The Liberal Democrats: a rebirth not a fightback

Britain’s political system is in turmoil, and each political party faces distinct problems. For now the Conservatives seem to be weathering the crisis best; the referendum result was the right one for them, in party management terms at least. Labour’s crisis is looking terminal, “the reek of death” as this excellent article by Nick Cohen has it, describing the particular lunacy of the political far left. But what of the party that has already suffered death: the Liberal Democrats?

Death might sound a bit strong. It continues to bob along at 8% or so in the opinion polls, win the odd local election, and its membership is resurgent. But the party has regained little of the political traction it lost during its coalition with the Conservatives from 2010 to 2015. And so much of the human capital and community connections it built up in its growth years in the 1990s and early 2000s has gone. Locally I can’t get over the fact that the Lambeth party has lost all its councillors – I remember so well the process by which the party took de facto control of the council in 2002, a process that will now have to restart almost from scratch. The party is now almost completely ignored by the mainstream media. In David Cameron’s valedictory Prime Minster’s Questions last week the Speaker saw fit not to call any of the party’s MPs, in spite of the important role the party played in his premiership. Only Lib Dem activists noticed.

And yet new life is stirring. Last year, after the calamitous General Election, party membership surged, and the Autumn conference was one its best attended, though ignored by lobbyists and media. But that is as nothing compared to what has happened in the last month – after the referendum. Membership has surged again (my local party has grown by about 60% – this may be the strongest it has ever been), but it is very different from last year. In 2015 the members were sorry for the party; they were interested in it, but few were up for a fight. In 2016 they are boiling. Membership events are better attended than ever; new and recent members want to get involved. The party is benefiting from a general increase in political engagement, which is benefiting most other parties too.

What is happening? Last year the party celebrated the membership surge under the hashtag #libdemfightback. This made me cringe. The old party is dead. A new party is being born. Not enough of the party’s remaining old hands recognise the difference between a fightback and a rebirth. With the latter you are dealing with a new party.

I want to say something about what I suspect about the reborn party. This is unashamedly based on my local experience in this part of cosmopolitan London, plus reading the odd blog and social media comment. I may be proved wrong – this year’s party conference in Brighton will be an important test. But here goes anyway.

First the new party is cosmopolitan, well educated, and, as a generality, distinctly younger than the old one.  Many in the old party, including me, find the new members to be kindred spirits. But much of the old party was built through local campaigning, and drew in a distinctly less cosmopolitan crowd. Many female activists reported casual sexism that would be anathema to the new membership. The new party may find it harder to rebuild in its old rural strongholds than many suppose, but it should be less dominated by white male representatives.

Second, the new party is not very tribal by British political standards. The need for political alliances to achieve wider political ends is often mentioned. The wider political scene, and especially the promotion of cosmopolitan values, is more important than the party’s own fortunes. Old hands need to be conscious of this, though the party leader, Tim Farron, has clearly picked this up.

Third, the new party is distinctly more centrist than the old one. After the coalition with the Conservatives ended in 2015, many old hands thought they could put those years behind them, and recover the party’s old standing as part of the “radical” left, which peaked in 2005. The new members will give them a shock. They may cringe at the tuition fees debacle, but they do not regard the coalition government, and its austerity policies, as a betrayal. They are largely private sector in employment and outlook. The more left-wing types have joined Labour. Members of the old party who think the former leader Nick Clegg should be erased from the party’s history will not find a receptive audience.

So, those are the main elements of the new party that is taking shape. What about its political opportunity? So far there is little evidence of traction with the public at large; but with the Conservatives embracing Brexit and Labour showing suicidal tendencies, that could easily change. At this point I just want to posit one negative and two positives.

The negative is shared with the emerging Labour Party, which is undergoing its own rebirth, except that in their case the old party hasn’t died yet. The social base of its membership is narrow. It will be a huge challenge to broaden the party’s appeal to less cosmopolitan groups – and yet that is what the party must do to succeed. At least the Lib Dems, unlike Labour, who are victims an overblown sense of political entitlement, can have few illusions about the scale of the challenge.

The first positive is that the referendum has proved to a cataclysmic political event, that has helped erase memories of what went before it, or at least changed their perspective. This gives the Lib Dems the chance to move on from its recent traumas more speedily that otherwise.

The second positive is that the referendum result has changed the political dynamic in the party’s favour, just as the country embarks on a course that it thinks is profoundly wrong. Previously being against the EU was a central organising theme of anti-establishment politics.  All sorts of ills could be blamed on EU membership, and it was very hard to refute these claims. Now that dynamic is reversing. The country’s ills can plausibly be blamed on Brexit, and life in the EU can slowly be built into a sort of promised land. Being pro-EU and pro-immigration will become anti-establishment. That is a much easier dynamic for an up and coming political party to play with, whatever the justice of it.

The media will continue to treat the Lib Dems as if their party was dead. The survival of the reborn party is certainly not assured. But something interesting is happening.

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Why WTO-plus is better than EEA-minus as Britain negotiates Brexit

It’s still very wounding to think of the UK leaving the European Union. The Leave campaign was based largely on lies and wishful thinking; those who voted to leave fell well below 40% of the electorate, which might be a reasonable threshold for such a major change. But Theresa May, our new Prime Minister, has said “Brexit means Brexit”. This is surely the best way forward. Rather than try to undermine the referendum result, it is better in the long run to test it to destruction.

Calls to rerun the referendum are understandable but unrealistic. The Conservative Party is overwhelmingly Eurosceptic amongst its membership, if not amongst its MPs. The party must rally to that cause. Members and MPs who don’t like it should leave the party. Politically it needs to rebuild its appeal to the working and lower middle classes outside London, who overwhelming voted for Brexit. Mrs May stands a better chance of succeeding here that the duo of David Cameron and George Osborne.

Labour is in an impossible position. Though its MPs overwhelmingly support membership of the EU, most of them had large Leave majorities in their constituencies. They will be unable to ignore this. So with neither the Tories nor most of Labour ready to fight to overturn the referendum result, that leaves the SNP, the Liberal Democrats and an assortment of Northern Ireland MPs to take up the fight. They are impossibly outnumbered. Which does not mean that they should stop putting the case. But that fight is the first step in a very long road. It may be possible that the UK could limp back into the EU as its negotiating position collapses and it faces a deep economic crisis. This would leave a bitter legacy and it is not to be wished for.

