My hopes and fears for the Lib Dems under Tim Farron

A week ago Tim Farron became the new leader of the Liberal Tim_farron_2014Democrats, my political party here in Britain. When such important events occur I am torn between two impulses: to comment straight away, and so be topical, or to pause for reflection; I take the “thinking” bit of my blog’s title seriously after all.

The decision this time was quite easy. I was quite depressed by the news of Tim’s victory, as I had been backing the rival candidate, Norman Lamb. I needed a few days to recover from that low patch so that could be more upbeat about the whole thing. Now I am past that wobble, I feel better able to comment.

My first reflection is that I must try to be be a good loser. It’s no good my hoping that Tim will be anything other that what he promised to be. And to me that sounds like a distinct step in the “Social Liberal” direction, of supporting centralised state interventions using taxpayers’ money. Or, put slightly differently, going back to the “left of Labour” idea that gained traction under Charles Kennedy’s leadership. This will be good for hoovering up protest votes, but not so good for establishing a coherent new foundation for liberal policy – which I happen to think is the party’s most pressing task right now. I will have to bite my tongue and ride with it. I fear for the longer term consequences, but Tim faithfully reflects the way most of the party feels.

What makes this a lot easier is the knowledge that Tim understands community politics. This should make him quite sympathetic to the new thinking when it comes. More so, perhaps, than the previous leadership under Nick Clegg, or even Charles Kennedy was. And Tim is reliably liberal in his attitudes, and with that comes a healthy suspicion of an over-mighty state.

My second reflection is that Tim must play to his strengths. While not exactly having had what most people would recognise as a “real” job (he worked in higher education before becoming an MP in 2005), his career doesn’t follow the standard Westminster model. He wasn’t a researcher, PR person, charity worker or union rep (though he was part of the National Union of Students); nor was he based in the rarefied atmosphere of Westminster or Brussels – he was worked mainly in Lancashire. And neither did he engage in politcal networking at Oxford or Cambridge (he went to Newcastle University). This gives him something of the prized “authentic” flavour, which could be very useful in reaching out to the public. As somebody pointed out on the radio over the weekend, he’s a bit like Nigel Farage, the leader of Ukip.  Mr Farage was for a long time England’s most successful retail politician, as he traded on his “authenticity” – though his career as a financial trader and European MP was hardly “real world” either. Tim’s rather raw quality will allow him to get away with the odd gaffe, as was the case with Mr Farage – indeed that will all be part of his “authenticity”. And Tim has an engaging turn of phrase.

A second strength is that Tim is able to preserve a degree of distance from the Lib Dems period of coalition. He did not serve in the government; he did not even breach the pledge on tuition fees. This will help the party rebrand. He needs to use this distance to his advantage.

All this will help him get noticed. As will his promise to support “spiky” policies – ones that aren’t necessarily popular, but which illustrate liberal values. If he’s brave these will include support for immigration and scepticism over nuclear weapons, especially Trident submarines. There really isn’t much to lose. The Lib Dems must become an insurgent party, making mischief while the Labour Party tries to carve out more conventional positions. This will draw attention to the party. But what will people find when they start to pay it more attention?

Tim needs to rally the party around coherent values and policies and attract the support of the many people who have liberal attitudes but who do not support the party. There is some baggage here that needs to be dealt with. Many in the party sat tight under Nick Clegg’s leadership, and coalition with the Conservatives, and now want to get revenge. However many people also joined the party because they liked and respected Nick’s leadership. Tim understands the nature of the balance that must be struck here, but the party must resist the temptation to tear itself apart, as its predecessor the SDP did in 1987/88, the party’s previous low point.

But this week’s political antics on the Conservative government’s proposed welfare changes shows just how difficult all this will be. Labour struggle to take a nuanced position, opposing some reforms but  accepting others. The Tim’s Lib Dems went for outright opposition. This is a role reversal from the last parliament, where the Lib Dems often defended Conservative changes that they had moderated, while Labour condemned the party as being complicit to an ideological attack on the poor. This reversal makes me feel queasy – though as it happens I think the Lib Dem stand is right one on this occasion. The public may just see rampant opportunism on both sides. Or a  cat fight amongst parties that aren’t serious about the responsibilities of government. But many Lib Dem activists will just love getting back into the politics of protest and paying back the insults that for years they endured from Labour- even if it plays into Conservative hands. They will enjoy this so much that they won’t notice where it is all leading.

What the Lib Dems need is an alternative critique of the government’s economic liberalism, that doesn’t take its inspiration from the way things were before Mrs Thatcher. The last leader to try this was Paddy Ashdown, who stepped down in 1998. Charles Kennedy went for a lazy oppositional-ism. Nick Clegg went for an economic-liberalism-lite. It does not particularly worry me that party turns away from Nick’s path, though I have supported much of it. It does worry me that Tim’s party will take after Kennedy’s rather than Paddy’s.

But the jury is out. Tim has the benefit of the doubt for now. And me? I want to put my main political energy into developing new ideas for the economy, public services and the way politics is conducted. What I won’t do is rallying the troops and knocking on doors for a new protest politics. Somebody else can do that.

 

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The Labour leadership race becomes a lot more interesting – but exposes the party’s hollow heart

Jeremy_CorbynApart from one piece shortly after the election I have resisted blogging about Britain’s Labour Party after Ed Miliband’s departure as leader. It felt too much like displacement activity from confronting the predicament of the Liberal Democrats, to say nothing of a depressing turn of world events. I am glad I did so. Because I had not foreseen the turn that the leadership election has just taken.

