thinking liberal – Page 61 – Matthew Green's blog

Why you should vote Liberal Democrat on 22 May

Britain, along with the rest of the EU, faces a very interesting set of elections this week, for the European Parliament. Our polling day is Thursday 22 May, when there are also local elections in many parts of the country, including London, where I live. I am not an impartial observer of these elections, but I do try to express my views dispassionately, and set aside the pure propaganda. Here is what I think of the various contenders.

Let’s clear the decks a bit. I am thinking mainly about England; my knowledge of the politics of other parts of the UK is better than that of most English people, but that is a low bar indeed. In Northern Ireland I have a strong inclination towards the Alliance Party, because of its non-sectarian ethos. I dislike the Scottish Nationalist Party (SNP) mainly because I am a unionist. But I will say for its politicians that they put Scottish politics above Westminster politics; SNP politicians do not aspire to a place in the British cabinet. Still, this is less relevant to the European Parliament than elsewhere. I have rather more sympathy with Welsh Plaid Cymru, who tend to set out a clear social democratic, reformist agenda. But Welsh politics is messy, and I don’t feel confident talking about it.

And neither will I talk about the local elections. These should be determined by local issue and the local politicians’ records – and not the subject of a sweeping blog post like this one.

In England there are five contenders for your vote: the Conservatives, Labour, Ukip, the Greens and the Liberal Democrats. Voting for any other party is a wasted vote, even under our proportional system – since there is no system of transferable votes outside Northern Ireland. There are many other parties contesting these elections, but they simply don’t have enough traction to get up to the level needed win a seat. This is to be welcomed in the case of the BNP, who did manage to win a couple of seats last time, in 2009.

The party everybody is talking about is Ukip. The main reason offered by people for voting for them is that they are political outsiders, and that supporting them will give Britain’s established political elite a well deserved black eye. This is about the only good reason for voting for the party. They are chaotic and ill-disciplined, and they don’t take the work of the European Parliament seriously, and so their presence will damages the national interest. Inasmuch as you can detect clear views, they tend to be illiberal. If you are a Eurosceptic, there are other parties you can vote for who will do a better job of representing you and the country in this forum, which has significant political power, whether or not you accept that is a good thing.

But do our political elite deserve such a kicking? Many of the voters I have met on the streets think so; they feel let down. This is not just our newspapers stoking things up, with the rest of our media in tow. Politics has become too professional, and not enough politicians genuinely engage with voters. Focus groups and polling might be quite useful for informing politicians about what people are thinking, but they don’t help people feel involved. But will the shock of voters defecting to Ukip, or not voting at all, make them change their behaviour? There is little sign of this. I am not sure the problem is entirely soluble in a modern, developed society. But to make things better we need political reforms, not protests. These reforms need to make politicians more responsive to voters. This means changing our electoral system, and it means devolving more power to local levels where it is much easier to involve people in decisions.

The trouble is that Ukip stands for a sort of conservatism. They want political reforms, but focusing on the European level, not at the national level, where they are most needed. This sort of conservatism tends to reject useful reforms, as we saw in the debate on the Alternative Vote system (which would have been a small step in the right direction), and the soft spot so many people seem to have for our appointed House of Lords. It’s not the right kind of kicking, and it is the wrong election to do the kicking at.

Most Eurosceptics would be better served by the Conservative Party. The Conservatives have a clear view on Europe: renegotiation and a referendum. This is surely the most sensible way forward if you believe that being part if the EU is bad for the country. The European Parliament cannot deliver on this agenda – but Conservative MEPs will be taken much more seriously in Brussels than Ukip ones, and will thus do a better job of representing the country – though they would have had much more influence if they had not left the parliament’s Christian Democrat grouping.

But is a referendum right for the country? Like many supporters of the European project I dither on this. I don’t think it is a good idea for the UK to leave the EU. This is mainly because emotionally I feel a strong European identity (maybe because I have lived a short while outside Europe). But more practically, our obligations within the Union are forced on us by our economic circumstances, and leaving it would make little difference. It would be a colossal waste of political effort that should be devoted to other issues. Meanwhile the uncertainty it would create, as so many things of commercial importance are renegotiated, would blight the country exactly where it can least afford it. Many of the same arguments apply to just having a referendum on the issue – never mind actually leaving. The main argument for a referendum is that it would lance the boil and let the country move forward. I would sooner wait until the EU is forced to undertake more significant structural reform that anything the UK can force on its own.

And so to the Labour Party. Their campaign for the European Parliament is focused on the “cost of living crisis”. Regardless of the merits of this, it is exactly the sort of irrelevant focus-group based politics that has given politicians such a bad name. Their election literature mentions practically nothing about Europe or the European Parliament. This kind of cynical campaigning should be rejected. Politicians should be courageous; currently Labour only want to play safe. I can respect David Cameron for his referendum strategy on Europe, which required quite a bit of courage. Labour are running from the fight.

And the Greens? They deserve respect: their literature (at least here in London) at least talks about what they would do in the European Parliament. They don’t talk about Britain in Europe, but about the sort of Europe they want. That is what these elections should be about. I am just less than convinced about their vision. For me it is too anti-business. Good intent is no substitute for knowhow. We should be pushing Europe towards an environmentally sustainable future – but we have to take the public with us. We have to challenge big business vested interests – but also allow big business to keep people in jobs, and provide that element of economic stability people crave. I don’t think the Greens have a clear idea of how to get that balance right.