That leaves the question of what Britain should aim for in its negotiations for exit. Many advocate something referred to as “EEA-minus”. EEA is the European Economic Area, which consists of the EU plus Norway and Iceland and one or more tiny statelets.  EEA members have access to the Single market, but must also abide by the three key freedoms of movement: goods, capital and labour. The idea behind EEA-minus is that the UK would negotiate exceptions to freedom of movement of labour – as immigration was easily the most successful argument used by Leave campaigners. It feels like a pragmatic compromise between the 48% who wanted continued membership and the 52% who wanted to do something about immigration. It would reduce economic disruption. But it is a shabby compromise that would please almost nobody. Leave supporters would still find the country bound by EU laws and courts, and making budget contributions, with the indignity of not being able to influence them. It is hard to argue that it isn’t a net backward step on practical sovereignty. Remain supporters would look at the whole exercise as being pointless. And any fudge on free movement of labour is guaranteed to disappoint.

Actually, there is a deeper problem. Free movement of labour goes to the heart of the EU’s sense of itself. It is precisely what excites most younger EU enthusiasts about the union. And it is hard to understand why the other EU governments would want to fudge it – the risks for them would be enormous. Any negotiation is practically bound to collapse or at least prove an enormous disappointment.

The opposite possibility is hard Brexit. This means that Britain would be unambiguously outside the EU, without an overarching treaty to bind it in at all.  Trade would be covered by the World Trade Organisation (WTO) framework, guaranteeing some minimum standards. This is by no means as straightforward as many Brexit campaigners claimed in the referendum campaign – it actually requires significant amounts of negotiation in its own right (as the FT explains). But it is a robust baseline, and there is much merit in making this the main focus of the UK’s rather limited negotiating resources. The UK would then need to identify a series of priority issues to negotiate with the EU to add on top. Top amongst these are the rights of residence and labour market participation of EU citizens living in Britain, and vice versa. Also there is the passporting of financial services, though this is not an issue to die in the ditch over.

There are three advantages to a “WTO plus” approach, over “EEA minus”. First is that it presents a tough negotiating position, which will help to win concessions on critical issues. Second is that it follows the picture painted by Leave campaigners most closely; in the long run it is critical to call their bluff – they are either right in their optimism – in which case the EU needs to rethink itself – or they are wrong, in which case they will be undermined as the major political force they have become. And third it helps get the bad news out of the way quickly. There remains a lot of denial about the impact of leaving the EU; the announcement of WTO-plus would administer a second shock to the system, causing further losses to the pound and inward investment. But then it should hit bottom, and the momentum might be back upwards. This would be healthier in the long run than a drawn out series of disappointments that would erode confidence in the British economy and make it look the sick man of Europe. Getting the bad news over with is something the Americans usually do much better than Europeans – and we should learn from them.

And for us EU supporters, we need to understand that freedom of movement of people is at the very heart of what we want, and we must recognise that we have, for now, lost the argument. But we must rebuild the case, using the traumas of Brexit as evidence. Meanwhile we must think about the sort of EU that we want. We are now witnessing an unholy mess as the Italian government and the EU Commission wrangle about rescuing Italy’s banks. The EU’s rules on state aid look much too restrictive.  The EU will survive, and one day Britain will rejoin it. But it will be a different Britain and a different EU. We must work to change both.

 

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Subjecting MPs to party membership votes is not democratic

Yesterday the Conservative leadership election resolved itself as the final Brexit-supporting candidate’s campaign imploded, leaving Theresa May unchallenged. Labour MPs look on with envy, as their own leadership election officially got started on the same day, as Angela Eagle formally challenged Jeremy Corbyn for the job.

What both these contests had  in common is that party rules give the deciding say to a vote of party members. It is the same for all Britain’s political parties. Back in the 1970s, when I came to political consciousness, such contests would be decided by party MPs alone. The Liberal Democrats (or its predecessor parties – I can’t quite remember how this evolved) were the first to move to an all membership vote. In their case, the parliamentary party was very small, and the party outside parliament relatively much more important. Participation in the party’s policymaking and leadership processes were designed to encourage people to join. Lib Dem activists describe this membership participation as “democratic”.

As membership of all political parties went into steep decline in the 1990s and 2000s, the other parties followed suit. Labour has done this with particular enthusiasm. Not only do they now put the leadership election to a full membership vote, but they allow the public to join as temporary members to take part. This extends the franchise to hundreds of thousands of people. The result last year was that Mr Corbyn was selected in a surge of enthusiasm from party members, charmed by the apparent freshness of his approach. This was described by his supporters as “democratic”. They still do. On the radio I recently heard one of his supporters use the words “democratic” or “democracy” in pretty much every sentence.

But Mr Corbyn never had much support in the parliamentary party, and he has not succeeded in winning Labour MPs to his cause. They have rejected him in an overwhelming vote of no confidence. And yet he clings on as leader, claiming that his “democratic” mandate trumps the views of MPs. This use of the work “democracy” to assert the primacy of party memberships is an abuse.

At the heart of any democratic system is the participation the public, or rather, a public. This public is not defined by personal preferences, such as voluntary memberships, but by some involuntary common factor – such as where they live. Excluding people undermines democracy. This makes it a messy, rough and tumble process. Without some kind of preselection process, there will be disagreements on most things. Unanimity is near impossible on large populations. Party memberships do not fulfil any reasonable definition of being “a public”. People join voluntarily, according to some understanding of shared values; they are essentially self-selecting. They may use democratic procedures to make decisions, but that does not make them democratic. The Labour selectorate is of an impressive size compared to other political parties, but it is still tiny compared to the population at large, and in no manner representative of that population.

This is one of the paradoxes of large-scale democracy. Political parties are essential to a healthy democracy, but they are not themselves democratic. They can only claim democratic legitimacy when they subject their candidates to a public vote. And that creates a tension for publicly elected representatives between the party that nominated them and the electors that voted for them. That tension is as old as political parties. It is a tension that has to be managed rather than resolved one way or the other. If a representative (an MP, say) ignores his party, then he is disregarding one of the most important things the public knows about him. But if he ignores the broader electorate, he is holding them in even deeper contempt.