To start with there seemed be just three serious contenders: Andy Burnham, Yvette Cooper and Liz Kendall. They all stuck to a standard Westminster narrative that Labour needs to move to right to draw back voters that they had lost to Ukip and the Conservatives. These, it was thought, were put off by Labour’s perceived softness on austerity policies. Ms Kendall attracted real momentum amongst the small circle of media commentators because she proposed a sharper move rightwards than the other two. And she was a fresh face, untainted by the the years of Brown and Blair. But neither of the other candidates was exactly left-wing, though Mr Burnham tried to nuance is message a bit to the left to draw in leftist support.

But as nominations closed a fourth candidate was let in: Jeremy Corbyn, a paid up metropolitan leftist who used to be a trade union organiser, before starting a long parliamentary career in 1983 representing Islington North – and whose views have no moved on since. Some Labour MPs nominated him apparently to liven things up a bit rather than because they actually wanted him as leader. There was a precedent for this. Another left-winger, Diane Abbott, was “lent” nominations by other candidates, embarrassed that the field otherwise consisted of white male ex-ministers. Ms Abbott lived up to her token status and did not get very far. No doubt MPs thought the same would happen to Mr Corbyn.

This has turned out not to be the case. Mr Corbyn quickly attracted nominations from many constituency parties, as well as the support of the vast Unite union. A private poll has reportedly shown him actually leading first preference votes at 33%; the same poll showed Ms Kendal nowhere at 4%. Quite why Mr Corbyn proved a more effective candidate than Ms Abbott I cannot say. Ms Abbott is an engaging, intelligent and colourful individual. It may simply reflect the mediocrity of the other candidates. Perhaps it’s good old fashion sex and race bias (the male candidates were well ahead). Maybe Labour grassroots supporters have moved to the left. No matter, Mr Corbyn is free from the conventions and coded messaging of normal Westminster politics, and speaks his mind more clearly than the other candidates, giving him the prize of “authenticity”. And he is unambiguously of the left – attacking austerity, promoting free university tuition, and so on. His appeal to Labour activists and trade unionists is not hard to see. At last somebody is articulating what they are thinking.

Labour’s opponents amongst the Westminster elite can hardly contain their glee at this turn of events. Mr Corbyn is regarded by them as unelectable. Some are urging Tory supporters to join Labour temporarily to vote for him. They may be right about his electability, but that would be to underestimate the significance of this turn of events. The Labour leadership contest has been turned into a real battle of ideas.

This is unusual in such contests. Usually contenders are mindful of the need to unite the party after their election, and so they tend to deal in coded messages. The recent Lib Dem leadership contest was like that. And that was the case with the contest before Mr Corbyn entered it, apart from Ms Kendall, perhaps. This poses a challenge for the middle of the road candidates, Mr Burnham and Ms Cooper. Do they sharpen up their act and challenge the fantasies upon which Mr Corbyn’s campaign is based? Or do they give Labour members another helping of fudge, hoping to pick up  second preference votes of left-leaning members?

If it is the former, it could be good for the party. Unity is prized too much by party leaders; sometimes it is important to have big row and trample over people’s sensitivities. Otherwise conflict is not properly resolved and breaks out at a much less convenient point. This is something that Tony Blair understood very well in the 1990s. He had an easy victory in the leadership contest, but he then took the trouble of rubbing the leftists’ noses in it by changing Clause 4 of the party constitution. Mr Miliband’s focus on party unity simply left lack of clarity and muddle. The Labour leadership contest has a while to run yet. This gives party members plenty of time for the cold hard logic of a move to the political centre to sink in and elect Mr Burnham (still considered the front-runner) or Ms Cooper (for my money a much better choice); but the leftists will at least have had their moment of glory and been beaten in a fair fight.

But there are risks. If Mr Burnham or Ms Cooper wins by means of artful fudging, rather than challenging the left, they will be stuck in the same mire than Mr Miliband left the party in. They will then need to take on the left in some symbolic fight on a policy issue; they may well not have the courage to do so. And it might risk a fatal split.

Or Mr Corbyn might actually win. With a tiny power base in the parliamentary party, and no experience as a front line politician, this is not likely to go well. He might well turn out to be an Iain Duncan Smith or a Ming Campbell, leaders (Conservative and Lib Dem respectively) who were forced out because they couldn’t take the pace. Or else there might be a split in the party and the more “moderate” elements form their own centre party, seeking an alliance with the Lib Dems.

All this looks very good for the Conservatives. There seems to be a hollowness at the heart of Labour, which makes it very hard to bind together the pragmatic wing of the party with the left wing ideologues who provide the footsoldiers, and, through the trade unions, much of its funding. This is leaving the current Tory creed of economic liberalism without any serious opposition, unless you count the vacuous anger of the left. A landslide win in 2020 beckons.

Of course I believe that there is an alternative political and economic narrative that can offer a credible challenge to this conventional wisdom. The Liberal Democrats are closest to understanding it. The Greens are likely to take it up once somebody else starts to promote it. But almost nobody in the Labour Party is looking for it, as they  furiously debate a false choice between economic liberalism and death by tax and bureaucracy.

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Is the Euro worth saving?

Anglo-Saxon economists were always sceptical. And so was much of the British establishment, though less so in the early days. But sponsors of the European dream were determined. And at first European Monetary Union defied the sceptics. But now the dreams are vanished and the only people defending the union seem to be those that have face to lose. Is it all over for the Euro?

