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Berlin: Germany faces its history

I’m just back from an Easter break in Berlin, Dresden and Prague. I will post on each of these cities, starting today with Berlin.

This was my first visit to the city for 30 years – last time it was still divided by the wall. I hardly recognised it. We spent most of our time in the old east, staying in a done-up Communist-era apartment very close to the site of the wall, near the Brandenburg Gate. The old east is where most of the government and official buildings were, so it is no surprise that it is now where most of the tourist sites are. It is a bit of a building site, and still a little, well, without the bustle you would expect from such an iconic city.

What eastern Berlin does have is a lot of spectacular old buildings in the classical style being restored from shabby and decaying blackened relics, to smart and shiny wonders. This is most spectacular in the Museum Island, where a series of post 1871 edifices in stone veneered brick, and in classical style, are in the process of restoration. It is the site of spectacular exhibits of reconstructed elements of the Babylon gate and Pergamon temple – and, of course, the bust of Nefertiti (which lives up to all the hype – it’s my favourite thing to have come out of ancient Egypt).

As an amateur writer I am sorely tempted to turn this process into some sort of metaphor, something to do with Germany scrubbing its history clean, restoring things that were a bit fake in the first place, to show off pillaged treasures (not that we Brits can complain on that last score). But what the Germans are doing with their history is something much more interesting than any such trite metaphors can convey.

Berlin has a series of museums and monuments that exhibit aspects of German history. We saw the museum of the DDR, about the communist era. There is a very popular museum about the wall. We also went to the Soviet war memorial, which features a series of display boards at the back about the war and war memorials in general (a lot of men in uniforms, one of our party noted, with only one picture of women, grieving over the bodies of the murdered). The tone is relentlessly objective; nothing seemed to be particularly concealed or glossed over.

This process of facing up to a country’s history, treating it as a subject of objective examination and analysis, is very striking, and remarkable even in the modern world, though it is one of my major passions. Even in modern Britain, our Education Secretary, Michael Gove, seems to favour the teaching of a sanitised, propaganda version of British history… And as for Japan… or China… or Russia… Germany itself took quite a while to get there. Post war there was a tendency to gloss over awkward aspects, and to treat the country as more victim than perpetrator. But the county’s overwhelming desire, and need, to reconcile with its neighbours, and its own eastern and western zones, made such a stance unsupportable. So they are going for objectivity now.

This must be welcomed. I wish we all did this. But I can’t help noticing that this turns history into an object of curiosity, rather than something of meaning and passion. The Soviet war memorial used to be protected by soldiers and barbed wire (Soviet soldiers with British ones to protect them!), and drew protest marches. Now the soldiers are gone and children play on the old pieces of artillery. A powerful symbol becomes another stop on the tourist itinerary. I suppose this is for the better, but I do wish that history could both have meaning and be treated objectively. I nearly wrote “dispassionately” instead of “objectively” – which sums up the problem rather well.

But this isn’t quite fair. Near the Brandenburg Gate we visited a shrine to the murdered gypsies of the Nazi era; a simple circular pool. We did not have time to visit the memorial to the Jewish Holocaust victims, though we could see it from our apartment. That is a vast collection of stone blocks without words. These silent, wordless memorials are appropriately moving, and stir the deeper sort of thoughts that words cannot. As a permanent part of the centre of Germany’s capital city, they seem to say “We will not allow ourselves to forget”. If that diminishes Germany’s standing in one way, as the guilt is allowed to linger, on balance it strengthens it, by saying that “We are facing up to our history”.

It would be nice to have something like this in London to mark our own nation’s crimes. The African slave trade; the Indian famines and massacres; and dare I say the indiscriminate bombing of German civilians. But we are too proud to do this, especially the last. But Germany’s way is surely the path to a better future, and the only way that we can truly mark the modern age as being an advance on what went before.

Economics is in denial. A new crisis builds

When the financial meltdown of 2008 to 2009 occurred, most people said that the science of economics was in state of collapse. And yet conventional economics ploughed on with barely a wobble. To see this you only have to listen to the commentary around central banks, which uses language from old text books, with only slight adjustments to modern jargon, such as “forward guidance” and “quantitative easing”. And this in spite of the fact that monetary economics was at the heart of the failure of economics in 2008. This is leading to false optimism about the prospects for the world economy. It is the economics of denial.

The story so far. The collapse in 2008 exposed gaping holes in textbook economics. Standard microeconomics, with people regarded as welfare-maximising, rational agents, had long been a laughing stock, unless you had to use it to pass exams or get academic papers published. But the crisis showed that macroeconomists were not paying much attention to the financial system – and yet the crisis that unfolded had finance at its heart. And the question of how wealth and income was distributed was treated as an afterthought, with the real attention being on how aggregated statistics (like GDP and inflation) behaved. For these reasons, most economists failed to see the crisis coming, and they failed to understand how long-lasting the following recession would be.

To be fair, many at the fringes of economics are asking deeper questions. I get a glimpse of these through The Economist’s Buttonwood column (written by Philip Coggan). In this week’s print edition he reviews a book by fund manager George Cooper which tries to rethink economics. Mr Cooper sees the world in terms of social competition – which has the virtue of putting wealth distribution at the heart of the narrative. I am debating as to whether to buy this book- but I have been disappointed in this genre of writing on economics – long on criticism of conventional wisdom, short on substantive new ideas.