The tension comes to a head when it comes to selecting the party leader, a position of enormous privilege in our political system. The MPs have a proper democratic mandate, and their cooperation is required in order for a leader to be effective. But in order to secure the commitment of party members, also very important for an effective political party, they must be given a say. Labour’s system for selecting its leader (courtesy largely of Mr Corbyn’s predecessor, the well-intentioned but lightweight thinker Ed Miliband) is based on wishful thinking rather than hard political calculation.

To most observers, it is quite clear that Mr Corbyn should step down, as a loss of confidence amongst MPs is fatal. The Deputy Leader should take over temporarily, while an open leadership contest takes place. Instead Mr Corbyn seems to view his MPs as traitors to the political movement he represents, and is clinging on, with every reason to expect that he will see off the challenge. There is some question as to whether he should only be allowed to re-stand if he fails to find 51 MPs or MEPs supporting him. But if he does not stand, there will be a huge rift in the party at large. As it is many MPs face de-selection.

The Labour Party is in enough trouble as it is. It somehow needs to reconcile three constituencies: middle-class public and third sector workers; white working class voters; and ethnic minority working classes. The white working classes in particular were strong supporters of Brexit, and feel alienated by the other two groups. And the party’s collapse in Scotland shows that its continued strength is not an inevitable fact of politics, as it used to think. But instead of confronting this existential crisis the party will indulge in a narcissistic battle of abstract nouns (austerity, inequality, democracy, etc.). They should be engaging in the hard graft of rebuilding community relations; listening rather than shouting. The prospects for the movement do not look good.

The Conservatives, meanwhile, seem to have a much stronger grasp of political reality. There was no nonsensical talk of “democracy” concerning the abortive final vote by party members. Their parliamentary party retains formidable powers in the selection of the leader (they whittle the field down to two candidates) and in holding the leader to account (they can eject the leader in a vote of no confidence). They will be very tempted to find a way of holding an early general election to complete Labour’s rout.

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The same arrogance that created disaster in Iraq is behind Brexit

It is a very British piece of political theatre. Yesterday Sir John Chilcot published the results of his enquiry into the Iraq. It is exhaustive, scrupulous, but examines events that are now ancient political history. Historians will find it useful, but in the big picture it tells us little we did not know already. It will have changed no minds. No currently active political career is affected. The US State Department spokesman sounded very puzzled over the attention the affair is getting, given the pressing challenges facing the world. No doubt that puzzlement is felt by other foreign observers. What was the point?

All I can say to that is that it is just the British way. We like to produce weighty reports that achieve little. Some people find it cathartic. It is much easier to reflect on the mistakes of the past than to consider a very messy present. I particularly enjoyed this reflection by an anti-war leftist in the New Statesman (Thank you Martha Zantides). I have always felt that moral certainties are evasions; my views on Iraq have always been ambiguous, notwithstanding the clear stand made by my party, the Liberal Democrats.

But I think it is a good moment to reflect on the nature of political power and decision-making. The immediate concern of Chilcot is Britain’s role in Iraq. And the main point here is how the moral certainty of Tony Blair, our then Prime Minister, managed to subvert the checks and balances of institutional decision-making to throw the country behind an American project, over which British leaders had very little influence. In Mr Blair’s eyes Saddam Hussein was a vicious dictator and a threat to world peace, and needed to be removed. He encouraged the Americans to work to that end, and backed them when they took the project on. After that he and the British were helpless passengers. British military resources, also committed to Afghanistan, were overstretched and forced into ignominious retreat – a small fraction of the continuing catastrophe that enveloped Iraq. Could this sort of thing happen again? Certainly; our institutions still favour the executive – though our capacity to act, and willingness to embroil ourselves in foreign adventures, are now much diminished.

But the British dimension was a sideshow. The real disaster in Iraq reflects the US political process. This firstly led to a reckless drive towards war, and, more culpably, a massive mis-judgement of how to deal with the aftermath. Driving these disastrous decisions was group of officials and politicians with a clear, driving vision. The most notorious was the Defence Secretary Donald Rumsfeld; there was also Vice President Dick Cheney (who brought shadowy commercial interests into the picture) , and the highly influential Paul Wolfowitz, a real ideologue. Collectively these were known as the Neo-Conservatives, or Neocons.

The Neocons had a clear vision of the world and America’s role in it. They wished to push over dictatorships using US military power, and let the grateful people set up democracies and unregulated market economies in their place. They dismissed the legions of diplomatic and military types who made practical objections as being hidebound by old norms. They seized on small scraps of evidence that supported their case, and dismissed anything else. This was exploited by a group of Iraqi exiles, notably Ahmed Chalabi, who had no real political base, but told the Neocons what they wanted to hear about the country’s readiness to embrace American ways. This process, whereby an arrogant, visionary clique creates a simplified world view in the teeth of the evidence has been given a name: “groupthink”.  There are plenty of examples down through history. There are notable parallels within the ruling elites of Germany and Austria-Hungary before the First World War, for example. Democracies should not be as vulnerable as autocracies, as there should be more pluralism of thought, but Iraq showed that the US and British systems are not immune.

And in Britain we are now in the middle of another catastrophe brought about by groupthink – Brexit – though thankfully not one so threatening to human life. Amongst the supporters of Brexit in the British establishment we see the same ideological zeal, and the same unwillingness to get involved in the practical details. Chief amongst these is the Justice Secretary Michael Gove. This man is full of visionary zeal, but he seems unwilling to listen to experts. Indeed he publicly dismissed the usefulness of experts in the referendum campaign. This was evident in his stint as Education Secretary, when he dismissed the educational establishment as “the Blob”. Experts often lose the wood for the trees, and so must be open the challenge. But the answer is not to drive a bulldozer through them. Mr Gove’s term at Education achieved some good things, but was mainly a colossal waste of effort, which we are still picking up the pieces from.

Alongside Mr Gove sit, or sat, political opportunists like Boris Johnson and Andrea Leadsom, and anti-intellectual populists like Ukip’s Nigel Farage. And behind them there are a coterie of Brexit backers, a group of businessmen, financiers, think-tankers and retired officials who provide intellectual heft. These are united by a loathing of European Union institutions (admittedly not an inspiring edifice). These have created a construct of Britain outside the EU that is not dissimilar from the Neocon vision of Iraq after the US invasion. Hopelessly optimistic, and dismissive of the practical difficulties of achievement. These people are still popping up on Radio 4 to tell us all will be well after the first wobbles have been overcome. They have no concept of the pain that Brexit is inflicting on our very sense of self. It’s question of puling ourselves together and getting on with it. And if disaster ensues, it will be somebody else’s fault. Just like the Neocons in Iraq (and Tony Blair) who blame Iraq’s collapse on bad people, over whom they hold no sway.

