Will the Euro survive the Coronavirus crisis?

So far in this astonishing episode, the world’s financial systems have held up well. Remarkably, lessons have been learned from the Great Financial Crisis, both in the behaviour of policymakers, and in the resilience of banks. But many claim that the Euro is especially vulnerable. Are they right?

The crisis so far has not been good for the egos of the Europocrats. The response has been led almost totally by the governments of its member states. It turns out that the EU really is just a free trade area after all. When something more important than trade comes along it has nothing important to do. And when its leaders at last got together to sort out a financial response, the outcome was pathetic, and spoiled by the sort of bickering shows that there is little solidarity amongst the member states.

Yanis Varoufakis, the former Greek finance minister, called this out on BBC Radio 4. The most important part of the EU’s infrastructure, the Euro, has turned into an instrument of oppression. The rich northern states, notably Germany and the Netherlands, were vetoing any serious aid to the most afflicted states, such as Italy and Spain, while not allowing them to help themselves. He said that German leaders should level with their public: the Euro was really good for their economy, but to keep it going they needed to be more generous to other members. The Italians, in particular, are throughly disillusioned and could provoke an existential crisis for the zone.

There is plenty of truth in what Mr Varoufakis is saying, but nobody should bet on the dissolution of the Euro just yet. Critics of the system miss two things. Firstly, as this week’s Buttonwood column in The Economist has pointed out, the European Central Bank (ECB) has learned a lot from the previous crisis and has now become the EU’s most effective institution, and not bogged down by the bickering that undermines the more overtly political arms. It has, amongst other things, rushed to buy up debt from Italy and Spain, thus greatly assisting a strong fiscal response to the crisis. This has the effect of mutualising their debt by stealth. The ECB has learnt the art of doing just enough to keep the Euro going, while being unable to fix its deeper flaws.

The second point is more subtle. It is wrong to suggest, as Mr Varoufakis does, the Euro is in effect a plot by Germany to rob Italy. It is better understood as a conspiracy between German workers and Italian savers. The Germans get plentiful and secure jobs, because their currency is held down, allowing its industry to run a surplus. Italian savers get more buying power for their money in a currency that is stronger than their own would be, with less risk of inflation. The victims are Italian workers, whose firms struggle to make progress with such a strong currency, and German savers, who lose buying power. It is arguments between these victims that drive the acrimonious politics of the Eurozone. Politicians like to blame an outsider, so German ones like to blame lazy Italian workers for low returns by their savers, and Italian ones like to blame the Germans for screwing their businesses.

So the Euro’s losers drive the day to day politics, but as soon as it looks as if they might succeed in their goal of causing the collapse of the Euro, the winners, German workers and Italian savers, hoist it out of trouble with a twitch upon a thread. The clearest example of this is Marine Le Pen’s tilt at the French presidency. Her bid featured resentment at the Euro, and it got her into the final round against Emmanuel Macron, but it rapidly collapsed when, in one of the debates, she floated the idea that France might leave the Euro. French savers, many of them older voters sympathetic to Ms Le Pen’s anger at liberal elites, suddenly realised that there could be a cost to their protest and deserted her. Something like this effect will happen in Italian politics if anti-Euro politicians get too much traction there.

So the Euro is safe but the politics is grim. What is needed are two things: more enlightened self-interest from northern leaders, and more willingness to embrace economic reforms by southern ones. The big trading surpluses by northern countries mean that they could easily be more generous to their southern neighbours by buying their goods and services or through direct aid (though lending them money simply builds trouble for later). Each of the southern economies has economic inefficiencies that their leaders should do more to tackle. In Italy it is excessive petty regulations to protect economic vested interests. In Spain it is lack of labour market flexibility. In Greece it is a failure to collect enough tax, especially from the better off. Until they tackle these they will always be supplicants and politically vulnerable.

For all that, the Euro has some very challenging times ahead (as do the US dollar and the Chinese Yuan, for differing reasons). Italy could easily be faced with a banking crisis, at a time when the attempts to mutualise banking risk across the Eurozone are incomplete. The acrimony will continue.

And this will set the EU on a trajectory that makes it more and more resemble the Holy Roman Empire. This was a tangle of German states, led by an Emperor with little practical authority. It was much despised by Enlightenment thinkers, and finally brought to an end by Napoleon. But it was the foundation of the strong commerce and devolved administration that makes Germany (and Austria) such successful states today. This is something Anglo-Saxon observers almost never understand.

Donald Trump’s message to Iran: get nukes fast

US President Donald Trump doesn’t do quiet confidence. If he had, then he might have ended 2019 displaying it. Which makes his actions in Iran in early 2020 baffling.

As Autumn approached Mr Trump might have been worried about his reelection and his legacy. He came into office promising to show his vaunted business skills, in contrast to his inept predecessors. He was the arch deal maker, he claimed. And yet he had practically nothing to show for it. His attempts to negotiate with North Korea had run into the sand. His dramatic ripping up of the “worst deal ever” to limit Iran’s nuclear ambitions had not restrained that country’s foreign adventures, and seemed to be hastening the day when it would become nuclear. There were almost no trade deals: even the replacement for NAFTA was stuck in Congress. On other issues, his attempt to negotiate a fabulous new deal for Americans on healthcare had long since collapsed. It was painfully slow to find funding for his border wall. He had aggressively slapped tariffs on Chinese trade, but he seemed unable to close any kind of deal with China, while America’s trade deficit roared ahead. His one significant achievement in his term to date was corporate tax cuts, which probably left most Americans unimpressed.

It got worse. He allowed Turkey’s President Erdogan to talk him into winding down the American presence in Syria, abandoning his Kurdish ally. Whatever strategic sense this made, it was tactically inept. It angered many of his Republican allies.