It is Greece that seems to prove the scheme’s futility. The Greek government cannot repay its debts; its banking system depends on a bankrupt government for solvency and the European Central Bank (ECB) for liquidity. Greece cannot print its own money to inflate its way out of the hole. Instead European institutions and the IMF have to bail it out, and they are demanding conditions that add up to a loss of the Greek government’s sovereignty over its economic policy. Both sides blame the other, and the more the blame game goes on, the more trust and solidarity break down. The Euro is tearing the union apart, when it was supposed to bring Europe’s peoples together.

It doesn’t take hindsight to see what went wrong. Mostly the scheme’s weaknesses were pointed out at the start. Its supporters (who included me) just thought that this time it would be different.

Monetary policy is set at continental level, and yet there isn’t a great deal of economic integration. In order to adjust to local business cycles and local economic shocks, national governments have only a very limited set of tools. And the most important, fiscal policy, is constrained by the Stability & Growth Pact. This was instituted to try and prevent member governments becoming insolvent, a contingency that the zone had no process to deal with. This made it quite unlike a federal system, like the US, the only comparable monetary system that most knew. In the US there is a strong federal level of government, which draws substantial taxes from all parts of the union, and can make big fiscal transfers between the union’s members to compensate for the lack of monetary flexibility.

Funnily enough the problems with this set up did not play out in the way that most critics foresaw.  They thought that different business cycles or local shocks in different parts of the union would be the big problem. This happened – especially when the central economies of Germany and France endured recession, while peripheral economies, such as Spain and Ireland fizzed. But these were not the main cause of the crisis that emerged following the global financial meltdown in 2008.

The first problem was that investors assumed that member governments could not go bust, and that if they got into difficulties somebody would bail them out. As a result, it became much easier for the peripheral governments to borrow, and this allowed them to run their economies with a looser hand than they should. This was most egregious in the case of Greece, who produced misleading economic statistics, which put their government into a completely unsustainable position. And when it was clear Greece could not repay its debts, the system had no set of processes with which to manage the crisis.

Perhaps Portugal and Italy were guilty of something similar without the fraud, though Italy has not needed a bailout. But the other bailout cases (Spain, Ireland, and Cyprus, though I am less confident that Cyprus follows quite the same narrative) the main problem was not government finances, but a reckless private sector that fuelled property bubbles. What added fuel to these bubbles was cross-border flows from elsewhere in the Euro area, and especially German banks. The Euro system had greatly facilitated such flows. When the bubble burst, it brought down the countries’ respective banks, and this in turn draw their governments down with them. Governments couldn’t let the banks go bust, since they controlled local payments systems and economic chaos would have resulted. Like Greece these countries then needed external support and bail-out.

The important point to make about this series of crises was that they were to great extent “endogenous” as economists like to say – they have to do with the way the system itself operated – and not exogenous – the external shocks and uncontrollable factors which most economists thought was the system’s weakness. That suggests that bad systems design was a large part of the problem – and that, in theory, could be fixed. Most suggest that it implies a fully federalised system, with a federal government, supported by federal taxes and federal debt. An alternative route would have two main elements: a national insolvency regime (a bit like US states, but not Puerto Rico, which is on the path to creating a US version of the Greek crisis); and banking reform to produce a more federalised banking system firewalled from member governments.

But either route would leave member governments facing a grim reality. The Euro offers a straitjacket for government finances, and not a liberation. In the fully federalised case, the scope of government responsibilities would be curtailed and handed over to a federal government. In the alternative governments would be heavily restricted by their ability to borrow in financial markets (which would do away with the need for the Stability & Growth Pact). This latter is, in fact, what many supporters of the Euro (including me) envisaged all along (though in my case I completely failed to grasp the difficulties of managing the banking system). It was rather a Thatcherite project. But others thought EMU would be a step along the path towards a federalised Europe. It was the unresolved conflict between these two visions of the Euro that got the system into its current mess.

And this conflict is still unresolved. But the federal vision is losing ground; there simply isn’t the political support for it. That doesn’t stop people in the European Commission from quietly pushing for it though. But those who aren’t convinced by the federal idea, aren’t convinced by the multi-state currency area alternative either. Why opt for a straitjacket? Wouldn’t it be more democratic and easier to say goodbye to monetary union altogether and let each country go its own way with its own currency?

And I don’t have the answer to that. One thing I will say is that the quality of economic commentary in the media is pretty dire. From this you would think that the advantages of having a floating currency make doing anything else foolish. But all Economics students are asked to do an essay on the pros and cons of floating currencies, and frankly it is not that obvious that either route is a winner. As a rule, the smaller and more open the economy, the more there is to be said for a fixed currency regime – which is why the Euro is popular with so many smaller EU members. Floating currencies reduce the effectiveness of fiscal policy, especially in such small and open economies. The rather loose fiscal policy of the Britain’s government in the 2000s caused the exchange rate to be too high, leading to a trade deficit and a hollowing out of British industry the country still have not recovered from. By contrast Germany has been able to maintain its industrial base within the Euro, albeit with some painful restructuring.

And a floating rate does not prevent banking bubbles. Iceland had one in parallel with Ireland, with its own currency. Recovering from the bust best no less painful for Iceland than for Ireland, though arguably not really any worse either.

But setting up a more secure banking system across the Euro area is no small thing, and its feasibility is an unknown. Against this, taking the Euro apart would be a huge undertaking, so there is there is much to say for trying to make it work on a rather less ambitious scope. Inertia is on the side of the Euro. But the starry-eyed enthusiam is gone

 

 

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The political isolation of Britain’s working class: liberals should reach out

Conservative Chancellor George Osborne’s Budget last week, his first without the need to negotiate with the Liberal Democrats, was widely hailed as a feat of political brilliance. It has put the opposition Labour Party into disarray. At its centre was a direct attack on Britain’s working poor. Nothing could demonstrate that group’s political weakness better.

