Archive for the ‘Financial crisis’ Category

Trump, bankers and populism


“According to CNBC, Trump is considering JPMorgan Chase chief Jamie Dimon as treasury secretary. Dimon is the leader of the largest of the Big Four banks in the United States, so he’s hardly unfamiliar with how business is done on Wall Street. Multiple reports also show that Trump is considering Steven Mnuchin, a former Goldman Sachs official, for the same post. Mnuchin served as the businessman’s campaign finance chief during the 2016 campaign. It appears as if Mnuchin is more likely to take the job, given his prior relationship with Trump. Dimon has said repeatedly that he has no interest in the job. The banker also bashed Trump’s policies in his 2016 letter to JPMorgan Chase shareholders”.



Trump, the outlier


An excellent article by Kori Schake notes that Trump is an outlier in his views, “You may have missed it, what with all the campaign tawdriness of late, but the Chicago Council on Global Affairs recently released its biennial survey of American public opinion on U.S. foreign policy, which not surprisingly this year focuses on Republican attitudes. Much coincides with surveys conducted by Pew and other reputable pollsters, but I learned three things reviewing the Chicago Council data that I hadn’t understood before: Republican positions on globalization and trade shifted in 2008; Democrats are more supportive of trade than their presidential nominee; and the great divergence in stances on immigration now evident between Republicans and Democrats is the result of dramatic changes in viewpoints among Democrats, not Republicans”.

She writes that “First, though, it merits saying how much consensus remains across the political spectrum about America’s role in the world. The overwhelming majority of Americans continue to want a strong military, participation in our existing alliances, and additional alliance relationships. And most Americans favour our country acting through international institutions and support international agreements as a means of protecting and advancing our national interests. In fact, 89 percent of Americans support strong alliances, and we like NATO best of all. Sixty-eight percent of Americans even approve of a stronger United Nations, that bête noir of the right. There is also considerable agreement over the threats we face, with strong majorities of respondents most worried about terrorism and nuclear proliferation (especially that of North Korea). Seventy-five percent of Republicans put terrorism at the top of their list of concerns, a higher proportion than did after 9/11. Democrats are more concerned about financial crisis and climate change than Islamic fundamentalism — but 49 percent of Democrats see the latter as a critical threat, too”.

She notes “The journalist Peter Beinart wittily observed that Democrats are the new Republicans: advocates of engagement with the world, proponents of trade and globalization, optimists about the future. The Chicago Council’s data bear that out. You would never know it from listening to Hillary Clinton equivocate on trade, but 74 percent of Democrats favour the Trans-Pacific Partnership; even 56 percent of people who voted for Bernie Sanders support TPP. Because the Chicago Council provides time-series data, it’s possible to see that the Republicans’ disaffection with globalization started in 2008 — before the Lehman Brothers collapse that started the financial crisis. Still, six in 10 Republicans continue to support globalization”.

Pointedly she writes “And Donald Trump supporters are not the outliers many consider them to be: 40 percent view trade as positive for the U.S. economy; 45 percent believe globalization has helped U.S. companies; 52 percent say globalization has been good “for consumers like you”; 49 percent agree that globalization has been beneficial for their standard of living. Where Trump supporters differ from other Americans is in their concern that despite those advantages, globalization has been damaging to jobs and job security. Moreover, Trump supporters are not outliers from traditional Republican positions on military strength, alliances, or international institutions. More Trump supporters than other Americans favour keeping U.S. military bases in Japan and Korea, though their candidate has made statements to the effect that continuing these relationships would be contingent upon cash. Even 50 percent of Trump backers want America to have a shared leadership role in the world and think the NATO alliance is essential — again, an area where the GOP standard-bearer’s views have been less than supportive”.

She ends “Interestingly enough, Trump voters are also those least affected by the diversity immigration brings. Such data reinforce the findings of sociologist Robert Putnam’s work on religious tolerance in America: The more exposure people have to difference, the more tolerant they become. Overall, the Chicago Council data are incredibly reassuring. There remains a broad, deep consensus among Americans about an engaged role in the world being positive for our security and our economy, that the allies and institutions we built from the devastation of World War II continue to deserve our support, and that trade is an essential component of our prosperity. Where differences have emerged — on immigration, for example — they result in increasing tolerance by liberals rather than growing intolerance by conservatives. It is alarming the extent to which one would come to very different conclusions listening to the Democratic nominee on trade or the Republican nominee on, well, everything.

Cameron’s legacy


An excellent editorial in the New Statesman, “Cameron’s tarnished legacy”, gives an excellent summary of Cameron’s legacy, “prime minister, David Cameron was derided for his U-turns. It was fitting, then, that his time in parliament should end with one. Having vowed after leaving No 10 that he would remain the MP for Witney for the duration of the parliament, he resigned on 12 September. Mr Cameron’s decision was understandable. At the age of 49, he is the youngest former prime minister since the Earl of Rosebery in 1895. He has no desire to be limited by the Commons. But his departure completes a remarkable denouement. Only 16 months ago, Mr Cameron became the first Conservative leader in 23 years to win a parliamentary majority. History will more often record him as the first to lose a national referendum. Despite decades of anti-EU sentiment, Mr Cameron wagered that he could win a vote on UK membership of the EU. That fatal misjudgement – Michael Portillo called it the “greatest blunder ever made by a British prime minister” – will define his legacy”.

The piece goes on to argue “Cameron’s decision was understandable. At the age of 49, he is the youngest former prime minister since the Earl of Rosebery in 1895. He has no desire to be limited by the Commons. But his departure completes a remarkable denouement. Only 16 months ago, Mr Cameron became the first Conservative leader in 23 years to win a parliamentary majority. History will more often record him as the first to lose a national referendum. Despite decades of anti-EU sentiment, Mr Cameron wagered that he could win a vote on UK membership of the EU. That fatal misjudgement – Michael Portillo called it the “greatest blunder ever made by a British prime minister” – will define his legacy”.

It goes on to note how “In his six years in Downing Street, Mr Cameron achieved some things of which he can be proud. He introduced equal marriage, in opposition to most of his party, agreed to spend 0.7 per cent of our GDP on foreign aid and oversaw record levels of employment. But, in most respects, his record is deplorable. After the financial crisis of 2008, he made it his defining ambition to eliminate the UK’s current deficit. But his premiership ended with government borrowing having only halved. Austerity starved the economy of investment, reduced growth and penalised future generations. Housebuilding stayed at its lowest level since the 1920s. Having vowed to make the Conservatives “the party of the NHS”, Mr Cameron imposed an expensive and botched reorganisation on it. Today’s underfunded and overstretched health service is the consequence”.

It rightly adds how “The promised transformation of the welfare system through Universal Credit was barely begun. After six years of Conservative government, the programme is not due to be completed until 2022. As Iain Duncan Smith finally recognised, “welfare reform” became a façade for cuts to the bene­fits of the poorest. Though he often spoke of social justice, Mr Cameron’s policies were frequently regressive. The “bedroom tax” and benefit cap penalised the vulnerable in return for paltry fiscal gains. After forming a coalition with the Liberal Democrats in 2010, Mr Cameron spoke of forging a “new politics”. He pledged to reform party funding to “remove big money from politics”, to create a “wholly or mainly elected upper chamber” and to fund 200 open primaries in safe seats. Not one of these promises was kept. Mr Cameron’s administration ended in tawdry fashion with his doling out of honours to donors, cronies and friends”.

It ends “Once asked why he wanted to be prime minister, Mr Cameron replied: “Because I think I’d be good at it.” At times, such as his response to the Bloody Sunday inquiry, he was. He was always fluent and composed, but he never settled on a larger purpose for his premiership. He was an incoherent fusion of soft Thatcherism, shire Toryism and modish west London liberalism. Theresa May, who has broken with her legacy in several respects, can learn more from his failures than his successes. Not yet 50, Mr Cameron has ample time to redefine himself out of office. He should put his talents at the service of those causes ill served while he was in it”.

“An impassioned plea for an open world order”


In this the 4,700th post, an article discusses Obama’s last UN speech, “Barack Obama used the pulpit of his last speech before the United Nations to make an impassioned plea for an open world order, even as walls rise against refugees, protectionism makes a comeback, and the West faces the prospect of a simmering cold war with Russia and other authoritarian states. The address represented a rallying cry for beleaguered democratic, pro-trade governments to promote the values of human rights and free markets. Obama also explicitly rejected the politics of isolationism, demagoguery, and nationalism that have gained political traction from the American heartland to Moscow. There appears to be a growing contest between authoritarianism and liberalism right now, and I want everybody to understand — I am not neutral in that contest. I believe in a liberal political order,” Obama said. “So those of us who believe in democracy, we need to speak out forcefully.”

It goes onto point out that “The U.S. president took aim at plenty of targets during his speech but trained a sharp burst of rhetorical fire on a country that has, in the course of his own administration, become Washington’s international nemesis and, at best, awkward diplomatic dance partner — Vladimir Putin’s Russia. He specifically rebuked Russia for intimidating its neighbours and using military might to shape the future of its growing sphere of influence. Obama argued that Russia’s military interventions — from Syria, where it is shoring up President Bashar al-Assad’s government, to Ukraine, where Russian-backed rebels seized control of Crimea and continue to challenge a Western-backed government in Kiev — are unsustainable over the long haul”.

Interestingly the writer notes how “Obama also took a swipe at China, which has erected an archipelago of military installations on disputed islands in the South China Sea. He said a “peaceful resolution” of China’s territorial dispute “will mean far greater stability than … militarization” in the region. Obama also challenged China to ensure that its troublesome client, North Korean leader Kim Jong Un, pays a price for his recent test of a nuclear explosive, a flagrant violation of multiple Security Council resolutions that China has supported. “When North Korea tests a bomb, that endangers all of us. And any country that breaks this basic bargain must face consequences,” he said. Hours after Obama’s speech, President Recep Tayyip Erdogan — Turkey’s democratically elected, though increasingly authoritarian, leader — delivered his first address to the international community since a failed coup attempt in July. Erdogan implored world leaders to crack down on Fethullah Gulen”.

The report notes how “Obama’s speech also served up a blunt rejection of growing calls for sealing national borders, including Republican presidential nominee Donald Trump’s proposal for a “beautiful wall” along the U.S. southern border to keep out foreigners from Mexico and elsewhere. “Today, a nation ringed by walls would only imprison itself,” Obama said. “So the answer cannot be a simple rejection of global integration. Instead, we must work together to make sure the benefits of such integration are … squarely addressed.”That included a now familiar endorsement of free trade, which Obama hailed as a necessary component for a more prosperous and peaceful world. He described “trade wars,” protectionism, and tariff hikes as “failed models of the past” and reiterated his pitch for the Trans-Pacific Partnership (TPP), a massive trade agreement among 12 Pacific Rim countries awaiting ratification by signatories”.

The piece goes on to note how “even in Washington’s political climate, Obama’s free trade message has become increasingly isolated. Democratic presidential nominee Hillary Clinton has disowned the trade pact, despite her vocal support for it as Obama’s secretary of state; so has progressive firebrand Sen. Bernie Sanders (I-Vt.), who challenged her for the nomination. Trump calls the trade pact, which would link together about 40 percent of the global economy, one of the “worst deals” ever forged. Yet Obama sounded an uncharacteristically populist note in his speech, highlighting the need for the world’s wealthiest to strike a fairer bargain with the world’s workers. “A world in which 1 percent of humanity controls as much wealth as the other 99 percent will never be stable,” the U.S. president told the gathering of foreign leaders. “A society that asks less of oligarchs than ordinary citizens will rot from within.” Although part of Obama’s speech centered on his forward-looking policy goals, he also sought to burnish his presidential legacy on the world stage. He noted that the meltdown of the global financial system, which nearly collapsed during the final years of George W. Bush’s administration, was stabilised under his watch. He cited landmark diplomatic agreements with Cuba, resulting in restored relations, and Iran, where sanctions relief was traded for the restriction of Tehran’s nuclear program. He also pointed to Washington’s role in supporting peace talks that ended Latin America’s longest civil war in Colombia”.

The report ends, “Obama struck a fatalistic note over the prospects of restoring peace in the Middle East, where leaders have demonised rival sects, persecuted political opponents, and tolerated the perversion of Islam. “[Such forces] are now at work helping to fuel both Syria’s tragic civil war and the mindless, medieval menace of ISIL,” he said, referring to the Islamic State. “If we are honest, we understand that no external power is going to be able to force different religious communities or ethnic communities to coexist for long,” Obama said. In the meantime, Obama said the United States and its coalition partners will continue to undertake a “united and relentless” military campaign against the Islamic State in Syria. Beyond that, Washington will limit its action to pressing for an elusive diplomatic settlement to the conflict while working to deliver assistance to those in need. The recent breakdown in the Syrian cease-fire, however, has raised doubts over the viability of such a plan.


“Legacy of the pivot is only partially complete”


An article questions the pivot of Obama, “Barack Obama’s trip to Asia marks the final lap in his acclaimed “pivot” or “rebalance” to Asia. The narrative of this policy, as trumpeted by current and former administration officials, is predictably positive — expounding the bold but careful execution of a strategy from Day One in the Oval Office. However, the real story may cast a less shimmering glow across the Pacific. A combination of inattention, surprise, and mistakes characterised the early years of Asia policy under Obama. Despite this inauspicious beginning, the administration reacted well to each of these obstacles, and these midcourse adjustments culminated in the pivot. The legacy of the policy, however, may ultimately be out of the president’s control as it rests in the hands of Congress and the next president”.

The writer argues that “The Asia that Obama expected when he took office was not the Asia that he got. Confronted with a global financial crisis, two wars, and policy priorities of climate change and health care reform, America’s first president with roots in the Pacific did not exactly have the luxury of looking East. The priorities for Asia were not laid out in any formal “pivot” document largely because the goals, based on my many conversations with Obama’s Asia team, were modest: 1) deeply engage China; 2) balance this with a strong alliance with Japan; 3) address the North Korean problem; and 4) re-evaluate free-trade agreements. In each case, the White House got slapped down. Obama wanted to implement a new cooperative strategy that offered strategic security reassurances to Beijing as it encouraged the country to partner with the United States in solving common global problems. The conciliatory language embedded in Obama’s November 2009 speech (i.e., that he did not seek to contain China and that Beijing was central to Washington’s global agenda) led journalists to write of a new “G2” strategy. As evidence, they pointed to the fact that the administration did not approve arms sales to Taiwan in its first year in office, and the presidentrefused to meet with the Dalai Lama”.

The arrogance, naiveity or both of Obama are clearly seen when the author writes that “Obama wanted to deal with one of the most vexing problems in the region by extending the unclenched fist to North Korea, penning a personal message through Special Representative for North Korea Policy Stephen Bosworth (the contents of which are still unknown) to move forward with high-level, bilateral denuclearization negotiations. Finally, the politics of his party compelled the president to call a timeout on all trade deals, most significantly for Asia, putting the Korea-U.S. FTA (KORUS) on hold, along with ratification of two other Latin American agreements (Panama and Colombia). Events in the first 18 months of Obama’s presidency undermined each of these objectives. In the case of China, Beijing disappointed America’s G2 policy by not delivering on climate change at the 2009 Copenhagen summit (it would do better in Paris in 2015); moreover, it launched what would become an unprecedented set of territorial claims in the East and South China Seas. The president’s disillusionment with the policy was evident as early as November 2009, as his principal Asia advisor, Jeffrey Bader, laterrecounted, when Obama was reportedly angered by Beijing’s haughty attitude and its efforts to disrupt his online conversations with the Chinese people”.

The article goes on to mention how “Presidencies are remembered not for their plans coming into the Oval Office, but for how they react to the surprises thrown their way. In this regard, Obama responded with worthy midcourse adjustments. The White House’s critical but unseen coordination with the Japanese government during the Fukushima meltdown, followed by the more public Operation Tomodachi recovery project and the return of the LDP to power under Prime Minister Shinzo Abe, helped to restore the reservoir of trust in the alliance. In North Korea, Obama transitioned from engagement to containment, helping to erect a comprehensive multilateral sanctions regime. And while unsuccessful with Pyongyang, he demonstrated positive and historic diplomatic advances with Myanmar, Vietnam, and Laos. The White House elevated relations with other partners like South Korea and Australia, both of whom were willing to contribute on signature Obama projects like climate change, nuclear security, and global health. On trade, starting with the National Export Initiative in the 2010 State of the Union speech, Obama engineered an astounding turnaround on trade that linked the nation’s economic recovery and job creation to export promotion, eventually leading to the passage of KORUS and the championing of the 12-member Trans-Pacific Partnership (TPP). Perhaps most important from the Asian perch, Obama just gave more “face time” to Asia. He broke the tradition of one annual trip to Asia after the United States joined the East Asia Summit in 2011, and went beyond the typical Northeast Asia circuit to Indonesia, India, and Australia as part of a larger G20 strategy that incorporated Asia. The current (and last trip) to Asia for Obama was the 11th of his presidency, the same as Bill Clinton’s 11 and more than George W. Bush’s eight. These adjustments would eventually aggregate to the “pivot” as announced in a speech to the Australian Parliament in 2011. As much as the administration would like to take a victory lap in Asia, the legacy of the pivot is only partially complete”.

He rightly points out that “it is on the China account where there remains much work. On the one hand, the administration responded well to its initial disappointment with G2 by returning “normalcy” to its relations with China in Obama’s second year. The president stopped refusing to meet with the Dalai Lama, and it resumed authorizing arms sales to Taiwan. More generally, it implemented a nuanced strategy balancing pockets of competition and cooperation with Beijing that resulted in significant agreements on climate change in Paris,maritime risk reduction protocols, counterproliferation (Iran and North Korea), and cybersecurity. Any Obama official will recite the number of hours the president and National Security Advisor Susan Rice have spent with Chinese President Xi Jinping in Washington; Sunnylands, California; Beijing, and elsewhere to build the type of Kissingerian relationship with the Chinese that could lead to such deals. Yet these accomplishments are bookended by continued Chinese land reclamations and military infrastructure building in the South China Sea, and aggressive patrolling in the East China Sea despite international opprobrium and U.S. freedom of navigation operations”.

The author moves to the second part of the article, North Korea, where it “remains a stain on the pivot legacy. Under Obama, North Korea has conducted an unprecedented three nuclear tests and 72 major kinetic and missile provocations. By comparison, there was one nuclear test and 19 provocations during Bush’s two terms. North Korea’s nuclear capabilities will have evolved during the span of the Obama presidency from a fledgling program to a stockpile of as many as 35 nuclear bombs and potentially a survivable deterrent. While the pivot’s defenders might argue that little more could have been done to stop China or North Korea, historians are often unkind, associating arguably unavoidable outcomes with negligent policy”.

He ends “Yet, the pivot’s legacy ultimately will be determined by ratification of the TPP. The 12-member free-trade pact, the first to include the world’s second- and third-largest economies, is not just important for business. As a high-standards agreement it has the potential to affect more than just tariffs, reaching deep into member countries to create conformity on labour, the environment, food safety, intellectual property, cybersecurity, the digital economy, development, and other standards. If China were to join the TPP, conformity with these clauses would have a transformative strategic effect on the nature of the Chinese state. Though a distant outcome at the moment, it is not implausible”.