Meaningful progress does not arrive through a visionary, revolutionary process imposed by a tiny elite. Neither does it emerge from a vacuum – the removal of the forces of order so that a new , more efficient system will emerge by market forces. It happens through a hard process of evolution, comprising a dialogue of bottom-up and top-down processes. It’s hard work and requires patience. Alas we have once more fallen victim to the impatient, who will walk away to leave others to clear up the mess.

 

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Remain supporters won’t get over Brexit but we must move on

“I feel that part of my identity has been taken away,” said one of our members in a local Liberal Democrat meeting last week. The local party, in a cosmopolitan part of London that voted 75% Remain, has grown its membership by 50% since the referendum result. I have never known members to be more motivated. Shock is turning to anger, though not yet to coherent action.

It turns out that party members are not alone, at least here in London. Psychotherapist Susie Orbach describes in the Guardian how her patients (mostly Remainers) will talk of little other than Brexit. Many had not been politically engaged, and hadn’t thought they were particularly worked up about the issue, but now find themselves in profound psychological shock. Interestingly this does not present itself as anger at the majority of Brexit voters, understood as being as those left behind by globalisation. I found that at our members’ meeting too.

This depth of feeling is surprising. I have been told many times that Britons had not accepted European-ness as part of their identity. Unlike those from other countries, they viewed the EU as a transaction which they weighed up in cold pragmatic terms. This has never been true of me personally, but I supposed that I was in a tiny minority. Us British-Europeans are still in a minority – but not as tiny as previously thought. For me feeling European was something to do with the stultifying claustrophobia of Englishness, and a strong feeling of not being American. For others, perhaps many years of foreign travel, and of European work colleagues and neighbours, have crept up on them without their realising it. Their horizons have just been narrowed. Freedom of movement, at the heart of Leave voters’ concerns, is closely linked to Remain supporters’ sense of who they are.

So there’s a gulf of understanding between us and that part of the political and economic elite that supports Brexit. This was evident from Sunday morning’s Point of View on Radio 4, by philosopher John Gray. He told Remainers to get over it and move on. To him the EU is a failing international project that Britain is well out of, and that Britain would be the first country to exit of many. He differed from many commentators in not seeing the British as exceptional from other Europeans, but he still saw the EU as essentially transactional – a power play by a shadowy group of politicians and bureaucrats. He was quite perceptive in many ways, though I think he made some factual errors. It is not right to call the EU strongly protectionist against countries outside it, except in agricultural products, where it has plenty of company, such as the USA and most emerging markets. The European expansion was not an exercise by the European elite to grow and deepen the EU, but something of a plot by Eurosceptics to make deepening impossible. The imposition of austerity policies on many European countries is not those same elites desperately trying to keep the union together – but a number of better off countries in the Union putting boundaries on its powers to deploy their taxpayers’ funds. These errors reveal a lack of understanding, though they do not directly undermine his conclusion.

But what Mr Gray has missed is how bound up the EU has become in people’s sense of identity. This happens in the same way as identity has become bound up with the nation-state. Why on Earth should the English feel a sense of belonging to the British state after all? We just do, and it grew over a 1,000 years; in 1066 the English state was controlled by alien Normans. On the way Englishness and Britishness have become entangled. Many English Brexit voters, incidentally, seem only loosely tied to the idea of Britishness, never mind European-ness. Identification with the EU varies from country to country, and is genuinely weaker in England (and Wales and Cornwall and Unionist Ulster) than in most other European countries. I sense it is also weak in Austria, for example, but strong in Germany and France. Identification should not be confused with satisfaction. The English are dissatisfied with the British state, but they don’t want to leave it so set their own governments in Yorkshire, Somerset or wherever. The sense of identity of so many of its citizens gives the EU a much better chance of surviving than Mr Gray thinks. He is far from the first of Britain’s intellectual elite to underestimate the EU’s capacity for progress and survival. I remember being assured by most of the Britons I met in the 1990s that European monetary union was utterly impossible. In the mid 1950s British thought the idea on the union laughable.

So, much as the Brexit leaders tell us Remainers to get over it, we won’t; there is a complete gulf of comprehension. Much like opponents of EU membership could not get over the last referendum, in 1975. As a nation we are utterly divided.

But us Europeans will have to move on, even if we cannot accept the result in our souls. The referendum result could be reversed – but only after a prolonged period of disillusionment and failure to get a satisfactory new way of being – and even then it would be hard. Our project to return to the European family could take another 40 years. It will happen as people’s outlook becomes more cosmopolitan; as the current 20-somethings move into their retirement; and as the bedrock of anti-European identity literally dies out. The central demand will be to restore the freedom to move, work and settle.

Meanwhile we must take on other political projects, to help create a less divided Britain and a less divided Europe. That means taking the Brexit slogan of “Take Control” seriously. The Brexit leaders have no intention of implementing this idea beyond the Westminster political establishment, and perhaps in boardrooms. We must look at the communities who voted to leave, and ask ourselves how to make the people living there less powerless. We may regard the Brexit leaders as traitors, but the bulk of people that voted for them are our sisters and brothers.

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Don’t panic, but look for signs that Britain’s finances are holed below the waterline

Last week, before Britain voted, I suggested that Britain’s finances were vulnerable, and that a vote for Brexit would lead to a financial crisis. After Britain duly voted for Brexit, many commentators have suggested that just such a crisis is unfolding.  Is it?

My form on predicting such crises is mixed. I thought that Britain’s failure to join the Euro in 2000 might lead to a crisis in due course, as international investors shunned Sterling. This was very wide of the mark.  But in 2007 I correctly foresaw that the apparent calm after the interbank markets froze could lead to a serious financial crisis, moving all my pension fund’s assets to index-linked gilts and cash. Its value rose while most funds were badly battered in the crisis of 2008/09, facilitating my early retirement. So I need to take a deep breath and try to look at this objectively.