But on Monday Mr Coggan looked at another book, Capital in the 21st Century by the French economist Thomas Piketty. This book, published in French last year, with an English version about to be released, is in a different league. It has the weight of data behind it, and some serious thinking. It could conceivably change the direction that conventional economics takes. It puts distributional issues at the heart of economics – which is surely where it should be. Mr Piketty suggests that if economic growth slows down, the elites who own productive assets accrue a disproportionate share of the wealth. We are in just such a slow growth era now in the developed world, mainly because of demographics, but also because technological advance does not seem to be translating into higher economic productivity in the way that it used to. I am rather afraid that I will have to buy Mr Piketty’s book, even though I already have a substantial backlog of reading.

But none of this stops the incessant chatter around monetary policy and growth statistics. The narrative is now that growth in the developed economies has returned, so that we can get back to familiar old track of steady economic growth (about 2% a year). Asset prices have jumped. And yet the fundamental problems that led to the last financial crisis have not been fixed.

Now let me develop my personal take on the world economy, building on some of the ideas that these authors have raised.

The fundamental problem of the developed world economy is that a disproportionate share of the wealth is accruing to a small elite. This may be because of globalisation and newer technology. It may just be a fundamental law of economics that was concealed by temporary factors in the 60 years after 1945 (as Mr Piketty seems to be suggesting).

Many would consider this to be problem in its own right. But it also creates a wider problem. The rich elite does not spend all that it earns. This, as going back to the circularity of economic flows that forms the basis of macroeconomics, will cause the economy as a whole to shrink. The textbook way in which that shrinkage is prevented is if the surplus earnings (aka savings) are channelled into investments; indeed basic economics holds that savings equal investment as a law of nature (with the dread qualification of “in equilibrium”). But this investment involves giving people jobs to do real things – like building ships or factories or even just houses. It does not work if the investment is simply a financial merry-go-round chasing speculative profits – or bidding up the prices of pre-existing assets such as land. But this is exactly what is happening, and a burgeoning industry has been created to support it.

But there are two other ways to stop surplus savings from causing the economy to shrink. The first is to lend money to the not-so-well-off to support a lifestyle beyond their financial means. We have witnessed this, strikingly in the USA, since the 1990s. The second is for the government to make up the shortfall in demand by running large deficits. This is what took over after the crisis. The trouble is that neither path is ultimately sustainable. Both cause the build-up of debt that cannot be repaid, and onto a crisis of default, involving the mass destruction of financial assets. That process of default comes in quite a few guises: hyperinflation, revolution, depression – with war often associated. This is what the developed world experienced between 1914 and 1945. The wealth of the elite is destroyed, with substantial collateral damage on the poor. And then we start the process all over again.

Is disaster inevitable? No. A conventional economist would offer two ways out. First we could switch those savings from the merry-go-round to real, productive investment. Second we could generate economic growth through increased productivity and further globalisation, and with new wealth generated outside the property-owning elite.

But I’m afraid there is a fairy-tale quality to these ideas. There is only a limited amount of potential commercially-worthwhile investment out there. It is difficult to understand how rapid productivity growth can happen in developed economies. This leaves us with the need for tough political action, to pre-empt disaster by forced redistribution of the elite’s income and assets.

Once conventional economists start recommending these sorts of strategy, rather than treating them as suicidal, we will know that they are making the transition. This is happening only at the fringes at the moment. Meanwhile we are sailing serenely into the next financial crisis.

It will probably take this next crisis to shake things up, and finally break the world of denial that most politicians and financial professionals currently inhabit.

Putin is no Hitler, but we have to draw a line

For those of us who take an interest in history, it has been a scary few days, as Russia flexes its muscles over Ukraine. It is the sort of behaviour that can lead to war, if not now, then the next time they try it. It’s worth trying to unpack these historical parallels a bit.

First there is a reminder of the lead up to the First World War, now very much in the public consciousness as the centenary approaches. There are some striking parallels here. First is complacency. In 1914 there had been 43 years of peace in Europe, and an era of rapid growth and international trade. It was widely assumed that economic interconnections were such that a major war was unthinkable – one side or other would always back down before it was too late. That assumption is widespread now.

Next we can see a “Great Power” mentality in Russian policy. Before 1914 politicians tended to see the world dominated by the interests of Great Powers (Britain, France, Germany, Russia, the USA, etc.), who had spheres of interest. Each great power pursued its own national interest, treating each other with circumspection and respect, but trampling over other countries at will, provided they were in there own sphere. Russia seems to consider the Ukraine as part of its own sphere – as with all countries within the boundaries of the old Soviet Union. China seems to think this way too, but the Western powers have a more enlightened view of the world, and like to see things in ethical terms. Of course the Russians and Chinese think this ethical view is just a cynical cover for extending the Western (or rather the U.S.) sphere.

And finally there is militarism. The most toxic element of the pre-1914 political cocktail was German militarism. The German ruling elite was dominated by the military, and barely constrained by democratic processes. They had developed a philosophy that world politics was a life and death struggle between nations, of which war was the only arbiter. Their military analysis of the European situation in 1914 – that they could win a general European war, especially if Britain stayed neutral – meant that they egged the Austrians on. The military play an important part in the Russian political elite, and they feel an acute humiliation from their decline of prestige since the Cold War, and a sense of satisfaction from their intervention in Georgia. The Russians will not want a full-scale war with the West, but they are probably happy to contemplate unequal confrontations with their immediate neighbours.