He later concludes “During Obama’s swing through Asia this week, he will get more questions about the TPP than he will care to answer. Unfortunately, the fate of Asia’s most significant new institution is beyond his control and now in the hands of an uncooperative Congress and two presidential candidates who oppose the deal. Historians undeniably will give Obama credit for the strategic priorities his presidency gave to Asia, but the president may indeed find himself in another campaign as a private citizen to ratify the TPP, and thus complete his unfinished legacy in Asia.

“Government spending has continued to balloon in recent years”


A piece discusses the Chinese economy, “Since the end of 2013, Chongqing — a city of 33 million people in China’s southwest known for its spicy food and political scandals— has been quietly selling off equity in city-owned companies at a time when state-sector reform, announced to much fanfare by President Xi Jinping three years ago, had otherwise seemed to have stalled amid bureaucratic infighting. In a country that often trials economic reforms at a local or regional level before rolling them out nationwide, that suggests there might be hope for Xi’s reform agenda. Equally as important, Chongqing’s experience also suggests a solution to one of China’s other intractable economic problems: local government debt”.

It goes on to point out that “China’s state-owned companies are the laggards of the economy. They areabout a third as efficient as private-sector companies — as measured by return on assets — despite being supported with a host of subsidies and other perks. State companies account for only about a quarter of economic output, but they dominate some of the most important industries, like telecommunications and banking. In November 2013, Xi called for what he termed “mixed-ownership” reform that would lift the efficiency and effectiveness of state-owned companies by diluting government holdings. Governments would sell down their shares to other state companies, pension funds, private equity investors, as well as private and foreign companies in the hope that a greater range of shareholders would unleash companies’ entrepreneurial spirits. If anything, however, reform has gone backward. In June, Beijing ruled that the Chinese Communist Party must have a say in all major business decisions taken by state companies. Meanwhile, Beijing seems to be moving in the opposite direction: In December 2015, it mergedtwo of its shipping giants, followed shortly by its two leading train makers, creating even bigger national champions.”

The article mentions that “What Chongqing is doing is found at the other end of the strategic spectrum. Chongqing would gain little, if anything, from retaining ownership over the type of companies it’s been selling. Equity in fun parks and baijiu distribution companies have been put on the block. Some companies have been big — being sold for billions of yuan — and some small, but regardless of size they haven’t occupied the economy’s commanding heights. As to whether Chongqing’s equity sales have resulted in more efficient companies, there’s no way of telling as of yet. But it may do wonders for the city’s finances. Despite repeated efforts by Beijing to rein in debt, local government spending has continued to balloon in recent years. According to data compiled by China Business News based on disclosures by local governments, China’s provinces — including Chongqing, a municipality with the administrative rank of a province — on average saw a 47 percent increase in debt between mid-2013 (the last time there was a nationwide audit) and the end of 2015. The increase varied widely, with the far western region of Ningxia posting a 127 percent increase, while its neighbour Gansu increased by only 40 percent. Chongqing saw its debt burden decline by 4.6 percent, or about $2.4 billion on debts of about $52.6 billion, making it one of only two provinces that reduced its deficit. That’s all the more significant given that Chongqing has the fastest-growing provincial economy in China, expanding 11 percent in 2015 compared with 6.9 percent for the country as a whole. None of the usual economic indicators explain how it has managed this twin feat of record growth and reduced debt. It hasn’t changed its growth model: The city is heavily dependent on investment, with fixed-asset investment (money spent on capital goods like machinery and buildings) growing by more than 17 percent in 2015. The most important tool available to local governments to fund investment and pay down debt is selling land, but Chongqing’s land sales fell 7 percent in 2015. Local governments also are trying to encourage private investment in infrastructure, thereby lessening the state’s funding burden, but Chongqing has arranged only a handful of so-called public-private partnerships, far less than most provinces. That leaves state-owned equity sales. In his 2016 annual work report — a kind of State of the City address — Mayor Huang Qifan, the city’s second in command, said that in the course of pursuing mixed-ownership reform, Chongqing sold about $10.6 billion worth of equity in state companies the previous year. In his 2015 report, he said the city sold $17.4 billion worth of equity in 2014. That’s equivalent to 44 percent of land sales in 2015 and 68 percent a year earlier”.

Interestingly it notes how “Nationwide, local governments own about 100,000 companies, with assets that could be worth about $7.5 trillion. Chongqing alone has $375.4 billion worth of state-owned assets, seven times its debt. The difficulty has always been that meaningfully large assets sales were off-limits. Chongqing’s efforts seem to have really kicked into gear in the second half of 2014, when the Chongqing State-owned Assets Supervision and Administration Commission (SASAC) — the agency responsible for regulating state companies — posted on its website a spreadsheet of 110 state companies, assets, and projects in which it was willing to sell equity and included contact names and phone numbers for the SASAC officials responsible for selling them. If you were interested in Locajoy, which was valued at about $300 million, you could contact Luo Rui, who would also entertain joint venture and leasing offers. It was an eclectic list that included eight live-aboard riverboats that cruise the Three Gorges, a popular tourist destination; a 10,000-ton electrolytic copper converter; and an iron-ore mine in western Australia — just the sort of companies a provincial government has little business being involved in”.

It concludes “Beijing still has to decide whether Chongqing’s experience is worth rolling out nationwide. Relative to China’s provinces, Chongqing is very small and Beijing regards Huang as a safe pair of hands when it comes to economic reform. Applying this to other provinces is more risky. When the central government published its long awaited state-sector reform blueprint in September, it was notable for just how jittery Beijing is about state assets being sold off too cheaply. That’s what brought state sector reform to a shuddering halt a little more than a decade ago, amid a public backlash against asset stripping and the perception that insiders were getting sweetheart deals. With cash-strapped local governments desperate to pay down their debts, there’s no guarantee that it won’t happen again. Of course, part of the problem is that it’s difficult to set a price for money-losing companies. For Locajoy, that might prove particularly difficult because there isn’t really a market price for performing dolphins, or for the dancing bears at the in-house circus. But the city of Chongqing’s willingness to try to find a price has put the amusement park at the cutting edge of one of China’s most anticipated economic reforms, one that could have a meaningful impact on the nation’s economic health”.

“Politicians need to respond to the howl of protest”


A piece from Foreign Affairs notes how to unite the UK after Brexit, “The referendum on the United Kingdom’s membership in the European Union has underlined the profoundly divided state of England. My middle-class friends and family based in the country’s south continue to bemoan the outcome of the referendum in tones more suited to a family bereavement than a political event. Meanwhile, in the north of the country where I grew up, there were celebratory street parties with revelers full of delight that voters had risen up and given the establishment a good kicking. Although the referendum revealed a riven country, it did not create it. It simply provided many voters who had effectively opted out of British politics an opportunity to get back in. Their opinions may be unpopular in some quarters, but their mobilization cannot be ignored”.

It goes on to mention “The Leave campaign’s dismissal of experts tallied with a pervasive mistrust of the establishment among those left behind by globalization. One incident at a town hall event sticks in my mind. A couple of colleagues and I were in Newcastle, in the northeast, discussing the fact that the vast majority of economists agreed that Brexit would lead to an economic slowdown. A two percent drop in the United Kingdom’s GDP, I said, would dwarf any savings the country would generate from curtailing its contribution to the EU budget. “That’s your bloody GDP,” came the shouted response, “not ours.” In deprived areas of the country, where jobs are insecure, wages are depressed, housing is scarce, and education levels are far below those in London, there is a profound unease with the kind of aggregate statistics bandied about by experts. Membership in the single market may have increased the GDP of the whole country, but it didn’t make a difference everywhere. Boston in Lincolnshire provided the Leave campaign’s biggest victory—76 percent voted for Brexit. The median income here is less than £17,000 ($22,600), as compared with £27,000 ($35,900) across the 20 local authorities where support for EU membership was strongest. For all the good that membership might have done for the economy as a whole, inequality has worsened. As one woman in Yorkshire put it to me, “I don’t mind if we take an economic hit. Our lives have never been easy, after all. But it will be nice to see the rich folk down south suffer.” Dramatic falls in the value of the pound or national income mean little to people who are already struggling”.

It goes on to mention, “The backlash from disappointed Remainers has been immediate. To date, a petition to annul the result on the grounds that turnout was below 75 percent and the winning side received fewer than 60 percent of the votes cast has received over four million signatures. Some members of Parliament have suggested that there should be a second referendum, or that the result of this one could be overruled by a parliamentary vote (the vast majority of British parliamentarians support Britain remaining within the European Union). Such talk is misguided and dangerous. To be sure, one-off referendums are not an optimal way of deciding complex political issues, and are even less so when there is no defined threshold for turnout or margin of victory. As leading economist Kenneth Rogoff has argued, it seems bizarre that such a crucial decision could be made by 36 percent of eligible voters. Further, the Remainers are also right to claim that the Leave camp proved adept at twisting the truth; its claim, painted on the side of its battle bus, that the United Kingdom pays £350 ($465) million per week to the EU was simply and provably false. And it is doubtless true that some people had not thought through what their vote would mean”.

He points out that “all that is in the past. Political campaigns are not usually beacons of honesty and straightforwardness. And the notion that large numbers of pro-Brexit voters are experiencing buyer’s remorse is both unproven and irrelevant. Voters knew the score before the referendum. It was a one-shot deal. The four million signatories of the petition are dwarfed by the 17.4 million who voted for Brexit. And it is hard to avoid the feeling that much of the Remain camp disappointment comes from people who are simply not used to losing votes that might negatively affect their own lives. As Manchester Professor Rob Ford put it, the English middle class is simply experiencing what UKIP voters have had to put up with for years. The fundamental problem with the idea of ignoring the outcome of the referendum, however, is political. The referendum was, in part, a political protest against a system that no longer adequately represents its people. Overturning the result, therefore, would simply make matters worse. And the backlash would hit the Labour Party worst of all. Many of the places where the Brexit campaign triumphed are areas in which Labour had been holding off a challenge from UKIP. Part of UKIP’s appeal—apart, of course, from being the only party in favour of a proposition that 17 million people supported—is its insurgent nature”.

He rightly points out that “the referendum result will affect their ability to do so. If the economists’ predictions are correct, Brexit will reduce the resources of the British state and hence its ability to act. Yet the levers that need to be pulled to address the kinds of issues that the vote revealed rest, nevertheless, in the hands of the British government. Training, education, the provision of adequate housing, and ensuring a more equal distribution of the spoils of globalization are all matters for which the British government has primary responsibility. Each would, in its own way, help to bridge the chasm that has grown between the globalized middle class and the white, blue collar working class. The rest of the world should watch the British response to this challenge with interest. The forces of reaction and revolt are on the march, whether via the Front National in France or the Trump presidential candidacy in the United States. In all these places, established parties, rather than dealing immediately with the legitimate grievances that have generated such anger, have waited until hurt feelings have grown into political movements capable of challenging longtime incumbents”.

He ends “As ever, no one would choose to start from here. The referendum will have severe consequences for the British economy and British society. Yet it can still serve as a wake-up call. Politicians need to respond to the howl of protest that woke them in the early hours of June 24. No longer can they simply plug their ears. Let that be the legacy of the European Union referendum”.


Brexit: cosmopolitan vs parochial


An important piece discusses what the Brexit vote revealed, “Referenda are terrible mechanisms of democracy. As a case in point, the recent British referendum over the United Kingdom’s membership in the EU was a reckless gamble that took a very real issue—the need for more open and legitimate contestation in the EU—and turned it into a political grotesquerie of shamelessly opportunistic political elites”.

Of course referendums are not terrible. They can be very revealing and legitimate ways to engage the public on very specific and important issues but must take place within special settings. The public must be knowledgeable, not just about the topic in question but politics generally. The UK has very poor, almost non-existent civic education. If there was a profound well defined and serious course of political education in schools and democracy, the role of the citizen and the state from an early age this would dramatically increase the level of debate. Moreover, it would marginalise the dangerous, lying and biased press, for which the UK has become known and played such a role in the referendum. There was no such education and so people were easily confused and unable to tell fact from lies. Had they been better educated the result might have been very different.

The piece goes on to argue, “The raucous debate over the United Kingdom’s continued membership in the EU was riven with lies and misrepresentations, some of which are now being explicitly rolled back by Brexit advocates; even the British press rues its bombastic support for the Leave side. Unfortunately, many British voters appear not to have known exactly what the EU is, validating other recent research demonstrating a lack of factual knowledge about the union. Observers of the referendum should therefore be wary about drawing conclusions about broader globalization efforts, the Western order, the inevitability of the rise of populist anti-immigration parties, or the viability of the EU project overall. The answer to the breathless question posed in the New York Times on Sunday—“Is the post-1945 order imposed on the world by the United States and its allies unraveling, too?”—is simple. No, it is not. And yet the emotions and cultural chasms brought to bear in the Brexit vote cannot and should not be ignored. Brexit’s real lesson is that there is a consequential divide between cosmopolitans who view the future with hope and those who have been left behind and have seen their economic situations and ways of life deteriorate. The same story may well play out in the United States and elsewhere, with important electoral effects. But the Brexit story also speaks to the uniqueness of the EU as a new kind of polity with a profound impact on the lives of all within it”.

The article goes on to point out, “Although the Brexit referendum was a highly imperfect form of democratic representation, the emotions voiced by Leave voters were very real. They echo important and valid feelings of other populations across the Western democracies. There are two worlds of people, as analysis of Brexit voting patterns clearly indicated, that are divided in their experiences and their visions of the future. Educational attainment, age, and national identity decisively determined the vote. Younger voters of all economic backgrounds and those with a university education voted overwhelmingly in favour of Remain. Older voters, the unemployed, and those with a strong sense of English national identity sought to leave. The fight over Brexit is a reflection of the social exclusion that arises in a world of stark economic inequality. One way of thinking about the division is to see it as cosmopolitan versus parochial thinking, rooted in deeper social and economic trends that create their own cultural dynamics. Cosmopolitanism, a sense of belonging to a global community beyond one’s immediate borders, requires confidence in one’s place in the world and implies a hope about the future beyond the nation-state. The parochial view is tinged with fear about that future and a sense that societal transformation will leave the common voter behind”.

Correctly he points out that “In part, that fear reflects the opening of markets, but it is equally due to changes in technology and broader shifts in capitalism away from protection of both the middle and the working classes. These shifts can’t be blamed solely on globalization; they also have much to do with domestic politics and policy decisions. In the United Kingdom and elsewhere, political choices have accelerated deindustrialization while decimating social safety nets and doing little to put the brakes on rising inequality. Given this harsh reality for the unemployed, the older, and the uneducated, the Remain campaign’s warnings about the economic disaster of Brexit carried little weight; many voters believed that their opportunities were closed off long ago. The clever marketing of the Brexit campaign, including the mantras “Take Back Control” and “Breaking Point,” spoke to very real senses of exclusion but offered few solutions; the reality is that British political dynamics, more than the EU’s rules, have created the United Kingdom’s social and economic problems”.

He argues that “The fight over Brexit is a reflection of the social exclusion that arises in a world of stark economic inequality. But the referendum should also be viewed in terms of a much longer history of political development and state building. The EU is far beyond a simple international organization or trade treaty, since it has accrued significant political authority across a wide range of areas. The rulings of the European Court of Justice, for example, supersede national law, and the laws of the EU have transformed everyday life in Europe, even as the Brussels bureaucracy and its fiscal presence remain tiny. Historically, new political authorities have emerged and evolved in messy, ugly, and often violent ways. National projects of unification have involved coercion, civil wars, and the brutal exercise of power. Questions of federalism in the United States are still being fought today. Although the nation-state seems universal and natural, there have been many other forms of government in Europe alone: the Habsburg monarchy, Italian city-states, the Holy Roman Empire, and the Hanseatic League, for example, have all come and gone. The EU, for all its faults, is an innovative new form, a polity in formation. Those under 45, and particularly those under 30, embrace it and see it as a natural and positive thing, a backdrop to their changed everyday lives that creates more opportunities than it closes down”.

It ends “Given history’s guide, we should not be surprised that the deepening of the EU has created a backlash. But we can be appalled by the craven opportunism and lack of political leadership in the United Kingdom and on the European continent in guiding this development. The EU will only work if all its citizens can imagine themselves part of a cosmopolitan, thriving democratic polity, one that balances local, national, and EU powers and creates economic opportunity. Listening to those on both sides of the cultural divide, and working to ease the economic inequality that underlies the division between the hopeful and the excluded, is the only way forward for the EU—and the rest of us”.

“Politics is never just about policy. It’s also about emotion”


A piece urges politicians to inspire people, “David Cameron. François Hollande. Hillary Clinton. What do they have in common? They’re all deeply traditional politicians. They all have long track records of public service, and they’re all thorough, meticulous managers. They make a point of exuding calm and competence.  All of which probably helps to explain why so many people dislike them. Despite helping France climb out of a long economic slump last year, Hollande’s popularity has been hitting historic lows. His compatriots despise him for his milquetoast manner and failure to move decisively against terrorism. Cameron achieved a remarkable record of growth during his six-year stint as British prime minister — but that didn’t matter to voters when he gave them a referendum on whether their country should stay in the European Union. His ignominious defeat in last month’s Brexit ballot, which prompted him to step down, will remain as the most memorable, and inglorious, achievement of an otherwise successful term in office”.

Aside from the author’s obvious lack of knowledge of the tenure of Cameron, his disastrous decisions and seemingly endless shifts which are anything but “meticulous” the overall point is still valid.

The piece notes “Clinton is burning through millions of dollars in her textbook campaign to win the presidency. But Donald Trump — dysfunctional, dishonest, underfunded Donald Trump — continues to hold his own. Clinton, Cameron, and Hollande are all very different politicians, operating in very different contexts. Yet they all seem to be suffering from a similar problem. The nature of their opponents may hold an important clue. Despite their impressive credentials, these establishment titans have proved vulnerable to exactly the same sorts of opponents — namely, fiery populists. Trump and Bernie Sanders are worlds apart ideologically, but together they’ve given Clinton a humiliating master class in the power of simple solutions and raw emotion. Hollande’s nemesis is National Front leader Marine Le Pen, who has ridden her blistering brand of far-right identity politics to unprecedented heights. Cameron was undone by his Conservative Party comrade Boris Johnson, the extravagant and ruthless former mayor of London (now turned foreign minister), and by Brexiteer-in-charge Nigel Farage, who has successfully channeled corrosive anxiety about migrants and globalization into a potent challenge to the status quo”.
He rightly points out that “To be sure, the U.S. presidential hopeful, the ex-British PM, and the struggling French president all have plenty of real flaws. Their problem is that we’re in a historical moment that plays up their shortcomings and undercuts what would normally be their strengths.  The Great Recession and the disruptions of technological change have transformed economies, fueling white-hot anger among those who have been left behind. Terrorism and immigration stir deep-seated fears, tapping into sections of the reptilian brain that don’t really respond to sedate calls for reasonableness and unity. Politics is never just about policy. It’s also about emotion. And that’s never been truer than today. It’s a sad fact of life that the most powerful political emotions aren’t always positive. The politicians of the far right have shown that appeals to nativism can be more effective in stirring people up than high-minded calls to idealism and common purpose. That’s a big reason why Euroskeptic nationalists are gaining the upper hand over the efficient, well-educated, and deathly dull officials who run the European Union. The British politicians who campaigned for the U.K. to stay in the EU — most notably Cameron and Labour Party leader Jeremy Corbyn — conspicuously failed to make emotionally compelling arguments for their case”.
The piece ends, “For Hillary Clinton, the answer is simple: Be more Margaret Thatcher, less Oprah. Something like this is what political satirist Jon Stewart had in mind, I think, when he astutely described Clinton as a “bright woman without the courage of her convictions.”  The problem goes beyond worries about some alleged lack of “authenticity.” Personally, I don’t give a damn about whether my president is someone I’d want to have a beer with. But we really do need to have a serious think about why some voters feel drawn to over-the-top buffoons. I suspect that it’s precisely because — in open defiance of the reigning ethos of focus groups, data mining, and sentiment analysis — the Trumps and the Johnsons and the Farages make a point of exciting a strong visceral response. So the Republican convention is a mess? Perhaps. But it’s generating a huge amount of nonstop coverage, social media attention, and passionate discussion. The Democratic version, coming soon, is shaping up to be a sleek, smooth, flawlessly managed machine. One wonders if anyone will tune in”.

