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.

The political consequences of Covid-19 depend on what the government does afterwards

There has been an understandable rallying round by the public during the Covid-19 crisis. Here in Britain, as in most places, the governing party has seen its popularity rise (the main exception is the USA). Will this last?

As with so much else in this crisis the answer seems to depend on which party you supported in the first place. Conservatives think they will keep the opposition parties on the back foot for the long term. The obvious precedent is the Falklands War in 1982. In spite of the initial calamity, which could be blamed on a careless government, people rallied to the flag. Mrs Thatcher’s Conservatives had been doing very badly in public opinion polls beforehand, but they won a landslide in the next two elections.

Opposition supporters, on the other hand, think there will be a reckoning as the dust starts to settle, and the government’s handling will be judged as inept. We are starting to see signs of a concerted assault on the government this weekend. The Sunday Times is running a story claiming that the government failed to follow scientific advice at the start and lost five weeks in its initial response. Kier Starmer, the new Labour leader, has joined in, after being reticent beforehand. Will the charges stick?

I certainly think the government made a false start. Contrary to what is repeatedly being said, though, this was not because they were ignoring scientific advice. That advice was muddled and contradictory; there were plenty of senior science types who backed the government up, though others were urging an earlier lockdown. There was a disastrous dalliance with the idea that the country should allow the virus to spread and build herd immunity; this was following one of the many strands of scientific advice. What was lacking was political nous. Politicians, not scientists, should be the experts on what the public will accept, and how best to communicate what the government wants it to do. The reason why so many governments went fast and hard for a lockdown in other countries was mainly political. It was a very simple message to communicate and it made them look decisive. Boris Johnson, the prime minister, showed poor judgement and has nobody else to blame.

But once the government grasped that the critical issue was not to overload hospitals, they started to do much better. The NHS built up capacity in intensive care with impressive speed, and, unlike in Italy, they have not been overloaded. The whole chain from reporting symptoms to admission to the ICU has been thought through and works (unless you live in a care home, unfortunately). Two issues nag, apart from neglect of care home residents: the slow rate of testing and the lack of personal protective equipment (PPE). Both partly go back to the government’s slow start, as other countries got ahead of the UK in stressed global markets. There has also been organisational ineptitude, especially in the case of testing. Public Health England, in charge of the testing (not actually part of the formal NHS) seems to have been using methods copied from Soviet Russia. They have been slow to take up available capacity, and getting the tests to the people that need them has been not been given much thought. Most people are expected to drive themselves to facilities set up in car parks, and even this is badly managed – I was caught in a 20 minute traffic jam outside the facility set up in Chessington World of Adventures, which I just wanted to drive past, and which would ordinarily handle much higher volumes with no disruption at all.

Still, the public probably don’t think anybody else would have done better – it doesn’t bear thinking about what would have happened if Labour had won the election last December and Jeremy Corbyn had been prime minister. I suspect the attacks on the government will resonate with the usual suspects and change few minds.

Much more important is what happens as the crisis subsides. There are some tricky decisions ahead about how and when to release people from the lockdown, but I don’t think the government is going to get this badly wrong. For all the criticism, it is managing the issue quite sensibly. The real risks are when life starts to return to normal, and the government works out what to do next.

Top of the agenda is our old friend Brexit. The government insists that it will not ask for an extension to the transition period, which ends on 31 December. It evokes too many bad memories of how Theresa May’s government lost control; there is also a powerful myth in the government’s inner elite that delaying deadlines weakens the government’s negotiating position. This is risky; the country is likely to plunge head first into a hard Brexit that could be very disruptive. On one view it would be throwing salt onto the woulds left by the pandemic; on another the pandemic will have dome so much damage already that few people will notice. We’ll have to see.

Next comes the economy. This deserves a separate post. The signs are that damage to the pre-crisis economy will be severe and there will be no quick bounce back. Also government finances will be in tatters. The challenge will be to make sure that panic about the latter does not prevent action about the former. With ultra-low interest rates, government finances are not nearly as scary as they will look. The early signs are that the Treasury has learnt from its mistakes after the Great Financial Crisis, and ministers are not ideologically averse to throwing government cash around. That should prevent catastrophe; the public will forgive a degree of recession.