But I find the parallels between Russia and Hitler’s Germany before the Second World War the more alarming. Hitler had developed a doctrine that it was right for Germany to intervene to protect German populations outside its borders. This led successively to the occupations of Rhineland (which had been occupied by the French under the Versailles Treaty, but which was recognised as German territory), Austria, Sudetenland, the rest of Czechoslovakia, and finally Poland. In each case, until Poland, the other European powers failed to react, which emboldened Hitler to move to the next challenge. The parallels with Russia’s interventions in Georgia and Ukraine are rather striking. First there is the doctrine of intervening at the request, or in the interest of, people considered part of a wider ethnic identity. Second is the kind fig-leaf legal pretexts that are used to justify these interventions (in Crimea the letter from ex-president Viktor Yanukovych) without any real regard to ethical merit. Third there is the failure to stand up to each provocation by the rest of the world community – justified in the name of avoiding war. There is a rather chilling parallel with some of the dissembling I read amongst some comments by some on the internet: Ukraine has a complicated history; there is no clear right and wrong; Crimea should really be part of Russia anyway. This is strikingly reminiscent of the supporters of Appeasement in the 1930s. In that case a firm intervention by Britain and France could have caused Hitler’s downfall and prevented war – or at least led to Germany’s early defeat in a war, and millions of lives saved.

We can overdo the parallel between Putin’s Russia and Hitler’s Germany. True, Putin’s rule has a lot of elements characteristic of fascism: contempt for the rule of law, suppression of dissent, and appeal to a highly nationalistic view of history. But there is little of Hitler’s sense of a national mission. Russia is a much more cynical place than Germany was in Hitler’s time. Russia may despise the West, but it also envies it and craves recognition by it. Hitler sought more than prestige: he sought something much more like domination.

But there are risks. Russia feels that it has “interests” not just in Ukraine and Georgia, but in Byelorussia, Moldova and the Baltic states (to say nothing of the Asian former republics of the Soviet Union). It might be tempted to use military means to extend its influence in each of these countries if it gets away with a painless annexation of the Crimea. This is not only bad for the people living in these places, but could cause war, and in any case sets an awful precedent for other countries.

To combat this the West needs to be clear and united on a number of things. First is that our view of democracy is that it comprises a system of moral principles that go way beyond the holding of elections. That includes respect for legal processes, honesty by ruling elites and protection of the interests of minorities. Mr Yanukovych lost his legitimacy through his theft of public assets and through his excessive deployment of lethal force against protestors. These are things that go beyond the pale of democratic rule. We need to be quite consistent in holding the new Ukrainian government to the same standards, condemning any oppression of the Russian minority. Secondly, we accept that borders can change, but that it must be done through a democratic and legal process, with full protection of minority rights. One day Byelorussia might join up with Russia. Perhaps even there is a way for Crimea to become independent or join Russia too. But military means is unacceptable. Military intervention is only allowed where something like genocide is starting to take place, and preferably with UN backing. Third is that military intervention against a NATO country really does mean war.

So, when Russia breaches these principles, what to do? There do need to be consequences, and the West much accept damage to its short-term economic interests. A number of sanctions have been talked about, against Russia and against Russian elites. These have justification, but we need to leave enough tools in the box in case Russia ups the ante. The legal pretext for Russia’s intervention in Crimea could equally be used for a full-scale invasion of the rest of the Ukraine. If this happens, what will we do?

Longer term, we need to do two things. First is to take concrete steps to speed the import of shale gas from the US to Europe, and other measures to reduce the dependence on Russian gas. Second it to make a number of gestures to strengthen NATO’s eastern defences. This is the sort of thing that gets noticed by the Russian elites – and will lead them to ask whether all this military adventurism is worthwhile.

Ultimately, though, we would like Russia to take its place amongst the community of civilised nations. This means rolling back the cynicism that is engulfing that society. If it does so, then it will become a more appealing place to live, and its soft power will be enhanced. Byelorussia would no doubt rejoin it. Meanwhile, though, the West must show some spine or things will just get worse.

Nelson Mandela: like all saints, he challenges us

After Nelson Mandela’s death yesterday, the news media and social networks are awash with adulation. One commentator said that he was the nearest thing we had to a modern saint. Personally I don’t go in for personal adulation of anybody, even saints, though I understand the sentiments. I greatly admired Mandela. The saint comment is apt. He shows that virtue, wisdom and above all humility of a saint. But saints should challenge us, as well provide us with objects of admiration. I can think of two ways that he is challenging conventional wisdom.

The first applies to the developing world, in particular. Mandela shows that if you really want to be admired by the world, you should use power with restraint, and show personal humility. Countless leaders across the world are doing the opposite – just look as Sri Lanka or Iraq. Here we see attempts to oppress minority communities, seeking revenge for past wrongs, the stirring up of divisions, and also the self-aggrandisement of those in power. Mandela acquired his stellar influence and reputation by doing the opposite. If only more world leaders would seek to emulate him.

The second challenge is to the developed world in particular. In face of the oppression and injustice of the Apartheid regime, Mandela did not discourage violent opposition, and indeed supported the “armed struggle” as it is euphemistically referred to. He did not glorify it, and his distaste for violent action was plain. But it cuts across our conventional wisdom that “terrorism” is never justified, which in practice means any violent challenge to the status quo. We urge non-violent resistance, following such icons as Mahatma Gandhi. Mandela himself was condemned by many in the developed world as a terrorist. And yet it is easy to see how this line of reasoning can be used to condemn any serious resistance to oppression; peaceful protest can simply be ignored, with enough brute force. The state of the Palestinians in Greater Israel is a case in point. However much we hate the apparently random attacks on civilians, what peaceful outlet for protest are the Palestinians being offered? In that instance, of course, the violence by Palestinians has not achieved anything useful – but we are left with a very troubling question of how the Israeli state will ever take them seriously.

Mandela did not eschew violent resistance as a last resort. But he did show restraint when he had the opportunity to exert the power of the state. To honour his memory we should reflect on these related principles.