The end of the BRICS, the US remains


An important article discusses the end of the BRICS as a threat to the United States, “When analysts and scholars compose their first drafts of the history of the Obama administration’s foreign policy, a chapter will surely address what were once dubbed “rising powers,” a group that included Brazil, Russia, India, China, South Africa, and others. But the optimism of 2008 — when the so-called “BRICS” were ascendant, ready to reshape global economics and politics — has turned to doubt. The impeachment trial of Brazilian President Dilma Rousseff and a Russian doping scandal that only a Soviet could be proud of are just the latest unmistakable signs that a surge of newly powerful nations collectively remaking the world stage is hardly a sure thing. A few years ago, a mortal rupture in Europe would have invited crowing over “the demise of the West and the rise of the Rest.” Now, the picture is more complicated: Europe is in disarray, as are several of the might-have-been beneficiaries of the continent’s turmoil. And as the United States looks ahead to a new administration come January, its approach to shifting global power relations will be ripe for a rethink. Amounting to neither a freshly minted set of trusty democratic allies nor a cohesive counterweight to the Western order, newly powerful nations are proving to be less predictable, more fragmented, and ultimately more reinforcing of U.S. power than even Washington’s own intelligence establishment predicted a decade ago”.

The piece add, “In the latter years of the George W. Bush administration and the early part of the Obama years, rising or so-called “emerging” powers seemed to captivate the foreign-policy establishment. Foundations and think tanks proffered rising powers projects, conferences, and white papers. Some were bullish. Analysts, including Princeton’s Anne-Marie Slaughter and John Ikenberry, predicted the rise of a group of new democracies — with Brazil, India, and South Africa topping the list — that would grow into natural allies for the United States. Everyone from John McCain to Madeleine Albright (who promoted the idea nearly a decade before others cottoned on to it) advocated uniting democracies in a global alliance premised on shared values and joint action. On the flip side, other academics and analysts anticipated that the rise of new powers could only herald an American decline. In 2010, University of Wisconsin-Madison professor Alfred L. McCoy predicted “imperial collapse” and “painful daily reminders of what such a loss of power means for Americans in every walk of life.” A detailed study prepared by officials from rising powers and published by Oxford University Press in 2012 explicated the “synergies and complementarities” that had “already catapulted the BRICS into a leadership position” globally. As Autonomous University of Madrid professor Susanne Gratius wrote in 2008: “In recent years a number of emerging nations have been challenging the position of dominance of the old powers, which are dropping down the international pecking order.” The downcast lot predicted that the decline in relative importance of the United States would be matched only by that of Europe, inaugurating what historian Timothy Garton Ash termed “Europessimism,” a creeping sense that the continent was being edged out by the fast-rising states of China, India, Brazil, and Russia”.

Importantly the piece goes on to mention that “The one thing the two sides agreed on was that the shifts wrought by rising powers would be tectonic. In “Mapping the Global Future,” an influential analysis published by the U.S. National Intelligence Council (NIC) in 2004, intelligence experts predicted that the “‘arriviste’ powers—China, India, and perhaps others such as Brazil and Indonesia—have the potential to render obsolete the old categories of East and West, North and South, aligned and nonaligned, developed and developing.” The report made headlines like “2020 Vision: A CIA report predicts that American global dominance could end in 15 years.” Not so fast, as it turned out. Many of the premises undergirding these predictions evaporated in the ensuing decade. The genesis of global focus on rising powers was a 2001 analysis by Goldman Sachs’s Jim O’Neill that forecast faster, more consistent growth rates among emerging economies that would position them to gradually dominate the world stage, eventually leaving only the United States and Japan among the traditional industrial powers still ranking among the top six global economies. The bank focused on Brazil, Russia, India, and China — a group that O’Neill dubbed the “BRICs” and, later, the “BRICS,” after South Africa’s induction. While Goldman’s analysis was full of caveats, policy wonks focused on the breathless expectation of sustained, rapid growth by emerging economies. Goldman’s anointment of the BRICs as the emerging markets “most likely to succeed” prompted a flurry of prognosticators to formulate their own acronym accolades: MIST (Mexico, Indonesia, South Korea, and Turkey — which O’Neill designated as next in line after the BRICs) and SANE (South Africa, Algeria, Nigeria, and Egypt — supposedly the African continent’s leading up-and-comers). Britain’s Telegraph went so far as to publish a full lexicon of the emerging-market alphabet city”.

Pointedly he argues “Fifteen years later, several of those BRICS (not to mention MIST or SANE) are crumbling, done in by self-dealing, asset bubbles, stock market swoons, commodities fluctuations, and finite supplies of low-wage workers. In a warning published in January, the World Bank predicted negative growth in Brazil and Russia, just over 1 percent growth in South Africa, steady growth of 7.8 percent in India, and a shortfall from expectations in China topping out at 6.7 percent. As the Financial Times put it: “What had once been the brightest spark in the global economy has now become its big headache.” Late last year, Goldman finally shuttered its BRICS investment fund, which had lost 88 percent of its value since its 2010 peak. The problems aren’t merely economic. Politically, several of the BRICS have proved similarly unstable. The rise of emerging powers was premised on the notion that they were domestically stable, ready and able to consistently project global influence. While some analysts spotlighted corruption, institutional weakness, and political dysfunction as risks, such concerns were often relegated to the footnotes. As the 2020 NIC project put it in its report: “Only an abrupt reversal of the process of globalization or a major upheaval in these countries would prevent their rise.” Yet in South Africa, Brazil, and Russia, corruption and governance failures have proved catastrophic. Whether you think Rousseff is being rightfully targeted or unfairly scapegoated — and no matter what you make of charges that her interim successor is trading favors for the votes to impeach her — none of it augurs well for Brazilian governance. In South Africa, President Jacob Zuma narrowly withstood an impeachment campaign and now clings to office as a lame duck in what is effectively a one-party democracy. While Russia and China continue to project firm centralized authority, their intensifying crackdowns on dissidents, lawyers, and influential cultural figures bespeak regimes nervous that corruption and economic slowdowns could turn their populations restive”.

The author posits that “Back when rising powers were in style, theorists diverged on what to expect from their foreign policies. Some expected the leading democracies to align with Washington, whereas others foresaw a solid political bloc of BRICS holding Western influence in check. Neither vision came true. In their approach to international human rights and humanitarian intervention, rising democracies have been influenced by their post-colonial identities far more than their modern political bedfellows, emphasizing respect for sovereignty over the moral imperative of civilian protection or conflict prevention. Brazil and India abstained on the 2011 U.N. Security Council resolution authorizing the use of force against Libya’s Muammar al-Qaddafi, anxious about the prospect that intervention could lead to regime change. Those two countries and South Africa have taken a reticent approach to handling the civil war in Syria, straddling the middle, but with a tilt more toward Russia and China than the United States and Europe. But while dreams of a powerful “alliance of democracies” have been dashed, the nightmare scenario of a solid BRICS wall has also failed to manifest. While the BRICS do meet periodically as a group, diverse growth rates, population sizes, carbon emissions levels, wealth, and other indicators dictate diverging interests on issues including the global economy and trade, climate change, nuclear proliferation, and conflicts in the Middle East. BRICS countries have come together to form their own development bank, a rebuke to the Western-dominated International Monetary Fund and World Bank system. But the two most powerful and stable nations in the bloc, India and China, are increasingly at odds over terrorism, Beijing’s regional ambitions in the South China Sea and beyond, and New Delhi’s strategy of hedging through strengthened relations with the United States and Japan”.

The writer mentions that “First, the United States’ status as what Madeleine Albright once called the “indispensable nation” remains intact. The United States is far from omnipotent and has bumped up hard against the limits of its diplomatic influence and military capabilities in places like Iraq and Afghanistan. But when it comes to catalyzing global action and providing the decisive voice in whether, and to what degree, a global conflict — Libya, Syria, the Islamic State, Ukraine, climate change, Ebola, take your pick — will be addressed at a global level, no other country’s say comes close to Washington’s. With the exception of Russia (where President Vladimir Putin seems motivated by dual desires to check the United States and perpetuate his own personal power), no other rising power has sought to call the shots nor assumed an obligation to lead outside its region. Second, Europe still matters. The implicit logic of the rising powers was that they would leave the continent a relic of a bygone era of power relations. Despite its economic stagnation, political malaise, refugee crisis, and rising right wing, Europe remains, by far, the United States’ most stable and reliable major ally. While Brexit has dealt a major blow to the European Union, it is likely to further strengthen U.S. relations with Berlin, Paris, and any other European capital that may stand in for London as Washington’s go-to conduit within the union. Just as many Brits belatedly seem to be awakening to just how important the EU is, so Washington may emerge from the crisis with a heightened sense of appreciation for the bloc. Whether on Iran, Ukraine, the Islamic State, or virtually any other issue, European support is the necessary — if no longer sufficient — precondition for U.S. action to enjoy legitimacy”.

He contends that “A third conclusion derived from the uneven rise of new powers is that China’s rise has rendered the United States more, not less, globally important. Rather than becoming the has-been many predicted, the United States, due to China’s surging influence, has become a far more important ally to countries throughout Asia and beyond. As China’s regional neighbors seek to fortify themselves against the behemoth next door, their relationships with the United States have both broadened and deepened. The U.S. pivot to Asia is now being driven as much by local demand for an American presence in the region as it is by Washington’s fear of being edged out. Recent discussions about arms sales and even the possibility of a renewed U.S. military presence in Vietnam are only the latest manifestations of thickening ties between the United States and numerous allies in the region, including South Korea, Japan, the Philippines, Malaysia, and Indonesia”.

He ends “After 9/11, and once the long-term damage to the United States’ global standing began to recover from the 2003 Iraq War, foreign-policy thinkers started opining about what would come after what Charles Krauthammer once dubbed the country’s “unipolar moment” following the end of the Cold War. Richard Haass of the Council on Foreign Relations projected a nonpolar era, with power widely dispersed. New America’s Sherle Schwenninger and others forecast a multipolar world. The prognostication-defying fate of the BRICS over the last decade, not to mention last week’s Brexit shocker, may point to a more unsettling prospect: an ambipolar world — ambivalent, ambiguous, ambient — where power is diffuse and national fortunes rise and fall to a rhythm too complex for any theory to adequately reflect. So rather than betting heavily on specific winners and losers, the United States should diversify its diplomatic capital, recognizing that predicting the path of the world’s rising powers is an uncertain business at best.


IMF and neoliberalism


An unusual article notes how even the IMF might be seeing the problems of unrestrained free markets, “The research department of the International Monetary Fund dropped a political bombshell last month. The furor was set off by the publication of an article — “Neoliberalism: Oversold?” — that sparked a near-panic among advocates of free market policies and celebrations among their critics. The piece concluded that, over the past 30 years, the proponents of the economic philosophy known as “neoliberalism” have been systematically overselling the benefits of the two planks at its heart — namely, fiscal austerity during economic slowdowns and the deregulation of financial markets”.

The article adds “This is a huge concession for an institution long known for its ideological self-assuredness. Essentially, the article contends that these two policies, which the IMF has long championed, are of questionable utility. It finds that they “have not delivered” the higher economic growth rates that were promised and may have even done more harm than good. Additionally, according to the article, both fiscal austerity and increased financial openness have often exacerbated economic inequality, which itself could become a drag on future economic growth rates. In other words, the venerable institution had essentially everything wrong — at least as far as these two key tenets of neoliberalism go. Most strikingly, the article infers that three policy prescriptions long advocated by the IMF’s critics — regulation of some capital flows, Keynesian fiscal stimulus policies, and effective economic redistribution — all have more merit than the IMF has long contended. As Ben Norton wrote in Salon, these conclusions amount to heresy: “It is somewhat like the Pope declaring that there is no God; it is a volte-face on almost everything that the IMF has ever stood for.” Longtime IMF critic Naomi Klein tweeted sarcastically, “So all the billionaires it created are going to give back their money, right?” Presumably not. But the significance of the article — at least in the long term — is that it might signal a deeper reckoning, both within the IMF and more broadly across Western capitals, about the failure of 30 years of neoliberal policies to bring about financial stability or lessen widening economic divides”.

The author goes on to write that “In the meantime, unsurprisingly, the IMF leadership was quick to distance itself from the piece, making clear that it had no intention of abandoning neoliberalism. The organization’s chief economist, Maury Obstfeld, conceded that the shock of the 2008 global financial crisis has “led to a broad rethink of macroeconomic and financial policy in the global academic and policy community,” including within the fund, but argued that the troublesome article “has been widely misinterpreted” and “does not signify a major change in the fund’s approach.” Similarly, the Financial Times described the article as “more a reflection of the vigorous debates [underway] inside the IMF than a brutal takedown of the free market policies the fund has long advocated.” Indeed, despite the uproar, it’s not clear that the IMF’s approach to economic development is about to change”.

Crucially it mentions that “Many IMF watchers have noted that the fund continues to operate as usual, attaching austerity policies and other neoliberal reforms as binding conditions to its loans. Economist Jerry Epstein said while such internal debates within the IMF are healthy, they have so far had little or no impact at the operational, country level of IMF policy. Isabel Ortiz of the U.N. International Labor Organization wondered, “Will the operational side of the IMF even listen to the researchers?” The controversial article’s lead author, Jonathan Ostry — who is the deputy director of the IMF’s research department — said the piece focused on two specific policies and was not meant as an attack on “the entire neoliberal agenda or the Washington consensus.” On the other hand, he also hinted that he hoped the article would be the first of more to come and that it would set up the opportunity to more broadly examine neoliberalism this year”.

Correctly the author notes that “The fact that the IMF is using the word “neoliberalism” in such a high-profile way is telling, since it is employed almost exclusively by critics of economic liberalization. Advocates of neoliberalism prefer to avoid the term, assuming that the policies are so self-evidently right that they don’t need a name at all. The fact that the IMF’s own research department has acknowledged the term could be interpreted as a nod to the fund’s critics that some of its policies did reflect ideological biases and that other approaches are valid. If so, it’s about time. The challenges raised by neoliberal economic development policies were easy for Western leaders to ignore when they were limited to crises in the developing world, such as Latin America in the 1980s, East Asia in the 1990s, and Russia and Turkey in the early 2000s. But since the 2008 financial crisis struck the rich countries too, their shortcomings have been harder to deny. With economic inequality untamed, financial markets still unstable, and fiscal austerity having utterly failed to revive economic growth and employment to pre-2008 levels, it’s increasingly difficult to keep pretending that the status quo is working”.

The article writes that “Before Ronald Reagan and Margaret Thatcher repopularized the ideology of free markets in the 1980s, the need for Keynesian economics and financial regulation had been widely accepted for a 40-year stretch following the Great Depression, and the advocates of free markets languished on the sidelines. Western leaders had learned the best way to prevent socialist revolutions and fascist dictatorships was to adopt policies that would avoid financial crises and lessen economic inequality. But the Reagan-Thatcher revolution set about unlearning those lessons, and the worsening inequality and financial instability of the last 30 years were the unfortunate result. If the IMF’s article is the first sign of a swing back in the other direction, Norwegian economic historian Erik Reinert, for one, won’t be surprised. He has noted that the popularity of free market policies has risen and fallen cyclically throughout history, such as before and then after the French Revolution, before the 1847 financial crisis that was followed by a string of social revolutions across Europe in 1848, and before the stock market crash of 1929 that was followed by the Great Depression. During each of these cycles, free markets were championed for a while but then eventually abandoned as financial crises became more frequent and economic inequality more pronounced”.

The writer goes on to make the point that “Today, in a time when Thomas Piketty’s critique of worsening economic inequality is a best-seller, leading U.S. presidential candidates rail against free trade deals, right-wing anti-immigrant parties win elections across Europe, and even the Organization for Economic Cooperation and Development calls on its members to put the brakes on austerity, it’s clear that the political center, which has favoured neoliberal policies for the last 30 years, is no longer holding. The high-profile IMF mea culpa may well be a first shot across the bow, a sign that we are now entering what Reinert calls our own modern-day “1848 moment.”




An article notes the possibility of Frexit, a French exit from the EU, “after Grexit and Brexit, the next crisis to confront the European Union will be Frexit. It will prove to be the worst of all. While dramatic, the Greek tragedy had a limited run. While seismic, the British divorce will not necessarily upend Brussels. But for historical and institutional reasons, a French crisis would be cataclysmic. The midwife for the EU’s birth, France now risks becoming its gravedigger”.

The author makes the point that “the French believe, rightly, there can be no Europe without the people of their own glorious nation. That corollary breathes life into France’s traditional conception of a united Europe and thus lends vitality to the continent’s abstract ideals. It also motivates Europe’s traditional bouts of frustration with France. Upon coming to power in 1958, Charles de Gaulle insisted upon the necessity of a “European Europe.” In principle, this meant a united Europe of equals; in practice, de Gaulle meant a Europe in which France would be more equal than the others. Tellingly, when he signed the Rome Treaty in 1958 (the future EU’s act of conception), it was not because he believed in “Europe.” Instead, it was because he believed in an independent and sovereign France, one yoked to the accomplishment of “great undertakings.” De Gaulle accepted the EU because it ensured France’s own magnificence”.

The author points out that “A funny thing happened, though, on France’s way to a future of peace and prosperity. While the former grew humdrum, the latter grew hazier. After enjoying the 30-year period of postwar growth — known as the “trente glorieuses” — the French economy faltered during the oil crisis of the early 1970s and never fully recovered. While successive French governments continued to lay bricks for the European project, they failed to restart the national economy — which slowed from an annual average of 4 percent during the trente glorieuses to slightly more than 1 percent now forecast for 2017 — just as they failed to resolve the predicament of the growing number of unemployed, which currently stands at slightly more than 10 percent. As the foundations of a new European order were being laid, France’s imperial past caught up with it as hundreds of thousands of immigrants from its former colonies in North Africa — Morocco, Tunisia, and especially Algeria — settled in the country. Recruited to fill jobs created during the trente glorieuses, these same immigrants found the welcome mat pulled from under their feet as France’s economy slowed and then headed south by the end of the 20th century. By the turn of the 21st century, the diffuse fear of “le grand replacement” — coined by the essayist Renaud Camus and positing the submersion of a white and Christian France by Arab and Muslim immigrants — had become an article of faith among the growing number of French turning to the extreme right-wing Front National (FN)”.