Which leaves the Liberal Democrats. The Lib Dems are the most Europhile of the parties (though quite a few Europhiles inhabit the Labour Party and the Greens). This has one particular advantage: it means that they part in the European Parliament’s processes with more enthusiasm, and so are much more influential than they would be otherwise. Liberal Democrats have held some very influential positions (such as Sharon Bowles’s chairing of the Economic & Monetary Affairs Committee). In this work they do a good job of standing up for British interests – and can actually talk about their track record in the Parliament with pride. They have also shown a lot more courage in standing up for a pro EU position – unlike the Labour Party – and unlike the party has done in previous elections to the European Parliament. You may not think all of their pro EU arguments are convincing (though the same can be said of most of the anti EU arguments), but they have done the campaign a service by talking about it.

Right through the country’s history Britain, and England before it, has never been sure about the role it should take in Europe. There have been times when the country has successfully pursued a global agenda while retaining minimal involvement in European affairs, such as in the mid to later 18th and 19th Centuries. At other times the country has been a fully fledged player, such as Waterloo in 1815 and the First and Second World Wars in the 20th Century. Right now the country’s dependence on trade leaves it no option but to be heavily involved in its European connections, whether or not the country stays in the EU. I believe that means that the country’s leaders should try to shape the EU from within. Others feel that by leaving the EU, it will be easier for the country to find the best path in the world. If you share my view, then the Liberal Democrats are the party for you. If you don’t, then you might still consider voting for the party as highly effective operators in the parliament. Otherwise think of voting Conservative or Green. Don’t vote for Labour or Ukip, whose campaigns are taking British politics in entirely opposite but wrong directions.

The complacency of salt-water economists

In his recent book on economics (reviewed by me here), George Cooper presented the discipline as being an irretrievably fracture, in need of a radical step change. There is an alternative view. This is that in fact the profession is split between two orthodoxies, with a diverse bunch of heterodox economists on the fringe, unable to get serious traction. The two orthodoxies are often given the names “salt-water” and “fresh-water”, because the former are popular in U.S. universities on the east and west coasts, and the latter with those in the Midwest – especially Chicago. This is worth picking apart.

Followers of each of the orthodoxies assume that criticism of economics is directed mainly at the other orthodoxy, and not at them. The heterodox say that the whole lot is in a mess. The fresh-water school do seem be in eclipse. This school, often termed “neoliberals” outside the US, believe that free markets are the fairest way of allocating economic resources, and that government interference almost always makes things worse. Many assume that they were cheerleaders for the rampant excesses of the financial sector before the crash, and hence have had their come-uppance. This criticism is wide of the mark, however. The banking boom arose at least as much from lop-sided government intervention as it did from “light-touch” deregulation. Fresh-water economists can plausibly blame the crisis on government intervention, not its absence – and in particular the crazy desire of politicians to boost property lending to all and sundry.

In fact there are other fatal problems for fresh water economists. First is that they opposed serious government intervention once the bubble blew. This was self-evident nonsense, ignored to a greater or lesser degree by practically everybody – except where government borrowing presented a practical problems. There have been loud arguments over austerity that have been so loud, but these have been on degree of intervention (big or massive?) and on completely different territory to that advocated by non-interventionists. A second problem is posed by what is usually called “inequality” – whereby it appears that the benefits of growth in developed economies go predominantly to the rich – and that most people in the US have seen little or no benefit from decades of economic growth. It is a central facet of fresh-water thinking that distribution of wealth and income is not an important concern for economists and policymakers. They have almost nothing to say here. And people are starting to notice that in countries with minimal governments (Somalia, say), the economy tends to be in pretty bad shape. Of course fresh-water economists remain well funded, as their views provide convenient support to many vested interests, and they are not about to go extinct. But you don’t hear very much from them these days.

Unlike the salt-water types. These are popularly referred to as “Keynesians”, and are now very well entrenched right across the political establishment. Their most visible cheerleader is Nobel Laureate and columnist Paul Krugman. They were as wrong-footed by the crisis as any of them, but quickly found the groove again. They provided the intellectual heft required to support government intervention after the crisis, though they usually complain that this intervention was inadequate.

Salt-water types do not consider that the crisis showed that their thinking was seriously flawed. Consider this piece a few weeks ago by Mr Krugman. He simply suggests that salt-water economists were a bit misinformed – because they underestimated the practice of shadow banking. Shadow banking, in this context, refers to the practice of banks hiding their dodgier lending by creating off-balance sheet entities to take them. To be fair on Mr Krugman, in the run up to crisis his writing was hardly cheerleading for the supposed economic miracle – though that seemed to derive from his hatred of the then Republican establishment, and their attachment to fresh-water thinking.

I can understand some of Mr Krugman’s frustration with the so-called heterodox economists. They tend to be pretty unconstructive – picking at the orthodox modelling assumptions (incidentally, largely shared across both orthodoxies), without suggesting much that could replace them in a useful way, to give the discipline a better predictive power. The beauty of the salt-water orthodoxy is that it finds it easy to tack on new ideas and integrate them – they have done this quite spectacularly with many of Milton Friedman’s ideas (on money, inflation and unemployment), even though he is one of the spiritual fathers of fresh-water thinking. They are now trying to do so with ideas on inequality, an issue that they acknowledge. Thomas Piketty, the French economist who is making a splash on inequality, looks more like somebody extending the salt-water orthodoxy, rather than challenging it.