First, what do I mean by a financial crisis? There are two things to look out for. First is a collapse in asset prices that causes people who have borrowed to finance assets (which what people usually do for property) difficulties, which in turns affects banks and squeezes demand, causing job losses and recession. The second is one of governmental finance, whereby the government finds it hard to finance the national debt, forcing interest rates up, and a drive to austerity regardless of any need to stimulate demand. This is likely to be combined with pressure on the currency that makes it impossible for monetary policy to take up the slack. The 2008 crisis was of the first type, but the government managed to head off the second type. For the second type examples are Brazil currently, and Britain in the late 1970s and early 1980s.

Why did I say Britain was vulnerable? First, the country has a large current account deficit, running at about 7% of GDP, historically high. This suggests that the economy requires substantial amounts of foreign investment to keep going, at a time when uncertainty would put such investment off (both by foreigners and locals’ overseas assets). Second the national debt is high, at over 80% of GDP, and there is still a fiscal deficit; though at 3% this is far from scary, there is not much margin for it to deteriorate into scary territory. Against this Britain’s national financial management, led by the Treasury and the Bank of England, is world class, prepared (unlike the government for Brexit negotiations) and with an excellent track record. British banks are also in much better shape than in 2008, adding to overall resilience. International financial flows are very mysterious, and  it is hard to forecast safety or disaster.

The best thing to do from where I’m sitting, without high powered computer models, is to describe the danger signals, and keep a watchful eye. This means keeping an eye on some key statistics.

First there are share values.  The FTSE100 is a darling of journalists, because it is so accessible. It also tells us not very much, since many of its components are multinationals and not really British. Last Friday was not a good day for share markets, but nothing out of the ordinary either. Today is also bad, with the more representative FTSE 250 falling by 4.6% in three hours (the 100 fell by an unremarkable 1.3%). If these sorts of falls persist, then that could be a wider sign of poor business confidence, which will affect all important investment. But for an asset based crisis it is real estate that is much more important, and this moves at a more sedate pace. Too early to tell there.

Next, there is the pound Sterling. This is much more important. A weak pound will feed through to inflation, for example in petrol prices. This could put pressure on the Bank of England to raise interest rates, which would have all sorts of nasty knock-on effects. But I think that risk is overdone in market commentary – it is very 20th Century. These days employers do not feel the need to match price rises with wage rates, which puts a cap on general inflation. In the recent crisis the Bank was able to ignore rises in consumer prices without risk. But it will mean the public faces a squeeze, which will reduce domestic demand. A second issue with the pound is any effect it has on investment; a weak Sterling will reduce the attractiveness of gilts (government bonds) as a safe haven asset.

The pound had a bad day on Friday, though that was partly because markets were so confident of a Remain victory. But is has continued its fall this morning; if this trend persists there is serious trouble ahead. But there is no sign that the pound’s troubles are affecting gilt prices; they have risen, as they are still regarded as a safe haven. If this continues the government stands a good chance of weathering the crisis. So far it is definitely a case of Don’t Panic.

Looking further ahead, there are two statistics to keep an eye on. One, inevitably, is GDP. The stats here are wobbly and don’t deserve the attention they get. But if growth slows or even goes into reverse, then the government will be under pressure either to extend austerity or to provide Keynesian stimulus, depending on its reading of the situation. The second, more relevant , statistic is tax collections. If this is under pressure then there is a risk of government finances spiralling out of control.

The first question is when the short term reaction to the vote overwhelms the country’s financial system, causing emergency measures. Based on the gilt yields this looks highly unlikely, even in today’s febrile conditions. The more important question is whether, having survived the immediate storm, the financial system is holed below the waterline, to use a nautical metaphor. When a ship is holed below the waterline, it sails serenely on, with only fairly minor signs of damage. But it is taking in water that may cause it to keel over later, if it does not make to safety in time. This was how the world financial system looked to me in 2007 – while many fund managers were saying that the crisis had passed. And the drying up of inward investment could make that metaphor appropriate to the British financial system now.

So my message is this. Don’t panic, but look at for small but significant signs of longer term trouble.

Afterthought

What I probably should have emphasized is that I think it is gilt yields/prices that are the critical statistic to watch. If these stay low (yields) or high (prices) than it indicates that the government can readily borrow Sterling, which gives it the scope to manage the financial situation. If they go in the opposite direction, then it could be a sign of a more serious crisis.

 

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The politics of Brexit: how should the parties respond?

I had thought things were going Remain’s way, after my near certainty of last week that Leave had won. A day helping get out the Remain vote in Wandsworth and Lambeth borders (mainly alongside Conservatives) helped cement that feeling. The vote for Remain there was 75% and over. But the backlash from the rest of England (aided and abetted by Welsh voters) was too great, and we ended up with a decisive vote for Leave. I’m still in the very early stages of grief for the country I love. British politics has suffered an earthquake. I want to  offer some first thoughts about how the different parties should respond.

The Conservatives first. As my experiences here in Wandsworth shows, they are bitterly divided. But they will now have to rally behind the result and be the unequivocal party of Brexit. David Cameron was clearly right to resign, albeit at a leisurely pace. It is very revealing about those that supported Leave that so many of them thought he should stay. It bespeaks denial about the gravity of what they have done. But Mr Cameron would have been a prisoner and puppet as Prime Minister and party leader; that is not what the situation demands. Personally I think Boris Johnson should take over; his leadership may well have been decisive for Leave; he should be made to answer for its consequences. He may not have enough support amongst Tory MPs, though. But he does have momentum.

There is a clear opportunity for the Tories tok benefit from the bitter divisions in England and Wales. George Osborne’s wish for the party to build bridges with voters outside London now looks altogether more credible. Quite what this means in policy terms is less than clear. But they will need a clear focus on limiting immigration to begin winning the trust of Brexit voters.

That they have a chance to do so arises from the problems of the political left. Labour’s leadership backed the wrong horse in this race, mainly through honourable and honest belief. But their core support now comes from educated public sector workers and minority ethnic groups. The gap between this core and their previously loyal working class voters outside London has turned into a gulf. This has become a strategic problem.

I believe that the best thing for them is to stick to their beliefs keep up the attack on the advocates of Brexit. They will need to play lip service to respecting the will of the British people, but what they really need is for the Conservatives to fall apart under the stresses of trying to follow Brexit through. A period of institutional chaos is about to unfold; they need to be the party of buyer’s remorse and even “told you so”. This should be combined with a bold move to the political centre, perhaps scooping up disillusioned Conservatives.