What is neoliberalism? The left’s muddle does not help reverse its progress

Political movements tend to be united by what they oppose, rather than any positive things they stand for. Today the political left unite against a universal enemy, which they name “neoliberalism”. The word is bandied about much as “socialism” is by the political right. But what is it? And is it a useful descriptive term? I believe it is, but that the left is muddled by what it is and is not.

According to Wikipedia neoliberalism started its life in the 1930s as a middle path between classical liberalism on the one hand, and the state planning ideologies of fascism and communism on the other. Classical liberalism advocated a minimal state, and, in practice, a world in which big capitalist corporations could thrive. It was widely blamed for the economic catastrophe that followed 1929 in capitalist economies. Neoliberalism stood for something called a “social market”, backed by a strong state. Nowadays, the left make no real distinction between classical liberalism and neoliberalism. This speech by Susan George in 1999, and posted recently on Facebook by a friend, illustrates this quite well – a lot of what she rails at should in fact be defined as classical liberalism. This is interesting, and not necessarily wrong. Neoliberal ideas have provided cover for a lot of classical liberal ideas – and neoliberals have seen state socialism as their main enemy, rather than unfettered capitalism.

I think it is best to understand neoliberalism in terms of three core ideas:

Markets are an unbeatable information exchange. Markets are idolised, because they are seen as the most efficient possible way of reconciling the masses of information that modern societies require to keep moving. This idea of the market as an information exchange, famously advanced by Freidrich Hayek, is a very powerful one, and an advance on the rather abstracted ideas of classical economists.
People respond to incentives. Pretty much all human behaviour, good or bad, can be understood as a response to external incentives. This is often developed into the idea of all people being independent agents rationally responding to the opportunities around them according to a set of pre-defined preferences – often referred to as homus economicus. However, the idea is deeper and stronger than this theoretically convenient way of looking at things.
Direct state management is inefficient. This actually follows from the previous two ideas, but takes on a life of its own in the minds of its followers. The state is incapable of processing information about people’s wants and needs with the efficiency of a market; the state’s officers generally respond to their personal incentives, often simply to secure a stable and easy job. Result: gross inefficiency. When any of the known theoretical weaknesses of markets are presented to neoliberal advocates, their response is often to accept them, but to point out that to try and solve them through a state managed solution would make things even worse.

There is a general view, supported by Ms George’s speech, that neoliberalism took hold in the 1980s, under Britain’s Margaret Thatcher and America’s Ronald Reagan’s political leadership, and the economist Milton Freidman providing theoretical heft. From these beginnings it developed into an orthodoxy across the developed world that, according to the left, still grips the political establishment today. The financial crisis of 2007-09 has not drained it of power, as the left thinks it should have done.

There is some puzzlement on the left as to how this neoliberal takeover happened. Ms George paints a glowing picture of the Keynesian consensus that preceded it, and derides any idea that neoliberal ideas had any real persuasive power in their own right. She resorts to a sort of conspiracy theory of coordinated and determined vested interests. Well, I was there, and voted for Mrs Thatcher in 1979 (though not afterwards), and find the rise of neoliberal ideas entirely unsurprising. Britain, in particular, was in a miserable state: and the “Keynesian” consensus was an evident failure. It had failed to respond to the changed world that followed the oil crisis, resulting in unemployment and inflation. We were surrounded by national bureaucracies and nationalised industries of an inefficiency that today people would find unbelievable. Much of what they said, especially about state directed solutions, rang true. Many politically powerful vested interests opposed the change – but the neoliberals were pushing at an open door in the world of ideas.

Trying to put all this in perspective is made harder by the following things that have accompanied the rise of neoliberalism:

There has been a dramatic change to the industrial and economic base to developed societies since 1945 (well since long before that, of course). In the first phase manufacturing industry advanced, in such a way that much of the capacity built to support the war effort could be readily redeployed (in contrast to what followed the 1914-18 war); this was the basis of an unambiguous economic miracle that lifted many out of poverty. In the second phase, from the 1980s, manufacturing industry became much more efficient, while the appetite for its production hit saturation; the economy switched to services. This has created huge dislocation, and, more recently, the disappearance of mid level jobs. It has driven overall growth in wealth, but also tended to increase inequality. Neoliberal policies have helped this transition forward, but were not the underlying cause of it.
Capitalist corporations have remained as strong as ever, and have grown increasingly able to press forward their interests in the political system, especially in America. They are not fundamentally neoliberal in outlook (their aim is to rig markets and not empower them, but they usually camouflage their lobbying in neoliberal terms. We should be careful not to exaggerate their power though. The corporations have not had it all their own way: their life expectancy has dramatically reduced over the period. Neither are these faceless corporations entirely managed for the benefit of a small elite; they have also benefited armies of employees, and their institutional shareholders are often pension funds that likewise transmit their gains to ordinary people.
A lot of theoretical economists have got carried away with their models based on homus economicus, and these have become a soft target for neoliberalism’s critics. But often these criticisms amount to criticising the tactics and not the strategy: about how people respond to incentives, and not the idea that incentives drive behaviour.

Ms George manages to be muddled by all of these things, leading to a speech that can only be called paranoid. I suspect many on the left share her views, though, and feel that they have been vindicated by the events of the decade and a half since. This muddle, and their failure to clear identify and advocate alternative approaches to the neoliberal consensus, means their persuasiveness is doomed to be very limited.