But this blew over, and things started to look up. As the race to be his Democratic opponent in 2020 started to heat up, it became clear that each of the candidates had weaknesses that he could exploit. There is nobody he can be truly scared of. The House of Representatives also cracked after revelations on Mr Trump’s attempts to pressurise Ukraine, and set impeachment proceedings in motion. This largely works in Mr Trump’s favour; ordinary voters will not be able to fully understand his wrongdoing and its implications, especially after these are buried by the barrage of nonsense supplied by him and his many allies. The whole episode will just serve to distract attention from his weak record in office. Meanwhile he managed to close a deal with the Democrats in Congress for the NAFTA replacement, and some kind of interim deal with China looks close. The wall is being built. Even in the Middle East, Iran was under increasing pressure from its own people, and those fed up with its meddling in Iraq and Lebanon. Thin pickings, perhaps, and North Korea is going from bad to worse, but enough for Mr Trump to suggest things were going his way at last. His core support was holding up. If opinion polls still seemed against him, he might reflect that they were probably good enough: all he needs to do in November is hold the states that voted for him last time; he needs no majority in the popular vote. Enough for some quiet confidence.

But then came the Iran/Iraq episode. He firstly overreacted to a militia attack on a US base in Iraq, and then, after those Iranian-backed militias made a not-all-that-serious attack on the US embassy, he launched his assassination of Qasem Soleimani and his associates. This is a dramatic escalation, to which Iran has “no choice”, in the oft-repeated phrase, to respond. The Iranian government is playing the episode for all it is worth to distract attention from its other troubles.

What makes this very striking is that it goes against the general restraint Mr Trump has shown in the Middle East. He is much criticised for this, and has shown no tactical acumen, but he is not wrong in principle. Not, at any rate, in his wish to disengage the US military involvement, and treat Russian adventurism with a shrug. We need to get beyond the post-colonialist thinking that everything that happens in the region is somehow the result of US and western government actions, while denying multiple local actors agency and responsibility themselves. Mr Trump is, though, wrong in principle to think that ripping up the Iranian nuclear deal and applying sanctions to that country will make it more amenable, rather than making the whole region a lot messier. This is the logic of the bully, who assumes their own actions are principled and everybody else simply responds to the exercise of menace.

The defence put up by Mr Trump’s supporters are really hard to fathom. Soleimani was a bad man and his removal will make peace more likely, they say. Soleimani, and his like in the Iranian regime, are indeed bad people. They use innocent human lives as pawns in their games, and have no compunction in perpetrating murder. But he was also a senior state actor, and acting against him is like declaring war on the Iranian state. Assassination is a very dubious instrument of state policy. Israel has long used it, but its conflicts with neighbours and people within its borders have just dragged on regardless. The Iranians are no worse than the Russians, but would the US attack senior Russian officials in this way?

Which brings me to the central point. The US under Mr Trump treats nuclear armed powers with respect, even such mavericks as North Korea. Mr Trump seems to think that the rational response to his behaviour is to come to the negotiating table to make serious concessions. Iranian leaders are just as likely to think that the only rational course for them is to acquire nuclear weapons as fast as they can.

As I write the Iranian response has begun with some missile strikes at US bases in Iraq. They are suggesting that this is the limit of their response, though it is hard to know whether to take that seriously. Mr Trump seems to be shrugging it off. If that is all that happens, then Mr Trump will have got off lightly, and he and his supporters will claim victory.

But earlier the Iranian regime abandoned its vestigial adherence to the nuclear deal. Their thinking may be to deliver this rather underwhelming response and then go as hard and fast as they can for nuclear weapons. In their eyes that is probably the most rational approach: if Mr Trump wants to scale down US action in the Middle East, there will be little they can do to stop Iran, if that country does not present too many easy targets for air strikes.

The US public is unlikely to understand that this is what is happening, and look on Mr Trump’s actions favourably. If so Mr Trump’s faith in his own genius will be affirmed. At some point this has to unravel. Doesn’t it?

Has Donald Trump made a serious mistake?

I was astonished a week ago when the US President, Donald Trump, launched a Twitter attack on Democrat Congresswomen, telling them to “go back to where they came from”. My first reaction was that he had lost the plot. Since then he has doubled down on this attack, incorporating it into a central theme of his campaigning. I have read and heard quite a number of comments on this from neutral and unsympathetic commentators. They all say that this is a clever strategy by the President, and makes life for the Democrats more difficult. This view is so widely held that I am compelled to challenge it. Mr Trump has blundered and is compounding his mistake.

Why is this comment so shocking? Rather too much hot air is being expended on whether or not it is racist or merely xenophobic. This type of comment is a favourite line of attack by racists, and can be taken to shocking extremes, as we see with the Burmese attack on the Rohingyas – an ethnic group that has lived in the country for many generations, but whom ethnic Burmese regard as being “from” Bengal. But you don’t have to be ethnically separate in order for people to think that you aren’t really “from here” and that your home is somewhere else, even if it isn’t. Mr Trump’s supporters don’t regard themselves as being racist, since they don’t think that it is ethnicity that they are attacking. But it really doesn’t make much difference what name you call it: it touches a very raw nerve on the part of anybody of immigrant stock. It says that however hard you try, you are not accepted as belonging. It says that the accuser is making no effort at all to be inclusive. It is particularly shocking in a country that is founded on immigration. No serious British politician would say such a thing intentionally (although I would not put it past The Brexit Party’s Nigel Farage, now that Mr Trump has blazed the trail).

Why do so many commentators think Mr Trump is being clever? First they say that it fires up his core supporters. That is clearly true. They are the type of people who think that it is a perfectly fair thing to say about somebody from a first or second generation immigrant background whom they disagree with, and they adore the way Mr Trump flouts the rules of political correctness. But Mr Trump needs more than his core support to win. In 2016 he persuaded many others that he stood for a fresh start against an under-performing political establishment. Stoking up fear and loathing does not get through to these voters.

The second thing that the commentators are saying is that the four congresswomen at the heart of Mr Trump’s assault are to the left of the Democrats and that by drawing attention to them he will put centrist voters off the party. But Mr Trump is drawing more attention to their ethnicity than he is to their political views with his “go home” attacks. He is attacking their views too, of course: I heard on the radio part of Mr Trump’s recent campaign rally implying that one of them was an Al-Qaeda supporter, inciting chants of “send her home”. Perhaps there is a parallel with his “lock her up” attacks on his 2016 opponent Hillary Clinton, but this served to reinforce his claim that there was something dodgy about her, rather than distract from it. Once again, it’s a great way to fire up the base, but it is far from obvious that the attack will be effective beyond that.