But the big issue will be catching the zeitgeist of how to change things after the crisis. In my last post I said that people will want to get back to where we were before. But there will still be some shock and reevaluation; the public will expect more than a shrug. What to do about the working-class heroes of the crisis, the nurses, hospital workers and care home workers, will be central. There is a public perception that these groups are undervalued by society. But what to do? Paying them more will be very expensive on public finances and almost certainly need more taxes to balance it. If the government picks up and runs with this idea they could prove unstoppable at the next election. It would mean trashing 40 years of Conservative ideology. But that doesn’t mean it won’t happen.

Alas other issues thrown up by the crisis, such as the precarious nature of so many jobs, and the poor housing conditions of so many of the less well-off, will be rapidly forgotten by most people, and the government will take little or no action. A more interesting question is whether people will feel more sensitive to environmental issues, forcing the government to take these more seriously. Previous crises would suggest not, but this is a different crisis in a different time.

Politically all crises represent both threat and opportunity. There is plenty of both this time. It will be a real test of political mettle. We haven’t seen anything yet.

Covid-19 will not make the world a better place

In these strange times I have been thinking a lot about the meaning and consequences of it all. I’m not alone. With so little else to do in lock-down many others are thinking about the effects of Covid-19. Alas this effort is as unproductive as so much else that is going on right now.

For contrasting ideas compare these two pieces. In the New Statesman philosopher John Gray explains Why this crisis is a turning point in history. For him it marks the reverse of globalisation and the return of the nation-state as the dominant idea in political and economic organisation. On the other hand in The Times there is Matthew Parris who explains why We say everything will change but it won’t. For me Mr Parris is much more on the money, but then I have never liked Mr Gray, a very clever man who somehow always seems to miss the point.

The remarkable thing about almost all the predictions of change is that they are expressions of wish fulfilment. Environmentalists say that we will stop travelling by air and learn to value the environment we have so despoiled through largely pointless economic activity. Socialists say the crisis is a vindication of socialist organisation at the expense of markets and capitalism, and that we cannot return to “Neoliberal” ways. Nationalists say that it is all the fault of outsiders and countries will raise borders and expel foreigners. Critics of the European Union say the crisis proves its uselessness and will prove terminal for it. The Economist suggests that the crisis will be good for big companies and herald a period of consolidation and takeover (to be fair that newspaper does not openly advocate such consolidation as a good thing, but its bias in favour of bigness is very evident). Critics of Donald Trump say the crisis means his presidency will end this year. And so on. Perhaps with the crisis having so badly disrupted people’s expectations for how the year would progress, there is some kind subconscious compensation mechanism which leads them to conclude it will hasten what they were always advocating. There must be a silver lining to all those dark clouds.

A lot of these thoughts have merit, but we need to adjust the seasoning. One of the deepest instincts of humankind is conservatism and a desire to recreate better times in the past. When all this is over there will be an overwhelming wish to go back to how things were before, which will be seen as a sort of golden era. This may take a little while to emerge, as a lot of people have been genuinely scared by the idea they could be contaminated by their neighbours. But a lot of infrastructure is simply falling into disuse rather than being destroyed. The planes and airports are still there. Many airlines will go bust, but their assets will be bought up on the cheap by stronger airlines and new ones. Dirt cheap fights will be on offer and, alas for those of us who think it is mainly pointless and destructive , things will get back to something like what they were.

Still, a number questions are worth posing. The first is whether we will treat this affair as a nightmare to be put behind us and forgotten, or whether we will take real steps to make ourselves less vulnerable to future pandemics. Much of history points to the former conclusion, as Mr Parris points out. But one of the interesting things to emerge is how much better East Asian countries have proved to be at handling the pandemic. This applies as much to China’s Communist dictatorship as to Taiwan’s and South Korea’s vibrant democracies. The reason seems to be that they have had major scares before, such as SARS. So perhaps western societies will learn too. Also it may prove very hard to beat this virus. An effective vaccine, the silver bullet we seek, might prove elusive. That would mean that we would have to build longer-lasting systems to fight it, and in particular tighter surveillance of people’s health so that outbreaks can be detected and isolated quickly. This will not be dismantled so quickly.