For me this is much too complacent. Regular followers of this blog will not be surprised to read that Exhibit A for the prosecution is thinking on monetary policy. Salt-water economists inhabit a world where the ideas of money supply, demand, interest rates and inflation interact in a relatively predictably way, to form an important way of regulating economic growth. Thus there is talk of raising inflation a bit, so that negative real interest rates can be implemented, which in turn will boost demand and get the economy growing. It is not that I think this line of reasoning is entirely mistaken, it is that it is an oversimplification that is more likely to lead to policy mistakes than insights.

Take Japan. This country is probably further down the path of accepting salt-water economics than any other. It has drastically loosened monetary policy (through a process of quantitative easing) with the aim of raising inflation, which in turn will help the process of managing interest rates and boosting sagging demand. But there is a snag: while prices are rising to a degree, wages are not keeping pace. Employers will consider giving employees a temporary bonus, but not raising basic pay. Without raising pay, all the nice things that are supposed to arise from inflation – like making debt easier to bear – will not happen. Economists simply assume that if inflation gets going in consumer prices, wages are bound to follow. But this does not seem to be true of a modern, globally integrated developed economy. There are plenty of other pitfalls in Japan’s strategy too.

The people at the heart of the salt-water school, like Mr Krugman, are a clever bunch. Heterodox economists do not seem to be unsettling their intellectual grip. Perhaps they are right that the orthodoxy must evolve rather than make a step-change. But if so it surely needs to evolve a lot faster.

Politics is not about policies. Why the politicians are failing.

Today the FT’s excellent Janan Ganesh writes on how the British Conservatives are failing to get the ethnic minority vote (£). Also this morning two opinion polls showed that the Labour Party had lost its poll lead to the Conservatives. We can add the Liberal Democrats and the Greens to the list of underperforming political parties in Britain, leaving the field clear for the insurgent Ukip. Mr Ganesh points to a reason for the Conservatives’ failure, that applies just as much to others (except the Greens perhaps).

Mr Ganesh says that the problem is that politicians “…think politics is about policy.” And yet voters hardly know what policies the particular parties stand for. The Conservatives note that conservative values and fear of immigration are at least as prevalent in ethnic minorities as elsewhere. So they freely talk about immigration being excessive and about the need for stronger controls. And yet all this heightens voters’ suspicions that the party is not inclusive. The Conservatives have been here before. In the 2001 election they went down to a catastrophic defeat after pushing policies (on Europe in particular, as well as immigration) that seemed to play well with voters, and yet heightened their reputation as the most toxic brand in politics. They fared little better in 2005, when they tried similar “dog whistle” tactics. Their fortunes only changed when David Cameron went to prodigious efforts to de-toxify the Tory brand by advocating policies (environmentalism, gay marriage, and so on) that could distinguish the party from their former selves. Unfortunately for them, this change did not go deep enough into the party’s inner being, and it is wearing thin.

Labour seem to be in a similar fix. They have used a lot of clever researchers to fix on a series of populist policies. These include fixing energy prices and controlling private rents. All these policies, apparently, play well with focus groups. Also they have chosen “the cost of living crisis” as their overarching theme – since many voters feel hard done by in the aftermath of the recent economic crisis. And yet their poll ratings are fading. The policies are popular but they are damaging the Labour brand – or at least doing nothing to strengthen it.

The Lib Dems find themselves in a not dissimilar predicament. Most people seem to think that their influence on the coalition government is for the good. They are associated with some popular policies, such as raising tax thresholds. And yet their poll ratings languish around the 10% mark. They are perceived as politicians no different from the others in moral fibre, who enjoy being in power a bit too much.

The paradox is that British politics has never had more sophisticated advice. Each party leader is surrounded by clever people with access to the latest evidence-based theories. and yet they are all failing – and the height of ambition seems to be to fail at a slower pace than the others. What is needed is a bit more old-fashioned nous.

The last really successful party leader in this country was Labour’s Tony Blair. He employed a lot of sophistication as well, but the secret of his success was that he understood political brand building. The rise of Labour in the 1990s under his leadership was nearly a policy-free zone. So much so that when he won in 1997, his government lacked momentum because it did not have a clear idea about what to do.

What Mr Blair realised is that to build voters’ trust you have to do things that are hard. In Mr Blair’s case, he took on the Labour left, overturning all their sacred policy shibboleths, and changing Clause 4 of the party’s constitution. It was a process of destroying polices, rather than making them. To be fair on Mr Cameron, his rebuilding of the Tory brand involved some hard things – but he chose not to be quite as radical, and left the conservatives in his party silent but undefeated.

For the Liberal Democrats, their time in government might in time come to be seen as courageous rather than self-indulgent. Their leader Nick Clegg’s firm stand on Europe is a clear step in the right direction – though as yet there is no sign of a poll boost. Petulant rows within the coalition, such as this weekend’s on schools, are probably not helpful though. Proper rebuilding of their party’s brand will have come after next year’s General Election.

That applies to Labour too. It is too late for Ed Miliband to resolve the tensions within his party, and so give voters a clear picture of what the party stands for, beyond its headline grabbling policies and slogans. For all party’s difficulties with ethnic minorities, it is perhaps the Conservatives that have least reason for discomfort, once the European elections next week are out of the way. They are failing more slowly than the others, and if they don’t panic they will recover a lot of the ground they have lost to Ukip, unlike Labour. It probably won’t be enough to win them a majority, because they failed to reform the electoral system in their favour, in spite of clear opportunity having been presented – through a combination of the Alternative Vote and boundary changes.