Meanwhile, consider the damage that he is doing to his own and his party’s standing. His attack could not be better targeted to anger or worry voters of Latino or Asian background, and their friends. The picture may be a bit more complicated with black voters, but the racist undercurrent won’t be lost on them either. Mr Trump is crafting his appeal to white, less educated and older voters, demographic groups that are all in decline (if you take the age criterion as being defined by a particular birth date, which seems applicable in this case). He is doing so at the cost of winding up everybody else. This is a strategically disastrous course for his Republican party, recalling the attack by that party on Latinos in the 1990s in California, which has proved catastrophic for them. The Presidential and Congressional elections of 2020 are more about tactics that strategy – but it is hard to see how the Republicans can do well without at least apathy amongst better-educated, younger or non-white voters. Stirring them up will make that harder.

A final line of defence for Mr Trump is that the attack is a “dead cat” – a tactic to distract attention from something that is more profoundly damaging. But there is no imminent election: it is hard to see what he is trying to distract people from and why it should be now.

Of course Mr Trump is not to be underestimated. In 2016 he showed a real mastery of the art of creating doubts about his opponents. He can point to enough success in his term to say that he has proved sceptics wrong: in many cases the disastrous nature of his policies will only be evident after 2020. His robust attitude to America’s trading partners, especially China, draws praise; the economy seems to be doing well enough to boost wages; he has made conservative appointments to the judiciary, which appeals to a sizeable chunk of the electorate. But the xenophobia takes voters who might be impressed by all this to a different place. He has not made his reelection impossible, but he has surely made it harder.

Some commentators suggest that his best chance of success is if the Democrats select a candidate from the left of the party. But after this episode one wonders whether amongst Mr Trump’s many remarkable achievements will be making a candidate from the left electable.

Why Donald Trump is right about Syria

The US President Donald Trump doesn’t do complicated. That’s one of his biggest weaknesses, as well as a major strength. Most real problems are complicated; but simple is easy to communicate. And the idea that “elites” use the excuse of complexity to mask incompetence or worse has a powerful resonance with many people.

Take Mr Trump’s diplomacy with North Korea. It is a hard problem, though arguably not all that complicated, and it has defeated every US regime that has tried to tackle it. Mr Trump’s is no different, though he assumed that his genius could crack it. He hopes that he can tempt the country into rolling up its nuclear programme by offering the benefits of an open economy. But convincing the paranoid is hard work, especially when you want to appear tough yourself. At least Mr Trump didn’t fall for the something-for-nothing deal that his counterpart sought. Meanwhile he hopes that his theatrics, and the reduction in tension arising with nuclear and missile tests now done, will be result enough, and he sticks to this simple message. While the intelligentsia gabbles on about his failure, there is unlikely to be much damage to his reputation.

No foreign policy problem is more complicated than that of the Middle East, a place where your worst enemy can be your friend elsewhere in the neighbourhood. But is Mr Trump onto something by pushing for the withdrawal of US forces from Syria? Sometimes it requires a simple vision to cut through nonsense.

Mr Trump’s stance has caused despair amongst foreign policy professionals. Extracting the US from Syria will mean that the country loses influence, and it would mean that the country’s most reliable ally, the Kurds, will go over into the Syrian government/Russian camp. Years of diplomacy and relationship building will be trashed.

But the US and its European allies have achieved nothing of value in Syria since its civil war erupted in 2011. The Islamic State terrorist organisation has nearly been crushed there, it is true, but was it a real threat in the first place? And has the level of threat diminished? IS’s leaders promoted it as a base for attacks against western interests around the world, in deliberately provocative propaganda. But did we respond to those provocations in the right way? Was there much practical sustenance to terrorists arising from IS’s Syrian bases? Such attacks as there have been were perpetrated by lone wolves and small cells, with little direct connection to Syria. They are more likely to have been provoked by western military action rather than deterred by it. Security experts are now telling us how little the wiping out of IS’s bases in Syria and Iraq makes to the level of threat – though admittedly they would say that regardless. The western powers simply gave what IS’s attention-seekers what they craved, with a bit of martyrdom thrown in. In the end the Syrian government, with their Russian and Iranian allies, would doubtless have dealt with them anyway, or they would have collapsed from their own contradictions.

Meanwhile the continuing western presence is creating more
conflict, in particular with the Turkish government. The Turks are by no means
good guys, but then are the Iranians, Saudis and Russians? Turkey is a European
power as well as a Middle Eastern one: the war in Syria makes other aspects of
our difficult relationship with it harder to manage. It was the Turkish
president Recep Tayyip Erdogan that started Mr Trump down this course in the
first place.

By now the concept of liberal intervention should be dead. It was pioneered by Tony Blair, for use in the former Yugoslavia, and then picked up by the neoconservatives that surrounded George Bush Junior. The Balkans are part of Europe, and military intervention there was followed through with state-building by mainly European nations. It more-or-less worked. But such follow-through could never be replicated in Iraq, Libya or Syria. Instead all we have learnt is how alien these places are to our concept of society. Military intervention, unless contained within clear boundaries and part of a broad coalition, like the First Gulf War, is doomed because it has to be followed by the process of state-building, which Western countries cannot do.

So what is to be done instead? Military interventions may often be helpful to prevent civil wars from escalating, or to break a stalemate and bring peace – or even to bring down a murderous regime. But it needs to be led by local powers, with outsiders providing logistical or air support if appropriate. In Syria these local powers are Turkey, Iran, Saudi Arabia and Israel. These regimes inspire no confidence: they are as likely to see civil wars as opportunities to develop their rivalries as crises to be fixed. But that is surely because the have become to used to the idea of superpower leadership. They are not used to taking leadership roles themselves. We in the west haven’t got used to that idea either. So many commentators, especially from the left, assume that all the problems in distant lands are the fault of western powers, and therefore it is our responsibility to fix them. They ascribe no agency to local actors. I call this way of thinking “post-colonialism” as it reminds me of the arrogance of the colonial era. Civil wars and state collapses do not benefit the neighbourhood. Sooner or later the local powers will learn how to manage them towards peaceful outcomes, even if this doesn’t look very pretty to our eyes. Mostly they are learning this the hard way (as Yemen shows – a civil breakdown that has been mainly left to the locals). But, for example in West Africa, there have been better examples. Western intervention doesn’t help. And if the Russians want to play superpower games, more fool them.

