Solving the Euro crisis means a stronger ECB

I do not regret paying my access fee to the FT website.  This morning there are two excellent articles on the Euro crisis from the two regular Wednesday morning columnists: Martin Wolf and John Kay.  It has helped clarify the way ahead for me.

Mr Kay comes in at high level to give an overview of the crisis.  It is not comfortable reading for supporters of the Euro project like me, but, as usual for this author, pretty much spot on.  The main problem is not that the currency area lacks appropriate institutions at the centre, but that local institutions in many member countries are not strong enough to cope with the pressures of being in the single currency.

The eurozone’s difficulties result not from the absence of strong central institutions but the absence of strong local institutions. A miscellany of domestic problems – rampant property speculation in Ireland and Spain, hopeless governance in Italy, lack of economic development in Portugal, Greece’s bloated public sector – have become problems for the EU as a whole. The solutions to these problems in every case can only be found locally.

So the answer will not come from strengthening the EU’s central institutions.  This goes back to the original design of the Euro: the whole idea was to put pressure on governments to reform themselves, by denying them the easy escape route of devaluation. Unfortunately the EU’s politicians forgot this in the first decade of the Euro, so no real pressure was brought to bear, making the crisis infinitely worse once it hit.

This article does not say much about how to go forward from here, beyond suggesting that grandstanding at summits like today’s may be part of the problem rather than the solution.  Mr Wolf’s looks at one aspect of how to manage the crisis itself.  This in turn in is based on a paper by Paul de Grauwe of Leuven university, who literally wrote the textbook on the Euro (I know, since I read it as part of my degree course).

Professor de Grauwe points out an interesting fact: the bond markets are much harder on the Euro zone fringe economies of Italy and Spain than they are on the UK, even though the underlying positions of the countries is not all that different.  The difference is that the UK markets are stabilised by having the Bank of England as a lender of last resort which is able to deal with liquidity crises (i.e. an inability to raise cash for temporary reasons rather than underlying insolvency).  The European Central Bank does not do this, or not enough, for the Eurozone economies.  Mr Wolf, who structures his article as an open letter to the new ECB president Mario Draghi, argues passionately that it should.  This would stop the contagion spreading from the insolvent economies of Greece and maybe Ireland to solvent but challenged economies like Italy, Spain and indeed France.

This must be right.  The Germans, who are the main sceptics, must be persuaded – and convinced that such interventions would only apply to liquidity crises and not solvency problems, and that the ECB has the integrity and independence to tell the difference, in the way that politicians never do.

Giving the ECB a wider and stronger remit will be a big help.  This should extend to supervision of the European financial system (preferably for the whole EU and not just the Eurozone).  This will help deal with one of the biggest problems for modern central banking – that of coping with spillover effects, as described in this thought-provoking paper from Claudio Bono of the BIS (warning: contains mild economic jargon, such as “partial-equilibrium”).

So a reconfigured ECB will help the Euro through the crisis and prevent self-fulfilling prophesies of doom in financial markets having to be solved in grandstand summits.  That still leaves the longer term problem of how the less competitive Southern European economies can have a long term future in the zone.  But then again, I think they would have just as challenging a future outside the zone – even if it were possible to devise an orderly exit mechanism for them.


The tricky politics of an EU referendum

Last night’s drama in the UK parliament over the call for an EU referendum is over.  Will it all blow over?  For now, maybe, but the issue will come back.  Wise politicians will be thinking ahead about what they should do when it does. For David Cameron, it looks like trouble.

The starting point is that there is mounting pressure for a referendum on the European Union in the UK.  Why should this be?  We operate a representative democracy, after all, and the issues are complex – not the sort of thing that referendums are supposed to be particularly good at sorting out.  But there is a substantial body of public opinion who believe the country’s membership of the Union is an outrage to our constitution.  This has always been so – but while in the 1970s these were overwhelmingly older people, scepticism is now more widespread.  The Tory Eurosceptics who entered Parliament last year are a younger breed, and to many a focus on Europe has reached obsessive proportions.

This scepticism has been fanned by the press.  Why?  Clearly newspaper proprietors don’t like the EU for their own reasons – but surely it goes deeper than this.  The EU is an easy target for our frustrations, in much the same way as ethnic or religious minorities used to be.  They don’t answer back.  Exploiting this is one way to sell newspapers.  Add to this the growing frustration with the Union right across Europe, and the steady fading of European idealism, and you have a ready explanation for rising scepticism.