Part of the political acuity was the spread of confusion over where the budget pain was to be felt. Mr Osborne, and the Prime Minister, David Cameron, had earlier set out their intention of wooing working class voters to their party. Huge cuts to tax credits, the Budget’s centrepiece, were camouflaged by rises to the minimum wage, to be renamed “living wage”, by more than even Labour had been proposing before the election.

Britain’s tax credit system was implemented by Labour Chancellor Gordon Brown. It is designed to top up the wages of those not earning enough to meet basic needs, in particular the costs of bringing up children.  Various arguments were used to justify this. It was said that companies were paying workers less because they were anticipating the effect of tax credits. The system was created by Labour so as to create a bank of dependent voters. Aspersions were cast on claimants as being shirkers, or feckless, especially poorer people who dare to have larger families (one proposal is to stop support for children after the second). It would be better to pay people more, and to tax them less, than to hand out state aid.

None of this really bears up to scrutiny. The minimum wage and higher tax thresholds are pinpricks on the wider problem for low pay. There was no sign that the public sector, for example, was going to be any more generous in its treatment of lower paid workers, many of which it pays for, directly or indirectly (through outsourcing contracts). Academic research does not support the idea that tax credits lead to lower pay – or at least, not by much. Claimants for tax credits are already working; they are very clearly not part of the army of shirkers, who, so far as they actually exist, claim direct state benefits. With an ageing population it is far from clear that the country needs fewer children with working parents – and poverty can adversely affect the progress of those children, reducing their chances of playing a full and active part in the economy.

This was nicely illustrated the Economist’s Bagehot column this week. He (Jeremy Cliffe) visited a local estate in south London (not all that far from where I live, as it happens), and talked to some of Mr Osborne’s proposed victims. He found a number of working women, with a diverse range of heritages, facing up to a difficult predicament with dignity. At the school where I am governor, such families demand increasing levels of support if their children are to keep pace with those from more fortunate families. We are lucky that the proportion of such families is manageable: but their needs will grow; our funding will not.

What our society is confronting is one of the most important issues it faces. It is the disappearance of mid-level blue and white collar jobs, and their replacement by less secure and less well-paid ones. These new jobs are overwhelmingly in service industries – carers, cleaners, call centre operatives, security guards, and so on.  This change is overwhelmingly due to new technology – but it has been helped along the way by globalisation. These new jobs often do not pay enough to allow their workers to fully participate in society – especially if they have children.

But it is not at all clear what the solution is. Two traditional answers do not look promising. The first is to improve productivity. And yet in these jobs it hard to see how this can be done without increasing general alienation. In any economy some jobs lend themselves to advances in productivity (think factories) and other don’t (think hairdressers). As the former become more productive, the proportion of workers in the second group increases. This is a phenomenon known as “Baumol’s disease” by economists – and it is a large part of what is going on here. The economy is stratifying between a small number of highly productive jobs, and a large number of relatively unproductive ones.  The former can lift up general levels of pay for everybody – but only so far. Improving productivity may simply help an elite of better off workers, without doing much for everybody else.

The second traditional answer is to increase job protection to improve the bargaining power of those in poorly paid jobs. This is the route favoured in such countries as France. It tends to lead to either or both of two things: higher unemployment or a growing army of temporary workers with fewer rights.

We are left with three routes that look inadequate, but must still be pursued. The first is redistribution through tax, benefits and freely available public services. Our tax credit system is a key element of this. The fact that its cost has escalated well beyond the scale originally envisaged simply shows that the problem it is trying to fix has grown. The answer is as surely to be higher taxes and not reduced benefits. The second route is universal education, and initiatives to ensure that children from poorer backgrounds get more support. This gives more people access to better paid jobs, and makes the job market less easy to stratify. Progress has been made on this, but it remains under pressure from lack of finance. The reduction of tax credits associated with children will be a step in the wrong direction.

And third is the strengthening of local communities and local economies. This may not make the economy much more productive in the traditional economic sense of creating more goods and services to consume, but it serves to humanise society and to tackle the exclusion that is the biggest cost of poverty. Tax credits have no role to play in this. They are a giant, soulless centralised system controlled by rules made by bureaucrats and politicians far, far away. They only help by improving incentives to work, and participate in communities that way, rather than dependency on straight benefits – which is corrosive of communities. But nothing the current government is doing, or the political elite is thinking about, is advancing this third, important approach. It does not follow from grand initiatives that make big political careers.

And the sad thing is to see how politically marginalised the modern working class has become. Our old picture is of white men, working in factories and belonging to unions. But this strata of working class is disappearing. Instead we have a growing army of male and female workers from diverse ethnic and cultural backgrounds. They are not unionised, and split into multiple communities. They often do not vote. The Labour Party, the traditional sponsors of the working classes, is now more interested in chasing their more engaged and better off cousins in what is left of the traditional working classes and in the middle classes (“Middle England” as I have called it). Middle England is not very sympathetic to the plight of the new working class. This has weakened the party’s opposition to Mr Osborne’s budget – though thankfully three of the four prospective leaders see that their stop-gap leader Harriet Harman has gone too far in suggesting that Labour will not oppose the cuts to tax credits.

Liberals, I believe, must stand firm behind tax credits, accepting tax rises to support them if need be. We should also support education policies to ensure the full participation of children from poorer families. But the real hope lies in reinvigorating local communities. We should remember that this is not just a middle class thing. The Liberal Democrats in particular have been forced back into a middle class ghetto, and I suspect that many find this a comfortable, if small, place to be. But the real need for liberal solutions is amongst the country’s new working class, and that is an important area for outreach, based on community politics.