But they have a leadership problem. Jeremy Corbyn has been criticised for being a lacklustre advocate of Remain, because of his half-hearted support for the idea. I have a feeling that the problem is much deeper. I don’t think he is cut out for hard political campaigning of any kind. On the radio this morning he sounded like a damp rag; he offered no ideas about what the country should do next. The Conservatives will have to be in bad shape indeed if they can’t beat him in a general election. And it is not just leadership. I would take an amazing act of political skill to persuade Labour members back to the centre ground. But not impossible.

Ukip have been dealt an interesting hand. They have done much to bring this situation about, and will doubtless gain Kudos. They must continue their pivot towards disaffected white working class voters, and peel them away from Labour. But it will be a hard road under Britain’s electoral system. Their power base in the European Parliament is about to be closed down. That this will hurt so badly will be amongst the many ironies of the vote.

And my party, the Liberal Democrats? The party continues its flirtation with irrelevance, and Brexit for these enthusiastic supporters of the EU makes it worse. But it has much stronger party infrastructure than Ukip; it has more MPs, more councillors and more Lords. They should benefit from the manifest troubles of the Labour and Conservative parties, but it is hard to see exactly how. They do not offer an inviting prospect for disillusioned centrist Labour and Tory MPs. I don’t see that they have much choice but to slowly rebuild on core liberal values, and make a strong appeal to younger voters. A lot will have to change to make this credible; not least it needs an influx of women and ethnic minorities into its leadership positions. I will write more on what the party should try and do another time.

And the Greens? They, too need to compete hard for that younger vote, where they have an edge over the Lib Dems. They have a very interesting strategic choice though. Do they continue with their leftwing, pro public sector lurch, away from their environmentalist roots? Jeremy Corbyn seems to have shot that fox, and offered a home for these voters in the Labour Party. But if Labour start a serious march to the centre, this gap might open up again. But if Labour continues to be a prisoner of its new members this route towards relevance will be blocked.

And the SNP? They have been presented an opportunity for independence and another referendum. But Brexit poses challenges for Scotland. A Scotland inside the EU and an England outside poses some major headaches. Many of these are about to be rehearsed on the island of Ireland. It may be hard for the SNP to create an attractive prospectus.

And what is the best thing for the country? I see the vote as a cry of pain from the politically excluded. This has a very ugly face, and I fear the rise racism and xenophobia. But all politicians should heed that voice. We must develop a new economic model that brings the excluded back in. That is the only way to bring liberalism back into fashion. If the Brexit vote hastens the development of such a new model, it will have been a good thing. All of the parties, apart from Ukip perhaps, show some signs of understanding this but are bereft of clear answers. But I fear that instead too many politicians will draw the conclusion that they should pander to dark side.

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The EU referendum: the arguments that count

Britain’s vote on EU membership tomorrow (23 June) has produced a lot of emotional polemic, and very little dispassionate analysis. I was persuaded yesterday to click through to this article by Professor Alan Johnson (not to be confused with his namesake, the Labour politician) on the basis that “it was the most compelling case for Leave that I have read”, to find that it was anything but compelling, as it jumped off from premises that are highly flawed in my eyes. And it made no real attempt to persuade people of an alternative view either. Of course, I am guilty of polemicism too, for Remain. But I try to stand above such things, as well. So on the eve of the vote I will assess the arguments that I think hold water.

I will do this based on the three substantive arguments for Leave: that the EU project is fatally flawed; that free movement of people within the union is too high a price to pay; and that rejecting the EU would give a needed shock to the country’s political and economic system. I will then say something about the benefits of EU membership.

A flawed project?

First is the flawed nature of the EU project; this lies at the heart of Professor Johnson’s case. What is the EU? It is an association of sovereign states that have agreed to bind themselves by treaty to hold to common standards in a wide variety of areas, to act jointly in others (most importantly in trade negotiations), and hold the whole thing together with a system for developing common policy and resolving disputes. Some of the Union’s founders saw this as an intermediate stage towards a United States of Europe, on a similar basis to the USA, and some of the language of the treaties (“ever closer union” ) was drafted with that aim in mind. But it lacks the wherewithal to make such a transition without the consent of the peoples of the member states. Unlike the early USA, there is no federal army to bring dissenting states to heel. Nor can there ever be.

But that leaves the project with some serious problems. Staying within the Union binds member states to a whole series of standards on a take it or leave it basis. Individual countries have little ability to opt out of the bits not to their taste – just opting out of the whole shebang, as Britain now contemplates. That is because it is a carefully balanced whole, and opt outs would be seen by other member states as trying to gain an unfair advantage. But it isn’t very democratic. Much ire is raised by, for example, the way Irish voters have been bullied into accepting treaty changes in spite of initial rejection (Professor Johnson aerates about this). But neither is it democratic for Irish voters to impose their will on all the other member states.

This leaves a dilemma at the heart of the project. If you want to make the EU more democratic and accountable, you have to make it look like a more conventional state, taking decisions as a whole union, reducing the autonomy of individual states. If you allow member states to vary treaty terms at a whim, then the whole project collapses.

This dilemma is at its most acute with the imposition of a common currency – which, of course, does not include Britain. Its implementation has been flawed, leading to ugly disputes between debtor and creditor nations. Many say that the only way to make the currency workable is to promote political integration. I don’t happen to agree with this, but further integration of the Eurozone could make Britain’s status within the union untenable – but we haven’t got there yet, and can act accordingly if we do.

There is really no easy answer here. You have to weigh the benefits of joint action against the losses to autonomy. I will come back to those benefits, but there is one clear area of lost autonomy that upsets a lot of people: free movement of people.

Free movement: too high a price to pay?

Our rights within the union to travel to and work in other member states mean that member states have little control over immigration from other member states. Very large numbers have come to Britain from other EU countries, especially the new states of eastern Europe. This is not Britain’s biggest immigration issue – which comes from other migrants, who are more numerous and who integrate less easily – but there is a feeling among many that Britain is “full”, with excessive stress on housing and public services. Many Britons, especially less educated ones, sometimes feel like foreigners in their own land as they pass through districts settled by people of foreign origin. There is little evidence that European immigration has caused pay levels to fall, but it may have stopped wage rates in some jobs from rising.

Leaving the EU, and its single market, would allow Britain to put quotas on migrants from all sources. This would be popular amongst most of the population. It is Leave’s most powerful argument.