So here’s what I predict for 2015. The Conservatives gain some seats but fall short of a majority. The Lib Dems lose 10-20 seats, but still leaving a substantial voting block in Parliament. Labour make few advances. Ukip will pile up 10% or more of the vote, perhaps surpassing the Lib Dems,but get one seat at most – they will take most of their votes from Labour. The Conservatives will attempt a minority government.

The rise of Ukip. What should the Lib Dems do?

My heating engineer is voting for Ukip, the United Kingdom Independence Party, the reactionary insurgent English political party. This party has hit the zeitgeist, even here in cosmopolitan London. Political activists from other parties seem to have no idea how to handle this. This should give us pause, especially in the Liberal Democrats. The party needs to rediscover its anti-establishment roots.

The typical reaction to Ukip from political insiders is annoyance. This party breaks almost every rule of political correctness. My Facebook account is bombarded by posts pointing out the various unsavoury views held by Ukip candidates, and denouncing them a as a bunch of idiots. All this is true but irrelevant.

The perception by many voters is that the country is run by a political establishment that makes life easy for themselves and their friends. They are not interested in listening to what the public wants. My engineer says that it has always been that way, and nothing is changing. Voting for Ukip is the only way he can see of mounting an effective protest. Besides, some of their policies, like a vote on the EU, strike a chord. This feeling is especially strong amongst the white working class. This group accounts for a lower proportion of the population here in London, so maybe Ukip will do less well here. But the disillusion with politics is not confined to white working class people. Last weekend an Indian-born gentleman told me that he expected bad behaviour from Indian politicians, but he had expected better from British ones.

Meanwhile the professional politicos, and their army of hangers-on, whether or not politically affiliated, attack Ukip as if they were normal politicians. They criticise their candidates and their policies. But they do not address the disillusion from which Ukip support springs. Indeed, the more they protest, the more disillusioned voters appreciate that voting for Ukip will annoy the establishment.

This is hard for a Lib Dem. In one sense Ukip’s rise shouldn’t bother us too much. Lib Dem core voters are the least likely to defect to Ukip, since they are anti-liberal. Indeed the Lib Dem strategy of talking up Ukip for the European elections later this month is quite a sound one – as this election depends on rallying the core vote. But we used to be able to pick up the disillusioned too. We were the party locked out of the establishment, with the least stake in it, and whose mission was to shake it up. The party leader Nick Clegg conveyed this message forcefully in the General Election campaign of 2010.

But coalition government changed all that. Now the party is part of the establishment, and they seem to relish it. And the record on political reform is weak. The voting system is the same; the House of Lords is still there; the balance of powers between the local and the central does not appear to have changed radically. A U-turn on student tuition fees shows that Labour and Conservative politicians aren’t the only ones that break promises. Lib Dems might argue this unfair: there is only so much they can do when both Labour and the Conservatives won more votes and parliamentary seats. The riposte to that, though, is: just what is the point of the Lib Dems then?

The answer to that is that lasting political change tends to happen slowly. Revolutions can happen, but they always disappoint. The Lib Dems have in fact forced some significant changes while in government, and blocked a number of illiberal moves. Even my heating engineer admits that you can’t expect people to campaign to get elected and then to refuse a share of power. So what do the Lib Dems do? I think they need to focus on three things.

First they need to consolidate their core. This means liberal internationalists, who seek a fair distribution of society’s wealth, and limits to state power. This may be rather vaguely defined, but there are clear values around which the party can rally. Without this core, nothing else is possible. The party compromises on key issues, such as Europe or human rights, at its peril.

But it is a minority pursuit. Most people aren’t liberal or internationalist by instinct. They prefer the values of identity and keeping everybody else at bay. So the second thing is that Lib Dems must keep reaching out people beyond their core. The relationship here is inevitably more transactional: specific issues and promises. The long term aim should be to listen and to build trust.

If that sounds wishy-washy it shouldn’t. It has a name and it is called Community Politics. Some Lib Dems practice it very effectively, look at Sutton in London. Most sitting Lib Dem MPs try something along these lines. For all that the implications seem to escape most modern political insiders, including younger Lib Dems. They prefer social media and clever communication strategies. Community politics is about looking people in the eye, and helping them when you can, but also explaining that you can’t compromise your core beliefs. It’s not about clever graphics, it’s about human engagement.

But a strong core and community politics is not enough for the party to progress. The party needs to convince voters that it feels their pain, and advocate real changes to the political system. In the past the party has thought too much in terms of national political reforms, and especially the electoral system. But to voters this sounds like juggling the same old rules in favour of the party, rather than promoting fundamental change. Most are sure to think that the disastrous AV referendum in 2011 should put that matter to rest for the time being.

Instead the party should focus its attention more on devolving power from Whitehall to a local level. The Coalition trumpeted localism, but lacked a clear vision of what was required. Many in the political establishment are against it, in practice, if not in theory. But there is a prospect of building up alliances across political parties. “Power to the People” is a corny slogan, but something like it needs to be the rallying cry. It has to hurt. It means confronting thorny issues like local taxation and finance, and it needs to mean job losses in Westminster ministries. It also means allowing groups of local authorities to combine to take on more responsibilities. STV for local elections should also be part of the mix, but the main deal should be about power.

Rally a liberal core. Reach out through community politics. Advocate radical devolution of power from Westminster. These will do nothing to fend of Ukip in 2014 – but in the long run they could show the voters that the Lib Dems really are different.

Prague: world city

From Dresden, we went by train to Prague. After Germany, it was a bit of a shock. Within minutes of arrival we had been ripped of by both the forex desk and the taxi drivers. We were driven through some seedy looking streets to a rather seedy-looking apartment. After a week of Germany, it felt that we had been dropped straight into the Third World.