It all looks very different, of course, once you are responsible for running the government.  Here the thought of operating outside the EU, or even taking a detached stand within it, looks plain silly.  And so you have a tension between the governing elite and a substantial body of public opinion.  A referendum campaign seems to be one of the best ways of bringing this to a head.  A campaign in the right circumstances has the support of many Europhiles too.  They are sick of their steady retreat in face of the Eurosceptic onslaught, and long to turn and fight, even at seemingly hopeless odds – like the British soldiers retreating to the Marne in 1914.

So far so good.  Now it gets complicated.  Europhiles want a straight in-out referendum.  This would force pragmatic sceptics, including large parts of the Tory hierarchy, into the “in” camp.  To them, this is the basic question of principle anyway.  Trying to have referendums on carefully negotiated treaty changes is a misuse of this method of democracy.  Extreme Eurosceptics would be happy enough to go along with this, convinced as they are that the country would be much better off out, and that the public would rally to their cause.

But pragmatic Eurosceptics don’t want this, for exactly the reason that the Europhiles want it.  What they aim for is a changed relationship between the UK and the EU – and that a pre-emptive referendum on an in-out question would weaken their negotiating position.  For them the main job of a referendum is to put a spanner in the works of the EU itself, by blocking any changes they dislike to the treaties.  Pretty much everybody accepts that a UK referendum would have rejected any of the previous treaties (Maastricht or Lisbon in particular – though the former might have been quite close, in my view).  The idea of a three way referendum, with a renegotiation option, in yesterday’s motion was an attempt to win over these pragmatic sceptics.  But it didn’t really stand up to close examination – one of the bigger reasons why the motion fell so heavily.

But it is possible to see a the outlines of a deal coming out of this.  First negotiate a new deal with the EU, then have an in/out referendum on its outcome.  Sounds simple enough, but the renegotiation idea is fraught.  Is it a new deal for Britain, or a more general rebalancing of Europe?  I think the government has in mind the latter, drawing in allies from across northern and eastern Europe.  The idea would be to use the Eurozone crisis as leverage.  If the Union’s constitution needs to be changed to make the Euro work, then this can be made conditional on other changes.

The trouble is that it is difficult to understand what the shape of this deal might look like.  To the the EU core members (Germany, France, Italy and so on) the EU constitution is carefully balanced, with a free trade area on the one hand, and regulation to prevent a disorderly race to the bottom on the other.  Besides a treaty change will have to go through referendums right across the Union – a nightmare as European politicians learn that a rejection of a treaty can earn them extra goodies.

And so the risk is that the government returns from the “renegotiation” without very much to show for it, and then be forced to hold a referendum on it.  The prospects for a Britain-only renegotiation are even bleaker, as our bargaining position is so weak.  This will place the pragmatic sceptics, like David Cameron and William Hague, in an impossible position.  Yesterday’s debate has reduced their room for manoeuvre, as the Economist’s Bagehot column points out.  They will have to produce something relatively soon.

One of Mr Cameron’s main achievements has been to de-toxify the issue of Europe for the Tories.  But the issue could yet return to destroy him, his government and his party.  It will be the greatest test of his leadership.


Inflation and the British economy

There is an excellent article in today’s FT by Chris Giles.  Unfortunately this is behind the FT paywall so I don’t think clicking through will help most of my readers.

Mr Giles considers what has gone wrong with the British economy over the last year – since growth forecasts are being consistently revised downwards.  Two explanations are often offered – “it’s the Euro crisis” or the government is cutting “too far, too fast”.  In fact both are wide of the mark.  The simple fact is that while rates of pay have stuck broadly on forecast (2% increase), consumer prices have increased by more (over 5% compared to just over 3%).  The gap is plenty enough to explain the lowering of real terms growth.

Why have prices shot ahead of forecast?  Mainly external factors to the British economy – oil prices, global prices for food and clothing and so on.  I really don’t like calling these price rises “inflation”.  Inflation suggests a degrading of money which, inter alia, makes debts easier to afford.  But incomes aren’t keeping up, so debts aren’t eroding by more than the 2% a year or so that incomes are rising.  Similar considerations apply to government debt – taxes largely depend on income.  VAT is an exception – but many benefits (like pensions) are linked to the rate of increase of consumer prices – so the national debt doesn’t get any more affordable.