Meanwhile political centrists seem to be trying to recover something of the original neoliberal outlook: the social market. The use of market mechanisms within a society that is still dominated by the state. As somebody who tends to the political centre I would like to say that this offers the most constructive way forward. But I have to point out that the great financial crisis of 2007-09 resulted from the collapse of just such a middle way philosophy, in the world of finance and banking. While the left blames it on rampant capitalism and greed, cack-handed state intervention was just as much of a problem, and the combination was lethal. It was a neoliberal project in the original sense of the word.

Where does that leave us? A lot of what neoliberals say is true. We need to grow up and recognise that. But a lot of it isn’t; and its failures are currently more important that its successes. Our societies’ institutions have not kept pace with the changed nature of society and the economy. But it will require a large dose of state direction, especially in education and housing, to fix this.

Us, them and Europe

Britain’s membership of the European Union used to command almost universal assent from the country’s intellectuals. Just how far this has changed was made clear to me by a recent BBC Point of View talk by the philosopher Roger Scruton. He concluded a thoughtful series of talks on the nature of democracy with what amounted to a diatribe against the European Union as an “unaccountable empire”. Mr Scruton is a serious man, and his criticism of the EU needs to taken seriously by supporters of Britain’s membership like me. .

The essence of Mr Scruton’s talks is that democracy is based on a series of institutions that allow opposition and argument. He criticises Egypt’s Muslim Brotherhood for claiming that its attempted imposition of a theocratic regime was democratic, when they were undermining the very institutions on which any democracy has to be based. Mr Scruton goes on to say that these institutions can only be sustained where a country has a sense of “us”, of identity that tolerates opposition with a sense of it being all in the family. But “there is no first person plural of which the European institutions are the expression”. He goes on to suggest that this because the EU is based on an international treaty that supersedes elected legislatures, and becomes incapable of being modified. He uses the EU’s free movement of peoples as his prime example, as many Britons are unhappy with so many people from other EU countries taking up residence here. He goes on to say that “democracies need boundaries, and boundaries need the nation state”, painting a picture of nation states coming together from a bottom up sense of togetherness and neighbourliness, shaped by shared language and culture – which the EU lacks.

I have two immediate reactions to this. Firstly I am very uncomfortable with the suggestion that our feeing of “us” and “them” are simply matters of historical and geographical fact that we should adapt to – and the all Britons are “us”, while Brussels bureaucrats are “them”. To me this has a rather scary overtone of the 19th Century idealisation of the nation state, based on language and culture. This movement led to the unification of Germany and Italy, and myriad calls for self-determination which led to the breakup of the Austro-Hungarian and Ottoman Empires. It helped usher in, from 1870 to 1945, 75 of the most disastrous years of war, conflict, forced migration and genocide in our continent’s history. Unscrupulous politicians played up on peoples’ sense of “us” against “them”, and tried to impose this on the continent’s tangled patchwork of languages, cultures and nationalities.

And if we think that Britain is exempt from all these continental complexities, I wonder if a Northern Irish person of Catholic heritage really thinks that government from Westminster is by “us” rather than “them”. And Scotland’s most successful political movement is based on the idea that Westminster is not “us”, and poses a threat to the country’s coherence. The first person plural is not a matter of received fact, but has to be built patiently out of liberal principle. And in the modern, highly interconnected world we must be inclusive. It is not as if Britain’s history is that of being an isolated island nation: we have been a hub of European and world politics; the country used by a the pinnacle of an empire that covered a quarter of the world’s surface, and for two millennia it been part of a highly interconnected European history. Britain is a trading nation and an international hub; we have to accept the responsibilities that go along with that or we will not appreciate its benefits.

As it happens, since being a teenager I have felt a strong affinity with the European project, and have ever since felt that the European institutions have been a political expression of my first person plural. And neither is it true that the European treaties have been fixed and unchanging; they have been subject to democratic pressures from below.

My second reflection is that the European Union is something of a lightning conductor of political discontent – and that removing it will not actually remove the discontent. When I look at technically fully independent countries like Australia, I don’t see places at are any more at peace with themselves and the world around them than we are. True, Australia has recently benefited from a good run of economic prosperity – but at the cost of big mining corporations running riot across the countryside (for people worried about wind turbines, just look at the open-cast mines marching across the Hunter Valley in New South Wales),and who have such political clout that they are able to overturn tax proposals that they don’t like. And the politics of immigration are just as toxic. Australia (and I could also use those other Anglo-Saxon bastions of New Zealand or Canada) finds itself at the mercy of an interconnected world, and it is by no means clear that they are better off outside an international federation like the EU. Britain’s problems would not go away, or become any more tractable, if it left the EU.

But having got all that off my chest, I have to admit that Mr Scruton has put his finger on a real problem, which is that EU institutions have lost popularity, and often seem beyond political accountability. His use of the free movement of people as an example is very telling. This idea lies at the beating heart of the European Union, but it creates a lot of tension. And unlike many supposed EU generated problems, like over-regulation, it’s for real. In Lincolnshire, where Mr Scruton was born and where support for the anti-EU Ukip is high, there have been real impacts from the influx of east European migrants in search of work. And yet freedom of movement has had real economic and personal benefits. And it is not just in Britain that anti-EU feeling, in large part directed at free migration, has been building up. This is all hobbling areas like energy policy where EU level action is increasingly warranted.

In the long run the answer is for Europe to develop a stronger sense of “us”. This may already be better developed than Mr Scruton allows, but it remains very patchy. I believe that there is enough of a sense of common values and history to provide a basis for this. One of the best ways for a Briton to feel European is to travel to a country like U.S. or, for slightly different reasons, Australia. But it needs to be promoted by liberal politicians, and is the work of generations.