He aruges the French is unsure of its identity which is rebounding on the EU, “The inability of both conservative and socialist governments to redress the growing social and economic fissures in French society, and to reinvent the republican model for the 21st century, has encouraged the retreat to nativism and nationalism. Tellingly, a 2015 poll revealed that if the 2005 referendum on the European Constitution were to be held again, 62 percent of respondents would vote against it, a 7 percent rise from the original “non” vote. It is a crisis, moreover, the French government seems incapable of addressing. The day after the British vote was tallied, and the stock markets went into a tailspin, President François Hollande went before the nation and again underwhelmed it. He explained that “Europe could not go on as before,” expounded on the need to “reinforce the eurozone and democratic governance,” and exhorted Europe to take the necessary “leap” to secure its future. Stapled to the end of these oft-repeated pieties — spoken by a president with the mien of a funeral home director — was a solemn chestnut: “History,” Hollande intoned, “is knocking at our door.” It remains unclear when or whether Hollande will open the door. Not only are 26 other nations huddled behind the same door squabbling over how to answer the knocking, but the weightiest nation seems in no great hurry to answer it at all. While Hollande was, in his inimitable style, urging his fellow leaders — in particular, German Chancellor Angela Merkel — to make haste, Merkel agreed that Europe must make haste, but slowly. Very slowly. After meeting with the leaders of Germany’s political parties, Merkel appealed for “calm and determination” and warned against “simple and fast solutions that would only further divide Europe.” In a word, whereas Hollande urged the principal duo of the EU, France and Germany, to take the lead, Merkel instead emphasized gemeinsam, or collective, action”.

The report mentions that “The tumult is greatest on the party’s left. Shortly before the Brexit vote, Arnaud Montebourg was unpersuasively denying reports that he planned to enter the primary race. Having been tapped by Hollande to serve as economy minister, Montebourg found himself unemployed in 2014 when the government, scrambling to meet the EU’s deficit requirements, largely swallowed its austerity demands. Not only has Montebourg since been a consistent critic of these policies, but his earlier anti-globalization sentiments — summarized in his 2011 manifesto Votez pour la démondialisation (Vote for De-Globalization) — are now crystallizing into a “dé-europisation” stance. Montebourg is not the only prominent figure on the left who is, as he recently described himself, “euro-épuisé,” or “Euro-exhausted.” Jean-Luc Mélenchon, the perennial presidential candidate of the Parti de Gauche, has long inveighed against “the caste of Eurocrats and politics of austerity” imposed on EU member states. Not surprisingly, he welcomed the Brexit vote as a reality check for the French political class, as well as a promising harbinger of his own political prospects. “This is the beginning of the end to an era,” he exclaimed. “Either we change the European Union or we leave it.” Though he hotly refuses such comparisons, Mélenchon’s reasoning and rhetoric echo that of his ideological opposite and nemesis, Marine Le Pen. Among the ways Le Pen has transformed the party founded by her father, Jean-Marie Le Pen, is to have turned inside out its relation to Europe. Fervently anti-Communist, anti-Gaullist, and thus pro-Europeanist during the Cold War, the FN began its long lurch toward its current hyper-nationalism with the collapse of the Soviet Union. The near-death of the Maastricht Treaty referendum in 1992, the full death of the European Constitution in the 2005 referendum, and its resurrection two years later in the widely despised Lisbon Treaty (signed by then-President Nicolas Sarkozy without a referendum) showed Le Pen père and fille the electoral advantages of mining the deepening vein of popular alienation from Brussels”.

Importantly he notes “In the wake of the Brexit vote, Le Pen could scarcely contain her satisfaction. At a short press conference at the her party’s headquarters, Le Pen stood in front of a newly minted poster displaying a pair of hands breaking free of a handcuff made of gold stars. For those unable to interpret the image, there also ran a caption: “And Now France!” Indeed. In her opening remarks, Le Pen congratulated the British people — along with the “very brave” Boris Johnson and her “friend and ally” Janice Atkinson (a European Parliament deputy formerly with the UK Independence Party) — for reminding France that, yes, “it is possible to leave the European Union.” She also abstained from playing the religion, race, and immigration cards that brought her to prominence: The French already know the hand she is holding. As a result, she mentioned the word “immigration” just once but repeated more than a dozen times the words “liberty” and “democracy” — the very values born in Europe, she has argued, but scorned by the EU and France’s traditional political parties”.

Crucially, “In 2014, Le Pen was already promising that, if elected to the presidency, her first order of business would be to schedule a referendum on whether France should remain in the EU. Suddenly, this promise seems a bit less fantastic, all the more because she has largely succeeded in making the FN a party like the others. (In a recent and underreported finding by France’s prestigious polling institute, the IFOP, the historic gap between those who say they will vote for the FN and those who do vote for it has almost entirely closed. This suggests, as IFOP director Jérôme Fourquet notes, that the shame FN voters once felt is a thing of the past.) In the most recent salvo of polls from early June, in which the French were asked for their presidential preferences, Le Pen is the first over the finish line. In nearly every poll, she breaks the barrier of 30 percent, leaving her competitors in the dust”.

He ends “For the moment, the nature of France’s electoral process — in which the top two finishers face off in a second round of voting — remains a rampart against a Le Pen presidency. Polls reveal that the only competitor she would defeat in the second round is the discredited and derided François Hollande. The candidacies of Alain Juppé and Sarkozy, the leading contestants for the nomination of the conservative Les Républicains, pose another obstacle. In a projected second round, both men would attract enough voters from the center and left to decisively defeat Le Pen. Finally, Le Pen’s path to the Élysée is also mined by the French public’s complex attitude toward the European Union. In an Odoxa poll taken last week, the French clearly stated that while they cannot live with the EU, they also cannot live without it. Sixty-four percent of respondents do not wish to see France quit the EU, yet at the same time only 31 percent saw the EU as a “source of hope.” Yet, as Le Pen underscored in her press conference, much can happen in the 10 months remaining between now and France’s presidential elections. Juppé’s Europeanism and economic liberalism can easily morph into political liabilities; by the same token, voters will not forget that Sarkozy, who now insists that the Lisbon Treaty be rewritten, had rammed through that same treaty in 2007 when he was president. Most important, if the United Kingdom manages a smooth divorce from the EU, a majority of French voters may come to see a “grande France” as a source of hope, just as a majority of British voters last week saw hope in a Little England”.


“Cameron is the captain who drove HMS Britain onto the rocks”


A piece argues that Cameron has been able to change the Conservative Party, “This is how a political life ends: with a crash, not a whimper. David Cameron’s place in history is now assured. He is the man who took the United Kingdom out of the European Union. As we wait for the full impact of Thursday’s referendum to be felt, he may be remembered as the prime minister who presided over the beginning of the end of the United Kingdom, too. Scottish independence, defeated as an idea just two years ago, is back on the table. Cameron’s ten years as leader of the Conservative party and six as prime minister now boil down to these solitary facts. Nothing else matters; nothing else will be remembered. Cameron gambled everything on one roll of the dice and lost it all”.

The writer goes on to mention “No prime minister in living memory has suffered a defeat of such cataclysmic proportions; none has been so thoroughly humiliated by his own electorate. Cameron lost control of his party and then his country. The consequences of that carelessness will be felt, in Britain and internationally, for years to come. Future political historians will ponder a melancholy question: what was the point of David Cameron? And their judgment is likely to be severe. It wasn’t supposed to be like this. Cameron was to be a different kind of Tory, one comfortable with the face and reality of modern Britain. He was elected leader on a modernising platform that stressed the party’s need to change. He would lead a gentler, more inclusive, Conservative party that would be economically conservative but socially liberal. Tax cuts and gay marriage; welfare reform and a marked increase in spending on international aid for the world’s poorest countries. Above all, he insisted, the Tory party would have to stop “banging on” about Europe. The EU, he recognised, was a distraction from more immediate and pressing concerns. Besides, Cameron appreciated that Tory divisions over Europe helped bring about Margaret Thatcher’s demise and crippled John Major’s premiership”.

Pointedly the piece notes “A year ago, Cameron didn’t even expect he would have to honour his party’s platform promise to hold a referendum on EU membership. But that was before he won a surprising majority in last year’s general election. Suddenly he found himself trapped by his own manifesto promises — promises made to placate the Eurosceptics in his own party and see off the threat posed to his right flank by the virulently anti-European UK Independence Party. A referendum would have to be held. Even so, Cameron was confident — or complacent — enough to think winning it would be an easy task. After all, most of the British establishment was firmly in the pro-Europe camp and so, overwhelmingly, was British business. Economic self-interest would surely persuade voters to set aside their concerns about the EU and endorse the status quo. They might not do so with any great measure of enthusiasm but a reluctant vote Remain was all Cameron, and his government, needed”.

Correctly the author makes the point that “if Cameron understood that there was anti-establishment sentiment in his country, he was entirely too confident he could placate it. Cameron’s attempt to win over Euroskeptics by renegotiating the terms of British membership was an embarrassing, even humiliating, flop. He had disastrously misjudged his room to maneuver. Britain was already a semi-detached member of the EU, granted exemptions from the single currency and the common Schengen travel area; there was not much further autonomy for Britain to win within the confines of the EU. Cameron’s attempt to do so was an inevitable failure, and an unforced strategic blunder”.

Centrally he argues “Any remaining hope the Remain side might cruise to a comfortable victory evaporated when Boris Johnson, Cameron’s most probable successor and arguably the most charismatic and popular politician in Britain, declared he would campaign for Leave. Worse still, the temper and character of the times offered Cameron little encouragement. Populism is the currency of the age and “elites” are fair game everywhere. The EU, which has never inspired much enthusiasm in Britain, was easily depicted as an unaccountable undemocratic, and out of touch. More relevantly, though perhaps less fairly, the same held true Cameron, with his privileged background and aristocratic manner. The would-be “One Nation conservative” came to be dismissed by his countrymen as a hapless toff. It did not help matter that all Cameron could offer, in response to the Leave campaign’s promise to “take back control” and restore British parliamentary sovereignty, was a parade of “experts” — ranging from the World Bank and the IMF to Barack Obama — all of whom warned against leaving the EU. Experts, too, are out of fashion in Britain. “We are about democracy, they are about economics” said Johnson, while Michael Gove, a former key Cameron ally turned impassioned Leave campaigner, remarked that “I think people in this country have had enough of experts”. Above all, the Leave campaign concentrated its fire on the issue of immigration. Cameron once promised to cut net inward migration to Britain to less than 100,000 people a year”.

The report notes “Cameron finds himself the laughing-stock of Europe. His reinvention of the Conservative party, reviving it in the aftermath of three shattering election defeats at the hands of Tony Blair, counts for nothing. His party is split in two; his country faces an impossibly uncertain future as the full impact of Thursday’s extraordinary vote begins to be felt. Most of all, Cameron must reflect on the manner in which he lost the confidence of the British people. The roots of this crisis run long and deep but they are connected to the ongoing impact of 2008’s financial crash. The British people have put up with six years of “austerity” government but have never done so enthusiastically”.

Yet this would be true if the Tories had not been re-elected last year. Had they rejected the level of austerity they should have voted for Labour who would have dramatically slowed, if not reduced it. Some mistakenly were enable to see past Ed Miliband’s personality instead of his competence at the job.

The report adds “We used to think Cameron was a lucky politician at his best in a crisis. He had the good fortune to face two Labour leaders — Gordon Brown and Ed Miliband — who were in their different ways almost heroically unpopular. In 2014 he saw off the threat of Scottish independence and, until just a few weeks ago, looked like seeing off the threat of Brexit too. That analysis no longer holds. This plebiscite was a revolt against Westminster just as much as it was an expression of anti-European animus. The British people have tired of the governing officer class and gleefully took the opportunity of kicking Cameron in the shins”.

It ends “The referendum result revealed a picture of a sharply polarized Britain. Older voters voted to Leave while their grandchildren overwhelmingly voted to Remain. Middle-class university graduates voted to Remain but working-class high-school graduates voted to Leave. London and Scotland endorsed the EU, the so-called “heartlands” of “middle England” backed Leave. Britain this morning is a country divided by class and geography as almost never before. That too is part of Cameron’s legacy; the proof of a failed premiership. At some point and eventually, even lucky generals find their good fortune runs out. Cameron has proved no exception to that immutable law of politics. Almost all political lives end in failure but few in quite such a devastating fashion as this. This is a shipwreck and Cameron is the captain who drove HMS Britain onto the rocks. That is his legacy; that is what he will be remembered for. And deservedly so.

“European leaders are likely to favour as amicable a settlement as possible”


A piece notes that after Brexit, the talks, despite minor tensions will be resolved cordially in the interests of all, “There has been no single official response by the European Union to the U.K.’s decision last week to vote in favour of leaving the bloc. Instead, we’ve seen a flurry of mixed and competing messages – a sort of good cop-bad cop routine, with European Commission President Jean-Claude Juncker pounding on the table and German Chancellor Angela Merkel asking Britain to take a few deep breaths and think. Toughest of all have been leaders of the EU’s institutions. Negotiations for exit must start immediately, argued Juncker, alongside European Parliament President Martin Schulz – Europe can’t be held hostage to an equivocating Britain. Seeing a chance to make a power grab, high-profile European parliamentarians – such as former Belgian Prime Minister Guy Verhofstadt – have, too, demanded a speedy departure and pressed for a seat at the Brexit negotiating table alongside representatives from the 27 EU member states”.

The author mentions that “By contrast, the member states themselves, and their leaders in particular, have been much more guarded. Belgian and Italian officials argued for speeding up divorce proceedings at a meeting of national diplomats last weekend, but they were in a minority. Most agreed to proceed with caution. Merkel, in particular, has warned against any anti-British backlash. Europe’s pragmatic national leaders are likely to prevail over the EU true believers in Brussels. All may have been irritated over the years at the U.K.’s prickly relationship with the EU, and its departure from the union will force all remaining member states to think long and hard about how they can renew their cooperation. But none of that’s a reason to expect an ugly divorce. A popular view in Brussels, and in some national capitals, is that ever since the U.K. joined the Common Market in 1973 it has vetoed ambitious projects of continental integration, leaving the EU weaker and more divided. The U.K.’s exit is, for these Machiavellian federalists, a golden opportunity to take the EU in a different direction, to advance their project of “ever closer union,” involving deeper fiscal union and the launching of new pan-European institutions like a European army. But to take advantage of this chance, they believe, they must move quickly – hence the hostility to Britain’s dallying”.

The writer makes the point, “There is also the fear that the referendum result may not stick, and so negotiations on Brexit must start before the U.K. has a chance to change its mind. Options for backing out are already being floated by some from the “Remain” camp. And a cold-feet reversal wouldn’t be as radical as it appears. After all, the EU has ignored referendums in the past: The Irish were asked to vote again after rejecting the Lisbon Treaty in 2008 and the French and Dutch voted against the constitutional treaty in 2005, only to see it reappear virtually unchanged in the form of the Lisbon Treaty a few years later. Most recently, Greeks overwhelmingly rejected a bailout deal in 2015, but their prime minister signed off on a worse one shortly afterward. But this attitude falls on deaf ears in many national capitals, and member states will have the final say on how to deal with the U.K. Among national leaders, the prevailing belief is that the block must proceed with caution when formulating its response to the U.K. referendum. This stems from the realization that the U.K.’s vote is not an isolated event, but connected with wider European politics”.

Crucially he makes the point that “Experienced politicians, such as Merkel, view the political meltdown taking place in the U.K. with great concern. The fallout from the Brexit vote has revealed the fragility of the British government’s authority and how weak mainstream political parties in the U.K. have become. For Merkel, who has made the center-ground in German politics her own, or for embattled leaders like Matteo Renzi in Italy and François Hollande in France, events in Britain are a sobering reminder of their own domestic political struggles. Renzi recently lost mayoral elections in Rome and Turin to the anti-establishment Five Star Movement, and his political future looks more uncertain than ever. Hollande leads a Socialist Party that has lost much of its support among working-class French voters, just like the British Labour Party has. The French political establishment will take the success of the U.K. Independence Party in the EU referendum as a warning about the chances of Marine Le Pen’s National Front in next year’s presidential elections”.

He concludes “In some ways, other EU member states are in more of a bind than the U.K. Since the U.K. does not use the single currency, its vote to leave the EU is complicated but achievable. For eurozone countries, exit is almost unimaginable. Faced as they are with deep domestic discontent, governments in the eurozone share many of the U.K.’s problems but have fewer options available to deal with them. And the already fragile and stagnant eurozone is hardly in a fit state to withstand the economic shock of Brexit. Shares of Southern European banks, for instance, took a dramatic hit after the Brexit result was announced and many eyes are on Portugal and Italy”.

Correctly he ends “For these reasons, the good cops are likely to win out: When negotiations around Brexit do begin, they are likely to be orderly and reasonable. There will be no excessive generosity, given that the remaining EU member states want to discourage their populations from arguing for a similar in/out referendum. But a hostile set of negotiations driven by a desire to punish the U.K. are also very unlikely. After all, voters in France, Germany, Italy, and elsewhere across Europe are angry with their own politicians, whom they consider remote and self-serving. They are far less preoccupied with punishing the U.K., a sentiment that belongs to disappointed Eurocrats more than it does to European citizens. What these citizens are concerned about is the dire economic performance of their economies, one which acrimonious negotiations with the U.K. would not help. Concerned about the impact of Brexit on the eurozone, European leaders are likely to favour as amicable a settlement as possible, where the economic interests of all concerned are accommodated”.

He finishes “As befits a bloc made up of national governments whose politicians are acutely aware of the fragility of their own authority, the response to the U.K.’s decision to leave the EU has so far been muted. The nastier and more jubilant responses have come from those parts of the EU that are more isolated from the realities of national politics – from the European Commission and the European Parliament. The sense of opportunity felt by Euro-federalists does not extend much beyond the Brussels bubble, and it is certainly not shared by governments in national capitals. There, the feeling is more one of a generalised political crisis that needs to be managed carefully if it is not to engulf the EU as a whole. The EU’s future rests upon its national governments being able to contain growing voter dissatisfaction with mainstream political establishments. This is the greatest challenge for the EU, and one that means European leaders will continue to tread very carefully over the next few weeks”.

Brexit, the result of austerity?


Daniel Altman argues that a part of the reason for Brexit was Cameron’s austerity policies, “I’m the guy who said the European Union would disintegrate, but I didn’t think it would happen so quickly. And I didn’t imagine that we would have the ill-timed economic policies of David Cameron’s Conservative government to thank. A big motivation for the vote to leave was the frustration of Britons with their economic situation. When people are in pain, they look for any way to fight back. For the more xenophobic among them, immigrants became the target. For others, it was the establishment, minus the toffish former mayor of London and a few grandees of proto-racist fringe parties. In both cases, voting “Leave” was the biggest and easiest way to put a sharp stick in their enemy’s eye. As satisfying as that might have felt, the economic situation today may be even worse. The collective fantasy engendered by the Leave campaign, which harnessed the power of mob psychology by appealing to voters’ worst impulses, is over, and the United Kingdom is waking up with the bed sheets a mess, the front door open, and its wallet gone missing. Introspection is creeping in. “My god, what have I done?” barely begins to describe it”.