The economic pain of these external price rises is being spread widely.  Surely the Bank of England is right not to tighten policy – which would only cause unemployment and concentrate the pain on an unlucky few.  Our comparatively low rate of unemployment, compared to previous crises of this economic scale, is one of the wonders of the British economy.

Pet hates no. 2: “There is good service on the Northern Line”

Last night, after 7pm, I was travelling home from Embankment on the West End branch of the Northern Line.  As I boarded I heard a routine announcement that “there is a good service on the Northern Line”.  I thought no more about it: the wait for the train had not been too long, and there was space on the train when it arrived, though not spare seats.  The problem arose once the train reached Kennington, where it terminates, and I changed onto the City branch for the rest of the journey.

There was quite a crowd already on the platform for the City branch.  The wait for the next train took a good three minutes (though I did not check the indicated), so the overall gap with the train before must have been about 5 minutes.  Unsurprisingly, for that time of night, the train was very crowded when it arrived.  I stood no chance of boarding it.  As it left, I looked at the train indicator, and it said that the next train was 5 minutes.  Oh dear; it was going to be very crowded too, and there might well not be enough room on that!  The came an announcement: “This is the Kennington control Room.  There is a good service on the Northern Line.”  The passengers took this surprisingly stoically; if there had been a riot going, I would have joined it.  When the train came, I did manage to board, just, and was jammed against the doors.  When the train reached Stockwell there was another massive crowd on the platform, which the train could not clear.  And it took quite a while for passenger wanting to leave to get off, the train was so packed.

I utterly fail to see how this service can be described as “good”, and how the Kennington announcement was anything other than a calculated insult to the travelling public that London Underground’s management so clearly despise.  The trains were not frequent enough to clear the platforms, and the overcrowding was both uncomfortable for passengers and causing further delays to boarding and getting off.  In fact they use the term “good” to refer to the best of three status levels: the others being “minor delays” and “major delays”.  And this seems to depend on departures from the timetable across the whole line.  I can happily accept that the delays last night (the service normally has something like a 3 minute interval at that time of day) did not reach the point of qualifying for as “minor delays”, a category, incidentally, that is almost totally useless to the travelling public (What are you to do with it?  It’s not sufficient to take alternative routes; it’s often cleared by the time you reach the platform with trains bunched up to provide rather a good service).  But this does not make it “good”.  To call it such is a misuse of the English language and an insult.  They need a more neutral word, such as “normal”.

Why aren’t people more angry about such abuses?  I can see this sort of thing spreading to hospitals and other public services, as the petty officials that run them try to fool themselves that what they are doing is enough to make their users happy.  It should be stopped.


Five Eurosceptic fallacies

I caught a bit of last night’s Radio 4 Analysis programme driving home from a meeting, on Euroscepticism in  Britain.  One speaker (I didn’t catch who) suggested that the case for Britain being in the EU was mainly economic – that we could put up with a bit of lost sovereignty because we were being hitched to an economic powerhouse that would do our economy good.  This he said, was now clearly nonsense.  In evidence he said that the EU used to be 26% on the world economy and now it is 18% (I may have misremembered the numbers).  “We are being chained to a corpse.”  I was apoplectic.  But it is typical of the drivel that is being spread across our media.  It’s worrying that so few people bother to argue back.

Let’s clear the decks with some points of general agreement.  The Euro is in crisis, and this crisis could lead to an economic disaster.  This in some measure results from severe mismanagement of the currency by the EU’s leaders, aided by the European Central Bank (ECB).  The stock of European institutions is low in public eyes, not just in Britain, but across most of the continent.  This has something to do with a democratic deficit – with the institutions wielding power with little apparent democratic consent.

But it is possible to accept all this, and to think that the EU, and even the Euro, is fundamentally a good idea, and that Britain would be mad to consider leaving it.  The country may even be forced to join the Euro – though that event is surely a long way off.

Let me try to help the feeble defenders of British membership by elaborating four critical fallacies behind the Eurosceptics’ arguments, and fifth that is a bit more arguable.

First fallacy: there is such a thing as “just” a free trade area.  It often said the the country joined something that was just a free trade area, but this has morphed into something else.  But free trade across borders is a complicated business – and not just a matter of border controls and tariffs.  Its implications quickly reach into vast swathes of ordinary life.  Most of the US Federal government’s powers rest on its right to regulate interstate trade.  And the unhappy experience of the North American Free Trade Area (NAFTA) shows how politics gradually undermines transnational free trade projects that do not involve a significant pooling of sovereignty.