A second question is how the world’s financial systems will cope with the surge in government spending required to confront the disease and to soften its economic effects. Each of three pillars of the world system is going to be put under immense strain: the US dollar as the world’s principal currency for reserves and international transactions; the Euro and the European financial system; and China’s opaque and highly manipulated system. Here in Britain our financial system looks a lot healthier than it did during the great financial crisis, but it cannot fail to be impacted if these other pillars start to falter.

And then there are things that people should be pondering but are not. The first are lessons about the most effective structure and governance of the state. Here in Britain we are seeing a lot of muddle, and many missed opportunities. A lot of these derive from excessive centralisation, which stops the government from making the most of many smaller organisations that could help unblock the bottlenecks in the supply of tests and personal protective equipment, for example. Instead people will probably conclude that the system was not centralised enough.

There is also a deeper philosophical question about our society. The lockdown shows how little of our economic activity we actually need to keep ourselves alive. Most economic activity is only of marginal worth when set against the big issues of life and death. Perhaps we should rethink our obsessions with economic growth and productivity, and instead try to build a society that is safer, more resilient, more sustainable and happier. But if that thought ever starts to get traction it will soon be crushed in our desire to put the nightmare behind us. I can’t yet see much of a silver lining to this cloud.

Why I have been offline

It’s been one of my longer periods of silence on the blog, and I’m still not ready to post at my old rate. I owe my readers an explanation.

Covid-19 is today’s excuse for everything. It has been an important part of what has been happening to me, but it isn’t the reason that I haven’t had time to devote to my blog. That is because in the New Year my wife and I finally took the plunge to move out of London. We’ve been plotting it for years, to the mounting boredom of our friends and relations. We are frustrated with our life in the big city. We love the countryside and feel trapped in London. We also want more space and less jostling with our neighbours. We weren’t looking for the full rural experience, but to take a big step towards it, to live somewhere with more space and with better access to the countryside: preferably a very short walk.

So in January we took steps to put our terraced house near Clapham Common on the market. I was hoping for a bit of a “Boris bubble”, before relief at the breaking of the political deadlock was overwhelmed by the contradictions in what the new government was trying to do, and an overdue global recession struck. Our plan was to achieve a quick sale if possible, so we promised “no chain”. In other words we were happy to move out to temporary accommodation in the probable event that we were unable to synchronise a purchase.

This proved well-timed. The local property market had been dead, but with quite a few potential buyers. Very few properties were coming onto the market. In a week the house had 40 viewings and we had five offers, though none for the asking price. We picked one of these, with our objective of a quick but secure sale in mind, negotiated a slightly higher offer, and we had exchanged contracts before Valentine’s Day.

This left the other half of our plans to move a bit adrift. We had been doing a bit of surreptitious looking over the previous two years. We initially focused on West Sussex and the Chichester area. But we were unimpressed with what was on the market there, and it was relatively expensive. So we started to investigate East Sussex, in the Battle and Rye area, and lined up several viewings. There were some near misses, but none quite hit the mark. We did find the area just as beautiful as further west, so we made a second visit, just as we were about to exchange contracts.

This time we combined the east of East Sussex with the region where the two parts of Sussex meet, in the area around Lewes and Eastbourne. This part of the world quickly grew on us. Lewes is a lovely and interesting place. The South Downs are nearby. And it is within easier reach of both central London and the west of the country, where most of our relatives live, than Rye. We found two properties we really liked there, and offered on one of them. After a bit to and fro our offer was accepted before my birthday on 21 February, though it was clear that there would be a gap between moving out and completing on the new property.

And so started the process of preparing to move out. We had been living in our house for nearly 24 years, and our entire married life. Although we had done a lot of sorting out last year, the amount that still needed to be done was massive. We set a completion date of 27 March, a bit later than our buyers wanted, but about as quickly as we thought we could manage. As usual I was more optimistic than my wife, but on this occasion she proved correct. Getting ready became overwhelming. Sorting things into boxes to take, or into various categories of throwing out. We made regular trips to the dump and local charity shops. We also needed to work out what we would need for our temporary accommodation and what was to be put into storage, without having any clear idea of how long the temporary interlude was going to be.

