled “What’s Really Driving the Trade Deficit With China”. Generally his view is that when it comes to explaining trade imbalances there is too much attention paid to currency and exchange rate mechanisms and not enough focus on the underlying internal national imbalances, such as excess savings, that drive trade surpluses.

The entire article is worth a read. This what Pettis has to say about Germany.
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Costas Lapavitsas who is an economics professor at London’s School of Oriental and African Studies, visited Barcelona last week to present his latest work, ‘Eurozone Failure, German Policies and a New Path for Greece’. In this text he advocates Greece leaving the euro, as an instrument for overcoming the country’s crisis. Critical of Alexis Tsipras, Yanis Varoufakis and Syriza (he had been an MP for the party before the third deal with the Troika), Lapavitsas is conscious that his positions regarding the EU and the euro are still in the minority among European progressives. Nonetheless, he believes that “the first step for the Left is to say that the currency union has to end.”

Last week Lapavitsas was interviewed by Oriol Solé Altimira and the text of the interveiew (in Spanish) was published by El Diario. Here is the interview translated into English.
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“I can’t spend all my money on women and drink and then at the end ask for your help,” Mr Dijsselbloem, head of the euro area’s finance ministers, was cited as saying in an interview with German newspaper Frankfurter Allgemeine Zeitung published a few days ago, alluding to the solidarity northern euro countries had shown with southern countries during the region’s crisis. “This principle holds at the personal, local, national and also at the European level.”

Whether the remarks attributed to Mr Dijsselbloem were accurate or not the story has resonance because a lot of people, including people at the top of the EU system, believe the same thing. The common view is that countries are just like people and if they spend too much, develop trade deficits and get into debt they do so because they lack the discipline of the countries that run trade surpluses and which don’t get into debt. When a person spends way too much on their credit card and cannot repay their debts, and they have to borrow money from charitable friends who are more prudent and have some savings, then the lenders have a right to give their friend a bit of lecture about how to mend their ways. The common sense view is that the same sort of thing applies to entire national economies, that if a country gets into debt it’s their own fault and they can’t rely forever on being bailed out by loans from their prudent neighbours, and that they really should save more and spend less.

That’s the common sense view of the debt problems in the eurozone but it is also completely wrong. The reason it is wrong is because national economies and the system of international trade work nothing like personal and household budgeting or the finances of a firm. In fact applying what seems to be common sense lessons from private household finance to national and international economic policy leads to disastrously wrong conclusions. Unfortunately these sorts of comparisons between household and national finances seem like common sense, are easy to understand, easy to communicate and are thus dangerously seductive. The real way national economies and international trade work is actually counter intuitive and requires some careful thought to work out, so the reality is quite hard to communicate, especially in a headline grabbing phrase.
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Making sense of it

November 16, 2016

How did Trump become President? Here are some attempts to unravel this very unusual election.


 

The BBC stats and maths program More Or Less had some interesting analysis of the US elections results, including the fact that Hilary Clinton received 5 million less votes than Obama.

The More or Less episode is called “US election, stray cats and puzzles”


 

Bernie Sanders on “CBS This Morning” explains how he thinks Donald Trump won presidency and why he thinks Democrats failed to appeal to the working class in the 2016 election.

 


 

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Against pessimism

November 9, 2016

On the Left, and amongst what might be called liberal opinion, there is a prevailing sense of pessimism. Pessimism is the default condition for most progressive commentators. Events like the Brexit vote, the refugee crisis and now Trump’s win can all make it seem as if the world is in a bad way and that things are getting worse.

That view is entirely wrong.

Even a cursory glance at the data shows that not only has the condition of humanity improved vastly in the last couple of centuries but that the improvement is accelerating and that there has actually been huge global social progress in just the last few decades.

Here are five slideshows that demonstrate that astonishing progress in the areas of reducing violence and war, poverty reduction, nutrition and hunger reduction, health improvements and the progress being made in Africa.

The Visual History of Decreasing War and Violence

The Visual History of World Poverty

The Visual History of Hunger and Food Provision

The Visual History of Global Health

Progress in Africa

Click through them and celebrate the great times we live in.

Pessimism finds its most acute expression in the form of Green ideology. The Greens claim that the very things that have so improved billions of people’s lives (cheap fossil fuel energy, travel opportunties for ordinary people, mass industrial production and consumption, urban living, industrialised farming) are actually terrible because they are causing some sort of existential environmental crisis.

That is not true.

As just one example here is a link to page of data about forest coverage in Europe, a continent that has hosted for the longest time the very modernising trends the Greens hate. On the bottom right of the page the third diagram is an animated historical map of tree coverage in Europe. If you click it you can see that since 1900 the number of trees in Europe has actually increased significantly. In fact it is modernity and economic development that makes the environment better.

The growth in European forests since 1900

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The Mountain to Climb

September 28, 2016

As the Labour Party conferences winds down and the left is confirmed securely in control of the party it is worth taking a moment to consider the task ahead. And it’s a very big task. A new Fabian report, ‘The Mountain to Climb‘, reveals that victory for the Labour party will be more than twice as difficult to achieve as in 2015.

The report looks at the likely effects of scheduled boundary changes and concludes that Labour will need to win 106 seats to secure a majority, reaching deep into middle England. It lists the ‘target’ seats Labour will need to win (prior to boundary changes) and suggests that the ‘victory line’ could be Harlow in England and Kirkcaldy and Cowdenbeath in Scotland.
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Berlin blinks

July 31, 2016

  The leaders of the EU know they are skating on thin ice. The eurozone is mired in a deep and prolonged economic stagnation that has caused the worse mass unemployment in the periphery of Europe since the Depression. Of the big economic member states only Germany is doing remotely well (if you consider a […]

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What is Trump?

July 30, 2016

Six months ago Donald Trump looked like the method the Republican Party was going to choose to commit suicide. Now Trump looks like he might actually win the Presidency. How can we understand Donald Trump? The American writer Michael Lind has been writing a series of interesting articles analysing the Trump phenomena and situating it […]

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Some recent items of interest

July 29, 2016

  IMF admits disastrous love affair with the euro and apologises for the immolation of Greece writes the always interesting Ambrose Evans-Pritchard in the Telegraph “The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending […]

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Austerity may be over – for the Eurozone banks

July 27, 2016

  The problems of the eurozone banks have escalated sharply this year, reflected in the collapse of their share prices, and the window of opportunity for another round of publicly funded bank bailouts is closing fast. The most serious banking problem is in Italy but there are also severe problems in Portugal, continuing weakness in […]

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The rise of western populist movements explained in one graph

July 25, 2016

After the turmoil of the 1970s, when the combination of the collapse of the international system for managing exchange rates and the oil price shock of 1974 combined to produce rising unemployment and high inflation, the global economy seemed to enter a far more tranquil period. This period of relative tranquillity and reasonably steady growth […]

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