Fallacy no 2.  Britain is being ripped off by the rest of Europe because we have a trade deficit with them. This leads to the idea that outside Europe we would get a sweetheart deal (like Norway of Switzerland, or at least in popular myth) because they need us more than we need them.  But the British trade deficit arises from the chronic mismanagement of the British economy, which led to a prolonged period (since the late 1990s) where the Pound was too high for many of our export businesses to be competitive.  This uncompetitive exchange rate has now been reversed, and so our trade balance with the EU will correct.  And as for bargaining power, there is a fatal flaw to this line of reasoning: the relative size of the UK against the rest of the EU.  EU trade is a major part of our economy; UK trade is not a major part of the EU economy.

Fallacy no. 3.  Being outside the EU means that we don’t have to comply with EU regulations.  This is largely true of the labour market, it has to be said.  But far from true of product markets – since we need to sell our products in the EU.  Also, if foreign manufacturers are forced to comply with separate British product standards before they can export here, they will either charge us extra or not bother.  If you are in any doubt about this ask a Norwegian or Swiss about how much better life is without the burden of EU regulations.  You will get a lecture about how they have to comply anyway, without any input into how they are made.  This is of particular relevance to one of the areas where Britain has a competitive edge: financial services.  Our representatives in Europe are forever batting back ideas for new rules that would disadvantage the City; I wonder what would happen if they weren’t there any more?

Fallacy no 4.  We would save money by leaving the EU, because we are a net contributor to the EU budget.  This is an illusion.  We may pay less in net contributions, but we would pay more in tariffs  And if we charge more tariffs in return?  Any economist will tell you that this is a road to nowhere.  Our net contribution is a small price to pay for access, and, besides, some of it helps to develop new markets in the Union’s less developed countries.

Fallacy no 5.  Britain would have been worse off by joining the Euro at the start.  This contention is unprovable, as is the opposite: that we would have been better off in it.  The Euro, of course was badly managed.  But so was the Pound.  While the Euro was going on, the pound shot up in value, destroying many of our exporters and creating a big trade deficit.  Borrowing ran amok, as did, to a lesser degree, government expenditure.  When it all blew up, it left the British economy in a terrible state, one that it will take many years to recover from.  Won’t the devaluation of the pound help our recovery?  Yes, but it should never have got that high in the first place.  What would have happened if we were inside the Euro?  Almost certainly no better – except that our problems would have been more transparent, so we might have started to fix them a more quickly.  My point: an ugly mess either way.  Look at our Eurozone colleagues and the British economic performance does not look stellar.  A floating currency is no free lunch.

Of course there is a lot wrong with Europe and the Eurozone.  That does not mean that this country is better off outside.  The best case for a referendum in this country is that it would force supporters of the Union to make the case more forcefully, and expose the fraud behind the anti-EU case.  But on their performance to date, who can be confident of that?

Parliamentary boundary changes: good idea, could be better

People grow attached to the status quo.  There used to be a large packing crate in our garden when I was a boy.  When my elder brother problem objected that it was unsightly and we should get rid of it, my mother countered that: “But the cat likes to sit on it!”.  This was too much for my brother who took an axe to the crate shortly afterwards.  An unsightly item was removed, and the cat had no difficulty in adapting.

So it is with the British parliamentary boundary reviews.  There’s a lot of fuss, with many saying that fundamental democratic principles are being undermined.  But the arguments offered against them are little better than that offered by my mother (who did come to see the humour of it) of our packing crate.

The idea behind the reforms is that all constituencies should have roughly the same number of electors, so that everybody’s vote carries the same weight in the political process.  That is a solid democratic principle.  The problem is that equal constituency size implies arbitrary boundaries.  Under the current arrangements quite a lot of weight is put on natural geographical or administrative boundaries.  That can lead to some quite big variations in size.  In my local borough of Wandsworth we get three seats, but two of them are 15% bigger than the third.  Across the country the variations can be much bigger, even excluding the peripheral highlands and islands (Western Isles is very small; Isle of Wight very big).  A further principle is to reduce the number of MPs from 650 to 600, which is still large by international standards.