And then came Covid-19. Like most people I didn’t see the seriousness of the impact until quite late. It was something happening in China. But as it took hold in Italy it slowly dawned that it could affect our plans to move. So our feelings differed from most people. We were willing the government to slow down on imposing restrictions, while most people thought the government was dithering (and most people were surely right). And while most people were stocking up for the crisis ahead, we were doing the opposite to minimise what we had at movement day. Slowly restrictions started to get in the way. The charity shops stopped taking donations and then closed altogether. Some quite usable things went to the tip instead. And then the tip closed, and more stuff had to go into regular bin collections. And the question nagged: would we be able to move at all on 25 March, when we had booked our removal company?

On Monday 23 March, I honestly thought we’d lost the race. Boris Johnson announced lockdown, and the four reasons that we could go out of the house, and completing a house move wasn’t listed. At this stage a high proportion of our stuff was packed; only the bedroom wasn’t taken over by boxes. Normal life had become impossible: we were camping in our own home. It was worse for the people moving in. The wife was six months pregnant and they had a young child. Their rental contract expired at the end of March. The emergency might be able to stave off eviction; it would not delay a new arrival.

On Tuesday we contacted our removers. They were keen to proceed, though they wanted to telescope a two day move into one. Government restrictions on work were vague, it turned out, and ministers talked of keeping the economy going. That gave our removers the wiggle-room, and we were asking no questions. Our relief was immense. It was only slightly marred by Premier Inn calling us in the evening to tell us that our booking for Wednesday to Friday was cancelled. We realised that staying at home after the removal had started was not a practical proposition and had planned to stay there. We managed to find a local apartment instead, though this proved not nearly as comfortable.

On Wednesday our removers turned up. A first there were five of them, and then eight. They worked hard and cheerfully, and got the job done. They marvelled how just the two of us had managed to accumulate so much stuff; we lamely said that a lot of it was inherited. That gave us Thursday and Friday morning to pack up the stuff we weren’t putting into storage, and to clean the place up a bit. On Friday completion happened and we became technically homeless.

We are now in Broadstairs, Kent, in a holiday apartment. We are then moving into a house nearby that a friend owns as a holiday hone and very generously offered to us for as long as we needed it. Our purchase is frozen, without us being able to exchange contracts. We are one end of a four property chain; nothing can move until restrictions are eased. On the Friday that we completed the government published explicit rules on the property market, effectively freezing it. We had only just made it. The landlady of our current apartment now says that she can let only to key workers; we would not have qualified. While our position is certainly not what we had been hoping for, it could have been a lot worse. Compared to the stresses that so many are now enduring our problems are small beer.

Up to the 27 March we had been focusing on completion to the exclusion of everything else. Since then, we have been recovering from the whole exhausting experience. I have actually been quite busy. There was a backlog of work on my various voluntary duties, and two online meetings last week. That has kept me pretty busy; there will be not let up for another week or two, with an ongoing audit and two important compliance deadlines to meet. And then the lockdown will finally catch up and I will have for reading, thinking and blogging (though most of the backlog of reading is in storage!). Service will resume.

Guest post: YOUNG PEOPLE HAVE PLENTY OF THINGS TO WORRY ABOUT. THE LONG-TERM EFFECTS OF THE CORONAVIRUS SHOULDN’T BE ONE OF THEM

Sorry for the lack of activity. I haven’t succumbed to Covid-19. I have just been exceptionally busy, not least with a house-move. And not just that: my Treasurer duties have been quite intense, and still are: I’m in the middle of an audit. I will recount my tale when things settle down a bit. Meanwhile it is my pleasure to publish this piece from John Medway.

A recent article in the Daily Mail raised the question of whether it might be better to accept a high death toll among the elderly from the coronavirus than to impose a huge financial burden on the younger generations by allowing major short-term disruption of the economy. Stephen Glover wrote (25 March 2020 ): “We have to ask ourselves a rather shocking question. Is it right that, in order to save the lives of mostly elderly people … the future lives of millions should be devastated?”