Altman goes on to aruge that “Half of the United Kingdom’s international trade will become, at least temporarily, subject to increased bureaucracy and controls. With its companies facing more difficulty buying, selling, and operating on the continent, British investments will become less attractive, depressing the value of the pound. Britons will no longer have the right to work in 27 other countries, and foreign goods will become more expensive and perhaps harder to find as well. It may seem odd to call this Cameron’s fault, since he led the “Remain” campaign as prime minister. Moreover, the Tories’ association with xenophobic scaremongering was arguably stronger when Michael Howard led the party in the 2005 general election. Howard promised to limit inflows of asylum-seekers and slap quotas on other forms of immigration, even though most immigrants held work permits and the number of asylum-seekers had actually been falling. Cameron — who allegedly wrote Howard’s speeches back in 2005 — faithfully towed the party line that there were too many foreign workers in the country, riding anti-immigration sentiment to a resounding electoral victory last year. But the influence of his economic policies was much more tangible than that of his rhetoric, unnecessarily exacerbating the suffering of millions of Britons at a time when the country was already under enormous pressure”.

He posits that “By taking an axe to government services, Cameron set in motion the destruction of more than a million jobs in the public sector. As I wrote in an earlier column, these cuts were inflicted on the national budget for ideological rather than fiscal reasons. The Tories were set on them since 2005, when the economic picture was vastly more positive. And while the Labour Party had also proposed a measure of fiscal austerity, its plan relied more on tax increases, which would have had a smaller direct effect on the economy. Slashing so many jobs in the aftermath of the global financial crisis had some very predictable effects. While the unemployment rate peaked in the United States in October 2009, it didn’t max out in the United Kingdom until two years later. Then it took almost two more years to drop by just one percentage point. That’s four extra years of pain”.

Altman writes,”Eventually, many of the public sector jobs were replaced by private sector jobs. But in a labour market with lower demand, wages were destined to fall. In fact, between 2008 and 2014, Britons suffered a double-digit drop in the buying power of their weekly pay. Imagine that — every pound in your pocket eroding until it was worth only 90 pence. The combination of lower real wages and a long period of unemployment undoubtedly took a heavy human toll”.

The result of this shrinking state is, “Hence the anger. Inevitably, some people turned it on the foreigners both in their midst and among the nameless hordes supposedly headed their way. Others targeted the sitting prime minister, who spearheaded the Remain campaign — and the same man who needlessly caused much of their pain, just for the sake of dogma. The Leave campaign brought these two groups together, and now things are bound to get even worse. The weakened pound will make imports more expensive, hitting working-class people who depend on cheap consumer goods. Many firms, especially branches of foreign companies, will freeze hiring and investment as they await an uncertain future. And the bureaucratic mess of disentangling the United Kingdom from the European Union will suck up even more tax money that could have gone into public services. So where is Cameron in all of this? Heading for the exit. Rather than take responsibility, he has exalted his own supposed achievements and foisted the fault back on the public, declaring that the country has chosen a “different path” that “requires fresh leadership.” It’s a change that will come several years too late”.


How Brexit happened


After the Brexit vote a report from the Guardian discusses how the UK voted to leave the EU, “Britain’s self-ejection from Europe is the culmination not just of four months of heady campaigning but four decades of latent Euroscepticism, which, through good times and bad, never really went away. Campaigners have agitated for EU withdrawal ever since the UK joined the common market in 1973. Labour’s official policy for the next decade was to quit, and a sizeable proportion of Conservatives have never been comfortable Europeans. The issue hounded John Major’s premiership, lay dormant through the Tony Blair years before rearing its head once again as the economy turned sour at the end of the last decade. David Cameron was keen to move his party away from “banging on about Europe” after he became leader. But once in Downing Street, he found it impossible to resist pressure from his backbenchers to call a poll as the idea of leaving the EU gained wider traction in the country with the rise of Ukip, populist rage against remote elites and discontent about immigration. Brexit, a term coined in 2012 before becoming mainstream political currency last year, moved from being a niche obsession to a victorious, mainstream political movement”.

The piece goes on to mention “As prime minister, Cameron tried to throw his restless Eurosceptic backbenchers enough red meat to keep them happy – like withdrawing from the centre-right federalist EPP group in the European parliament. However, this would never be enough for the right of the Conservative party – from Iain Duncan Smith to John Redwood – who would stop at almost nothing to free the UK from what they see as rule by Brussels, even at the expense of tearing apart their party. Cameron’s troubles began as it became clear that the 2010 intake of Tories was more Eurosceptic than the last, as they set about applying pressure for a referendum from the outset. As early as October 2011, David Cameron realised he was facing years of trench warfare with Eurosceptic backbenchers after 81 Conservative MPs supported a referendum on Britain’s membership in the largest postwar rebellion on Europe. John Baron, the Tory MP for Basildon and Billericay in Essex, was one of the ringleaders with a letter from 100 colleagues demanding a referendum on the EU in July 2012“.

The piece adds “Cameron thought he had scored a Margaret Thatcher-style victory when he vetoed a rise in the EU budget later that year, but the episode appeared to inflame anti-Brussels feeling. In December of that year, Boris Johnson publicly called on Cameron to attempt to renegotiate Britain’s relationship with the EU before calling a referendum. The prime minister finally committed to an EU vote in January 2013 with what has become known as his Bloomberg speech, promising to renegotiate and then call a referendum by the end of 2017. Those familiar with his thinking at the time say Cameron had what was, in hindsight, an overoptimistic belief that he could lance the boil of Tory Euroscepticism by making such a promise. It was also unlikely he would ever have to call such a poll because the Conservatives did not believe they would win an overall majority and could rely on the Lib Dems to veto the plan, like they did before 2015. However, Cameron’s victory last year, partially on the back of the promise of a referendum, meant there was no turning back”.

It goes on to point out the roles of immigration the aloof elite and UKIP in the result, “Polling suggests discontent with the scale of migration to the UK has been the biggest factor pushing Britons to vote out, with the contest turning into a referendum on whether people are happy to accept free movement in return for free trade. Public unease has been fuelled by a failure to prevent immigration from piling pressure on jobs markets and public services, and a refusal by politicians to acknowledge the sheer numbers of Europeans making new homes in the UK after the EU’s expansion east in 2004 and 2007. Cameron promised before the 2010 election to bring migration down to the tens, not hundreds, of thousands. However, his failure to live up to his promise, repeated in 2015, has undermined trust in his leadership and contributed to a sense that UK politicians are powerless to lower migration from the EU. The leave camp tried to make the arguments for Brexit more about the economy and sovereignty than immigration, but quickly found that “taking back control” over immigration was the most resonant message. They also linked immigration to shortages of primary school places, difficulty in getting a GP appointment, and depressed wages. The other force that welled up during the campaign was a wholehearted distaste for the thing that Brussels had become in the 40 years since Britain last voted in a referendum on its place in Europe. The UK has never voted on being part of the EU, which was formed at the time of the Maastricht treaty in 1993 and expanded its remit from an economic community to include foreign affairs, justice and policing. The leave camp argued that Brussels has been on a mission to expand its powers and sought further political integration, which is far removed from what the UK originally voted for. Voters appear to have decided that this was their one chance to leave a union they never particularly embraced and did not consent to in the first place. It should not be forgotten that the referendum came at a time when populist revolts against elites were gaining momentum, from Eurosceptic parties in France, Germany, Austria and Scandinavia to Trump’s brand of Republicanism in the US”.

The piece goes on to rightly mention that “The leave campaign has throughout painted the EU and Brussels officials as a hotbed of unaccountable political elites who were not democratically voted by the British people. Despite MEPs being elected and leaders on the EU council each having their own mandates, it has become a tenet of Euroscepticism that the union is too remote from the people it is governing. Brexit campaigners frequently cited the “five presidents” of Europe, who they claimed no one had ever heard of, and pointed out that the unelected European commission proposes laws that end up passed by the parliament. It hardly helped that the remain campaign was steered by almost the entire political establishment, with David Cameron, George Osborne and every living UK former prime minister from Tony Blair to John Major lining up to warn that leaving would be a terrible thing”.

The report goes on to note “Cameron might never have called the referendum had it not been for the rise and rise of Nigel Farage and Ukip. By January 2013, when the prime minister called the EU vote, Ukip had started to gain traction in local elections and was polling in double digits for the first time. There was a feeling that several Tory backbenchers could defect if Cameron failed to heed their calls for a plebiscite. Even after promising the referendum, Farage managed to gain millions of votes in the 2015 election, many of them in Labour areas as well as Conservatives. His frequent media appearances also helped cement a link between immigration and the EU in the public mind, preparing the ground for leave’s successful referendum campaign long before it officially kicked off. David Cameron overplayed his hand on EU reform when he raised hopes that he might be able to curb free movement in an FT article in November 2013. He aimed high but quickly had to water down what he was seeking from other EU leaders who were not prepared to open up the fundamental principle”.

It concludes “Realising his error, the prime minister then tried to make the issue about limiting benefits for migrants, rather than restricting numbers. His final negotiation, announced in February, came back with a ban on migrants getting full benefits for four years after arriving with no detail about how the tapering system would work. Cameron tried to make the best of his renegotiation, hailing it as a major success that he got the 27 other member states to agree. However, the process ended up cementing the impression that Brussels was inflexible and unwilling to make big concessions to keep Britain in the union. When the two political big beasts and friends of Cameron came out for Brexit, it gave a huge boost to the leave campaign. Brexit had previously been caricatured as an obsession of very rightwing Conservatives and Ukippers but Johnson and Gove legitimised the push for leaving the EU. Both highly articulate and savvy media performers, they made it more of a fight between equals against Cameron and Osborne. Johnson’s personal popularity seemingly across many different sections of society may also have made a difference as he crisscrossed the country in a battlebus selling a better Britain outside of the EU. Matters were not helped by equivocating on the part of Labour, whose leadership never looked truly comfortable campaigning with Cameron, and some of whose traditional support has drifted off towards Ukip in the belief that it will address concerns about immigration more robustly than metropolitan Labour MPs”.



The United Kingdom has voted to leave the European Union. The Guardian reports on what happens to the Conservative Party now, “David Cameron did not realise it at the time, but his decision to suspend collective responsibility and allow his ministers to campaign against him in the EU referendum, was the moment that the Conservative gloves came off. It wasn’t meant to be like that. At the start, four senior figures in the party, including the 1922 Committee chair and leave campaigner, Graham Brady, and head of Conservative In, Nick Herbert, set up a steering group in a bid to maintain party unity by laying down some ground rules. Back then, the mantra of Conservative advisers was for MPs to do their best to avoid “blue on blue” conflict. When Boris Johnson came out as a leave supporter, he promised that he would not be debating with the prime minister directly. The steering group never got off the ground, and a few weeks later the former London mayor was challenging Cameron to a face-to-face battle, allowing newspapers to depict the prime minister as a chicken”.

The reports adds, “For the Tories, the battle over Britain’s place in Europe had become toxic with both sides resorting to heavier-handed tactics day by day. The effort with which Cameron and his chancellor, George Osborne, tried to win makes the pain of the Brexit outcome all the more intense and humiliating. “This did get a lot more heated than we all expected,” said one remain MP, who argued that the ferocity of the leave campaign and its focus on immigration had taken him aback. A cabinet secretary said the personal attacks by Johnson and Michael Gove on their friend, the prime minister, including over his integrity, would not be forgotten. But the power is not in the hands of those who wanted Britain to stay. A leave campaigning MP told it from his perspective, saying: “The damage has been done by the way [the remain campaign] have conducted themselves. An awful lot of people are very offended. They have called us economically illiterate, dishonest, and little Englanders. George’s exercise last week was probably the worst.” The MP was referring to the day that Osborne unveiled a budget scorecard that suggested income and inheritance tax could be hiked in the wake of a Brexit vote. The chancellor called it “illustrative” but dozens of his own MPs labelled it a “punishment budget” and vowed to vote against it. And that wasn’t the only tactic by the Downing Street duo that leave campaigners felt went too far – spending £9m on leaflets delivered to every home, and Treasury report after report that was seen as scaremongering have left a bitter taste. Some MPs believe that this is the outcome that a clear majority of their party wanted in their hearts, whatever they said in public. “Brexit is the most uniting outcome,” said one”.

It mentions “Before the Brexit result, Cameron was preparing to have a domestic policy drive next week to reunite his party. There were three key areas to be used as a way to unite the Tories and drive a wedge between them and the real enemy, in many of their eyes, the Labour party: Trident, a policy to scrap the Human Rights Act, and Cameron’s life chances strategy. On Trident and the British bill of rights, Tories smelled Labour blood, knowing that both policies would force the opposition into taking positions that could sit uncomfortably with an important part of the working class electorate with which it needs to reconnect. Life chances was to be a cross-governmental effort, led by the Department for Work and Pensions, to improve the opportunities for the most disadvantaged in society. It was a policy through which Cameron wanted to dictate his legacy; reminding people that he began as a modernising leader who wanted desperately to detoxify his party and end an obsession with Europe. But it is hardly a unifying agenda for a party that has lost its leader. It seems unlikely now that Cameron will ever break free from his most significant act – a referendum that tore Britain from its European neighbours in a way that shocked the world. Like Iraq for Tony Blair, it is his record on the EU that is now likely to overshadow his premiership”.

In response to the vote in which a UK turnout of 72% was recorded, the pound collapsed and markets tumbled, just as the Remain camp predicted, “Shares plunged and the pound plummeted to a 31-year low as panicked traders reacted to the UK’s vote to leave the EU and the prospect of recession amid months of market turmoil. The FTSE 100 fell more than 8% within the first few minutes of trading on Friday, with shares in banks particularly hard hit and nursing their biggest falls since the collapse of the US investment bank Lehman Brothers in 2008. At the opening bell on Wall Street, US shares were down sharply, with the Dow Jones industrial average shedding more than 500 points, down nearly 3%. There were even sharper falls on bourses in mainland Europe, where economists said Brexit would hurt an already fragile recovery. After the heavy early losses, UK markets were calmed somewhat by David Cameron’s announcement that he would resign, and a pledge from the Bank of England that it would take any measures needed to stabilise markets and the economy. More assurances to step in where necessary followed from the US central bank, the International Monetary Fund and from finance ministers in the G7 group of big economies. The Bank of England’s governor, Mark Carney, said:“Inevitably, there will be a period of uncertainty and adjustment following this result.” “But we are well prepared for this,” he added in a televised statement. The Bank will not hesitate to take additional measures as required as markets adjust and the UK economy moves forward.” The G7 finance ministers said they would consult closely on market moves and financial stability and cooperate as appropriate”.



“Instead of promoting sound markets, the government twisted them to drive economic growth”


A report from the Economist writes about the contradiction between state control and problems of the financial system, “IF YOU SCOUR the annual reports of China’s biggest banks, you will find hardly a mention of the Communist Party. There are passing references to the “Party Discipline Office” in descriptions of the banks’ internal structures, and the biographies of a few executives note that they graduated from the “Party School”. But that is about it. Only when you get to Citic Bank, the ninth-largest by assets, is there any suggestion that the party might play an important role. The first four of Citic’s objectives for 2015 read like those of banks anywhere in the world: improve management, increase profits, control risks and boost efficiency. Its fifth and final objective, though, is quite distinctive: “Comprehensively strengthen construction of the party”. In all countries there is a gap between what banks and regulators reveal to the outside world and what happens behind the scenes”.

Crucially it adds, “In China that gap is wider than usual. The party’s unchallenged, spectral position at China’s apex gives it a tight grip on the financial system but also causes many of its ills. The key to understanding the party’s influence is that it does not simply sit atop China’s financial institutions. At the highest levels, it is them. The same people often hold senior roles in both their firms and the party. As far back as 1995 the Chinese government declared that banks were to be commercial entities, focused on making money and responsible for their losses. When the government invited foreign firms to take stakes in the country’s biggest banks in the early 2000s and encouraged them to list on stock exchanges, its ambition was to instil a businesslike mindset. Hard-nosed investors would scrutinise their books and put pressure on them to perform well. Up to a point, this has worked. China’s banks, brokers and insurers have acquired the patina of profit-focused banks. They file regular statements to stock exchanges and publish glossy annual reports. Their results are reviewed by international auditors such as KPMG and PwC. Their risk-control departments stress-test their balance-sheets. Over the years they have become leaner: Agricultural Bank of China, for one, has cut back from 50,000 branches in 2000 to less than half that today. But if considerations of social stability and market efficiency clash, the former almost always wins. When the global financial crisis erupted in late 2008, banks had to toe the party’s line and finance the government’s mammoth stimulus. When the stockmarket crashed last June, state-owned brokers were ordered to buy shares and banks were made to lend to them”.

Interestingly he notes “the party’s hand is visible in bankers’ daily lives. If you step out of the lift on a Chinese bank’s executive floor, you will often see signs pointing to the president’s office in one direction and to the office of the discipline inspection committee (the body in charge of enforcing party rules and rooting out corruption) in the other. In much the same way that Xi Jinping is presented to foreigners as China’s president but described domestically as general secretary of the Communist Party, so bankers wear two hats. The person whom investors know as chairman is also known internally as the bank’s party secretary. Like the heads of other state-owned corporations, China’s titans of finance are moved among institutions whenever the party’s organisation department sees fit. In the first decade of the 2000s at least 43 senior cadres shifted from one top financial firm to another”.

Worryingly he writes “in China the whole point is to fuse the elite together. Regulators and financial firms are meant to work towards the common goal of building a prosperous nation. However, just because the party is in control does not mean that it has things under control. Last summer’s stockmarket crash and the capital flight of recent months are only the latest examples of its frailties. Crudely put, shadow banking has evolved in recent years through firms devising investment products that get around regulations; the government slowly catching on; and the firms responding by finding new loopholes. If the party is so powerful, how can its edicts be so blatantly disregarded? Many in the government now believe the failure lies in the structure of regulation. In the early 2000s China divided its supervisory framework, appointing a banking regulator for banks, an insurance regulator for insurers and a securities regulator for brokers. That worked well enough for a decade, but as the financial system has grown bigger, so have the holes in it. Last year’s stockmarket crash exposed some of them. The securities regulator, looking at margin financing on brokers’ books, saw little danger from investors buying stocks with borrowed cash. The bank regulator, focused on lending, did not watch off-balance-sheet products that brought yet more leverage into the market”.

The piece mentions that “the concentration of power has, if anything, been associated with greater instability in markets and unpredictability in policy. Officials at all levels are more hesitant, afraid of making decisions that go against what Mr Xi might want. Regulatory bodies tried their best to recruit people with experience working for top-flight international firms, but after a few years of low pay and limited influence many have left. Some believe the problem lies in the very nature of party control. Governments have three basic functions in finance: as promoters of healthy market development; as regulators of institutions; and as owners or guarantors of firms, especially at times of trouble. In a stinging report last June, the World Bank said China had mangled all three. Instead of promoting sound markets, the government twisted them to drive economic growth; the state’s ownership of financial firms was too pervasive; and regulations were consistently loosened to suit economic priorities”.

The piece advocates for banks and other businesses to go bust, despite the political consequences, “Even with the best intentions, this transition is bound to be volatile. Government guarantees—sometimes explicit, often implicit—blanket much of the economy. Many in China, from investors to bankers, assume that local governments and state-owned enterprises (SOEs) cannot fail. By fostering cohesion, the party encourages the belief that, if the worst happens, it will keep credit rolling over. Private companies understand the power of this belief. Whereas state-owned banks often hide their party background, their shadow peers play up their government connections, however tenuous. Ezubao, the large peer-to-peer lender that collapsed recently, held its annual meeting last year in the Great Hall of the People in Beijing, the venue for big party gatherings (which is available for hire when not in official use), and advertised in state media. Investors who lost their money have protested, demanding that the government compensate them”.