The main argument offered against the new boundaries is that they are too arbitrary, and, to listen to the rhetoric, you would think they would tear communities apart, with half a village represented by one MP and half by another, say.  I really struggle to understand this.  MPs may be moderately important community figures, but they hardly define communities.  If they did we would already be in deep trouble.  In Wandsworth the local parliamentary seats are all very well for the residents of Battersea, Putney and Tooting – but the communities that lie between these (Wandsworth Town and Balham) are carved up between three different constituencies each.  Life goes on.

A related issue is that the new seats will cross local authority boundaries much more often.  In Wandsworth none of the three current seats crosses a boundary.  Under the new proposals the borough will be split between four seats, all shared with neighbouring boroughs.  No doubt this will make constituency casework a bit harder.  But frankly I’m not sure it is entirely healthy for parliamentarians to get too closely associated with their local governments – they are meant to sit above that layer of government and judge in the common interest.  They may even gain from comparing the way different authorities handle things.

Another issue is that boundaries will change more frequently and by larger amounts, to reflect population changes.  Locally we have a major development that will be smack in the middle of one of the new seats; when all these new people move in this will cause the boundaries to be changed – knocking on into neighbouring seats.  But there’s too much job security with MPs as it is – it’s good for them to have to sell themselves in new areas every so often.  There are too many safe seats as it is.

A more subtle argument is that new areas represent equal electorates but not equal populations.  Quite a few people aren’t on the register, or don’t count because they aren’t allowed to vote in parliamentary elections (through not being UK citizens).  Surely the interests of these people should be represented too?  But it is hard to overcome the principle of equal rights for all those entitled to vote.  And frankly, those who deliberately avoid being registered (which is in fact illegal) shouldn’t be given weight.  The running of a democratic society requires a degree of active engagement by citizens; people have a perfect right to say they aren’t interested and not vote – but if they can’t even be bothered to register, how hard are we to fight for their democratic entitlement? And why should their neighbours be empowered in their place?  There is an issue for MPs with a lot of non-voting constituents generating a bigger case load – but if that really is a problem, they should simply be paid more.

Mind you, the Boundary Commission’s current proposals could be less arbitrary.  They have created some rather silly looking constituencies.  But the consultation and appeal process should help a lot here.  It’s not too hard to come up with some better looking alternatives.  One idea I have seen in our area does an even better job than the existing boundaries, though this may knock on badly further afield, managing to reunite the currently split communities of Wandsworth Town, Balham and Clapham, while keeping Putney, Tooting and Battersea together.

Better still would be to have a system of proportional presentation, where party representations would be based directly on votes cast.  You could have less arbitrary constituencies then.  But the British political class has set its face against such radical ideas; they should accept the consequences.


Pet hates No. 1: “suitable for all coffee makers”

A decent cup of coffee.  For me it’s one of life’s top little pleasures.  You can overdo it, of course.  My usual ration is one large one with caffeine in the morning, followed by a smaller decaff at lunch, and again in the evening.   More than that I tend to get a bit hyper, followed by a late afternoon low.  If you are restricted as to quantity, quality is sacred, and especially for that first cup (mug) of the day.

So seeking out good coffee is a bit of an obsession.  As a student (in the late 1970s) I soon tired of instant, being given an electric percolator by my parents…though I still find a good instant OK for a late evening decaff.  But how to make the real stuff?  Percolators are long gone.  Filtering used to be my favourite – but the flavour lacks a certain something.  Then came the cafetiere; I dislike its messiness, and the you can’t get rid of all the grounds, which interfere with the pleasure of drinking and subtract from the flavour; besides it takes a lot of coffee to get up to a decent strength.  I briefly experimented with the stove top espresso pot – but apart from being fiddly I always found a nasty edge to the flavour.  Besides, they can be a bit dangerous.  My hairdresser’s exploded recently, trashing his kitchen and nearly causing injury.  You simply can’t beat and espresso machine.  I have been using one (or rather a succession of them) for years.

But one thing you have to get right with an espresso machine is the fineness of the grind.  Too coarse and liquid comes through too quickly and it’s a bit watery.  Too fine and the machine clogs.  I started by grinding my own – and I still do at weekends – using a grinder where you can calibrate the fineness.  But this adds to the hassle, so I want a more convenient option: using ground coffee straight from the packet.  Also the variety of choice at the local supermarkets for plain beans is steadily diminishing.  My local Tesco has just the one type, if you are lucky.  The (rather bigger) local Sainsbury’s is a bit better, but still limited.