Some of this was just lack of acclimatisation. The apartments soon looked characterful rather than seedy, being in a genuinely old building. And it had functional wifi, unlike both of our otherwise highly functional German apartments. Prague is not remotely German. The streets are untidy, but they were also bursting with life. It seemed like you could buy anything. Sex shops were common, and the food shops seemed to devote most of their space to booze.

Tourists were everywhere. The locals did not even attempt to speak Czech – and I’m afraid I didn’t either, not even a thank you in the local language, which I usually manage. Visitors crowded around the various outstanding tourist favourites: Charles Bridge, the Castle, and the Old Town Square. Beyond these they seemed more interested in eating, drinking, shopping and having fun, rather than taking in their astonishing surroundings.

Prague’s buildings escaped serious damage in the war, unlike Germany’s (or Poland’s, Hungary’s or Russia’s, to name a few). The Communists did not have the resources to do mass redevelopment. The result is that the city is left with a huge variety of old buildings. These cover a very wide range of dates. There are the medieval gates, and the 16th, 17th and 18th century churches and palaces. But also there are a lot of 19th century buildings, including many Art Nouveau ones from the late 19th and early 20th century. The sheer extent of these old buildings is breathtaking. Before the war, Prague was one of many beautiful old European cities. Now it gives you an idea of how much has been lost in that orgy of destruction.

Unlike the buildings, the people were not so lucky. The Nazi occupation was brutal, especially after the assassination of Reinhard Heydrich in the city in 1942. The previously flourishing Jewish community was mostly murdered or driven out. Quite by accident we found the Jerusalem Synagogue. We could not resist going in, where we found a display on the history of the Jewish community after the war. We need to remember that the persecution of Jews, up to and including further murders, did not end with the war. This was especially if they tried to reclaim their property. The idea that one of history’s great wrongs had been done to the Jewish people was slow to develop. The Communists continued to discriminate against Jews right up to the liberation. It may be that without the central focus provided by the Zionists and Israel the Holocaust would have been lost amid the many other appalling acts of the 20th Century. Though we gentile Europeans draw a rather different lesson from that crime than do the Zionists, they were right to raise our consciousness of it, and it has shaped the way we view ourselves and the world profoundly.

So Prague is a treasure trove of old buildings and artefacts from a lost age. But, like so many other European cities, it also reminds us of our chequered past. It deserves to be one of the most visited cities in the world. Perhaps it’s a shame that so many of them are more interested in shopping, sex and booze than in history – but maybe their money helps keep the memories alive.

Dresden: reclaiming old glory

In my post on Berlin, I suggested that the British bombing of German civilians in the Second World War might be considered a crime. The most cited case of egregious bombing by the British occurred with the attack on Dresden on 13/14 February 1945, which caused a firestorm, mass death and the destruction of one of the most beautiful cities in Germany. People still argue over the rights and wrongs of that event, but either way it hangs over the city that we visited after Berlin, at Easter time this year.

The Germans have done much to restore the city’s outward appearance. Most of the impetus came after German reunification. The Communists had a rather ambiguous attitude to restoration, destroying many historic sites to create a modern, socialist metropolis – though they did some restoration too. But what they build was mediocre. Now the classical facades have been replaced with modern imitations. Behind them are smart, modern shops and apartments; beneath them are underground car parks. And there are still whole blocks that are just holes in the ground. Some of the iconic older buildings have been restored inside and out to varying degrees. So we has the royal palace complex, and the Catholic Hofkirche, amongst others. Blackened stoneware from old buildings has not been cleaned, as in Berlin, to act as a reminder of the past. It is still recognisably the same city that was memorably painted by Canaletto’s nephew Bernardo Bellotto (who also used his uncle’s name). It has retained the open, spacious feeling, dominated by the Elbe river, of the old town, which acquired its character in Enlightenment times – it is not a modernised medieval city, like Prague (or London, come to that).

So there is much to see and admire – much more than you think has survived or has been restored from what we generally assume from accounts of the bombing. What is more the collections of the Electors and Kings of Saxony had been moved to safety before the attack, and have mostly been returned (they were largely in Russian custody after the war – so this could not be assumed). So the museums are well stocked – with wonderful examples of old art, porcelain and scientific instruments, as well as some important modern works. The locals are friendlier than in Berlin, too, and museum officials less officious. With two full days we left much to see for another visit.

Of course the bombing and reconstruction is a moving enough story in its own right. The most moving element of this is the story of the Frauenkirche. This magnificent edifice, the largest Lutheran church in Germany (and so the world?) was the city’s pride. It collapsed into a heap of rubble the day after the bombing, and was left as a pile of rubble until the 1990s. A massive restoration effort was completed in 2005, pretty much stone for stone. The old stones left blackened, the new ones are gleaming pale gold. The interior (pictured) is a wonder. Freshly painted and gleaming it perhaps gives a vision of what its 18th century creators intended – in a way that a building that had survived from that time would not. It is magnificent.

As we Europeans come to terms with our history, at times creating magnificent monuments and works of art, at others engaging in wonton destruction, Dresden is a good place for us to reflect on who we are, and, I hope, for non-Europeans to learn from our achievements and our mistakes.

Ukraine: as Russia wins the battle it is still losing the war

The picture from Ukraine remains as depressing as ever. Following the ouster of the kleptocratic President Viktor Yanukovych in February, Russia has taken the opportunity to destabilise the country, annexing Crimea and turning the east and south against the west and centre . The West, and especially the EU, has looked completely ineffectual. What are we to do?