I must declare an interest here – I am elderly. To be fair to Glover, he doesn’t come down in favour of letting the elderly die off. He accepts an imperative to “throw the kitchen sink at the problem”. In any case, I’m going to leave aside the moral issue of balancing human lives against economic well-being. My view is that his prediction of long-lasting economic devastation from the coronavirus is simply bad economics. I don’t accept that we necessarily face years of austerity because of a generous approach to the temporary economic victims of the coronavirus.

The coronavirus episode will have some significant short- and medium-term economic effects. One is that resources are going to waste because workers are being made idle. This means that for a time, the economy will be smaller than normal and that on average we will be poorer for a short while. If the episode is prolonged and government support for businesses inadequate, there could be some lasting damage to the economy through premature retirements from the workforce, loss of skills and delays in training. These are real, medium-term effects but should be manageable. They should not mean that “the future lives of millions” will be “devastated”.

Glover’s main concern is not with short-term effects on the real economy – its ability to produce the goods and services we need or desire. It is rather with the sudden and huge surge in government expenditure, the loss of government revenue and rapid growth of government debt. “Let’s be in no doubt”, he writes, “that our country faces years of austerity that will almost certainly make the past decade look like a minor irritant.”

That would be true if an unreconstructed George Osborne were to return as Chancellor but I hope this is most unlikely. Thatcherites liked to portray the state and the country as a household whose expenditure was limited by its level of income or by its ability to borrow. This gave some cover for their aim of reducing the size of the state and passing as much of the public sector as possible to markets – an aim no doubt with a strong appeal to the sort of people who donate five- six- and seven-figure sums to the Conservative Party.

But a government does not always need to finance its deficit by borrowing. If, like the UK, it does not belong to a currency union, it can also do it, in co-operation with its central bank, by “printing” money – also known as “quantitative easing” or QE. The limit on the prudent printing of money is set (if not by ideology) by the perceived needs of the economy. If, once the coronavirus is beaten, the economy is held back by the inability of many firms and households to repay or finance their debts, an injection of liquidity through QE could solve the problem. This could be done through a generous welfare system and by offering cheap credit to basically sound firms in temporary financial difficulty.

It is, of course, tempting to think that governments can go on indefinitely financing their deficits through printing money. Some countries have done this, with disastrous results. The volume and speed at which money circulates needs to match the productive capacity of the economy or inflation results. As the economy recovers and nears its short-term limit, there may be a need to reduce rather than increase the money in circulation. This can be done by increasing interest rates, increasing taxes, reducing public expenditure or any combination of these. The important point here is that when printing money is an option, taxes are needed, not to pay for government expenditure, but to help keep the supply of money in the economy in line with productive capacity. In normal times, the notion that taxes are needed to “pay for” public expenditure is a useful approximation to the truth. But these are not normal times.

To a person who thinks in terms of public expenditure invariably needing to be paid for through taxation or other revenue, a sudden and enormous surge in government spending is deeply alarming. Glover’s alarm is perhaps because his perception of the nature of money, spending, borrowing and taxation is fundamentally different from mine.

There are big things to worry about in the British economy. One is the age imbalance in the population and the problem of caring for a growing elderly population – ironically, a problem that might be alleviated by a cull of the elderly population by the coronavirus if it gets truly out of control. The age imbalance is a problem in the real economy – the resources devoted to the care of elderly people. The problem is exacerbated by unfunded public-sector pension commitments, to which printing money will not be the answer.

More serious is the climate emergency. It is an emergency because global warming seems likely to prove catastrophic unless action is taken urgently to reduce carbon emissions. Governments generally show no sense of urgency and some (such as the US government) are in actual denial of the problem. The medium-term economic and social effects of dealing effectively with the climate emergency are likely to be far-reaching – for good or ill, depending on the attitude and skill with which governments and societies approach the problem. The price of failure could be one or more future generations of people for whom life is nasty, brutish and short.

Young people have plenty of things to worry about in the economy, society and environment that we oldies are bequeathing them. The long-term effect of the coronavirus should not be one of them.