The piece ends “Yet that can have extreme repercussions. In China’s struggling industrial heartland, the Hebei Financing Investment Guarantee Group, a government-owned company, underwrote vast amounts of loans to small manufacturers over the past decade. Thanks to its support, lenders treated the manufacturers as virtually risk-free. But when they began defaulting, Hebei Financing could not come up with the money. Last year it revealed that 32 billion yuan of loans it had guaranteed were in danger. Soon afterwards, a distraught investor stabbed the CEO of Global Wealth Investment, a fund manager that had lent to companies backed by Hebei Financing. Alarmed at the prospect of unrest, the Hebei provincial government has since scurried to make good on the loan guarantees, at least in part. It set up a re-guarantee company, in effect underwriting the underwriter. That has helped mitigate panic, but the trade-off has been moral hazard: investors will continue to expect the government to bail out state-run companies. Elsewhere the party is taking a harder line. A handful of small state firms have missed bond payments this year. A credit-risk officer with a mid-tier bank says his team no longer assumes that provincial-level SOEs will receive bail-outs. He expects a few bankruptcies of government-backed steel mills and coal miners. But neither he nor almost anyone else thinks China will allow the biggest state firms to default. With so many economic and political levers in its hands, the party still retains plenty of control for now. The rest of the world can only watch and wait”.

“Raise the spectre of a fearsome crash”


A piece from the Economist argues that China needs to “free up” its financial system in order to “save it”, it opens, “Decades of heady growth had put money into the pockets of Sheyang’s residents. But China’s big banks had little time for the countryside. Farmers who wanted to buy homes or start companies struggled to get loans. Illegal lenders stepped into the gap; they collected cash from those with idle savings and lent it out, often at double-digit interest rates. Business boomed. As locals put it, the lenders sprouted up like bamboo shoots after a spring rain—until a few years ago, when a harsh wind uprooted them. The economy was slowing and investment plans relying on superfast growth fell apart. Borrowers could not pay back what they owed. The unregulated lenders started defaulting on their depositors. Panic spread. In March 2014 it was rumoured that even Sheyang Rural Commercial Bank, which is owned by the government, was low on cash”.

It goes on to argue “This was enough to spark China’s first bank run in years. Crowds gathered outside its branches, waiting for hours in the drizzly chill to get their money out. Bank managers stacked up bricks of 100-yuan notes (China’s largest denomination) to show they had sufficient cash. Yet fear travelled like a virus, infecting another nearby bank. On the third day of the panic the China Banking Association, an industry group, entered the fray and declared the rural banks to be healthy—in effect, pledging to stand behind them. That ended the run. It had taken the full weight of the nation’s banks acting in concert to restore calm. One county’s travails might not seem worth making a big fuss about. After all, the deposits at Sheyang Rural Commercial amount to just 13.5 billion yuan ($2.1 billion), barely 0.01% of the total in banks nationwide; and the problems were successfully contained. But the run raised troubling questions. How could the authorities have let so many illegal lenders operate? Why were they suddenly collapsing? If they were in such bad shape, were proper banks safe? Was China on the brink of a financial crisis? Sheyang’s bank run is just one of a series of problems to reveal cracks in the Chinese financial system in recent years. Others include a cash crunch in 2013, a wave of shadow-banking defaults in 2014, a stockmarket collapse in 2015 and a surge of capital flight at the start of 2016. Underlying it all, China has seen a dramatic rise in debt, from 155% of GDP in 2008 to nearly 260% at the end of last year, according to an estimate by The Economist. Few countries have gone on borrowing binges of that magnitude without hitting a crisis”.

The article goes on to argue “The scope for potential trouble in China is immense. Its banking sector is the biggest in the world, with assets of $30 trillion, equivalent to 40% of global GDP. China’s four biggest banks are also the world’s four biggest. Its stockmarkets, even after the crash, together are worth $6 trillion, second only to America’s. And its bond market, at $7.5 trillion, is the world’s third-biggest and growing fast. A cocoon of regulations limits direct foreign involvement in China’s financial system, but connections are deepening by the day. Given its economic heft, serious problems could easily dwarf the global consequences of any previous emerging-markets crisis. Even the mild yuan depreciation at the start of this year (1% against the dollar in one week) sent shock waves around the world, upsetting stocks, currencies and commodities. Just imagine the effects of a big one. Still, it is worth recalling that predictions of financial doom in China have long been wrong. Because of the nature of the system—the state owns both the banks and their biggest borrowers—the government is in a much better position to dictate outcomes than those in most other countries. Until recently the financial system has been very conservative. Plain-vanilla bank lending is the dominant form of credit; exotic products such as securitised loans that caused havoc in rich economies barely exist in China. Moreover, liquidity buffers are strong: residents have historically had little choice but to stuff their cash in banks, and a semi-closed capital account has made it hard for them to send money abroad”.

Yet it notes that “China’s status quo cannot be sustained for ever. Returns on capital are declining. It now takes nearly four yuan of new credit to generate one yuan of additional GDP, up from just over one yuan of credit before the global financial crisis. As the population ages and the economy matures, growth is bound to slow further. At the same time, bad debts from the past decade’s lending binge are catching up with banks. Given slower growth, it will be tougher to clean them up than it was 15 years ago, when the country was booming. Moreover, the edifice of control is getting shakier: shadow finance is eating away at the power of state-owned banks, and the capital account has sprung leaks that regulators are struggling to plug. China has, in other words, reached a level of development where it needs a more sophisticated financial system, one that is better at allocating capital and better suited to the market pressures now bubbling up. The government pays lip service to this, and indeed some reforms point in the right direction: it is deregulating interest rates; the exchange rate, though still managed, is more flexible; defaults are chipping away at the notion that the state will guarantee every investment, no matter how foolish”.

It mentions that “This report will argue that China is faced with two unpalatable options. One is that it moves more boldly to free up its financial system. That would be the right thing to do for the future but would release pent-up perils now; defaults would climb, banks would rack up losses and many shadow lenders would go bust. The other is that China eschews reform and instead tries to patch up its current system. That would be easier in the short term, but the inexorable accumulation of debt would sap the economy’s vigour and raise the spectre of a fearsome crash. In practice, the government has wavered between the two options. In good times, when the economy behaves as it should, it plods ahead with reforms. But at the first whiff of trouble it tends to lose its nerve, building up much bigger problems a few years hence. China needs to move faster, even at the cost of greater turbulence today”.

It ends “Some good at least came of the Sheyang bank panic. China introduced nationwide deposit insurance last year, trying to reassure savers that their money is safe, no matter what happens to their bank. Banks have also raised their game, as demonstrated by the car giveaway at Sheyang Rural Commercial Bank. People again line up at its doors, only this time to put their cash in the bank, not take it out. But financial fragility is surfacing nearby. Grass encroaches on the lot of a textile company that defaulted on a bond last year. And on the county’s outskirts, apartment blocks stand empty, totems to the debt that looms over China’s financial system”.

“A Panamanian law firm that specialises in offshore tax havens”


A massive leak of secret files from a Panamanian law firm that specialises in offshore tax havens has revealed the often-murky financial wheelings and dealings of some of the world’s most powerful political players, such as Russia’s Vladimir Putin, the king of Saudi Arabia, Iceland’s prime minister and the family of Prime Minister Nawaz Sharif, among dozens of others. In a data dump that is described as being larger than leaked US diplomatic cables, around 2.6 terabytes of information drawn from the internal database of Mossack Fonseca has been made public. The data from the Panama Papers, available on the website of the International Consortium of Investigative Journalists — one of around 100 news organisations and 300 journalists that worked on mining the data simultaneously — also reveals the offshore holdings of members of Prime Minister Sharif’s family”.

An empire of tax dodgers, drug dealers, and embargo breachers


A piece in Foreign Policy notes the UK’s “empire of tax evasion” after the release of the Panama Papers, “There is a temptation, when looking at the astonishing “Panama Papers,” to start by searching for politicians from your own country who are implicated. If you are British and approach the documents in this way, you’ll find slim pickings in the information released so far. Among the many thousands of names listed in the leak as possibly implicated in dodgy tax deals, there can’t be any appearance less surprising than that of Baroness Pamela Sharples, the widow of the former governor of Bermuda. That is, until you get to Lord Ashcroft — billionaire, Belizean national, and former deputy chairman of the Conservative Party — who would have been more remarkable if he had been absent. Then there’s Michael Mates, a former Tory MP, who stood down in 2010 amid another business scandal. And David Cameron’s late father, but again — hardly a surprise. To engage in this exercise, however, is to largely miss the point: not just the point of this astonishing leak, but the point of the whole United Kingdom. Because it’s hard not to look at the whole affair and see Britain right at the core of it. Or, at least, the British state, which one might argue is a very different entity”.

Crucially he writes that “There are, you see, a few important facts we are rarely told about the British state. Like, for instance, the fact that it governs more land in the Southern Hemisphere than the Northern; more penguins than any other; that there are 18 legislatures under Westminster’s auspices; and that these include the governments that oversee by far the most important network of tax havens in the world. With the City of London at its center, Britain’s network of refuges from taxes, regulations, and other pesky laws stretches first to the crown dependencies — the Isle of Man, Guernsey, and Jersey — and then into the 14 British overseas territories: places like the British Virgin Islands, Bermuda, and the Cayman Islands. From there, this web extends to places like Hong Kong, not under British rule since 1997 but, according to author Nicholas Shaxson, still feeding “billions in business to the City.””

The piece goes on to mention “The overseas territories — the last vestiges of the old empire — each have slightly different political structures, but all of them have a governor figure, appointed by the British government. All of them hand control of their foreign policy over to Westminster, and all of them depend on the motherland for military protection: The Falklands War is an obvious example, but let’s not forget that when Tony Blair famously claimed Saddam Hussein had weapons of mass destruction capable of reaching British military targets within 45 minutes, he was referring not to London, but to Akrotiri and Dhekelia, Britain’s military bases and overseas territory on Cyprus. Akrotiri and Dhekelia still serve a strategic purpose, which make them the exception; most of the overseas territories have evolved into, essentially, parking lots for the wealth of the .01 percent. It’s worth pointing out that more than half of the companies listed in the leaked Mossack Fonseca documents are registered in the U.K. or its overseas territories — and they’re not based in Birmingham”.

He does argue that these territories are now part of a “financial empire”, he then correctly writes that “Want to understand how things on the edges got so bad? Look to the center: The City of London itself is even older than the empire. The 1.12 square miles that make up London’s financial center have had their own constitutional arrangements for a millennium. (As Shaxson notes, it’s said that William the Conqueror allowed the City to keep its “ancient rights” in 1067, as he trashed the rest of the country.) Today, those square miles are governed by the City of London Corporation, whose representatives are elected by the businesses that operate there, and they have an unelected representative who sits in Parliament, as well as their own police force, which has been remarkably unsuccessful in policing British banks. Because having its own built-in constitutional protections wasn’t sufficient, in 2010, the City paid for more than half of the Conservative Party’s election campaign, ensuring Cameron’s narrow victory (along with the aforementioned Lord Ashcroft) and that any significant new regulations on finance after the 2008 crisis would be politically impossible. To be sure, however, the Labour Party didn’t do anything to regulate the city in the previous 13 years when it was in power — winning it over with a famous “prawn cocktail offensive” that was a key part of its strategy to get into No. 10 Downing St. in the first place. All of this goes a little way to explaining why Britain has, for some time now, been considered the global capital for criminal money laundering among those in the know. Perhaps, with the release of the Panama Papers, the last sheen of respectability will finally be stripped away”.

He rightly notes the obsession with money and money laundering has led to pushing up the price of the pound making exports more unaffordable and driving up the cost of housing in the South East.

He ends “It was not so long ago — within my grandparents’ lifetime — that Britain was at the center of the biggest empire in human history. Many observers have considered the present day, understandably, as the post-imperial era, placing the end date of empire somewhere around the time Britain withdrew from South Asia. But perhaps we got ahead of ourselves — perhaps we’re only just now seeing the final stages, the physical empire replaced with a hidden financial one. And perhaps the Panama Papers will be seen as the moment when this empire, too, finally began to come unstuck”.

“So that their benefits are more widely shared”


A piece in Foreign Affairs asks if American is “great”.

It opens, “Defeat in Iowa aside, whether or not Donald Trump secures the Republican presidential nomination, his campaign has certainly captured the deep disillusionment among many voters about America’s place in the world. “This country is in big trouble,” he said in the first GOP debate, a theme he has repeated in countless speeches since. “We don’t win anymore. We lose to China. We lose to Mexico both in trade and at the border. We lose to everybody.” Trump isn’t the only candidate to make this point. Scratch below the surface of either the Republican or Democratic presidential contests, and it is clear that much of the debate is over the United States’ economic standing in the world, and what it will take, in Trump’s words, to “make America great again.” The important word being “again.” Trump’s rhetoric—and much of that from Democratic insurgent Bernie Sanders—longs for an earlier time in which the United States was the strongest and most productive economy in the world and faced little in the way of global competition. It is no coincidence that both candidates find common ground in rejecting trade agreements, such as the Trans-Pacific Partnership (TPP), that would intensify the competition”.

The writer adds, “nostalgia isn’t a good guide for policy. Strategies designed without an appreciation for where the United States actually stands could end up undermining its strengths without fixing any of the weaknesses. So how does the United States stack up? According to the World Economic Forum’s most recent Global Competitiveness Report, the United States is the third most competitive economy in the world, behind only tiny Switzerland and Singapore and slightly ahead of other large economies such as Germany, Japan, and the United Kingdom. That is several notches up from the seventh-place spot the United States held as recently as 2012. U.S. job creation over the past five years has outpaced that of any other advanced economy, and the U.S. dollar has surged as investors flee Europe and Asia in search of better returns. In our own research, we have looked in detail at how the United States measures against other advanced economies on many of the attributes that underlie national competitiveness, from innovation to education. The picture is a pretty good one. On innovation, for example, which drives economic growth in wealthy nations, the United States is far ahead of any country in the world. Corporate taxes and regulations, although both in real need of reform and modernization, do not pose the serious competitive disadvantage that many Republicans have suggested. The United States has slipped in global education rankings, but there are encouraging signs of progress, with high school graduation rates recently reaching record levels”.

The piece goes on to note, “So if the United States is doing so well compared to its economic rivals, what accounts for the political appeal of claims that it has been a loser in global competition? The answer lies in the growing disconnect between the macro-level performance of the U.S. economy, which has been reasonably good, and the economy as it is lived by many Americans, which has been far from good. The economist Michael Porter and his colleagues at Harvard Business School have called it “an economy doing only half its job.” Porter defines a competitive economy as one in which companies can compete successfully in global markets while also supporting rising wages and living standards for ordinary citizens. U.S. companies such as Amazon, Apple, Facebook, and Google account more than half of the top 100 companies in the world by market value, and such firms have only gained ground over the past five years. But despite this competitive triumph, wages and living standards for the average American have stagnated for decades. Real wages have been flat since the 1970s, which roughly corresponds with the time when the United States began facing tougher overseas competition, first from Japan and Germany and later from China. Young men today, who have been hit particularly by the disappearance of manufacturing jobs, on average earn less than their fathers did”.

Crucially they argue, “Porter and his colleagues argue that the biggest cause of this growing divide is the failure of governments, and of companies themselves, to invest in Americans—to give them the education, skills, infrastructure, and access to capital they to need to prosper along with U.S. companies. Our own research supports this conclusion. Compared with governments in other advanced economies, Washington is doing a decent job of supporting the competitiveness of its companies. But it is doing less to help bolster the competitiveness of workers and to help them prosper as individuals and families”.

Pointedly the article argues, “Meanwhile, when it comes to investing in Americans to help them secure a bigger share of the gains, the government has done less. Consider the challenge of retraining workers to fill the demands of a rapidly changing economy. During the Great Recession, long-term unemployment in the United States spiked to European levels, and even with recent strong job growth, overall labour market participation is the lowest it has been since the mid-1970s. Yet the United States spends next to nothing retraining its workforce, even as more than five million jobs go unfilled. In fact, U.S. spending on “active labour market” measures—job retraining, apprenticeships, and job search assistance—amounts to just 0.1 percent of GDP; in contrast, Germany spends 0.8 percent of GDP and Denmark an astonishing 2.3 percent in helping unemployed workers find their way back into the job market. Although those economies have not outperformed that of the United States, they weathered the recession with less disruption to the lives and economic well-being of their citizens”.

The piece points out that, “On education, the United States spends a lot of money, but most of it goes to those who need it least. The achievement gap between children from wealthy families and those from poorer families is much larger than it was a generation ago. Yet public schools in poor neighbourhoods get fewer resources than public schools in wealthy neighbourhoods, and federal financial support for universities mostly benefits the better-off students attending those institutions. Community college funding has languished, and American students in vocational and technical colleges get less support than similar students in most European countries. The result of such failures is a massive disconnect between the economy of U.S. companies and the economy of average Americans. That is the fuel on which insurgent campaigns are built. Both Trump and Sanders, in different ways, are appealing to Americans who feel like they have been the losers”.

Worryingly he adds, “The risk now, however, is that such sentiments will overwhelm sound policy. Trump’s few forays into actual policy prescriptions suggest that he would make the problems much worse. He wants huge tariffs on imports from China and Mexico, which would result in retaliation that would shrink trade with two of the three largest markets for U.S. companies. He calls for deep cuts in corporate and individual taxes, which should help to attract investment, but his tax plan—and those of several other GOP candidates—would cut revenues so deeply that it would be impossible to pay for programs to boost the skills of American workers or invest in infrastructure. Sanders’ campaign is longer on specifics, and he promises a great deal to correct ongoing underinvestment in Americans. He calls for eliminating tuition at public universities, and creating a $1 trillion Rebuild America fund, which would put millions of Americans to work rebuilding the nation’s infrastructure, creating “jobs that cannot be shipped offshore or outsourced overseas.” But to pay for these programs, he wants vast increases in corporate taxes that would drive more companies to look for other places to invest”.

It concludes “Sadly, the failure of Congress and the Obama administration to make any real progress on these challenges has opened the door to more radical approaches. And the more voters are persuaded by the “America the loser” campaign rhetoric, the likelier government will be to embrace policies that will do real harm to the United States’ economic competitiveness. Instead, it is time to take another look at the many underlying strengths of the U.S. economy and build on them so that their benefits are more widely shared. As former President Bill Clinton put it in his inaugural speech in 1993—following an election in which a weak recovery and growing foreign competition had similarly fueled insurgent campaigns for the presidency—“there is nothing wrong with America that cannot be cured by what is right with America.” As the presidential campaign enters a critical phase, the candidates and the voters need to rediscover that truth”.

Consequences of a Brexit


A piece in Foreign Policy tries to asses what might happen if the UK leaves the EU, “The death of London as a financial center. A trade war between Germany and Britain. The possible collapse of a historic trade deal. When British voters head to the polls this summer to decide whether to stay in the European Union, the results will have major repercussions at home and abroad — and could trigger economic meltdowns in both the U.K. and Europe. At issue is the so-called Brexit, which would see London choosing to leave an alliance it helped create 43 years ago. For ordinary British citizens, the impact would be felt at airports and train stations, where it could be more difficult to freely move across Europe for the first time in decades. They could also see European-produced goods become more expensive because of an expected fall in the value of the pound”.