Mr Trump seems to get this better than most. The paradox of his ambition to “Make America Great Again” is that it means a retreat from global responsibility, and taking a narrower view of its interests: the opposite of greatness. But the colonial era is over; the Cold War has passed; and Pax Americana is now broken. It is about time the world joined Mr Trump and woke up to the consequences of that.

Are there Australian lessons for Brexit?

I have now just a week to go in my long trip to Australia. I’m not all that surprised that I haven’t managed to update this blog regularly on my travels. It turns out that it is quite hard to fit into my holiday routine. But witnessing the mounting political tension on Brexit in the UK from afar, I will manage one more post. Does an Australian perspective have anything important to say on Brexit? Well, yes and no.

Australia is beloved of Brexiteers, partly because it is part of an “Anglosphere” which they hope can substitute for Britain’s European identity. But there are two more substantive reasons. One is that Australia shows that a medium-sized nation can be economically successful as a fully sovereign state. The second is that a country that attaches itself to the booming Asian, and especially Chinese, economy will prosper.

Let’s start with the first proposition. Australia is undeniably successful without being part of a wider formal economic block like the EU. Indeed most Australians would probably be horrified at the loss of sovereignty that such an arrangement involves. They are fiercely self-reliant and independentlyminded. Most of the Australian6s I have had proper conversations with have been internationally aware and sympathetic to Britain’s membership of the EU. That makes them unrepresentative. It is very hard to get any kind of international news on television or radio out here. The bulletins are consumed by stories on the latest bushfires, weather events, local political spats and sport. Only the Royal Family can intrude. I suspect that most Australians are pretty sympathetic to Brexit. The country has half or less of the population of the UK, and still makes a very good go of things. Indeed it is prosperous. One shouldn’t make too much of this, though. Australia’s dependence on the US for security has meant that it had to send its boys to be killed in Vietnam. And Australians worry about Chinese intrusion into their state currently.

Australia’s success has a lot to do with the second proposition – that its economy is tied to the fast-growing Asian economy, rather than the lacklustre European one. Australia exports substantial amounts of minerals and agricultural produce to China, in particular, and attracts lots of Asian tourists and students. There is a lot of Chinese investment. That keeps its exchange rate high, so that Australians can afford lots of exotic imports. A popular theme of the Brexit case was that Britain should unshackle itself from the European corpse, and trade more with Asia. Although the example usually given is Singapore, Australia seems to make the case even more convincingly.

But, of course, we have to think of the differences between Britain and Australia. The first is Australia’s relative isolation. The country has little choice but to go it alone, as it is not geographically close to any other large nation – if you exclude Indonesia, which is not close to any of Australia’s major economic hubs, quite apart from a cultural gulf that makes the divide between Britain and its European neighbours look trivial. Indeed the internal distances within the Australian continent are often more daunting than those between Britain and even its more distant European neighbours. Australians are self-reliant because they have to be.

But they are still a success. That is surely down to the next big difference: it is a vast continent with huge exportable assets. These include massive mineral wealth and agricultural land. The Australian economy has a highly extractive character. That even applies to its agriculture, where few farmers give serious consideration to the long-term sustainability of their methods. While on our trip we experienced dust storms in New South Wales. Dust of that sort doesn’t come from deserts (where such fine particles would have been blown out long, long ago) nor form vegetated land; it is agricultural top soil being left exposed by exploitative farming methods. Even without leaving vast areas of topsoil exposed, agriculture depends heavily on artificial fertilisers, which can only do so much. All this means high agricultural productivity and competitiveness of exports for the time being. Britain does not have the option of exploiting its natural resources in a similar way, even if it wanted to – which it very clearly doesn’t. Nobody suggests that despoiling hundreds of square miles of British countryside is what the country must to to escape economic dependence on Europe.

So what could Britain do instead to ride the Asian wave? Asia has strong demand for capital goods. But Britain has hollowed out its manufacturing industry (unlike Germany which is riding the Asian wave successfully from within the EU). There is hi-tech expertise and products. Britain could do better here, but China is investing hugely so that it becomes less dependent on foreigners. Tourism? Professional services? Universities and schools? There are possibilities in all of these, though Britain tends to shoot itself in the foot, especially with over enthusiastic anti-immigration policies. But it would be a hard road. Anyway it is far from clear that Britain is better off being outside Europe and free of its regulations and trade restrictions, or within it and so having a wider semi-domestic market in which to scale up its products and services. Britain’s proximity to the rest of Europe is one of its comparative advantages over Australia – it seems silly to get in the way of that.

Another point is worth making. Some Brexit supporters suggest that Australia could be part of a wider international support network, economic and political, rather as the Commonwealth was before Britain joined the European Community. From here that looks naïve. Australia has long outgrown its old links to Britain. We used to be a significant source of agricultural outputs – but now Britain cannot compete with the closer and larger China. On other matters, education or business services, Australia looks more like a competitor than a partner. Distance prevents the intimate supply chain links that are a feature of Britain’s economic relationship with its neighbours.

While the Empire 2.0 and linking up to Asia’s dynamism look like fatuous arguments for Brexit, Australia still shows that smaller countries can plough there own furrow if they want to. Outside the EU Britain would still keep its strong links to the continent, and the laws of comparative advantage suggest that the economy would in due course rebalance to a new reality. The only question is how much poorer (or, for the Brexit optimists, richer) that new reality would be. Lacking Australia’s natural assets, it seems likely that it would be quite a bit poorer.

Is Australia a neoliberal success story?

I have just started a six week tour of Australia. Right now I am in Perth pictured), our first stop. Australia is a country I know quite well. I have visited it in every decade since the 1980s. In the late 1990s and early 2000s my visits were frequent as I was working for an Australian-owned company. But my last visit was in 2006. I am interested to see some new places (Perth is one; Tasmania will be another), and also to understand how the country has developed.