Russia’s President Vladimir Putin is drawing a lot of kudos from this turn of events. He has outwitted his opponents at every turn. His main problem now is one of success. He might be forced to annex the eastern provinces of Ukraine into Russia, which will simply add an expensive headache to his country. Probably all he intended was to destabilise Ukraine and force it into a sort of Belgian federation that would cripple the western-inclined part of the country and prevent it from aligning with the EU and NATO.

Undoubtedly this state of affairs reflects Mr Putin’s tactical skill, and some finesse and tactical assurance from his security services. As a result he has attracted some admiration from fringe political figures in the West, such as Scotland’s Alex Salmond and Ukip’s Nigel Farage. Still, it is not too difficult for us over here to have a feel for right and wrong. Russia, with its oligarchs, mafias and overbearing security services, as well as old-fashioned prejudices, is not a country we would want to live in. The pro-Russian activists in their military fatigues and balaclavas, to say nothing of their tendency to beat up those who disagree with them, look like the paramilitary thugs we knew all too well from Northern Ireland, and not the voice of the people.

And yet Russia is clearly winning the war of hearts and minds in eastern Ukraine. The Ukrainian state has sunk to such depths that Russia looks like a better option. The state apparatus, such as its security services, was undermined to such and extent by Mr Yanukovych and the revolution that overthrew him that they cannot counter Russia’s intervention. Ukraine’s most effective supporters are its own oligarchs, who no doubt have their own problems of credibility. So Russia is going to end up by winning. An irregular referendum will drive a breakaway of the Russian-leaning provinces from the rest of Ukraine. The country will be able to hold credible country-wide elections, and the Western alliance will end up by having to pour in money to an economic basket case in the rump, a lot of which will under up in Russian coffers as it jacks up energy prices. The US and the EU seem to be helpless to stop this.

And there isn’t much they can or should do. Deploying armed forces is a non-starter. Tougher economic sanctions will probably be more pain than they are worth. The West needs focus on strengthening its strategic defences to counter future Russian adventurism. In particular Europe needs to invest in alternative energy sources to Russian oil and gas. It also needs to show that even if the principle of no military intervention applied to Ukraine, it does not apply to other potential flashpoints. And it needs to think about projection of propaganda to counter the Russian state-controlled media.

If it does all these things, Russia’s ruling elite will eventually lose out. Russia’s economy is running out of road. It badly needs productive business investment, but such investment requires reforms: to strengthen the rule of law, and to tackle large monopolistic businesses. Mr Putin’s regime lacks the clout and skill to do this, which means that the country will seriously fall behind both Western developed economies, and emerging Asian ones. His foreign adventures, based on yet more thuggery, simply reinforce his country’s weaknesses, making it a less attractive place to invest, whether you are a foreigner or a Russian businessman outside the favoured elite.

The West won the Cold War not through military confrontation, whatever some on the American right believe. It won because the Soviet Union and its satellites fell so far behind their Western counterparts in economic standard of living that their ruling elites lost the confidence to govern. Russia’s economic governance is much better than that of the old Soviet Union, but sooner or later its people, and people in places like the east and south of Ukraine, will start asking why things are so much better in the West.

The strength of the West, and especially the EU, is in the long game. That strength remains: we should have more confidence in it.

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.

Brexit: an own goal for the Eurosceptics

It must have seemed like a good idea at the time. A while back a right-wing think tank, the Institute for Economic Affairs (IEA), launched a EUR 100,000 prize for a blueprint for Britain’s exit from the EU, the “Brexit”. The winner was announced last week, to not very much fanfare. You can read it here: Brexit Entry 170_final_bio_web. It is not surprising that our mainly Eurosceptic media have given it a low profile. It exposes flaws that go deep into heart of the Eurosceptic case. Better to stick with Nigel Farage’s meaningless soundbites. No doubt the Europhiles ignored it as its thesis is still Eurosceptic. That is a pity. This piece of work deserves to be taken seriously by both sides of the debate.

First, though: credit where it is due. This piece of work is a breath of fresh air compared to most of what comes out of both sides of the debate. It is calm, factual and objectively reasoned. It reflects well both on its author, 30-year old diplomat Iain Mansfield and the IEA. Bar one or two articles in The Economist, it is about the best reasoned thing I have read on Britain’s possible exit from the EU.

The essay answers the question of what would happen if Britain voted to leave the EU. It considers the various negotiations that would need to be made, and what these should aim to achieve. It has a stab at assessing what the economic consequences would be. Along the way it explains a lot of the facts that impinge on this (such as what is the difference between the EEA and EFTA?). This is a welcome change from the airy hopes and assertions usually made by Eurosceptics – and the equally airy scorn poured on them by Europhiles.

Its central idea is quite a sound one. Britain would not bring up the drawbridge and retreat into “Little England”, as no doubt some older Ukip supporters would like. The UK would establish itself as an open nation, promoting free trade. This reflects the economic liberalism of most modern Conservatives. They feel that membership of the EU gets in the way of the country promoting a economically liberal policy agenda.

There is one big gap in this work as a review of Britain’s options. There is no sense of industrial strategy. British business would flourish in a less regulated environment; we would trade more with emerging economies. That’s about it. Where are Britain’s comparative advantages? Which industrial sectors would we rely on – and how would these be promoted after Brexit? And the gorilla in the room: what happens to international wholesale financial services (aka the City) in the brave new world? It is easy to see both positives and negatives for the City – but how would these balance out? If there is one thing that makes other European nations exercised about Britain, it is the financial industry. Surely they wouldn’t hesitate to use a Brexit to make mischief?