The article goes on to mention that “On Feb. 21, amid Brexit fears, the sterling had its biggest one-day drop since the U.K.’s 2009 banking crisis. It could even affect their favourite sports teams because it would be harder to sign soccer players from mainland Europe to contracts in the U.K. because they would not meet more stringent visa requirements. Not surprisingly, Brexit advocates see things very differently. To them, leaving the EU would keep European immigrants from abusing Britain’s welfare system. They say it would give the British government more freedom to negotiate independent trade deals with countries like India, China, and the United States. And advocates say severing the relationship would put Europe’s Syrian refugee problem squarely in the hands of Brussels, not London. That may be significantly understating the real-world economic impact of a Brexit”.

The author goes on to argue that “Add uncertainty to the mix: Nobody’s quite sure what happens to the EU without Britain because no nation has left the EU before. This is the same fear that gripped the EU last summer, when Greece was on the verge of going its own way rather than accepting the onerous austerity measures Brussels was pushing it to adapt. A recent research note published by economists from Citigroup said the Brexit “will be highly negative” for both economies because it would throw out the trade blueprint between the European alliance and the U.K. About 45 percent of British exports going to Europe would be at risk, as would the 16 percent of total EU goods that cross the English Channel to the U.K”.

He cites a German MP who said that a trade war between the UK and EU would be possible but this is almost impossible and could simply be about hype for a domestic audience more than anything else.

He does note that “Pro-Brexit backers take a different view. They argue that the U.K. doesn’t have enough influence in Brussels, despite sending 350 million pounds, or $498 million, to the EU capital each week. Capital Economics, a research consultancy, predicted “business as usual” if a Brexit occurs, anticipating no major economic disruptions. Nigel Farage, leader of Britain’s far-right U.K. Independence Party (UKIP) has proposed giving the U.K. the same status as Norway, which has access to the single market but is not bound by many EU regulations on farming and domestic policy”.

After the “reforms” Cameron returned with a referendum will take place on 23 June, “Bank of England governor Mark Carney refused to explicitly take sides, but warned that the Brexit is “the biggest domestic risk to financial stability” and that some banks would leave London if it occurs. The U.K.’s famous bookmakers favour Britain staying, giving a vote to remain a 77 percent chance. Pacific Investment Management Co., a major bondholder known colloquially as PIMCO, puts the chances of a Brexit at 40percent. A recent YouGov poll found about 37 percent of Brits wanted to stay in the EU, 38 percent wanted to leave, and 25 percent were unsure”.

However a note of caution is needed with these figures as the referendum is not on the minds of most voters at this early stage and as a result these numbers should not be trusted to any significant degree.

The report goes on to mention “The prospect of a Brexit is also dangerous politically, said Heather Conley, director of the Europe program at the Center for Strategic and International Studies. She said Europe is facing a “perfect storm” of crises: the ongoing debate about bailing out Greece, the Syrian refugee crisis, and the looming Brexit referendum. The Greek flirtation with leaving the EU, combined with the U.K. referendum, has made the prospect of abandoning the alliance a possibility for other members who don’t want to deal with broader European issues”.

“Can only be solved by rebalancing its economy”


A piece by Patrick Chovenac argues that China should not devalue its currency, “Buffeted by a slowing economy, a falling stock market, and a rising tide of money leaving the country, China is flirting with weakening its currency, the renminbi (RMB). Despite repeated — and very high-level — pledges to maintain its value, Beijing quietly let the RMB slip 5 percent against the U.S. dollar in 2015. Many see its decision in December to switch the RMB’s peg from the dollar to a basket of currencies as a back-door way to piggyback on the weakening of other currencies against the dollar. Meanwhile, a growing chorus of economists, hedge funds, and policymakers are saying that China must “go with the market” and let its currency fall to save its stumbling economy”.

The writer argues that those calling for a Chinese devaluation are wrong, “A weaker RMB won’t fix the problems with China’s economy that are causing capital to flee; it will only make them a lot worse. Only reform and rebalancing — moving away from a reliance on exports and investment to drive growth and toward a more balanced, consumption-based economy — can put China’s economy back on track. Beijing drawing down on its bloated foreign currency reserves to defend the RMB — instead of letting it slide — is integral to making that rebalancing happen”.

However there are serious questions to be asked as to whether the CCP has any real desire, or indeed motivation, for such a move. It would require not just economic but political effort to scale back or even pritatise large chunks of Chinese state owned industry with all its connections to the CCP. That might be a bridge too far for the CCP.

He goes on to argue “Economists are prescribing the wrong solution for China because they are used to dealing with an entirely different set of problems. Countries that suffer a “currency crisis” — unrelenting pressure for their currency to fall in value — are usually debtors that run a trade deficit. If their exports falter, or import prices spike, or foreign financing to cover their trade gap dries up, they will run short of the foreign currency they need to pay their bills. The amount of local currency it costs to acquire (the now scarce) foreign currency will rise, making imports more expensive and locally made goods more competitive, at home and abroad. The shift in the exchange rate sends a corrective signal throughout the economy — consume less, save and produce more — that pushes payments back into balance”.

Logically he adds “China is different. Like Japan in the 1980s, China has piled up a precariously high level of internal debt, but in relation to the rest of the world, it is a creditor nation with a trade surplus. Its problem is not a reliance on external financing to support consumption, but an excessive reliance on external demand to support domestic output and return on investment. The corrective is a stronger, not a weaker, currency that enhances the purchasing power of domestic consumers while discouraging the build-out of even more overcapacity. The question is not whether China is facing an economic crisis, but what kind of crisis. Crises faced by creditor nations have different origins, impose different constraints, and have fundamentally different solutions than those of debtor countries. When Japan suffered a sharp slowdown in growth starting in 1990, accompanied by a property and stock market collapse, it did not face a currency crisis; in fact, the yen actually rose in value”.

He goes on to mention that “Yet the RMB has come under strong downward pressure in recent months. The current pressure isn’t a signal to rebalance — that came in the form of a 36 percent rise in the RMB with relation to the dollar since 2005 — but the result of Beijing’s consistent failure to heed that signal, by flooding the Chinese economy with cheap credit, erecting subtle trade barriers, and propping up money-losing industries. Now, falling asset prices and investment returns, along with doubts about the coherence of Beijing’s policy response, are causing capital to leave the country. Despite a record trade surplus, China is hemorrhaging cash — with an estimated $1 trillion in capital outflows in 2015″.

He goes on to make the point that “Responding by letting the RMB weaken further would be counterproductive on multiple levels. Far from reducing capital outflows, expectations of a falling RMB would only intensify them, pushing the currency down even farther. If expectations were the main problem, then a sudden, large devaluation might preempt and defuse them. But neither gradual depreciation nor a sudden devaluation would solve the major reason money is leaving China: Beijing’s failure to rebalance its economy. In fact, a weaker currency, by subverting the purchasing power of China’s consumers and fostering unsustainable forms of growth — in other words, favouring savers and production at the expense of consumer purchasing power — would only worsen the problem. Even the benefits of a weaker RMB would likely prove illusory. Other countries would quickly come under pressure to devalue their own currencies, erasing whatever advantage Beijing sought to gain. In 2015, a stronger U.S. dollar — against the euro, yen, and a host of emerging-market currencies — cut noticeably into U.S. growth and corporate earnings. Another round of competitive devaluation, triggered by China, could tip the United States into recession. Weakening the RMB would do little to boost China’s exports, if it sinks one of China’s top markets”.

He argues that “The alternative — which China has been doing, at least for the most part — is to support the RMB by drawing on the country’s huge stockpile of foreign currency reserves. Over the past two decades, China’s central bank accumulated nearly $4 trillion by intervening to keep the RMB from rising. Since June 2014, it has sold $663 billion of that defending the exchange rate”.

He ends the piece “What China is facing with these capital outflows isn’t a payments crisis but a crisis of confidence, one that can only be solved by rebalancing its economy. Supporting the RMB sends the right price signals to facilitate that move while buying time for more substantive reforms to unlock a less lopsided path to growth. Of course, it is possible that Beijing will squander this opportunity. Or that it is already too late, that nothing at this point will restore confidence, and all the money will simply flee. But while China may risk failure defending the RMB, not doing so virtually guarantees failure. If Beijing lacked the resources to hold the line, the IMF and other central banks possibly could augment its firepower — and ward off speculative pressure — by lending China hard currency or swapping it for RMB. Buying time for China to rebalance might well be to their advantage, compared to the potentially disastrous global consequences of competitive devaluation”.

Brazil’s myriad problems


A report in the Economist discusses the mounting economic problems of Brazil, “THE longest recession in a century; the biggest bribery scandal in history; the most unpopular leader in living memory. These are not the sort of records Brazil was hoping to set in 2016, the year in which Rio de Janeiro hosts South America’s first-ever Olympic games. When the games were awarded to Brazil in 2009 Luiz Inácio Lula da Silva, then president and in his pomp, pointed proudly to the ease with which a booming Brazil had weathered the global financial crisis. Now Lula’s handpicked successor, Dilma Rousseff, who began her second term in January 2015, presides over an unprecedented roster of calamities”.

The author mentions that “By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems”.

The report adds “Ms Rousseff’s political woes are as crippling as her economic ones. Thirty-two sitting members of Congress, mostly from the coalition led by her left-wing Workers’ Party (PT), are under investigation for accepting billions of dollars in bribes in exchange for padded contracts with the state-controlled oil-and-gas company, Petrobras. On December 15th the police raided several offices of the Party of the Brazilian Democratic Movement (PMDB), a partner in Ms Rousseff’s coalition led by the vice-president, Michel Temer”.

Worryingly for the future stability of the country it mentions “Brazil’s electoral tribunal is investigating whether to annul Ms Rousseff’s re-election in 2014 over dodgy campaign donations. In December members of Congress began debating her impeachment. The proceedings were launched by the speaker of the lower house, Eduardo Cunha (who though part of the PMDB considers himself in opposition) on the grounds that Ms Rousseff tampered with public accounts to hide the true size of the budgetary hole. Some see the impeachment as a way to divert attention from Mr Cunha’s own problems; Brazil’s chief prosecutor wants him stripped of his privileged position so that his role in the Petrobras affair can be investigated more freely. Mr Cunha denies any wrongdoing”.

The piece argues that both external and internal factors have come together, “Now prices of Brazilian commodities such as oil, iron ore and soya have slumped: a Brazilian commodities index compiled by Credit Suisse, a bank, has fallen by 41% since its peak in 2011. The commodities bust has hit economies around the world, but Brazil has fared particularly badly, with its structural weaknesses—poor productivity and unaffordable, misdirected public spending—exacerbating the damage. Regardless of what she may or may not have done with respect to the impeachment charge, Ms Rousseff’s cardinal sin is her failure to have confronted these problems in her previous term, when she had some political room for manoeuvre. Instead, that term was marked by loose fiscal and monetary policies, incessant microeconomic meddling and fickle policymaking that bloated the budget, stoked inflation and sapped confidence. Poor though her record has been, some of these problems have deeper roots in what is in some ways a great achievement: the federal constitution of 1988, which enshrined the transition from military to democratic rule. This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending”.

Pointedly it writes “Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older”.

The scale of the problem is seen when the author notes “Analysts at Barclays, a bank, expect debt to reach 93% of GDP by 2019; among big emerging markets only Ukraine and Hungary are more indebted. The figure may still seem on the safe side compared with 197% in Greece or 246% in Japan. But those are rich countries; Brazil is not. As a proportion of its wealth Brazil’s public debt is higher than that of Japan and nearly twice that of Greece. Unable to increase taxes, Ms Rousseff’s government may prefer something even more troubling to investors and consumers alike: inflation. Faced with the inflationary pressure that has come with the devalued real, the Central Bank has held its nerve, increasing its benchmark rate by three percentage points since October 2014 and keeping it at 14.25% since July in the face of the recession. But despite this juicy rate the real continues to depreciate”.

The article calls for harsh cuts, a policy that seems to not have worked, or at least worked at the expense of all other measures, “These efforts are meeting with some success: in December pro-government rallies drew more people than anti-government ones for the first time all year. It looks unlikely that the impeachment will indeed move to the Senate (which would trigger a further six months of turmoil). But this hardly provides a political climate conducive to belt-tightening, let alone to the amendment of the constitution which Mr Barbosa has said is needed to deal with the ratchet effect on benefits. Fiscal adjustment is anathema to the government workers and union members who are Ms Rousseff’s core supporters. Like the country’s economic problems, its political ones, while specific to today’s particular scandals and manoeuvring, can be traced to the transition of the 1980s. History reveals a consistent tendency towards negotiated consensus at Brazil’s political watersheds; it can be seen in the war- and regicide-free independence declared in 1822, the military coup of 1964, which was mild compared with the blood-soaked affairs in Chile and Argentina, and the transition that created the new constitution. One aspect of this often admirable trait is a resistance to purging. The mid-1980s saw a lot of institutions—the federal police, the public prosecutor’s office, the judiciary, assorted regulators—overhauled or created afresh. But many of the old regime kept their jobs in the civil service and elsewhere. The transition was thus bound to be a generational affair”.

It adds “In 2013 the average judge was 45 years old, meaning he entered university in a democratic Brazil. Civil servants are getting younger and better qualified, says Gleisson Rubin, who heads the National School of Public Administration. More than a quarter now boast a postgraduate degree, up from a tenth in 2002. Sérgio Moro, the crusading 43-year-old federal judge who oversees the Petrobras investigations, and Deltan Dallagnol, the case’s 35-year-old lead prosecutor, are the most famous faces of this new generation. Unfortunately, this rejuvenation does not extend to the institution most in need of it: Congress. Its younger faces typically have family ties to the old guard”.

On the scandals at Petrobras the writer notes “One of the causes of the mensalão scandal was corruption that provided Lula’s government with a way to get the votes it needed from the disparate small parties. The petrolão (“big oily”, as the Petrobras affair is widely known) apparently shared a similar aim. Such ruses may have helped PT governments pass some good laws, such as an extension of the successful Bolsa Família (family fund) cash-transfer programme. But the party was not able to do all that it had said it would; potentially helpful reforms in which it was less invested fell by the wayside. Raphael Di Cunto of Pinheiro Neto, a big law firm in São Paulo, points to many antiquated statutes in need of an update, such as the Mussolini-inspired labour code (from 1943) and laws governing foreign investments (1962) and capital markets (1974). A Congress in which dysfunction feeds corruption which feeds further dysfunction is not one likely to take the hard decisions that the economy needs”.

It ends “The strength of Brazil’s institutions suggests something shy of the failed populist experiments of some South American neighbours. And the fact that voters in Argentina and Venezuela rebuffed that populism in the past few months has not escaped the notice of Brazil’s politicians. But every month of dithering and every new petrolão revelation chips away at Brazil’s prospects. The 2010s are already certain to be another lost decade; GDP per person won’t rebound for years to come. It will be a long time before a president can match the pride with which Lula showed off his Olympic trophy. But if Brazil’s politicians get their act together, the 2020s could be cheerier. Alas, if they do not, things will get a great deal worse”.

“Scandinavia’s best lesson”


An interesting piece discusses the “real” lessons of Scandinavia.

It opens “During this presidential campaign season, Scandinavia’s democratic socialism has had something of a starring role in Democratic discussions. In the debate on October 13, U.S. presidential candidate Bernie Sanders extolled the virtues of Europe’s north: “We should look to countries like Denmark, like Sweden and Norway,” he argued, “and learn from what they have accomplished for their working people.” Sanders’ paean elicited a flat rebuke from Hillary Clinton: “We are not Denmark.” In truth, there are many things that the United States can learn from Scandinavia, but not what Sanders implies. Scandinavian countries call themselves foregangslande, or pioneers, and they have much to show in terms of forward-looking and innovative policy. Most everyone is familiar with the progressive ideas—from gender equality, universal health care, and energy sustainability—that have turned the region into a model for Bernie Sanderses everywhere”.

The article goes on to mention that this image has become tarnished, “However, in recent years, Europe’s north has also been home to more controversial practices—namely, restrictive immigration measures and austerity policies. They have also been rocked by the rise of radical populism. Because of their wealth and relatively small size, countries in northern Europe have had to face economic and social issues before some of the other Western countries. And the results reveal that it is best to be careful what you wish for. For the better part of the past century, Nordic countries seemed to provide a third way between East and West. At the height of the Cold War, this positioning was understood in diplomatic terms; some of the countries remained neutral. But before then and again more recently, it was a social-economic label. The region seemed to mix free markets and universal social protection better than anyone else”.

The piece adds “In the aftermath of the 2008 recession, policymakers and observers have understandably been tempted to draw back on the Scandinavian model for inspiration. But in the intervening years, the Nordic socioeconomic experience has changed beyond anything Childs could recognize. What made Scandinavia distinctive then was the state’s deep reach into the market; in recent years, it has retreated. Experiments such as the voucher system have introduced private choice in key public sectors such as health care and education. In Sweden, public spending as a percentage of the GDP has shrunk by a quarter over the past two decades. Bookshelves have filled with titles such as From Social State to Minimal State, a treatise by Anders Fogh Rasmussen, later to become Danish prime minister, in which he advocated an increase in private initiative”.

However the problem with this is example is that Rasmussen is from Vestre a liberal party that has an ideological commitment to shrinking the state. So to therefore imply that this is some kind of consensus is misleading, at the very least.

The author writes “In time, Scandinavians’ self-perceptions have changed. Globalisation and delocalisation have challenged the competitiveness of some of the region’s industrial champions. Inflows of migrants have made Nordic cultures more diverse. Over time, the Scandinavians have slowly crept away from traditional social democratic tenets toward more pragmatic and yet conservative positions. Even conservative icons such as Joseph Schumpeter and Ayn Rand have become increasingly popular at these latitudes. If Europe’s north still represents a middle way, it is not between free market capitalism and socialism. It is between two radically different visions of democratic politics. On the one hand, Europe’s north pioneered the kind of efficient and impartial technocracy that has been emulated elsewhere, most notably in the European Union. The region is a paragon of bureaucratic autonomy (defined as the extent to which the civil service is uncorrupt and operates without interference from political power). Not coincidentally, “getting to Denmark” is used metaphorically by scholars such as Francis Fukuyama and the World Bank before him as shorthand for states’ modernization and good governance”.

The author bemoans the rise of the technocracy and subsequent lack of accountable as it eats away at the consensus and communitarian values that have been the hallmark of much of Scandinavian governance yet the problems of technocracy and a lack of accountability and transparency are not uniquely Scandinavian but come from a general desire of politicians not to make decisions which could harm their electoral prospects.

He concludes “What Scandinavia has to offer the United States is more than a utopian vision of universal health care; it offers lessons about the future of liberal democracy. Scandinavia has accumulated valuable experience trying to reconcile technocracy and populism, a balance that can quickly deteriorate when it is not founded on a watertight social contract between the citizens and the state. The upheavals and wide divergence among Scandinavian countries in their responses to Europe’s ongoing refugee crisis testify to the risk. Indeed, Scandinavia’s best lesson for others is that, in the future, state success will rest on finding a middle way between the forces that pull liberal democracy in opposite directions”.