If the choice of beans is limited, that for ground coffee is wonderful.  All manner of appetising flavours are on offer, and I’m itching to try them.  But it’s no use.  Because most of them are ground “suitable for all coffee makers”.  This is a downright lie; what they actually mean is “too coarse for espresso machines”.  The supermarket executives that allow these designations should sacked and debarred from working anywhere near food or drink for the rest of their lives.

What works?  No surprise that Italian stuff is fine.  Lavazza’s Gold is a regular standby, and their decaff is my normal for that lunchtime cup.  The Illy stuff is just as good, by recollection, though it is some years since I have bought any, because it comes in expensive metal tins, though these are useful for storage.  Filter ground coffee is fine too.  Sainsbury’s used to stock a couple of types, but they’d gone on my last visit.  Waitrose do a decent range of filter ground coffee, alongside a full range of beans, making this easily the best supermarket to shop at – but sadly my local stores are just over the edge of the inconvenience threshold.  What doesn’t work is Starbucks own brand, surprisingly enough, given how much they have promoted espresso coffee.

And so my blood pressure will always rise a little when I reach the Sainsbury’s coffee aisle.  And as for Tesco, I have given up even looking; another reason not to go to that horrible place.

Battersea riots: what can we learn?

Wandsworth Council commissioned an independent review of the disorder in the borough in early August, which is mainly about the riots at Clapham Junction on Monday 8th August.  Clapham Junction, of course, is located in Battersea, and not Clapham, which is a couple of miles away and in a another borough.  This report, by Neil Kinghan, was published this week.  What can we learn?

The most valuable part of the report is its clear description of how events unfolded.  It is amazing how quickly garbled stories gain currency, especially since our media aren’t particularly fastidious about factual accuracy.  The trouble (at Clapham Junction) started at 8pm, after some earlier incidents in the nearby estates.  After about half and hour the local police team was withdrawn, and they did not return until after 10.30pm.  The police heavy mob, in their armoured cars, did not arrive until after midnight, when the trouble was pretty much over.  The fire at the Party Shop, which was the most spectacular and dangerous part of the episode, happened after an explosion shortly after midnight, and was not part of the main “rioting”.

Who were the looters (a better description than rioters, I think)?  The only hard facts come from the 150 or so that have been arrested.  The total number of looters was estimated to have reached a maximum of 450, though more people than this must have been involved as people came and went.  Of those arrested, half lived in Wandsworth (nearly half of those in Battersea), 24% were under 18, 66% were black, 29% white – and 88% were already known to the police (i.e. they’d filed their DNA).  How representative are these?  It’s difficult to know.  Most of the arrests were not made at the scene, but through follow up, using things such as CCTV footage and car numberplate reports.  These may well be biased towards the more organised elements.

The looting itself seems to have been motivated by the idea of grabbing something for nothing.  The sequence of events across London may have started with anger over the shooting of Mark Duggan in Tottenham, but by Monday any political angle was at most vague.  It seems to have been led by organised gangs, using social media to focus on one area and overwhelm the local forces there.  A lot of opportunists joined in, probably including people who just turned up to see what was going on.  There was little actual violence directed towards people.

There’s not much much more I want to say about this aspect.  Our society has a criminal fringe; given the opportunity many others will indulge in looting and theft.  There’s nothing new in this.  Serious though the issue may be, the moral panic is overdone.

The most important public policy issue to arise is the performance of the police.  This was a quite straightforward public order issue, and they let us down.  At borough level it is easy to overdo the criticism.  The social media had forewarned them that there might be trouble through the afternoon – to such an extent that the police convened a meeting with the council at 5pm.  Although Clapham Junction figured in this chatter as a likely trouble spot, it was far from the only place, and the meeting decided that the information was not firm enough to do anything with.  The obvious solution, to create a mobile reserve of officers to react quickly to events, was surely not within the Borough’s resources.  And the issue applied right across London and within the ken of the higher echelons of the force.  The decision to abandon the scene at about 8.30pm was surely correct, with only 8 properly equipped and trained men on the spot, as the looters were building up in hundreds.

The failure occurred higher up, and outside the remit of Mr Kinghan’s report.  Senior officers at the Metropolitan Police knew that trouble was probable.  They could have mobilised enough mobile reserves to respond much more quickly than they did (local police called for help almost as soon as the trouble started).  There has been some bleating that there were not officers properly trained.  This has been rejected by Lib Dem Mayoral candidate Brian Paddick, a former senior officer at the Met – and indeed sufficient numbers did turn up in sufficient numbers – eventually.  And they could have asked for reinforcements earlier in the day from neighbouring forces – as indeed they did on the following day.