A referendum on EU membership, the policy of our Prime Minister David Cameron, remains an enticing idea. The consequences of a “no” vote would be disastrous, but the pro-EU forces need to be rallied, and the institution’s legitimacy must be reaffirmed. I am also coming round to the idea of another of Mr Cameron’s ideas: a British Bill of Rights. This would mainly give a British label to core European principles, but it could also set clear British constitutional limits to European power, much as Germany’s Basic Law does.

But the bigger truth is that we must move on from the 19th century idea of an all-powerful sovereign nation state. We have to develop the legitimacy of multinational bodies like the EU; we also need to devolve power to more localised levels, especially in bigger states like Britain. This requires fresh thinking on the institutions of democracy. Roger Scruton is right to remind us that democracy is about more than voting, and requires a sense of common identity, but in the end he is not helping us to adapt the world where humanity now finds itself.

What does the Syria vote mean?

Last night’s vote by the UK Parliament to reject a government motion to clear the way for punitive action against Hafez Assad’s regime in Syria feels like a very important moment in British politics. It is a small but decisive step away from Britain’s centuries-old role as a Great Power on the world stage. This has good and bad aspects.

The vote itself has divided opinion among in my social network. The less political of them, including my liberal leaning but unpolitical friend at the gym this morning, are very happy. A depressing chain of events that started with Tony Blair’s joining of the Iraq war has reached an end. But many of my Lib Dem Facebook contacts are very unhappy: who will restrain President Assad’s regime now? But just as many share the views of my friend at the gym. I find my feelings very mixed. I do not want this country to take sides in this conflict; but the thought that Mr Assad’s government will take comfort from it is not a comfortable one.

But what will non-Britons make of this episode? It doesn’t seem to be all that important. The real power is with the United States; Britain’s military capacity is puny by comparison. This debate is not being had in many other countries, from the economic powerhouses of German and Japan, to other world powers such as Brazil or India. Only our French neighbours are weighing up the same issues, apart from America, and, in a different way, Russia. It all seems to be more about maintaining the status of our political elite than something that a third rank world power should be concerning itself with. It will be more difficult now for that elite to maintain its delusions of grandeur.

In one way this a good thing. The expense of the country maintaining this world status is increasingly unsustainable, as cutbacks to the armed forces show. There have been successful military interventions: in Kosovo, Libya and Sierra Leone. And places were we probably should have intervened but didn’t: Bosnia and Rwanda. But the results of the bigger interventions, Iraq and Afghanistan, are at best ambiguous. Syria looks more like the latter, though the government has been trying to limit the scope of any intervention. The judgement of our political leaders and the civil servants and military men that back them up has not proved particularly sound. And successful small interventions only encourage them to think bigger. We are now facing up to a more realistic view of Britain’s place in the world.

But there is also a dark side. It is not good if a country turns in itself, and does not want to accept the implications of being part of a bigger world. There is a strong undercurrent of this in Britain: from anti-immigrant feeling to criticism of foreign aid, as well as resistance to taking part in the European Union. But the country’s fate is more bound up than ever by what goes on in the rest of the world, and far too often this sort of isolationism leads to paranoia and conflict.

Personally I would like to see Britain take further steps back from its pretension to a world role: giving up the country’s seat on the Security Council and our nuclear weapons. But I would also like the country to take part in military interventions if these are needed, especially in Europe and (perhaps) Africa. But we need new ways of going about this, and a clearer idea about when and how we go about it. I hope last night’s vote is a step along the path to a better way.

The West has become irrelevant in the Middle East

Along with most of my politically conscious compatriots here in Britain, I am deeply shocked by the massacres perpetrated by the Egyptian security forces on supporters of the Muslim Brotherhood over the last couple of days. A deeply shocking, and depressing, revelation came from an EU mediator in a BBC interview yesterday. Apparently he was very close to achieving a negotiated way forward, before hardliners in the Egyptian government overruled the people he was negotiating with to press ahead with the violent crackdown. This episode deserves more attention that it got (I have failed to find any report of it after searching both the BBC and Google, so quickly have the news media dropped the story), as it is very revealing about both Egypt and the Middle East at large. We in the West have become completely irrelevant.

What we had hoped for in the Arab Spring was the emergence of democracy in the various Middle Eastern states, with a working relationship developing amongst the main political factions, with workable, effective governments emerging over time. Perhaps a bit like Portugal after the 1970s. We cling to the hope of this now in just Tunisia and Libya. What has emerged instead is a conflict between an Islamist faction and the state security apparatus, neither of which is interested in liberal democratic government. In Egypt both factions have decided they should get what they want by ignoring the liberal factions and Western standards. They are following a path taken by Algeria; the uprising in Syria is evolving in a similar direction. In Jordon and Morocco the state security apparatus is in control but toy with democratic reforms to keep Western sponsors sweet. In the Gulf and Arabian Peninsula the state security apparatus is not even doing that. In Iraq democracy is gradually being pushed into the background as a similar dynamic emerges. Israel/Palestine and Lebanon are much more complex, but some of the same themes can be seen there. The real battle is between a powerful state security apparatus and an Islamist protest movement, which shades into insurgency and outright guerrilla war. Neither side is interested in democracy, and no other civic or foreign forces can persuade them otherwise.

The first disappointment in Egypt is that the Islamists failed to embrace democracy. Rather they saw democratic institutions as a means of seizing power for themselves. They seemed to have no concept of governing by consent, or of building democratic institutions. President Morsi’s democratic mandate was weak, as the electoral system failed to give voters a proper choice. There is no properly elected parliament, and the Muslim Brotherhood showed no real interest in conducting proper open elections for them. Their attitude to democratic institutions seems rather similar to that of Lenin or Hitler: a means to an end. This seems to be part of a wider pattern of similar Islamist movements in the Middle East – notably Hamas in Gaza, and Hezbollah in Lebanon.