 

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To build a core vote the Lib Dems will need to change culture.

After a series of catastrophic election results, the Liberal Democrats 80-20
are indulging in some deep thinking about the party’s future. The one silver lining from the party’s disasters is that it is left with the nearest it will ever get to a blank slate on which to rewrite what the party is.

Into this debate comes an important pamphlet. The 20% strategy: building a core vote for the Liberal Democrats by former Cambridge MP David Howarth, and inveterate blogger Mark Pack. I would urge anybody interested in the party’s future direction to read it. The jumping-off point is familiar to anybody that has followed the party’s internal debates. Critics of the party’s leadership (especially under Nick Clegg) suggest that the party neglected the build-up of a core of loyal supporters who would vote for the party come what may. This core now stands at something like 5%, and is much lower than that enjoyed by the Conservatives and Labour, or the SNP in Scotland, and is being challenged by the Greens. Instead the party chased the floating voters of the “centre ground”. But instead of articles sounding off in Liberator magazine, this pamphlet is altogether more serious. It starts with a real attempt to look at evidence, and moves on to a concrete set of proposals.

The authors believe that the party is held together by shared values, rather than class identity or nationalism. These values are shared by about 35% of the country – those who display openness, tolerance and internationalism. That 35% figure comes from a polling answer to a question about immigration. From this the authors reckon that a 20% core vote is feasible. There is some interesting analysis of that 35%. It leans left, tends to be female and is ethnically diverse. It isn’t hard to see how the party’s appearance of being white, male and in coalition with the Conservatives got in the way of building that vote.

So what to do? I would urge readers to read the paper – there are many facets to their action plan. They want the party to formally adopt a core-vote strategy, and to establish a national campaigning infrastructure to focus on this, to complement efforts to build the local government base, and winning parliamentary seats. This national level of campaigning, led by an elected Deputy Leader, would build up the party’s vote for proportional voting elections, of increasing importance to the party, and provide a home for supporters not lucky enough to live in one of the areas where the party is active locally. This national campaigning would focus on issues that demonstrate the party’s values – go to places that other parties cannot. Paddy Ashdown’s stand on Hong Kong and Yugoslavia are quoted as past examples of such campaigning.

I can see this paper and its proposals being very popular in the party. They make a lot of sense. There is something for everybody. I particularly like its realistic assessment of local parties in areas where the party is weak. So often the party’s campaigners have glib answers to the challenges. “Just set up a target ward and grow from there,” they say. I am happy to support the paper myself.

But it is all too easy. The authors point out that a core vote strategy is hard, and that the party has failed in its many past attempts. That tells me that something big has to change; a lot of received wisdom has to be put on the scrapheap, and a lot people in the party are not going to like it. It is not just a matter of adding another strand of campaigning, and then tweaking the party’s internal processes here and there. The danger is that everybody will assume that all the changes in behaviour apply to other people, and they will continue to do what they have always done, with a bit of judicious relabelling.

But succeed in cultural change such a big change you need to have a flaming row, and annoy some people a lot. If need be such a row has to be provoked artificially. The one successful political transformation achieved in recent times in Britain was by Tony Blair, Gordon Brown and Peter Mandelson to the Labour Party in the 1990s. They theatrically replaced Clause 4 of the Party’s constitution to show they were serious – rather than just ignoring it. Contrast this with David Cameron’s attempt to transform the Conservatives, where he was careful to avoid such rows – with the result that the party never really changed (or not not in the direction he favoured).  Only now are there signs that he and George Osborne are ready to make  genuine cultural change for the party, towards economic liberalism, with EU referendum being the chosen field of conflict. Even worse was Ed Miliband’s attempt to move the Labour Party to the left while maintaining party unity, which left the party in a terminal muddle. So if a cultural change requires a degree of conflict, where will conflict need to be invited if the Lib Dems are to make a success of a core vote strategy?

The first place is in what the pamphlet calls the three pillars of campaigning: local, parliamentary and national-core vote. In their vision these three happily coexist. But they also compete. In the Kennedy years the party brilliantly built up its parliamentary base – but at the expense of brave national campaigns to demonstrate core values. The exception was the the party’s stand on the Iraq War; but Charles Kennedy had to push for that in teeth of advice that rocking the boat would not be good for the party. Parliamentary and local government campaigns depend on winning over floating and tactical voters (“It’s a two horse race” and a bar chart are almost compulsory in Lib Dem election literature). Strong national campaigning is likely to upset those voters and the activists trying to woo them. The party is obsessed with winning electoral contests; that obsession must be loosened if a core vote strategy is to take root. It must recognise the idea of good losers – candidates who did not come first but built up members and long term voters.  This concept is so alien to the party’s campaigners that they will not take it seriously. This is why the idea of these values campaigns being led by an elected official with a separate mandate (whether or not Deputy Leader) is a critical element of the overall plan.

So campaigning is likely to provoke conflict, but it is not an easy place to have a theatrical row to demonstrate that the party really has changed its spots. That may arise from political strategy. Political strategy is about how the party intends to use its assets, especially seats in various representative bodies, to further its aims. For a liberal party that must mean working with other parties – rather than throwing rotten tomatoes from the fringes. To date such political strategy has been left to the leadership, and not spelled out clearly to electors and debated amongst the wider membership. At parliamentary level the declared policy is to work with the largest of the main parties to form a coalition in a hung parliament. But it matters a lot to voters and members which party or parties the the Lib Dems choose to work with. That is one reason why their vote tends to drain away in election campaigns when a hung parliament looks likely. In this year’s election the party’s stand contrasted with the Greens, the SNP and Plaid Cymru, all of whom said the would not work with the Conservatives.