I have just finished reading a special report by the Economist on the country. It paints it as a neoliberal beacon; it doesn’t use that word of course – neoliberals never use it themselves. That is an interesting thought to challenge while I’m out here. The country is a remarkable economic success story, with continuous growth since 1991: a better record than any other developed country. It has weathered two financial crises (the 1997 Asia crisis, and the 2008-09 crash), and several twists of the commodity cycle, impressive for a country for whom mining is so important. Doubtless raw materials and hitching the country’s fortunes to China’s economic growth, play an important role – but other Southern Hemisphere countries do that without Australia’s success. Its economic policies have a clear neoliberal bent. Fiscal policies have been conservative; pensions and healthcare have been substantially privatised. The currency floats freely. Levels of immigration are high. It stands as a reproach to the conventional wisdom of the left, which hates the involvement of markets in public services as well as governments aiming for low levels of public debt. It also stands as a reproach to the conventional wisdom of the right, which holds that multiculturalism is doomed to failure, and that high levels of immigration undermine social cohesion.

These headlines cover a much more complex picture, of course. In fact the Economist’s report is maddeningly shallow. But Australia is an interesting case study. To me the it looks as if the critical element to its success, which helps explain the way it has beaten the conventional wisdom of left and right, is healthy incomes across a broad stretch of society. This allows people to take more responsibility for health and pension expenses. It also makes them less stressed about the economic impact of immigration. But why? That is one of the questions I want to gain insights into by talking to people who live here.

Maybe Australia shows that it is too early to write off neoliberalism. Interestingly it is making a comeback in South America, as Brazilians follow Argentinians (and others) in turning their backs on leftist economics. Indeed outside some developing economies (including China perhaps), there seems to be no example of a successful economy that has abandoned neoliberal tenets. Even Scandinavian economies have tilted in the neoliberal direction in the last decades. And yet things are clearly not right in most neoliberal economies, including Britain’s. A lot of this has to do with pressure on those with middle and lower incomes, and in the phenomenon of left-behind places: middling and smaller towns, and rural areas. It will be interesting to understand how Australia has met these challenges, if, indeed, it has.

Three things the EU needs to fix, and one that it doesn’t

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At a recent event organised by the Spectator, Matthew Goodwin, an academic who has made his name with studies of the far right, suggested that the European Union was falling apart, and that in time Brexit, for its trauma, will be seen as the right move for Britain. Supporters of the EU are so mired in the crises of the moment, from Brexit to the Italian budget to refugees to governmental corruption in east Europe, that they are not asking deeper questions abut the Union. In the spirit of moving the debate along, I want to talk about three fundamental problems that need to be fixed, and one that doesn’t.

The one that doesn’t is a lack of democracy. This is a nearly universal complaint, but it is a proxy. It is an old rule about complaints: often what people say isn’t the real issue. In the EU’s case the real issue is that people feel that they don’t have enough say in key things that affect their lives, such as who can move into their neighbourhoods. The answer to that isn’t making EU institutions more transparent and accountable, and still less directly electing officials. In practice these will tend to centralise power and create yet more aggravation from those who get outvoted. There is as yet no European polity, and little solidarity between Europe’s extremes. These are necessary prerequisites for democratic structures. The European parliament is a democratic failure for this reason: the only useful purpose its elections serve is as a vehicle for protest votes – but that is because the voters don’t care about the consequences. Decisions in the Union are made through a consensus or near consensus of democratically elected heads of state – which is as good as it is ever going to get. Instead we need to look at the issues that are causing the deepest friction, in particular the free movement of people, or the greatest institutional stress, such as corrupt and populist governments, or both, like the Euro.

Let’s start with the free movement of people. This is so difficult is because free movement is in fact very popular. People like the idea that they can up sticks and move anywhere in the continent where the opportunities are better or the climate is nicer. This is, above all, what inflames passions amongst Britain’s Remainers. And it is why Europe’s politicians created the Schengen passport free zone. But for those people who find themselves surrounded by newcomers, it feels that they have lost control over an important aspect of their lives. And the biggest stress of all comes from people who originally come from outside the continent to live here, though we shouldn’t forget the stresses created by Poles and Lithuanians in Lincolnshire, or British “expats” in Spain. There is an undoubted racist undertone to this, but liberals need to understand that behind this is the feeling that rural and small town residents have of lost control. Democratisation, in this case, means more local control on who is entitled to residency, work and benefits. Of course this would mean that those choosing to keep foreigners out should lose the benefits of having foreigners come in – but people need to make that calculation for themselves, rather than have it imposed on them from on high.

The next problem for the Union is the way that corrupt elites can take control of governments with weaker national institutions, and bend them towards favouring insiders. Often this is done under the guise of populism, as in Hungary and Poland; sometimes it is a bit more obvious, as in Bulgaria and Romania. The elites running these countries are able to take the benefits of EU membership while ignoring its institutional norms, such as free speech and the rule of law. The more skilled practitioners, like Hungary’s Victor Orban, are then able to portray the EU’s complaints as an outrageous attack on their own democracy. Here what is needed is a bit of rebalancing of EU institutions to give the majority more leverage. Time is on the EU centre’s side: few things are more unpopular than corruption and sooner or later voters will endorse the rules-based EU institutions. But the majority need to be able to exert more subtle pressure on the backsliders than currently. The EU budget is an obvious place to start.

And so we come to the Euro. As with freedom of movement the problem is that the Euro both very popular, and has a capacity to create extraordinary friction. The Euro is popular because it is, for most people (Germany and the Netherlands excluded), a better store of value that any local currency would be, as well as a more flexible unit of exchange – two of the key functions of a currency. Meanwhile governments like the reduced cost of borrowing that the Euro brings. Germany and the Netherlands, meanwhile, derive much of their wealth from trade and doubtless appreciate that a floating currency would tip the terms of trade against them. And yet a single currency brings many problems with it, especially when combined with the fiscal rules that prevent countries from properly managing their business cycles. This can create unnecessary hardship, as well as dangerous frictions between the currencies haves and have-nots. The new Italian government is about to challenge the system to breaking point. It wants to loosen the fiscal rules to stimulate its economy, for which there may be a perfectly decent case, while at the same time rolling back reforms that would make the Italian economy more efficient. Interestingly, it is not finding this as easy as it thought, since its manoeuvres have raised its cost of borrowing without the EU institutions lifting a finger. But doubtless they will succeed in engineering a damaging confrontation. Most people think that they way forward is to create stronger institutions at the centre of the zone so that resources can be moved around within it more freely. The Germans object, though, and so there is impasse.