The report makes a number of recommendations, mostly worthy enough, but many along the tired old bureaucratic lines of “we should improve our planning and coordination”.  But the real issue is leadership.  No amount planning and procedure can compensate for that.  The Met’s leaders were busy enough wining and dining journalists and and attending to their PR.  But we employ them to fight crime and they have repeatedly been found wanting.  Not showing decisive leadership themselves, and not allowing their juniors to use their own common sense initiative.

The Met has a new Commissioner, Bernard Hogan-Howe.  He has his work cut out, but he’s made a promising start.  Here’s hoping.

Lib Dems and the Quality of Life

One of the more entertaining episodes of the last Lib Dem conference was the debate on the party’s new Quality of Life policy paper.  This paper had wended a long but largely uncontroversial path through the policy formation process, including extensive consultation, before reaching the conference – and I was a member of the working group – interest declared.  And generally policy that has followed this path gets more or less nodded through.  Not this time.  The motion and paper got the backs up of many representatives, and there were a number of well-delivered and entertaining speeches against.  For a flavour of this ire see Alex Wilcock’s blog – scroll down past the Dr Who stuff to 20 September.  If you click through to the comments page, you will find Alex describing yours truly as “not so much a thinking liberal as a sneering one”!  The paper was passed, but the margin was quite narrow by the usual standards of these things.

And that’s a bit of a problem.  This is policy that stands behind other policy – important not so much for its direct recommendations as its influence on subsequent policy.  I hesitate to call it philosophical – since it does not attempt to develop the core values of the party, but rather to apply them in a new way.  But if it is considered contentious, it may get ignored.  And for all that it is official policy, this would be quite easy.

What’s the fuss about?  The starting point of the paper is that public policy is too dependent on “hard” economic statistics, such as income and economic growth, to measure success.  But these are only intermediate measures – in other words we like them because they lead to good things, rather than being good of themselves.  That is because of the difficulty of measuring success in itself – the hitherto rather woolly concepts of wellbeing and quality of life.  But social science has been advancing rapidly and it is now possible to measure wellbeing in a rigorous way – mainly through asking people to make subjective judgements on their state of mind.

What the paper recommends is to make wellbeing an explicit policy goal, alongside the traditional economic measures.  To ensure this is done rigorously, it recommended that a National Institute of Wellbeing is established to promote standards. Various other devices (a cabinet champion, for example) were recommended to get it embedded into the business of government.

So far, so good, perhaps – but for liberals some loud alarm bells should be ringing by now.  This could be a charter for highly paternalistic government.  And especially when you come up against the evidence that many people seem to have a poor understanding of what is good for their wellbeing.  So the beating heart of this policy paper is the insight that individual autonomy (“agency” in wonks’ jargon) is central to wellbeing.  The idea is to help people help themselves, and not bullying and cajoling them into making better choices.

Education is central.  And, to make a small digression, this takes you in a very interesting direction.  A lot more is understood about life skills – emotional intelligence, resilience, and such – and the wellbeing insight gives these a much higher priority at all levels of education.

Fortunately there is a wealth of evidence to support the liberal view.  There one further thing – the measurement mechanism of choice for social sciencists, self-reported wellbeing, is a thoroughly liberal idea.  Wellbeing is what the population says it is, and not an arbitrary idea imposed by policymakers.  It’s like voting.

What were people objecting to?  One faction distrusted anything with so little in the way of concrete recommendations – especially when those few recommendations sounded like more bureaucracy and a new quango.  At best they interpreted it as harmless, and so a cost-free policy to rebel against; at worst they thought it was opening the party up to being criticised for being irrelevant in times of widespread economic hardship.  Others, Alex was amongst these though he was not called to speak, understood how dangerous the the quality of life idea could be in the wrong hands, and felt that it was too toxic to touch.  Or, possibly, that the detail of the policy paper did not live up to its liberal intent. At any rate that is my reading of what they were saying.

All this put the promoters of the motion in a bit of a difficulty – it is really quite difficult to push abstract ideas in this kind of debate.  In a short speech you don’t really have much opportunity to say more than “I think this is a good idea” rather than why you think it is good – at least not in a way that will connect to more than a minority of the audience.