The main counterargument is that this would either make less difference to migration than most people suppose, or cause even more stress to services than it saves. Unemployment in Britain is low. Jobs are being created as fast as migrants come in to take them up. Our workforce is shrinking as more of us retire.  So if those migrants did not come, who how would be find people to do the jobs that need doing? The government would be under huge pressure to let the migrants keep coming. We can see that this has happened for migration from non-EU countries – which the government has tried to limit, but which remains high.

There are other arguments. The rights of Britons living in other EU countries (and there are many) would be endangered; the system for administering immigration (an Australian-style points system has been suggested) would be a bureaucratic nightmare; there may be an intractable problem on the border between the Irish Republic and Northern Ireland. And would the politics of immigration controls make the country a less tolerant and open-minded place?

It’s messy, and it comes back to the same balance between the benefits of autonomy over the benefits of being part of the union.

A shock to the system

There is also an angry argument. This says that Britain’s governing institutions have become complacent and need to be shaken up. There are two groups of complaints, which are not necessarily consistent with each other. One is that the “elite” ignore the social and economic tensions in communities outside the metropolitan South East of England (or devolved Scotland). A second, from businessmen, is that they are overregulating the way we live and work,  and holding back creativity; nothing much is being done to rectify a large trade deficit. There is substance behind both of these complaints. And a vote to leave the EU would constitute a massive institutional shock.

The trouble is that the results of that shock are incalculable. The British trade and government deficits leave the country vulnerable. A prolonged period of political and economic uncertainty would be extremely damaging.; it is not inconceivable that the country would have to call in the IMF, and face economic conditions much more severe than anything the EU imposes.  And who would take political control in the wake of a Brexit vote?

It really depends on how much risk you are prepared to run, and how likely you think that what emerged on the other side would be better than what we have now.

So what are the benefits of the Union

A decision on which way to vote may be affected by a worries about the short-term chaos that may or may not arise from a vote to leave. But the main factor behind any decision must be a view on the longer term benefits of the union – to weigh against the loss of national autonomy. There are three important ones: the single market, extended personal rights, and the Union’s political project.

The single market is the most talked about of these, and the most important – it was why, after all, that Margaret Thatcher was initially happy with the trade-off, though she changed her mind later. The important point here is that in order to have a true single market, in which businesses can sell to each other across the union on a playing field that is rather more level than otherwise, you have to go way beyond the absence of tariffs – which is implied by the idea of a “free” trade area. Barriers to trade  are about much, much more than this. It is about standards, regulations and subsidies. Is it fair that one country can undercut another through lower environmental standards, inhuman working conditions, or state subsidies? But addressing these issues is intrusive. Most of the power of the US federal government arises from its constitutional power to regulate interstate trade.

The EU single market is an imperfect compromise, inevitably, but it has taken the idea much further than any other association of sovereign states. The economic studies I have seen have shown that it has largely worked. Trade between the EU states has increased massively since the single market was developed (and not by diverting it from the rest of the world) – it has been much more effective in this that the single currency, which has had little measurable impact. There is bound to be a significant economic cost to withdrawing from it. It makes Britain a much riskier place to build a car factory, for example. This is why economists and businessmen so overwhelmingly support staying in.  The Leave campaign have resorted to quoting the same two: Andrew Bamford and James Dyson over and again; Remain can call on hundreds.

A second benefit is extended personal rights. We get these when we travel abroad, and, especially, when Britons live or work abroad. These are imperfect, of course, but life is much easier for us than, for example, for Australians. This will be irrelevant for those that don’t travel – but many of us do, if only to holiday in other EU countries.

A third benefit, on the other hand, is very indirect: the EU’s political project. This has been to spread the standards of democracy, the rule of law and good governance across the continent of Europe – to say nothing of making warfare amongst the nations unthinkable. From its initial core of countries the union has been the leading force in democratising first southern Europe, and then post-communist central and east Europe. This is reaching its limits. New members may be brought in from the former Yugoslavia and Albania, but Turkey and Ukraine look like steps too far. More important, there is much work to do to consolidate democratic standards in the post-communist members, especially in Romania and Bulgaria, but in most of the others too. This worthy project would be weakened if Britain left, even if we individually feel little impact. Closer to home the EU has also a vital part of the fudge required for the Northern Ireland peace settlement to stick; leaving would add to the already big headaches there.

In conclusion

I was going to mention the host of spurious arguments that have been put up in the campaign, mostly be the leave side (such as the one about the EU’s economy being weak, as if that would not be just as much a problem if Britain was out of the EU), but I’ve been going on for long enough.

It will be clear from the above that deciding the best way to vote means making some tricky judgement calls, balancing the costs and risks either way. This does not mean that the choice is marginal or unimportant – it would make a big difference to what this country becomes. In these tricky circumstances we are guided by value judgements.

If you are angry about the restrictions European treaties place on our politicians, that will point you towards Leave. If you are reasonably happy with the status quo, and want any change to be gradual, that points to Remain. If you feel that in order to make our way in an interconnected world the countries of Europe need to take joint decisions; if you are happy with the idea of Europe as an extension of “home”; if you don’t mind that so many of your neighbours are from other European countries; then that points to Remain also. Which doesn’t mean that you should be happy with the way things are, but that Britain leaving the EU would be a step backwards, not forwards.

And me? I was just to young to vote in the 1974 referendum – but I was a very keen supporter of Britain’s membership at the time. It has been a defining part of my political outlook ever since. I wanted to be part of something bigger than Britain, much though I love it. I still do, though I have fewer illusions about what is going to be possible. So for me voting Remain was an easy decision. For most of my compatriots it may not be.

 

 

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This is the wrong way to leave the EU

It is quite likely that the British public will vote to leave the European Union this week. Supporters of staying in are left with straws to clutch at. Perhaps the pollsters have overestimated the propensity of less educated Leave supporters to turn out and vote. Perhaps the awful murder of Remain supporter Jo Cox MP will give people pause. Polls show that there may be a modest swing back to Remain, but the political momentum behind Leave still looks formidable.

But the consequences of a vote to leave are incalculable, not because the aim of leaving the EU is necessarily so awful, but because Britain’s governing institutions are so unready for the consequences of the vote.

This shows the limits of the referendum as a means for governments to consult their electorates. Referendums work best when the electorate is offered clear and coherent alternatives. This is only likely if the government of the day is recommending a change from the status quo; it is clearly going to be accountable for the change – while the status quo is what the public and governing institutions are familiar with.