The solutions to each of these three issues are not clear. But what I think is clear is that they will require a new EU treaty of some sort. At the extreme it may mean closing down the existing union and creating a new one – or at least for the core countries to threaten this. That will require the crisis to deepen. They also mean that some of the fundamental rights and freedoms on which the Union has been built will have to be rethought. The sooner that people start that rethinking, the better.

But before we despair we must remember the things the Union does well. First is that it makes continental commerce easier, especially since the Single Market was instituted in 1992. Second, it is more effective than any national institution in taking on global multinational businesses, whose anti competitive practices are an increasing global problem. Third, they help its smaller members to stand up to bullying by countries inside and outside the union. Ask yourself why Vladimir Putin and Donald Trump dislike it so much? And fourth, it does regulation pretty well. A recent example of this is the General Data Protection Regulations (GDPR). This is a welcome push-back by the European public against the abuse of data by commercial and other interests. It is very unlikely that individual governments would have done as good a job. Their local political agendas are too full to make room; crucial elements would have been watered down by local vested interests. Even in Brexit Britain you hear very little protest against what is a very irksome set of requirements; people feel that something needed to be done. There are many other examples. And, of course, it makes sense if each country’s regulations are compatible with each others. It is not that EU institutions are immune to special interests, but that it is better placed to handle them than national governments.

And there is such a thing as a shared European identity, based on a shared history. This may get stronger. Europeans used to see the rest of the world reflected in its own image – a result of its period of empire in the 18th and 19th Centuries. As other continents emerge from that shadow, Europe looks a smaller place – but it becomes more obvious what unites it. It stands against the free-wheeling capitalism of America, the totalitarianism of China, the theocracy of Iran and Saudi Arabia, and the cynical kleptocracy of Russia. It does so based on centuries of learning things the hard way. As the EU struggles with its raison d’etre something more cohesive should emerge. That is my hope.

 

 

Liberals still don’t get the Trump phenomenon. He is not in danger

To judge from the headlines in the liberal press, or liberal commentators on the BBC, you would think Donald Trump’s presidency in the US was on its last legs. This follows the conviction yesterday of two of his (formerly) close advisers, and his being implicated by one of them in an illegal pay-off. But these commentators have failed to understand how the Trump phenomenon has rewritten the rules of US politics. Provided he maintains his health, Mr Trump will surely last until the end of his term in 2020. And if his liberal opponents continue to underestimate him, he could well win a second term.

The first point to make is that Mr Trump is utterly shameless. He is not the least bit embarrassed by anything that he has done. Call this narcissism if you like, but he will fight on. The second point is that his base of support both remains solid, and maintains a grip on the Republican party.

To his base, Mr Trump is the man who has delivered. Evangelicals have their conservative judges. Business leaders have their tax cuts and roll-back of tiresome regulations. Conservatives everywhere are enjoying are enjoying the rout of liberal values: it feels like fresh air. And the bad behaviour? That is utterly unsurprising; they knew the sort of man they were taking on. So long as he is doing the job of battering ram, they will forgive everything. Corruption is something that happens to liberals, in their eyes, and not to politicians on their own side. Indeed in they seem to think that corruption is less about illegal payoffs and more about the process of political compromise with people who are not like them.

So neither Mr Trump nor his base will be shaken by recent events. Legally the President looks secure too. There is debate as to whether it is possible to indict a sitting president with a crime – but if that came to be tested the Supreme Court has shown no appetite to challenge Republicans on anything important. It is unlikely that the special prosecutor, Robert Mueller, will even try. Everybody else in Trumpland is either dispensable or Mr Trump can use his powers of pardon. There is pretty much nothing Mr Trump would not do rather than admit defeat.

Which leaves the danger of impeachment, which is essentially a political process. It is looking likely that the Democrats will take control of the House of Representatives in the mid-term elections in November. That would allow impeachment to proceed. If there were grounds to do so against Bill Clinton in the 1990s, there will be more than enough against Mr Trump. But success depends on the votes of two-thirds of the Senate. Which means that half or more Republican Senators will have to turn against him. Given Mr Trump’s hold on the party grassroots, and his ability to undermine the credibility of any given opponent by a constant process of smearing, he looks secure. He will paint the impeachment as a politically tainted process, and not without a degree of justice. This is politics, and Mr Trump has proved to be America’s most effective politician.

The problem for liberals is that they persist in judging Mr Trump and his supporters by their own standards. Mr Trump’s behaviour would kill a liberal politician’s career. But Mr Trump does not need liberal votes. Instead he is playing an altogether different game: the politics of emotion, victimhood and identity. It is something liberals really don’t get.

But Donald Trump is politically vulnerable. His base is as loyal as ever, but it is a minority. He is making little attempt to win over anybody else: indeed he enjoys antagonising large sections of the US nation. This is one reason why it looks as if he will do badly in the mid-term elections. Another is that there are some cracks in his record for some of the people who had supported him.

To his supporters Mr Trump is a breath of fresh air because, unlike politicians before him, he is delivering on his election promises. That is true in the sense that he is doing things that mainstream politicians have not dared to do: notably the ratcheting up of the trade war, which has widespread public support. There are broken promises aplenty, of course, but these are either on secondary issues, or easy enough to pass off blame onto others. But I think there are two sources of trouble. One is healthcare reform. This is fiercely complicated, and the Trump administration is unable to do anything complicated. His attempts to push through a reform last year collapsed. That itself is not a problem: there are plenty of people to blame it on. And if he had succeeded it might actually be worse for him. The problem is that for many working class Americans, getting decent and affordable health care insurance is becoming impossible. A Republican reform of healthcare would not have helped. But the slow decay of the Obamacare system is making things worse. That is enough to create doubts for a lot of Trump voters, who increasingly realise that the Republicans are not on their side.

A second problem comes with the trade war. The process itself may be popular, but as it progresses it will create more victims. Already many farmers are worried. It may be enough to help the Democrats hold on to Midwestern Senate seats that would otherwise have been near impossible to hold.

This may be enough for the Democrats to overcome gerrymandered boundaries and win the House of Representatives, and even the Senate (tricky because the previous contests were six years ago on a Democratic high water mark). But the path to the presidency in 2020 is much trickier. Once Mr Trump is able to concentrate his political skills on undermining a single opponent, all bets are off. A lot of people blame his victory in 2016 on the Democrats choosing a weak candidate in Hillary Clinton. But in many ways Mrs Clinton was a strong candidate. Mr Trump would have successfully undermined any Democrat opponent, just as he did with his Republican opponents in the primaries.