Does it matter?  The problem is that the wellbeing agenda is slowly but surely infiltrating itself into the public policy process already.  The word (or “well-being”, the spell-check compliant variant which I don’t like) and quality of life come up with increasing frequency in all kinds of public policy contexts, and especially in health.  The concepts, if not the measurements, lay behind so much of the last government’s meddling in people’s lives.  And David Cameron is an enthusiast too, though with an entirely different agenda -but no doubt paternalist in  a different way.  Liberals need to get into this debate and push back hard against paternalism – but using the language of wellbeing, and not just pronouncing the plague on all its works.

And there is something else, even more important in my view, which the paper doesn’t really touch.  And this is the usefulness of the idea in promoting a more environmentally sustainable economy.  It is important to break through the tyranny of current economic measurements to show that a more sustainable way of life does not equate to poverty – and indeed that it can be better for everybody.  This is why the New Economics Foundation is so interested in wellbeing.  I particularly like their paper on Measuring our Progress.

So we need to keep pushing.  As one of the motion’s supporters said to me afterwards “Who remembers how close Nick Clegg’s margin of victory was for the party leadership?”.  Still, we that understand and support the policy have a selling job on our hands.


Understanding the Euro Crisis

My favourite contemporary economist is UCL’s Professor Wendy Carlin.  She was my tutor at UCL, and led my second year macroeconomics course, and a third year course on European institutions.  Her patient, dispassionate analysis is worth so much more than all that shoot-from-the-hip banging on by celebrity economists, Nobel Laureates and all.  It was her analysis, well before the current crisis broke, that demonstrated to me that the last government’s economic “miracle” was unsustainable (the combination of an appreciating real exchange rate and a trade deficit being the giveaways).  She also helped me understand the Eurozone, and pointed out the trouble ahead, again well before it happened, arising from diverging real exchange rates within the currency bloc – in other words Germany was becoming more competitive while Italy, Spain and others were becoming less so.

So I was delighted to read her summary of the Eurozone crisis – 10 questions about the Eurozone crisis and whether it can be solved.  The is a wonderfully clear summary of the whole situation, written in early September.  Her central point is that the zone’s banking system is at the heart of the crisis, and tackling the banks will the heart of any solution.  European politicians have been trying to avoid this, no doubt because it shows that Northern European countries have played an important role in creating the crisis.  However, not least thanks to the new IMF chief Christine Lagarde, this is changing.

Of course Professor Carlin cannot point to an easy escape.  She points to two alternatives paths, other than the breakup of the zone:

Scenario #1 – a more decisive approach based on current policy (bailouts)
Policy-makers need

  • the existing bailout schemes to be successful and to be seen to be working in the next year
  • to keep Italy out of the bailout regime
  • to develop a replacement for the high moral hazard regime for banks and for governments but to do this in a way that does not undermine the bailout regime in the meantime.

Scenario #2 – large-scale restructuring of bank and government debts (defaults)
Policy-makers need

  • to move decisively now to end the high moral hazard regime by accepting that default on bank and government bonds on a much larger scale than envisaged in Scenario #1 is necessary
  • to engage in restructuring sovereign debt and bank debt by, for example, forcing bond-holders to swap existing short-term bonds for long-term
European politicians are attempting the first path, but the problem is contained in Professor Carlin’s third bullet: devising a financial scheme that avoids moral hazard by banks and sovereign states – this reckless behaviour in the belief that it will be underwritten by everybody else.  The favoured answer of many is a “Eurobond” – i.e. government borrowing underwritten collectively, combined with a toothier version of the failed Stability & Growth pact.  But this decisive step towards a more federal Europe runs well beyond any democratic mandate.  The German Chancellor, Angela Merkel, is rightly suspicious.
Which leaves the second scenario, which is favoured by American commentators, based on their experiences of Latin American debt crises.  This is surely much more convincing, and I hope that the IMF will use its influence to push down this path.  Bank regulation clearly needs to change, but beyond that it doesn’t need a more federal Europe.  We can use bond spreads to act as a break on government profligacy – which is how the Eurozone should have been run from the start.
A final point worth making from Professor Carlin’s analysis is that dropping out of the Eurozone wouldn’t really help Greece or any other country that much.  They would still have to run a government surplus, and so still have to go through a very painful reform programme sucking demand out of their economies.  Of course the hope is that a rapid devaluation would kick start exports – but it does not stop the need for painful supply-side reforms if these countries are to recover anything like their former standards of living.