There is also a quibble. He says that Britain should gain a net £10bn per annum in net contributions – though not straightaway. He says some of this will have to be spent on building capabilities that we have delegated to Brussels, such as trade negotiation and antitrust, but mostly it would be a gain. And yet he freely suggests the need for agricultural subsidies, and a host of inducements to entice in foreign direct investment (FDI). That £10bn is unlikely to last very long.

But that’s a detail. Three big problems stand out from this study. Has the British public signed up to economic liberalism and deregulation? Is the Brexit strategy trying to have its cake and eat it? And is it worth all that effort?

There is common belief on the right that Britons are a nation of freewheelers, and that the inveterate regulators in most other European countries are anathema. We are more like the Americans. Leaving aside whether Americans really are such freewheelers (you need a licence to be a hairdresser in many states), this is not well founded. Britons love to whinge about excessive regulation, to the extent that “Health & Safety” has negative connotations, but attempts at deregulation usually fail. Mr Mansfield wants a “Great Repeal Bill” to roll back and replace a host of product and labour regulations. That promises to be the mother of all political battles, and its outcome is bound to disappoint. Britons have as much affinity with Scandinavia as America – and you can’t move for regulations there, not least in Norway, which is not even in the EU. Indeed the sort of new Britain that many Tory Eurosceptics seek is a kind of right wing dystopia so far as most Britons are concerned.

More serious is the strategy for European trade that lies behind the Eurosceptic economic case. For all his thoughtful detail and realistic attitudes, this looks like a strategic flaw in Mr Mansfield’s strategy. The idea is that Britain gets free access to most European markets (he rightly suggests this would be unrealistic for agriculture, though); but that our industry will be more competitive because it can avoid large areas of regulation, especially for labour. And he takes this a step further, by suggesting that, with the help of some extra incentives like low tax rates, the country can retain its popularity as one of the top European countries for FDI – so that these incomers can export to the EU. This is known as having your cake and eating it. This strategy requires the cooperation of the county’s EU trading partners, who have a name for it: social dumping. And the fact that Britain imports more from Europe than it exports to it does not, in fact, give the country a strong negotiating position, as many Eurosceptics suggest. To his credit Mr Mansfield does not mention this last argument, and describes the British negotiating position as weak.

Which leads to the next problem. When you get into the detail of what has to be negotiated, Britain will end up giving concession after concession. Mr Mansfield suggests that half or even two thirds of the aquis communitaire (the body of EU laws and regulations) would have to be retained by Britain. The scope is massive. The overwhelming impression I get from reading this essay is the sheer size of what would have to be dealt with in a series of extremely tricky negotiations. All for what? Mr Mansfield estimates a range of impacts on the economy from -2.6% to +1.1%, with +0.1% as “most likely”. He observes that the case is more political than economic.

In only one area might the general public, as opposed to right-wing politicians, think that this might be worth it: ending the free movement of people, and especially labour. We would still need quite a free flow, but it would be easier to manage – and it would be easy to establish inferior rights for European immigrants. I suspect that the whole case for or against the EU will turn on this – and Europhiles badly need to sharpen up on the subject.

At the end Mr Mansfield refers to the examples of Canada and New Zealand as being successful countries in spite of being separate from nearby behemoths (the USA and Australia respectively). Interestingly another study on the benefits of EU membership, reviewed in this week’s Economist, uses a comparison with New Zealand to suggest that British incomes are 25% higher for having joined the EU in 1973. New Zealand’s economic record, in spite of (because of?) being a bit of test bed for economic liberalism, has been pretty underwhelming. It has recently being doing better courtesy of massive exports of agricultural products to China. Well New Zealand is a small country far away from anywhere – so comparing it with the UK is a stretch. But at least it has a decent export engine based on its natural resources (as does Canada with its mineral wealth). Britain’s oil is fading (and mostly Scottish anyway); it has been in agricultural deficit for a century; it is not an option to despoil swathes of countryside to dig out minerals for the Chinese market. We have the City, and lots of management consultants. Is this enough to build big export industry with the developing world?

In recent article, Vagueness is a danger for eurosceptic demagogues FT columnist Janan Ganesh pointed out that the Eurosceptic case tends to fall apart when Euroscpetics try to spell out exactly what they think exit it all means. Mr Mansfield’s interesting and refreshing essay cannot hide this truth.

Does money really grow on trees?

A few months ago David Cameron, the Prime Minister, defending the government’s austerity policy said that “Money doesn’t grow on trees!”, a well used expression when discussing household budgets. The Financial Times economics columnist Martin Wolf responded that money did indeed grow on trees, and the money tree went was the Bank of England. Can Mr Wolf be right?

Mr Wolf was referring to the Bank of England’s policy of buying government bonds, known as Quantitative Easing or QE. One arm of the government, the Treasury issues bonds to pay for government spending; another, the Bank of England, buys them by simply adding to its reserves – creating money. Actually, the Bank doesn’t buy the exact same bonds, it buys others that had been issued earlier – but it amounts to nearly the same thing. The extra money ends up in the accounts of major investors such as insurance companies or pension funds, at home and abroad. Government spending has been financed by the creation of money. Hence money seems to grow on trees.