And there is a trap for Democrats. It is tempting to follow the Republicans into the politics of victimhood and identity. There are plenty of people who feel victimised by the Trump regime. But that takes them away from many of Mr Trump’s less committed and more sceptical supporters. He may be able to rally them again. The Democrats need to show that they are standing up for these voters too, on healthcare and jobs in particular.

I continue to hope there will be a moment of revelation to Trump supporters, akin to what Hurricane Katrina did for George Bush Jnr. But the man has survived so many knocks, that I doubt this will happen. After that I just hope that the Democrats can choose a candidate with high ethical standards that can convince all working class Americans that she or he is on their side and Donald Trump isn’t.

Italian populists will find it easier to complain than to govern

Well one of my 2018 New Year predictions is bearing fruit. I predicted that the big issue in 2018 for the EU would be Italy, and its push back on how the Euro is run. Just how this will play out is very hard to judge, but it is now centre stage. Most of the coverage centres on threats by Italy’s Five Star Movement (M5S) and the Northern League to take Italy out of the Euro. But the politics of that is much trickier than many give credit for.

It is, of course, too easy for liberals like me to sneer as the disparate group of politicians we refer to as “populists”. The popular frustration they play on is real enough, and liberals are very reluctant to engage with it. We seek for ways round it and dismiss it. But for all the weakness of established political movements, populism does represent a threat to European (and American) society. What populists aim to do is stoke up a sense of grievance and victimhood to secure power for themselves, which they then proceed to use to for the purposes of self-enrichment and cronyism. Nobody should be surprised that a movement built on resentment at elitism and cronyism should, in practice, be much worse than the system it is replacing. Donald Trump made hay from Hillary Clinton’s minor lapses in data security, and talked of “draining the swamp” in Washington. And yet the new governing elite plays fast and loose with security and thinks nothing of placing its own friends and relatives in positions of influence. Its supporters don’t seem to mind.

The populist system in Europe is most advanced in Hungary, where under Victor Orban’s Fidesz a crony state is becoming deeply entrenched. It is worth noting that when Fidesz first emerged from the post-Communist gloom it seemed fresh, modern and innovative. It has been corrupted by power. But Hungary does have some advantages. First it can claim subsidies from the European Union because of its relative lack of development. Second it has its own currency, so it is not beholden to the system of Euro governance. But note a key element of the system: it requires EU subsidies to keep going, and anti-EU resentment is one of its key themes. Staying within the system while complaining about it ever more loudly is Fidesz’s central political strategy.

The Italian populists are embarking on a similar strategy. I am perhaps being a little harsh on M5S. Its hatred of the old establishment cronyism is genuine and it does seem to want to move to something better. It refused to deal with Silvio Berlusconi, one of the pioneers of populist cronyism, for example – though its more cynical Northern League allies had long been associated with him. And yet Italy’s economic predicament makes something like the classic populist trajectory almost inevitable.

The central issue for Italy is the Euro. Both M5S and the League make this a central complaint. They complain that the Euro’s budget rules are too tight and prevent sensible fiscal policies from being implemented that might help lift Italy’s dismal economic growth rate. Plenty of economists from across the world agree with them. How much substance there is to these complaints is a complex topic for another time (my answer: yes some, but nearly as much as many make out). The real question for populists is just how serious about this do they want to be. Do they want to make genuine, credible threats to leave the Euro? The answer is surely not.

It is, in fact, institutionally and practically very hard to leave the Euro once you are in it. For all its extreme problems, Greece never seriously contemplated it. But there is a political problem too, which, for example, cost Marine Le Pen in France dear when she seemed to be on the threshold of power. That problem revolves around two things: interest rates and savings. One of the main reasons Italy joined the Euro was to reduce interest rates, especially on government debt. It should be remembered that, contrary to the populist narrative, Italy was not bullied and cajoled into joining the Euro by the Germans. The Germans never wanted them in, but Italy made it in thanks to both some fairly hefty austerity economics and diplomatic skill. This proved very successful. If Italy left the Euro, the country would surely have to raise interest rates on its debts and government finance, including a looser fiscal policy, would in fact be much harder. That is exactly why Italy joined the Euro and the basic dynamics haven’t changed. And this would not be some future prospect (like the dire predictions made about the British economy after Brexit), but would be immediately apparent should the prospect of Italy leaving the Euro look real. The rise in Italian government bond prices after the populist victory at the polls shows this.

The economics may not be quite as simple as I have made it sound. The Italian economy, for all its weakness, is roughly in balance on trade, which makes looser fiscal policy and monetary policy much easier – but that was true before. The real problem is that successive Italian governments have been unwilling to take on the economic reforms that might make the economy more productive, and a looser fiscal policy more sustainable. It is a popular misconception on the left that “Keynesian” loose fiscal policy can drive growth and pay for itself. That is only true of there is spare productive capacity, such as in a recession, or if productivity reforms form part of the government programme. In fact the left usually see “Keynesian” policy as an alternative to “neoliberal” reforms rather than a complement to them. I have written often that neoliberal reforms are played out – but that is not true of Italy, which used the gains made from joining the Euro to put off the evil day. The populist movement draws much of its strength from resistance to such reforms when they were belatedly embarked on by the Socialist government of Matteo Renzi – so embarking on a reform programme looks out of the question.

Still, politically, the interest rate problem is not the most serious. That is that leaving the euro would be seen as a threat to many Italians to the value of their savings. Economists talk about currency as a means to an end – a sort lubricant to help achieve real economic gains through higher levels of investment and consumption. Money means nothing in itself. But most people outside the elites have a different view. To them money is a sacred promise made by the government to the people that they can save now to spend later. Politicians forget that at their peril. If Italian savers start to think that threats to leave the Euro are serious, they will see a threat to their savings and support will drain away from M5S and the League faster than most people think is possible.

And so the populists need to maintain that balance: whinging about victimisation within the Euro straitjacket, while making no serious attempt to leave the system. This sort of have-your-cake-and-eat-it politics is, as it were, bread and butter to populist politicians. But it will surely be harder inside the Euro than out.