This is what happened in 2014’s referendum on Scottish independence. In that case the Scottish government ( though not the UK one) set out a prospectus for independence, and it was clearly up for leading the country through the transition process. A referendum proposal that had been cobbled together by members of the public without the support of major political institutions would have been a wholly different thing.

The EU referendum does not fit the bill. It was designed by David Cameron’s British government to make his Internal Conservative critics, who passionately oppose the EU, go away. But nobody has formulated a clear prospectus for life outside the EU; instead a number of half-baked and irreconcilable alternatives are advocated (characterised in an earlier post of mine, as following Singapore, Switzerland or Japan), and it is far from clear which the public is being asked to sign up to. And exit does not command a parliamentary majority, still less any of its particular versions. A Brexit vote would create political chaos. And, given Britain’s dependence on trade and external finance, this political chaos threatens economic chaos. It is the lack political leadership, more than the exit proposition itself, that threatens the country’s economic stability.

This was illustrated by the Chancellor of the Exchequer, George Osborne. Last week he suggested that a Brexit vote would have to be followed by an emergency budget, driving through austerity measures as government revenues fell with the economic shock. This was clearly a stunt, which convinced few – even those, like most economic forecasters, who accept that Brexit would put government finances under pressure. And yet many Conservative MPs immediately said they would reject such a budget, and they were joined by the Labour leader Jeremy Corbyn, who rejects all austerity ever. This presents the prospect that there is no working parliamentary majority for any given way forward. Neither is it clear from where any such parliamentary majority would emerge, even if there were a general election. There might even have to be another referendum to resolve the constitutional deadlock.

So it is not hard to imagine that a financial crisis could follow a Brexit vote. Inward investment would halt to see how the dust settled. Sterling could dive as a result, and the government could start finding it hard to fund the National Debt, with the still considerable budget deficit, as it loses its status as an international safe haven. Creating new money to fund the debt may solve the short-term crisis, but only at the expense of harming the country’s longer term financial standing. Britain has a large current account deficit, meaning that it depends on flows from abroad – a key point of departure from the inveterate money printer, Japan. This could be worse than the financial crisis of 2008 to 2010; the deficit may be smaller, but overall debt is larger, and political leadership then was clearer; indeed this was the most compelling logic behind the Conservatives forming a coalition with the Liberal Democrats in 2010. In due course the British government might have to call in the IMF to stay afloat. Something like Mr Osborne’s putative budget might then follow. The irony than an attempt to become independent of EU institutions led only to becoming dependent on the much more intrusive IMF would be bitter.

I happen to think this sequence of events is quite likely if Britain votes to leave, though many would consider it absurd given how easily the country floated through the earlier crisis of 2008 onwards. But what is unarguable is that the lack of political leadership on the Brexit side, with no clear political accountability for any Brexit result, makes this outcome more likely.

This is the wrong way to leave the EU. What should happen is that one of the main parties puts leaving the EU in its election manifesto, gets a majority, and then takes the proposal to the country in a referendum. If it wins, it is clearly responsible for the consequences.

Curiously enough, in today’s grumpy politics, the lack of a clear prospectus, and the threat of political chaos, seem to be no disadvantage to the Leave side in the referendum. Indeed it adds to an anti-establishment appeal. There seems to be a curious death wish at large. The leaders of the Leave campaign thrive on their power without responsibility, seemingly relishing a ringside seat in the chaos that would follow.

Mr Cameron’s judgement looks poor in getting us to this dismal point. And yet what could he have done instead? His big mistake was his attempt to lead his party to a place it did not want to go. The most honest thing for the Conservatives to have done would have been to elect a leader that was explicit about leading the country out of Europe. If they had done that, then Gordon Brown might still be Prime Minister, but the politics would have been more honest, and the risks to nation fewer.

 

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An awful moment in British politics, and it could get worse

Yesterday I spent most of the day helping my local Liberal Democrats in the Tooting by-election. Alas there was little to show for it as the two main parties steamrollered all the others; we hope to have built something for the future.

But that, of course, is not what prompted the title of this article, though it hardly helped. During the day a British Labour MP, Jo Cox, was shot and killed by one of her constituents while she was holding a surgery. This comes on top of week where English football fans exhibited shocking, loutish behaviour at the European Championships in France, and in the EU referendum, the Leave campaign took a firm lead in the opinion polls, as it sank to new lows in ad hominem attacks and the raising of irrelevant fears. This included a poster showing refugees modelled on one devised by Goebbels in Nazi Germany.

I did not know Ms Cox. Her murder has shocked the political establishment, and she has drawn eulogies from across the political spectrum. Her attacker seems to have taken exception to her internationalist outlook, be it support for the Remain campaign or helping refugees from Syria and elsewhere.

I, and many of my friends, are linking these depressing events. The Leave campaign is riding on the crest of a public backlash, especially by older, less-educated English white males , against the political establishment. Immigration and Muslims are their subjects of choice. Political correctness is condemned. As this movement gathers momentum, people feel free to indulge in all manner of rudeness in the cause of “putting Britain first”, by which they usually mean England. This is a far cry from murder, maybe, and I’m sure that Leave campaigners are as shocked as anybody else, but the fire they are playing with reduces the psychological barriers to violence.

And it is leading nowhere good. A Leave result next week will provoke political chaos – and perhaps economic chaos too, according to the FT’s usually sober Martin Wolf. The paradox is that the aggressive anti-world, anti-establishment campaigning of the Outers leaves the country ill-equipped to deal with the consequences. While some Leave campaigners hope for a confident Britain making its way in a world without its horizons limited by the EU, it is not this which is giving their campaign traction. The country will enter one of the most politically and economically challenging periods of its recent history virtually leaderless, and with little sign of where any coherent leadership will come from.

And the world is not nice place at the moment. The week started with the shocking massacre in Orlando. Xenophobia is rising in the rest of Europe. The peoples of the Middle East are helplessly mired in conflict. And that is to say nothing of the self-indulgent nationalism of Russia and China who feel take no responsibility for making the world a better place except for their own ruling elites..

Still I hope that enough British Leave supporters will draw back at the last moment, after gaining a sense of the abyss into which they may push our country, and stay at home or perhaps event vote the other way. It is but a faint hope; deep down I think things are going to get worse. And the consequences of even a narrow remain victory look difficult.

At times like this my habit of political optimism is very hard to sustain. And yet we must keep trying for better.

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