This type of financing is associated in the public imagination with disaster – such as the hyperinflation in Germany and Austria after the First World War, or more recently in Zimbabwe. In conventional economic theory an increase in money supply, if not matched by expansion of the economy, leads to inflation. But there is no increase in inflation in either Britian or the USA, which are both practising QE, and in Japan, where increasing inflation is actually a policy objective of QE, the increase in inflation is anaemic. So what is going on?

There are three problems with the conventional economic theory of money. First is that only trivial amounts of money are represented by notes and coins, whose circulation is controlled by the government. Instead we use bank accounts provided by commercial banks. Economists have tried to understand this type of money in equivalent terms to notes and coins. People bank money and the banks then lend it; the banks do not create money, though the central bank may. But further reflection reveals that this is not the way it works, as the Bank of England has recently admitted. It is the other way round: banks create money by lending it to people. With this more realistic idea of what money is, we can see that far from the money supply expanding with QE, it is shrinking as banks reduce their balance sheets after the boom years when they created money freely. You could then argue that QE is simply offsetting the shrinkage of credit from the banks, balancing the whole thing out. All will be well until the banks turn the corner and start creating money again.

But there is a the second problem. The overall supply of money, as far as it can be measured, does not strongly correlate with either the size of the economy or inflation, as monetary theory predicts. That’s because money doesn’t flow round the system at a constant speed. If you print banknotes, and people simply stuff the new notes under the their mattresses, the real economy doesn’t change. The electronic equivalent is people holding bank deposits which they don’t spend. That’s been happening a lot. Standard monetary theory, such as that put forward by people like Milton Freidman, is based on the idea that money circulates at a reasonably constant speed. But in fact people don’t behave that way.

But even if they did, there’s the third problem. Excess monetary expenditure does not necessarily lead to inflation; in fact in a modern developed economy it rarely seems to. Instead of people raising consumption which pushes up consumer prices and then pay, people spend it on assets or imported goods. Asset prices don’t seem to behave in a rational way, being subject to a price bubbles. In the modern globalised economy it is easy to import goods to satisfy any increase in consumer demand. And in any case the link between consumer prices and levels of pay has been broken. The wage-price spiral, at the heart of the way economists view the world, does not seem to happen in developed, globally integrated economies. Incidentally this is the problem that the recent aggressive monetary expansion in Japan (“Abenomics”) has bumped into; prices are edging up but companies remain reluctant to let wages follow suit, so that inflation simply makes people poorer. The concept of central banks targeting inflation as their main objective, the big idea of the 1990s, has simply led to complacency.

So the theory of monetary economics is in ruins. That does not stop usually quite economically sane publications. like The Economist, discussing whether central banks should adjust their inflation targets from 2% to 3%, or use nominal GDP as their reference point instead of inflation. This is rearranging the deckchairs on the Titanic (apologies for the over-used metaphor). Fortunately central bank professionals are highly pragmatic and they don’t seem to be letting the vacuum in economic theory lead them into being too dangerous, with the possible exception of Japan.

And the upshot is that in many developed economies, including the British one, governments can get away with the monetary financing of government spending, without much in the way of immediate adverse consequences. Money really does grow on trees! How on earth to understand this – and any not so benign consequences?

Well you have to recognise that money is simply a means to an end: a social construct to enable economic activity and regulate societal relationships. It often helps when thinking about an economy to take the money away and see what is going on in what economists call the real economy.

Let’s look at the real economic flows, which are at the heart of Mr Wolf’s analysis. The government is consuming more resources than it is receiving from taxation. This deficit must be supported from outside (you can’t print money in the real economy), and in general terms this is from two places: the private sector and outside the economy. The private sector, as a whole, is consuming less resources than it is producing and this surplus, in various direct and indirect ways is helping to support the government deficit. This is partly because people are working off their debts, but also because private businesses are hanging on to profits. Also the economy (in Britain and the USA in particular) as a whole is in deficit with the outside world: importing more than it exports. The government can safely run, or even increase, its deficit because it is balanced by surpluses by the private sector and the outside world.

But this is not sustainable in the long term, because persistent deficits lead to excessive debts, and the monetary economy breaks back into the real one. If the government has cleverly got out of financing its deficit with debt, it is simply passing on the affordability problem to somebody else. The assets being accumulated by the private sector and foreigners are not worth as much as they think. The government has avoided the risk of a solvency crisis by increasing the risk of a currency crisis or an asset price collapse. This may be localised, or it may be part of a gathering global financial crisis.

But if by running a deficit the government is staving off a wider economic disaster, or even bringing the country back to the path of economic growth, it is opting for a lesser evil. Mr Wolf argues for continued government deficits, financed by QE if necessary, on just these grounds. Austerity will simply precipitate the economic crisis rather than buying time to fend it off. He has a strong belief in a “trend rate” of economic growth of about 2% per annum which can be readily unlocked and get us out of jail.

That’s where I disagree. That trend rate may sound a small number, but it is in fact a very large one for an economy that is fully developed (China can grow faster because it is catching up). A special set of circumstances combined in the period 1945 to about 1990 or 2000 to make it seem normal – but we are in a slow growth world now.

So keeping government deficits going using QE to bypass the bond markets caries risks. The main priority for governments is to reduce their countries’ vulnerability to future crises and improve their resilience. That means rebalancing. Between public expenditure and tax; between rich and poor; between imports and exports; between financial engineering and productive investment; between young and old; between environmental degradation and restoration.

Government deficits may or may not play a role in this rebalancing process. For what it is worth I think the British government has it more or less right in terms of its overall austerity policies. QE may or may not be helping. But any money plucked from trees will, to mix metaphors, go off if it isn’t spent wisely.