This is doubtless behind the Italian President Sergio Matterella’s rejection of the coalition’s proposed finance minister. What looked like a clumsy denial of democracy could in the longer term be part of a challenge to the populist parties to put up or shut up about the Euro. That could pay dividends if only the established political parties to put up a credible alternative government.

The method in Donald Trump’s madness

It is two months since my last post. This may be the longest period of silence since I started this blog in 2011. This is mainly because I have been consumed with the process of getting 39 local election candidates nominated for council elections here in Wandsworth, and all the attendent duties of being agent and local party Treasurer, officer and volunteer. Along with other duties as school governor and party officer at regional and, now, even Federal Party level. Plus the occasional bit of time off and some family care issues.

Meanwhile the newsletter section of the blog was subject to over 1,000 fake subscriptions consisting of Russian web addresses. This was only stopped by implementing Captcha, which was somewhat trickier (and more costly) than I expected. In any case, the oncoming election, and my senior role in one borough, has constrained my ability to comment as freely as I like this blog to be. And it isn’t over. The election itself happens in a week’s time. After that I have to prepare and submit 39 expense returns. All I will say on these elections for now is that I have been involved in local elections in Wandsworth for 32 years, and in that time they have proved a graveyard of predictions. I will comment when it is all over.

Meanwhile there has been plenty else going on. In Britain we have had a kerfuffle in Labour over antisemitism. And there has been the so-called “Windrush Scandal” in which the Home Office has hounded legal immigrants with incomplete paperwork. I want to comment on both in due course. And politics in America continues its sinister course, with the Trump administration subverting institutions of the Republican Party, the US Federal state, and the world’s trading and diplomatic architecture.

Which draws me to today’s topic. Looking back over the last two years it is striking how liberals and established politicians have consistently underestimated Donald Trump. It has been easy to dismiss him as stupid and immature. And yet he has proved wily and dogged and he has always ended up on top. His critics need to understand him better if they are to devise an effective counter.

The first thing to say about Mr Trump is that his intelligence is of a different type from that we are used to in our leaders. It is very right-brained. We have traditionally adored and respected the left-brained virtues of logic, computation, complicated language and rules. But the right brain handles values, emotions, context and seeing thing as a whole. A healthy mind keeps the two in constant dialogue. We see Mr Trump’s left-brain deficiencies as fatal flaws; and yet neglect of right-brained virtues by liberal intellectuals is just as serious a deficiency.

Now let’s be more specific. Mr Trump’s world consists of competing individuals and groups who win, or lose or strike bargains with each other. It’s a world divided between adversaries and trusted insiders. To the former you must be merciless; to the latter you must show and expect unquestioning loyalty. In this way of looking at the world, the liberal system of collaboration and shifting coalitions with its infinite shades of grey is simply weakness. There is an acute sense of victimhood: that honest Americans have been made monkeys of by outsiders who have outmanoeuvred the country’s establishment.

Another aspect of the Trump view is that rules are a means to an end, and should not be elevated to an end in themselves, as liberal intellectuals do when they set the rule of law on a pedestal. Liberals say that the rule of law protects the weak; but does it really? The Trump alternative is for people to be part of a group with strong mutual loyalty and leadership that focuses on results.

The problem for liberals is that the Trump view is very widely shared, especially amongst less-educated people, but, clearly, not just them. Liberals tend to worship institutions that favour educated people through an unseeing meritocracy. They then try to compensate for this by offering handouts to the less fortunate, which creates a patron-supplicant relationship that undermines human dignity. Many on the left, who rail against “austerity”, just don’t understand why so many poorer people hate state benefits.

A further problem for liberals is that Mr Trump’s methods will produce enough results to justify the faith his supporters are putting in him. The tax reforms in 2017 were a huge coup, whatever we my think of them objectively. The pressure he is putting on China, North Korea and Iran may well yield some short-term results. His approval ratings may not be good in comparison to other presidents a year into office, but they are not particularly bad in absolute terms; they may not suffer the sort of middle-term decay that those predecessors were subject to. And he knows how to rally the sceptical floating voters when he needs them, not least by casting doubt on his opponents.

So what could stop him? The pundits predict that the Republicans could lose their control of the House of Representatives in November, though the Senate looks more secure. That would limit his ability to pass legislation. And yet it will also give Mr Trump a scapegoat on which to blame his failures. Nobody knows how to milk victimhood like Mr Trump. It may even give him a chance to reshape the Republican Party into his instrument in time for the next round of elections in 2020.

A further problem for Mr Trump is a declining base. This base is core to the Trump phenomenon: it is the loyalty group that is central to his identity. It is white, working class and ageing. It will be impossible for Mr Trump to form such a strong bond with other voter groups, and these are growing faster than his base. But in the medium term Mr Trump can keep this threat at bay by suppressing it, through promoting scepticism and apathy, plus changing electoral rules through things such as voter ID. In the longer term Mr Trump bumps into term limits and old age. But he can do a lot of damage before then.

I think there are two more important threats to Mr Trump, because these concern his base. The first is trade policy. Mr Trump’s narrative on trade is very appealing, but if he follows through by starting trade wars it will threaten the working class jobs of exporters. In the Trump narrative, of course, many more workers will benefit. But in the short term these benefits will be much harder to see. Midwestern farmers, who have been strong supporters, are already starting to wonder. Still, Mr Trump loves brinkmanship, and he may well feel he can strike bargains and claim victories before any serious damage is done.

The second problem is health insurance. One of the driving themes of Mr Trump’s presidency is to dismantle anything his predecessor, Barack Obama, put in place. Mr Obama’s crowning achievement was his health insurance system, and Mr Trump is desperate to dismantle it. And yet Obamacare tackles a genuine working-class problem of basic healthcare becoming unaffordable. Abolishing it would cause anger and hardship. Replacing it is the sort of massively complex enterprise that the Trump White House is incapable of. And, unlike tax reform, there is nothing like a Republican consensus on what any replacement regime should look like. Mr Trump will try to blame the Democrats as Obamacare gradually breaks down through neglect – but for once this line of attack will be hard to sustain.

So Mr Trump’s revolution may fail. But liberals, and not just in the US, would do well to ponder how to broaden their appeal so that they are not so vulnerable to right-brained populists like Mr Trump.