Their implacable opponents are hardliners in the security establishment: armed forces, police and murky intelligence organisations. In Middle Eastern countries these forces in most cases, including Egypt, have become monstrous and unaccountable. They are usually incredibly incompetent at their alleged purpose of maintaining law and order, as this week’s massacres showed. They effectively control most Middle Eastern governments, though often with civilian or royal heads of state nominally in charge. They have no time for liberal democracy. The sort of accountability implied by such a system is anathema.

More liberal forces did flower for a while in Egypt, allying with the Islamists to temporarily turn the generals out of power. But the Islamists were not interested in a real partnership. There was a small hope that, after the military coup, the Brotherhood might again see that it was in their interests to team up with the liberals, and concede real power to them. That, no doubt was the substance of what EU mediators were trying to negotiate. But the security hardliners have now crushed all hope of that. And now ordinary Egyptians are faced with a stark choice. Whose side are they on? The Islamists or the security forces? After the Brotherhood’s disastrous period in power, many will choose the latter.

And there is practically nothing that we in the West can do to influence events. The best hope for democracy lies in the Islamist forces coming to understand that they need and should respect democratic institutions, even when it proves inconvenient. They can then build a secure partnership with secular liberals that will command broad popular support. This is what happened, eventually, in Turkey as the Islamists embraced the idea of Turkey being part of Europe. Instead the Islamists in the Middle East and Africa seem to take their lead from their implacable opponents in the security state: it is all about getting your hands on the levers of power.

All we can do in the West is help nurture the small shoots of liberal democracy as they emerge, through mediation and advice, as much as through money and aid – as the EU did with Turkey. Meanwhile we are condemned to being utterly helpless. Neither side needs us.

The Euro does not need a federal superstate to prosper

The Euro crisis is in one of its quiet phases. But few are foolish enough to think that its future is now secure. It is often said that the currency is destined to fail because of a fundamental economic law which means that you cannot operate a successful currency without the full authority and resources of a state behind it. The Euro needs to the apparatus of a federal superstate to survive, it is said. One Tory MP even suggested that the Euro’s promoters were committing fraud to suggest otherwise. But, for all that many in Brussels want it, establishing such a superstate is not politically feasible. And yet it is possible to see emerging the institutional architecture that will allow the Euro to survive and prosper without it. It’s a hard road, but there are enough benefits for the currency’s members to persist with it.

There are four key elements to the architecture. The first is an obvious one: a powerful European Central Bank (ECB), able to do what it takes to ride out the various crises that financial markets will throw at the system. The current ECB has proved up to the task, albeit by pushing at the boundaries of its formal powers, for example by buying the debt of member governments on the secondary market. Confidence that it can handle future crises is growing, adding to the overall stability of the system. And yet this power has its limits; it cannot transfer taxpayer funds from one country to another (referred to as “fiscal transfers” by economists), in the way a federal government could. The Euro has to find a way of existing without the sort of massive fiscal transfers that you see in the United States, for example.

In its place is the second element: provisions for states to default on their debts. This has been resisted tooth and nail by Euro federalists, but at long last it has been implemented for Greece. Alongside this, a crisis infrastructure is emerging, including crisis funds to support governments that are in the process of restructuring their obligations. This whole process needs to go further: publicly held government debt, e.g. that bought by the ECB, needs to be included, for example. Greece will surely need another restructure. But we are seeing the different nations’ bond prices reflecting the risk of default, and this imposes a discipline on government finances. And no government will want to follow the humiliating path of Greece into default, if they can help it.

There remains the problem of managing the banking system, which is very much run along national lines. While Greece got into trouble because of a profligate government, Ireland, Spain and Cyprus were brought down by banking crises. At first the response to a banking crisis was for governments to underwrite all banks’ creditors in order to restore confidence. Many applauded the Irish government when they did this early in the crisis; but it is a terrible idea, transferring liabilities from various people who should have known better to taxpayers who could ill afford it. Therefore the third element of the new architecture is to force bank creditors to pay, or at least contribute to, bailing out bust banks, referred to as “bailing in”. This solution was put in place for Cyprus, and hopefully will be the pattern in future. Of course it remains possible for financially strong governments, like Germany’s, to stand behind their own banks – but this should be discouraged. It is essential for discipline to be brought back into banking, and the system whereby bankers keep the profits and pass losses on to taxpayers has to be terminated.

But this approach is undeniably destabilising; it adds to the risk of bank runs. The obvious solution to this is to establish a Europe wide deposit insurance scheme, just as America has its federal scheme. Initially European governments seemed to favour this, but as they grew to understand its full implications, possible taxpayer transfers between states and increased central regulation, they have backed off. This has left us with the fourth and final element of the new architecture: emergency capital controls. This has been implemented for Cyprus, where depositors at Cyprus banks are suffering severe limits to their ability to move money out. It is an ugly process, and represents a big step bank from the integrated ideal of the Euro. The third and fourth elements in particular mean that a Euro held in a German bank is worth more than one held in a Portuguese one, say. But this is better than the alternatives, which attempt to wish financial risks away into an anonymous federal centre.

I believe that these four elements can evolve into a system that will give the Euro long lasting stability, and a better distribution of risk than a federal system would. We must remember that systems of human relations are only in a small part dependent of formal laws and powers, and much more based on expectations of how people should and will behave. This is how the management of the Euro is evolving. In the early days those expectations were wholly unrealistic, and ultimately required some kind of federal system to underwrite them. Now that we know this cannot be, new expectations are evolving. This is a bit like the way the British constitution and Common Law develops.