But the party’s campaigners hate to take sides – they see that it will upset groups of voters they are wooing, and so make winning marginal seats that much more difficult. When the question was put to the two leadership contenders at the London hustings, neither said that the party should change its position of working with either of the main parties. That surely has to change. It makes the party look opportunistic and transactional – only interested in the status of power, rather than principles. This was the most wounding criticism of the party while it was in coalition. The party, after debate and consultation with members, will need to say that it will not work with a Conservative-led government (the party may accept Tories as junior partners…). In due course we might contemplate electoral pacts in order to promote an agreed programme of political reform. Labour is the competition; the Tories are the enemy. And I say that as somebody from the right of the party that loathes the Labour party, and has more sympathy with the Conservatives than most.

I do want the Liberal Democrats to want to be a clear and effective political voice for the 30% of so of the electorate that is open, tolerant and internationalist. I also want it to champion reforms to politics, public services and economic management that place sustainability and wellbeing at their heart, rather than money and  vested interests. David Howarth and Mark Pack point to some useful next steps. Necessary, perhaps, but not sufficient.

 

 

 

 

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Greek crisis: the problem is loss of trust

The leaders of Greece’s Syriza government are clever people. They include university academics, well versed in modern economics, including game theory and the theory of negotiations. After yesterday’s decisive No vote in the referendum on settlement terms, these negotiators now feel they have a strong hand. I don’t share their optimism.

Unless you believe the conspiracy theories that Syriza’s real aim is to create a Venezuela in the Mediterranean, they appear to think that their EU counterparts and the IMF will be forced to negotiate because the consequences of not doing so are dire. What they seek are two things. First is that the level of government debt be reduced through forgiveness. The second is that the Greek government has a free, or freer, hand to follow an economic policy of its choosing, supported by fresh funding, primarily in the form of support for the Greek banking system by the European central Bank (ECB).

On the face of it neither of these requests is all that unreasonable. The moral case for debt forgiveness is a sound one. In the modern age more responsibility needs to be pinned on creditors to lend responsibly, and to suffer losses otherwise. The lending made to Greece before the crisis was not responsible, although misinformation from the Greek government contributed. This moral case is softened but still stands after two things. The Greek debt has already been substantially restructured so that the country’s interest rate burden is proportionately less than even Germany’s; the net present value of Greece’s debt is not nearly as high as you might assume for its nominal size. And now the debt has been taken over mostly by government agencies; the private sector banks that originally lent the money have mostly been paid off, after significant losses were forced on them.

And as for economic policy, the nominal Greek aim is to set up a virtuous circle of increasing demand that will help the economy to recover, so that its banks can repay the ECB, and that other lending becomes more sustainable. There is a familiar, Keynesian demand management logic to this. I think this is why so many respectable economists (especially based far away in the US)  support the Greek government’s standpoint. There is also a powerful argument about democracy – surely a democratic Greek government should choose its own path to a sustainable economy? The sight of so many unelected functionaries dictating terms to the Greek government has angered not just Greek citizens. I have seen many comments this morning about how the Greek referendum vote was a blow for democracy. The People have spoken!

So what’s the problem? International leaders are masters of fudge and pragmatism. Surely some kind of face-saving formula can be found that will be better than the consequences of a collapse of the Greek banking system? This is now a clear and present danger. Greeks having been withdrawing deposits from their banks, making the system insolvent. Since this looks like a temporary problem, the ECB has been prepared to prop the system up with emergency funding, awaiting the return of those deposits once a new deal has been struck. But last week this support was cut off, as the confidence of European governments was shaken about the ability to do any deal, when the Greek government called the referendum. With the referendum done the outgoing Greek Finance Minister, Yanis Varoufakis, suggested that this funding would return while a new and more reasonable deal was in prospect. Mr Varoufakis, who had taken to lecturing his European colleagues on basic economics, even resigned to make such a deal easier to negotiate.

But all negotiations are built on trust. You have to believe that your counterpart will stick to their side of the deal. And this has always been the problem with Greece and its creditors. What these creditors fear is that the Greek government do not put their economy on the path to true sustainability, and that it and the country’s banks will continue to need injections of foreign money without any real prospect of these being repaid. And this further support will have to supplied or underwritten by fellow European governments. There is little feeling of solidarity with the Greeks from other European electorates. Better off countries, like Germany, Finland and the Netherlands are outraged about the prospect of more taxpayers’ money being sent to countries that they see as feckless. Many east European governments, like Slovakia or Lithuania, are poorer than the Greeks overall, and see no reason to let the Greeks off; in some cases they have been forced to endure harsher austerity regimes than the Greeks were. Governments in other countries that have been subject to bailouts, Spain and Portugal in particular, do not want to give an easy victory to Syriza, lest it encourage similar movements in their own countries.

And why isn’t the Greek economy sustainable? This is a familiar combination of corruption, clientalism and ineffective government. Tax collection is inefficient; many benefits are too generous; there are too many meaningless publicly funded jobs. Many Greeks are entrepreneurial and hard working, but overall the economy does not pay its way – consumption is sustained by net imports. To create something more sustainable would require a programme of reforms, most of which would be politically unpopular. They would also suck demand out of the economy in the short term, i.e. they involve what has become known as “austerity”. Some theoretical economists, like Joe Stiglitz and Paul Krugman, seem to think that economic reform programmes can be designed without austerity. But this requires a favourable context and an efficient government – which does not apply here. The commonest way for such reforms to be imposed is through the government following a programme designed by outsiders, such as the IMF. Or else it is the threat of such an intervention that forces governments to act. These outsiders become convenient scapegoats, but in the longer term the reforms may be popular, as they deliver a healthier economy.