But is it worth it? Is it a loveless marriage between southern economies locked into permanent austerity, and more dynamic northern ones which are constantly being dragged down by their neighbours? (And France which manages to be on both sides of this equation at once!) If so the enterprise will lose political support and die anyway.

This question deserves a post all to itself, but I believe that all this pain has benefits to both sides. For the southern economies, joining the Euro was all about converging with their rich northern neighbours and their higher standard of living. Unfortunately they at first thought this would be easy. Lower interest rates and hot money from the north created a short term boom, but could not do the trick. Endless tax transfers (like between north and south Italy), are not on offer, and probably wouldn’t work either. In order to raise living standards the southern economies will have to undertake a painful series of reforms, rather in the way Britain did in the 1980s, Sweden in the 1990s, and, to a lesser extent, Germany in the 2000s. The process is starting, and the new disciplines of the Euro zone help this.

And for the northern economies of Germany, the Netherlands and Finland? Being in the Euro gives them a more stable economic environment, at a time when the global economy has been destabilised by the rising of China and other emerging markets. With a lower exchange rate than otherwise they have been able to preserves their exporting industries and maintain a degree of social stability. You only have to look at Britain to see what might have happened otherwise. There a short-term boom and appreciating exchange rate led to a flooding in of cheap imports and a hollowing out of export industries. Living standards grew for a while, but it could not last. The country is still struggling to escape the bust of 2008/09, with exports remaining weak.

The first decade and a half of the Euro has not been a happy experience, taken as a whole. But these are difficult times for developed world economies. In these circumstances the Euro remains a good idea, and indeed eastern European countries are still queuing to join. In the rough, interconnected world that is the modern economy, living with a freely floating currency is much harder than many would have you believe.

Japan: are there lessons for other developed economies?

A while ago I wrote that the radical economic policies of Japan’s new government under Shinzo Abe would be an interesting experiment for the world. They were much lauded by austerity sceptics, such as Paul Krugman, who drew attention to aggressive monetary policies and fiscal stimulus, which they were advocating for other developed economies. I was sceptical. But early results have exceeded expectations. There is a good analysis here from the Economist, which also discusses the new government’s nationalist tendencies. Is this evidence that the austerity policies being pursued by much of the rest of the developed world are mistaken?

My scepticism when I last posted was based on two things. First that the policies hinged on companies raising wages, when their profits were under pressure. Second was that, based on Mr Abe’s previous form, I did not think that structural reforms to Japan’s economy would be pursued with vigour. On both counts it looks as if I was too pessimistic. This means that Japan’s economy might well get a sustained period of growth, and that it will reduce the burden of government debt. But applying its policies to other developed economies is problematic. There are three reasons for this.

The first is that for longer term success it is still the element of structural reform that is critical. Mr Abe refers to his programme as “three arrows”, in reference to a Japanese folklore story that you can snap the shaft of a single arrow easily, but not three held together. These three are monetary easing, fiscal stimulus and structural reform. Austerity policies in Europe and America are firmly based on structural reform: especially in reducing the size of the state. Opponents of austerity tend to want to halt or slow down structural reform. Some say that it should wait until growth is resumed; others would rather avoid the reform process altogether. The three arrows approach would in fact promote reform, alongside the monetary and fiscal palliatives, and, indeed, the more considered critics of austerity do say this. But here there is a problem: Japan does not have an oversized state, so cutting back government expenditure is not a major reform priority, as opposed to opening the economy up to more competition and reforming corporate taxes. In Britain, France, Italy, Spain and so on the size state has run beyond what the economy can sustain, and so it has to be cut back, which in turn drains demand from the economy in the short term. There is good reason to doubt whether fiscal or monetary stimulus, beyond their current levels, are compatible with the need to shrink the state.

There is a second important difference in Japan. Its economy has a trade surplus and (which is linked) a savings surplus, albeit temporarily challenged as it has to import energy while its nuclear programme is in abeyance. That means that a fall in the exchange rate, as has happened to the Yen, will generate an immediate bonus to businesses, easily outweighing the extra costs imposed on the economy. This allows companies to put wages up. The savings surplus also means that the economy is not dependent on borrowing from overseas investors, who might be shaken by such currency depreciation. This is not the case with the austerity economies. Where their exchange rates have fallen, as in Britain, this has simply contributed to the squeeze on consumers without benefiting business to anything like the same degree.

Mentioning the exchange rate brings me to a third observation. It is that a lot of Japan’s success so far has less to do with with the country’s actual economic policies than with the effect of announcements on the zeitgeist. Implementation has hardly started, and yet the exchange rate has already plummeted and stock market risen, which is having the necessary warming effect, and set off a virtuous circle. The same can be said, in reverse, for austerity policies in the West, of course. But where reforms are necessarily painful, this is almost impossible to do. Economists have long been reluctant to admit the role of psychology in macroeconomic policy, and have let it in only gradually (through such ideas a inflation expectations). Governments and central banks have long known it – and Mr Abe’s government is acutely aware. The question for Europeans, in particular, is whether further aggressive monetary easing, linked to higher inflation expectations, combined with some fiscal stimulus would lift the zeitgeist and get the economies moving again. We have reason to be sceptical.

Almost all the developed economies in the world are experiencing difficulties. It is easy to fall in with the idea that this must be for similar reasons and that the solutions for each economy are similar. In fact each major economy is unique. And the differences between Japan and the others is amongst the largest. Abenomics may work for Japan, but that does not mean they will work anywhere else.