But the hidden background to the current crisis is that the Syriza government has not offered any convincing programme of reforms, while reversing reforms enacted by its predecessor. You wouldn’t guess this from listening to their smooth-talking spokespeople on the international media. But the Syriza movement contains many with more extreme, anti-foreigner views, limiting the government’s ability to act. The IMF in particular have found their plans utterly unconvincing. Politically they seem happy to go after rich people to tax them more. But rich people’s money is a notoriously elusive quarry; and the government is unwilling to take on any other reform with a political cost.

So what are the European governments to do? They are the critical parties on whom a deal depends. They have been humiliated by the referendum. Their electorates are telling them to not throw good money after bad. Their expert advisers suggest the Greek offers of reform are unconvincing, which means that the crisis will simply repeat itself. Over the years they have increasingly embraced an idea that had been unthinkable: that countries may be able to drop out of the Eurozone. The political costs of a negotiating failure have never been lower.

So what might happen? This depends in some measure on how well-prepared the Greek government is for this moment. If they have in their back pocket a credible compromise deal that saves some face for the European governments, we might pull back from the brink. Mr Varoufakis’s resignation is a good start, it has to be said.

What are the ingredients of such a deal? The Greek banking system must be at its heart. The banks must be recapitalised using external capital. They need to be insulated from the Greek government – in other words the money supplied by outsiders shouldn’t be simply channelled into government debt. Something needs to be offered to reduce the principal of older debts – though perhaps the interest bill can be kept intact. The Greek government can then be left to work its own way out of its short-term economic problems.

Such a deal would point towards the sort of reforms that might make the Euro more sustainable. Separating the banking system from government, with a more centralised regulatory and ultimately deposit insurance scheme. A resolution system for insolvent governments that means debts can get written down quickly. More nominal freedom for government fiscal policy – with discipline forced by bond markets, not EU agencies.

Such a deal would be a way forward. But it still needs trust. Alternatively the Greeks will have to create a quasi-currency of their own to keep their banks afloat – a first step towards the Euro exit. I am not optimistic.

 

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Heathrow is a big test for David Cameron’s leadership

The election is done with, so now it is safe for the Airport Commission to report on options for expanding airport capacity in England’s South East. They have duly proposed that another runway be built at Heathrow airport.

Personally I was a bit surprised. I had expected the Commission to recommend expanding Gatwick. An article in the FT a while back led me to think that its Chair, Howard Davies, favoured the expansion of point to point services, which allow greater levels of competition, over the conventional arguments for the economies of hub airports, which favour big operators. But if he felt that way he was overwhelmed by conventional economic arguments that pointed to expanding the biggest airport, while skating lightly over the pollution and noise arguments that arise from this airport’s proximity to the main London conurbation.

I am emotionally very anti Heathrow airport. Living under its flightpath I find the noise of planes coming into land irksome, especially when they thunder over before 6am. I hate the way it ruins such beautiful places as Kew Gardens. I hate it as a passenger, as it is hard to get to by public transport or car, and when you arrive it is just too big. Every step in your journey before take-off or after touchdown takes longer than it should, and the whole enterprise is managed with the lack of imagination we expect from major corporate operators who know that you have no choice. Gatwick is a delight by comparison, especially since it was put under independent management. And I resent the history broken promises from the airport’s operators after each previous bid to expand. Which in turn undermines many of the promised safeguards proposed by the Commission. Heathrow’s lobbyists know how to dismantle such promises one at a time; their victory in this battle would give them immense sway.

But I have to admit that I’m not on top of the business arguments in favour of Heathrow’s expansion. And I have to question how much we can keep shooting ourselves in the foot, in conventional economic terms, while trying to maintain the tax base to support the level of public services and benefits as the population ages. Through gritted teeth I will admit that there may be case to be made for expanding this horrid airport.

But our Prime Minister, David Cameron, and his Chancellor George Osborne, should entertain none of these doubts. They have a conventional economic liberal approach to the economy. The Commission’s logic should make perfect sense to them, and it is exactly the sort of opportunity to invest for growth that the country badly needs in their world-view. It means the country is “open for business” in a commonly-used phrase. As such it is much more solidly based than the distinctly shaky HS2, the proposed high speed rail line from London to Birmingham and beyond. The only thing against it is the politics.

A number of their Conservative colleagues are passionately opposed to Heathrow expansion. These include the current London Mayor, Boris Johnson, and the prospective mayor Zac Goldsmith, who has threatened a by-election. These opponents all have seats in the west and southwest of London, where the party did well in May’s General Election. And in 2009 Mr Cameron himself said, “Ni ifs, no buts, no third runway.” But, as the FT’s columnist Janan Ganesh points out, Mr Cameron’s honeymoon is going to end soon anyway. Why not end it in a manner of his choosing, and on an issue that he feels is right? The quote was before a different election, and against a different proposal; and anyway he will be stepping down before the next election. The Lib Dems, who will oppose, have been reduced to a tiny rump in parliament; the Greens only have one MP. MPs from the the SNP, Plaid Cymru, and the Northern Irish parties are unlikely to show much interest either way. Massive lobbying by Heathrow’s backers will ensure that most of the Tory party stays true, and that any Labour opposition will be divided – indeed their first official response has been to support Heathrow expansion. This is something he can push through. If he acts decisively the whole thing will be a fait-accompli by the time of the General Election in 2020. Even in southwest London it will surely be trumped by other issues by then.

Will he have the nerve? Opponents of Heathrow expansion will hope he doesn’t.

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The European dream slowly unravels

I am one of nature’s political optimists. But 2015 is one of those years where it is all going wrong. The Lib Dem near wipe out in this year’s UK General Election, for one thing. The rise of Islamic State is another – along with the spread of vicious Islamophobia promoted by such outfits as Britain First. Meanwhile state after state in the Middle East and Africa is failing, with vicious dictatorships taking hold in other countries. This gives Israeli hardliners the cover they need advance their own brand of apartheid, and the ghettoisation of Gaza. Any attempt at finding a humane middle way is undermined by extremists of one sort or another, in country after country.

And now, as Gideon Rachman points out in yesterday’s FT, the European dream is dying before our eyes. The idea of ever closer European union was one of the formative ones in my own politics. In 1975 I was a 17-year old that was definitely ready to vote in that year’s British referendum on Europe. I’m not sure why it should have caught my imagination so – I grew up in postwar prosperity, where the World War was just an interesting piece of history. I suppose I found British society so staid and constricting that I wished for its institutions to be subsumed into something much more modern and exciting. I meet many people of my age that feel the same way though.

But apart from opening out British society and commerce, the EU represented a path towards civilised governance and prosperity for the undemocratic countries on its fringes. Greece was the first country to take the path of throwing off dictatorship and coming in to the mothership of Europe. 35 years on and the achievements look hollow. Greece took on the trappings of a well-managed European democracy but did not take it to heart. It remained run by a rich elite which did as it pleased, while bribing the rest of society with generous pensions and meaningless public sector jobs. They became artful in keeping that show on the road by extracting grants and loans from the rest of the union at the same time as disregarding rules they did not like. They even managed to join the Euro, reducing borrowing costs, and allowing the fiction of a properly functioning European state to continue. But sooner or later the music had to stop. And when it did the foundations of the European project looked shallow. There is an absence of trust and solidarity.

The Greeks themselves, or at least those that govern them, seem in denial about the sort of reforms that will be needed to get them on the path to prosperity. They claim to be victims, condemned as to doom-spiral of “austerity”, with many Anglo-Saxon economic commentators (Noble Laureates Paul Krugman and Joseph Stiglitz among them) cheering them on. But dig a bit deeper and we find that words such as “austerity” and “reform” have been abused so that a lot of the dialogue is at cross purposes. The Syriza government wants to reform some aspects of the Greek state, but sees no problem with those aspects that I have referred to as “bribery”: maintaining ineffective public sector jobs and unaffordable state benefits, such as pensions.This leads to the suspicion, especially amongst Germans, that all the Greek government want to do is to keep the old, failed way of running the state on the road, lurching from bailout to bailout, using moral blackmail each time.

The Germans, of course, are hardly blameless. Their banks kept the Greek show on the road, in the apparent anticipation that their government would bail them out if things went wrong. That expectation proved sound enough – most of the bailout money went to them, and practically nothing towards providing the investment the Greeks so badly need. The Greek government’s moral case is not entirely hollow – but their combative approach to negotiation is destroying trust. No wonder that British Eurosceptics urge the UK government to emulate such tactics in their dealings with the EU! Even now the Greek Prime Minister, Alexis Tsipras, suggests that a No vote in the forthcoming referendum is just a step in the negotiation, not a real moment of decision. Those European leaders who have been trying to fudge things to get a deal, like Claude Juncker, the President of the EU Commission, feel betrayed.

The prospect of Greece dropping out of the Euro and then the EU is steadily growing. This would be a calamity for Greeks, and raises the prospect of yet another failed state. As more than one commentator has suggested, if the Greek ruling elites had what ti takes to run an independent monetary policy, they would not have got into this mess in the first place. It would mark a big moment for the EU too. Its first major defeat. But it has limited powers; it cannot make an unwilling partner reform itself.

And old Europhiles like me must wake up and acknowledge the truth behind that. Our dream cannot be fulfilled. The EU is a confederation, not a federal state. It cannot bind its members by force of arms, as the United Stares did when some of its members tried to secede over 150 years ago.

The question now is whether the EU can survive a Greek exit, or will it be the start of a general process of disintegration. Greece is not the only country to be a cause for concern. The other bailout cases -Spain, Portugal and Ireland – were always more serious about reform and integration, and I do not see these as being of immediate concern. Cyprus, with its cultural ties to Greece, may be different. But the future integration of Hungary, Romania and Bulgaria are far from secure.  At least they are not members of the Euro.

Greece seems to be the lesson that the EU learns by. After its entry to the Euro, the EU became much stricter about allowing further new members. After its flawed bailout, which let many private sector investors off the hook, it was much stricter with Cyprus.

But what is emerging is a different Europe. One where much less solidarity is expected. And one with an Exit door. It is a system of rules and standards that facilitate free trade, environmental cooperation and good governance – but one where it if you fail you are out. Integration is not necessarily in one direction. The union will no longer be ever closer.

Into this sad situation the British Prime Minister David Cameron enters with his attempt at British renegotiation, leading to a referendum. This may seem to be the last thing that Europe needs. But Mr Cameron’s negotiating skills are far more advanced than Mr Tsipras’s, and he is showing much more application than hitherto. This cloud offers a silver lining. It may define a looser union, but if the British public votes to stay in it will offer a counter-narrative to the slow disintegration that is happening elsewhere. Such is what is left of my European dream.

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