Millennials and the end of the American Dream


A report in the Washington Post discusses the end of the American Dream, “When Harvard’s Institute of Politics asked 18- to 29-year-olds if they considered the American dream to be alive or dead, the result was an even split. About half said they considered the American dream alive and well for them personally. About half said it was dead as a doornail”.

The report mentions “Harvard also asked millennials about a number of other issues, too; people in that age bracket like Donald Trump and Bernie Sanders more than other Republicans and Democrats, for example. But this bit of data on the American Dream stood out. Particularly in light of data released on Thursday by Pew Research. Pew found that the beating heart of the American dream, the middle class, has shrunk significantly over the past 40 years”.

The piece goes on to note “young Americans are sceptical of their ability to get ahead. Pew’s data also shows that the age range looked at in the Harvard IoP survey saw the biggest drop in income status since 1971, with the biggest gain of any demographic group going to those 65 and over. Within that American dream data was a noticeable split. Those with a college degree thought that the American dream was alive and well at a rate 16 percentage points higher than those who weren’t in college or who had never attended. Non-college-graduates also saw broad decreases in income in Pew’s analysis, with the research firm writing that “[t]hose Americans without a college degree stand out as experiencing a substantial loss in economic status.” We’ve known for some time that people with college degrees have done better in recent years. But two threats still exist. The first is student loan debt, which continues to be a massive burden to recent college graduates. The second is wage stagnation. In analysis by the Economic Policy Institute, for example, wages for young college graduates have been dropping since the year 2000. The trend is more widespread and older than that, but this number certainly might make a new graduate pessimistic”.

It concludes “The idea of the American dream is somewhat nebulous, relating mostly to the idea of the equal opportunity for economic success. Half of people under the age of 30 are sceptical of that idea, and even those with a college degree might still see clouds on the horizon. The results of Harvard’s survey aren’t surprising, even if we might think they should be”.


Economist tries to take down Bernie


A piece in the Economist tries to negate the popularity of Bernie Sanders, “BERNIE SANDERS is due on stage. But a stream of Bostonians—mostly hip, twenty-something, often lightly bearded—is still flowing into the waterfront convention centre, pressing politely forwards and flustering the similarly youthful volunteers who are organising the Vermont senator’s Democratic primary bid. When the doors are eventually closed, over 20,000 people are crammed inside, warming up to John Lennon and Hunter Hayes (“Baby, kids on the run/Gonna party like we just turned 21”) as they await the 74-year-old socialist and grandfather of seven. Thousands more are shut out, watching on giant screens: it is said to be the biggest primary rally in Massachusetts ever”.

The report goes on to write “When Mr Sanders stalks into view, all white hair, bony limbs and baggy suit, a glowering scarecrow-prophet, the roar is tremendous, the atmosphere hilarious. It is tempting to think the huge support he is drawing could be America’s biggest-ever student prank”.

The Economist, who for decades has defended a failed mode of capitalism has sought, through cheap tricks to compare Sanders and his ideas to a clown, as if he were Donald Trump. Sanders who has been remarkably consistent in his ideas about poverty, inequality and its attempt to deride him in order to defend a morally bankrupt system only demeans the publications credibility.

The author adds “It is unexpected, admits Tad Devine, a veteran Democrat strategist who is working for him. When Mr Sanders declared his intention to stand in April, he says, “many people were incredulous. There was a feeling that there was no way this guy could knock such a formidable front-runner off the top spot.” Yet Hillary Clinton has been damaged by her peculiar use of a private e-mail server while secretary of state. And Mr Sanders, boosted by large, well-publicised rallies in student-heavy cities such as Portland, where he drew 28,000, and Seattle, where he drew 15,000, has soared. Polls suggest he could win the first two Democratic ballots; he is running Mrs Clinton close in Iowa, which votes on February 1st, and has a handsome lead in New Hampshire. An average of national polls puts him on 25% and Mrs Clinton 42%. Joe Biden, the bereaved vice-president, who is still making up his mind whether to stand, is on 19%—a wedge of which, Mr Sanders’s aides believe, is an anti-Hillary vote that could come their way”.

The author tries to dismiss Sanders further by drawing a false anology from a decade ago when things were very different, “The Democrats have been here before. In 2004 another left-winger from Vermont, Howard Dean, dazzled in the early campaigning, then died in the polls. Mr Sanders looks a bit different, however—not least because he is much more left-wing. The only socialist in Congress, he believes capitalism is screwing over 99% of Americans and, moreover, that the resultant “grotesque levels of income and wealth inequality” are no accident, but a scheme of the boss class to beggar the rest. “Why is it that with all the improvements to productivity from technology, people are being forced to work for longer hours, with lower wages?” he snarls on the stump”.

The piece then derides the ideas that the magazine and its ideology actually benefit from, “To peg back the plutocrats, he would abolish the corporate funding of elections that he himself disdains. “I don’t represent the interests of the billionaire class and the corrupt men on Wall Street and I don’t want their money,” he says. He would nationalise health care, break up banks and swell the size of the state. He would provide free college education for all and convert outstanding student debt into soft loans, at an annual cost of $70 billion, paid for with a special tax on Wall Street. The crowd in Boston loved that”.

Pointedly the piece adds “Sanders’s recent progress suggests he may be drawing broader support than his predecessor. In some polls, he is outgunning Mrs Clinton against the leading Republican contenders, which suggests many Democrats are at least thinking through the consequences of him winning. A survey last month put him ahead of Mr Trump by five points and level with Jeb Bush. Those kinds of numbers attract money. Mr Sanders raised $25.5m in the three months to October, mostly in small contributions; the average was around $25. By comparison, Mrs Clinton raised $28m, much less than she had managed in the previous quarter. This puts Mr Sanders within reach of the $50m Mr Devine says he needs to be competitive through to Iowa and New Hampshire, where he already has nearly 100 paid staff. The southern states, where he is only starting to build his organisation, are a tougher prospect. Black Democrats in the South like Mrs Clinton and hardly know Mr Sanders. Yet his advisers trust that early success and the prevailing anti-establishment mood will awaken a storm of interest in him, obliterating these weaknesses”.

The author, sounding concerned goes on to write, “If that is not entirely laughable, it is because Mr Sanders’s rise is being propelled by some novel factors. A combination of economic uncertainty and political polarisation has discredited the mainstream: the way Republicans are being bewitched by Donald Trump, another man selling simplistic solutions to complex problems, is further evidence of this”.

To compare Senator Sanders to Donald Trump is laughable. One, an elected official with legitimacy and decades of policy experience in Congress, the other an arrogant and moronic gas bag.  To say Sanders’ ideas are simplistic is both stupid and correct. These ideas have been tested for decades in nations that continually top rankings for quality of life, low levels of poverty and crime and a civilised society. Indeed the Economist itself has praised the very Nordic model that the author in this article is deriding.

The writer then tries to end the hopes of those who follow Sanders by saying that even if he is popular he won’t get elected because “The trouble with the millennials who dominate Mr Sanders’s rallies is that less than half of them actually vote. And there is still no reason to believe the wider support he is drawing will prove stickier than it was for Mr Dean. “The problems with candidates like that—and like me,” Mr Dean, who is backing Mrs Clinton, has said, “is that as you get closer to election time…you’re going to tend to want to see somebody who you think looks presidential.” That is, the joking stops there. Those who argue that this time will be different perhaps misunderstand the role anti-establishment feeling is playing on the left. The anger Mr Trump is drawing on is primarily directed at the Republican establishment; by contrast, Democrats like their party leaders, and hate Republicans. That makes them likelier to revert to the primary candidate who looks most likely to win the presidential election—which, as even some of the enthusiasts in Boston ruefully conceded, will not be Mr Sanders”.

It ends “His advisers understand this, which is why they are increasingly looking to turning blue-collar Republicans and the formerly apathetic—an effort in which Mr Sanders’s strong support from trade unionists is considered crucial. Over 70,000 union members have signed up to a support group, Labour for Bernie. In Larry Cohen, former leader of America’s largest communications union, Mr Sanders has also recruited a powerful ally. “The support we’re finding for him in working towns is overwhelming” said Mr Cohen, recently returned from an eight-city campaign tour. Yet the unions have never been weaker; only about one in ten American workers belongs to one. That is partly a consequence of the deindustrialisation Mr Cohen laments, but also of a dwindling of the class-based loyalties and faith in collective action he shares with Mr Sanders. They also share a strong protectionist urge; yet, while most Americans recognise that globalisation has made the jobs market harder, over two-thirds want more of it. This is why, as a political movement, able to mobilise large sums of money and get its candidates elected, the hard left in American politics that Mr Sanders represents is almost dead. He is not about to revive it”.


“This Chinese crisis is far from over”


An article with great forethought notes that the Chinese stock market collapse could get more worse “After two weeks of “Made in China” havoc, share prices in established and emerging markets alike had made a comeback — at least until this morning. But to judge by the major indices, plenty of traders seem to think the worst is over and that the problems on Chinese exchanges have been or will be contained. I disagree. First, let’s examine investors’ recent behaviour and its context. On Aug. 11, China began to devalue its currency — or allowed it to lose value in the market, if you prefer — which pushed other Asian currencies downward, too. The reasons were twofold. First, with Chinese exports becoming cheaper, China’s competitors need their exchange rates to fall as well in order to keep up. Second, the weakness in China’s economy and the tumult in its stock market also lowered expectations for its own import demand. This hurt China’s suppliers in East Asia and beyond, leading foreign investors to sell these companies’ stocks and bonds, and often their countries’ currencies along with them. Lower exchange rates and lower asset values across the region meant that investors there were losing money. But they also meant that investors had smaller holdings in these markets as a share of their portfolios — and, all other things equal, smaller holdings of emerging markets overall”.

He goes on to mention that “As I wrote last week, and as Robert Shiller, the Nobel Prize winning economist whose work I cited, has since reiterated, stocks may still be overpriced in markets around the world. But more germane to the current situation in China is the fact that the crisis that started in its stock markets may be far from over. Over the past several days, Beijing has been all over the map: It apparently tried to find the bottom for share prices in its markets and failed, extracted a confession of causing a run on markets from a journalist, and arrested hundreds more people for allegedly spreading rumours that hurt the economy. These are not the actions of a government with its markets under control; they are the actions of a government used to having its people under control”.

He argues that “Options markets, which depend on investors’ expectations for future prices and volatility in stocks, suggest that the Chinese markets have further to fall. There’s a substantial chance that they’re right, since any more downside moves will have a snowball effect. Even more of the money plowed into stocks through margin lending and shadow banking — investment funds managed by banks that promise a high fixed return — will have to be pulled out and not gradually, either. There’s a chance that the crisis could metastasize to the banking system, too, if stock sales don’t raise enough money to cover the high returns promised to investors in shadow-banking products. If that happens, Chinese banks will have to pay investors out of their own capital — and they may not have enough, especially after Beijing eased capital requirements last year. If the banks come up short, Beijing will have to bail them out again, this time directly — rather than by trying to support share prices. Most likely, the government would do so by cashing in some of its reserves of assets denominated in foreign currencies, such as U.S. Treasury notes”.

He notes that “China is already selling Treasuries from its reserves to stop the renminbi from plunging further, after the abortive devaluation shook traders’ confidence in the currency. Only a few months ago, this would have been no big deal. During roughly two decades of export-driven growth and trade surpluses, China built up $4 trillion worth of foreign reserves, far more than it needed merely to protect its currency (which didn’t float freely on global markets, in any case) from speculative attacks. But from July 2014 to July 2015, China’s reserves shrank by more than $300 billion, and the past month is likely to have eroded them even more. So how much would Beijing be on the hook for if shadow banking blows up? Recent estimates vary widely, but the shadow-banking system was probably worth between $6 trillion and $8 trillion at its peak, so let’s call it $7 trillion. The returns owed to investors may have been about 7 percent on average, or $490 billion. Not all of the shadow-banking funds were invested in stocks, but the other uses of the funds — often loans for municipal construction or infrastructure projects — may also be running losses of as high as 24 percent“.

He concludes “So if the government had to cover a quarter of the promised returns, the cost would be about $120 billion. If it had to cover some of the principal, too, then the cost would be much higher. And when construction projects don’t pay off, and stocks take a nosedive, that outcome becomes a genuine possibility. I’m not saying that China is on the verge of a full-blown fiscal and monetary crisis. But at the very least, these developments would slow down the economic reforms on which China is pinning its hopes for growth and jobs in the next several years. After all, Beijing won’t be so keen to float its currency when its reserves have taken a huge hit, or liberalise its capital markets when stocks have just emerged from a period of sustained chaos, or let go of state-owned enterprises (like banks) when they’ve already overextended themselves”.

He ends cautiously, “In short, the strong likelihood is that this Chinese crisis is far from over. Investors with money in China could soon be in a whole new world of pain, to say nothing of journalists and foreigners, the government’s favorite scapegoats. Falling asset prices will breed discontent in China, too, and as political risk there rises, so will uncertainty in global markets. Economic growth in China will eventually suffer, and economies everywhere that depend on Chinese demand will struggle as well. It’s not a sure thing, of course, but it’s a risk that too few investors appear to be taking seriously”.


The China meltdown and the Economist


An article in the Economist discusses China’s stockmarket collapse and wants it both ways, saying it is serious but also unimportant.

The report opens “ONCE the soundtrack to a financial meltdown was the yelling of traders on the floor of a financial exchange. Now it is more likely to be the wordless hum of servers in data centres, as algorithms try to match buyers with sellers. But every big sell-off is gripped by the same rampant, visceral fear. The urge to sell overwhelms the advice to stand firm. Stomachs are churning again after China’s stockmarket endured its biggest one-day fall since 2007; even Chinese state media called August 24th “Black Monday”. From the rand to the ringgit, emerging-market currencies slumped. Commodity prices fell into territory not seen since 1999. The contagion infected Western markets, too. Germany’s DAX index fell to more than 20% below its peak. American stocks whipsawed: General Electric was at one point down by more than 20%. Rich-world markets have regained some of their poise. But three fears remain: that China’s economy is in deep trouble; that emerging markets are vulnerable to a full-blown crisis; and that the long rally in rich-world markets is over. Some aspects of these worries are overplayed and others are misplaced. Even so, this week’s panic contains the unnerving message that the malaise in the world economy is real”.

The writer goes on to make the point that “China, where share prices continued to plunge, is the source of the contagion (see article). Around $5 trillion has been wiped off global equity markets since the yuan devalued earlier this month. That shift, allied to a string of bad economic numbers and a botched official attempt to halt the slide in Chinese bourses, has fuelled fears that the world’s second-largest economy is heading for a hard landing. Exports have been falling. The stockmarket has lost more than 40% since peaking in June, a bigger drop than the dotcom bust. Yet the doomsters go too far. The property market is far more important to China’s economy than the equity market is. Property fuels up to a quarter of GDP and its value underpins the banking system; in the past few months prices and transactions have both been healthier. China’s future lies with its shoppers, not its exporters, and services, incomes and consumption are resilient. If the worst happens, the central bank has plenty of room to loosen policy. After a cut in interest rates this week, the one-year rate still stands at 4.6%. The economy is slowing, but even 5% growth this year, the low end of reasonable estimates, would add more to world output than the 14% expansion China posted in 2007″.

The author only captures the economic aspects of the crisis. It is certainly true that China is heading for a hard landing and that the property market is certainly more important. Yet this overlooks the fact that the property market is collapsing with oversupply and a bubble bursting and secondly, that the equity market is less important but that many small investors are in the equity market so it is not just simply a matter of “market correction” as the Economist would have the reader believe. Both the property market bursting and the stockmarket collapsing would not just be dangerous for the global economy but for the internal stability of the regime itself. China watchers have continually said that China will move its economy to one based on domestic consumption but there is little evidence of this happening with all the attendant political consequences of this.

The writer goes on to argue paradoxically, “China is not in crisis. However, its ability to evolve smoothly from a command to a market economy is in question as never before. China’s policymakers used to bask in a reputation for competence that put clay-footed Western bureaucrats to shame. This has suffered in the wake of their botched—and sporadic—efforts to stop shares from sagging. Worse, plans for reform may fall victim to the government’s fear of giving markets free rein. The party wants to make state-owned firms more efficient, but not to expose them to the full blast of competition. It would like to give the yuan more freedom, but frets that a weakening currency will spur capital flight. It thinks local governments should be more disciplined but, motivated by the need for growth, funnels credit their way”.
The author seems to be holding two contradictory views at the same time, that China is undergoing dangerous transition but this is not a real problem. There is no mention of the political dangers of this for the regime or its long term stability.

He does make the point that “Fears over China are feeding the second worry—that emerging markets could be about to suffer a rerun of the Asian financial crisis of 1997-98. Similarities exist: notably an exodus of capital out of emerging markets because of the prospect of tighter monetary policy in America. But the lessons of the Asian crisis were well learned. Many currencies are no longer tethered but float freely. Most countries in Asia sit on large foreign-exchange reserves and current-account surpluses. Their banking systems rely less on foreign creditors than they did. If that concern is exaggerated, others are not. A slowing China has dragged down emerging markets, like Brazil, Indonesia and Zambia, that came to depend on shovelling iron ore, coal and copper its way (agricultural exporters are in better shape). From now on, more of the demand that China creates will come from services—and be satisfied at home. The supply glut will weigh on commodity prices for other reasons, too. Oil’s descent, for instance, also reflects the extra output of Saudi Arabia and the resilience of American shale producers. Sliding currencies are adding to the burden on emerging-market firms with local-currency revenues and dollar-denominated debt. More fundamentally, emerging-market growth has been slowing since 2010. Countries like Brazil and Russia have squandered the chance to enact productivity-enhancing reforms and are suffering. So has India, which could yet pay a high price”.

Counter-intutively he argues that “The rich world has the least to fear from a Chinese slowdown. American exports to China accounted for less than 1% of GDP last year. But it is hardly immune. Germany, the European Union’s economic engine, exports more to China than any other member state does. Share prices are vulnerable because the biggest firms are global: of the S&P 500’s sales in 2014, 48% were abroad, and the dollar is rising against trading-partner currencies. In addition, the bull market has lasted since 2009 and price-earnings ratios exceed long-run averages. A savage fall in shares would spill into the real economy”.

He ends “Monetary policy is just the start. The harder task, in the West and beyond, is to raise productivity. Plentiful credit and relentless Chinese expansion kept the world ticking over for years. Now growth depends on governments taking hard decisions on everything from financial reforms to infrastructure spending. That is the harsh lesson from China’s panic”.

China’s lack of communication, competence and credibility


An article argues that the Chinese authorities don’t know what their doing, “What better way for China to cement its role in the global economy than to be the trigger of a global financial crisis? It was the United States in 2008 and Europe in 2011 and 2012; now it is China that is sending shockwaves through financial markets. Just as Beijing insists, the global economy is now multipolar — no longer an American-dominated block with the dollar at its core. And like it or not, China has become one of these poles — perhaps before it was quite ready”.

He argues that “In 2008, when the collapse of Lehman Brothers almost brought to a halt the American banking and financial system — which had significant impact on the rest of the world — China, once again, was to a large degree financially isolated, with a non-convertible currency. Thus, like other developing countries, it managed to keep itself largely immune from the financial contagion, but it experienced second-round effects on the real economy — indeed, the crisis in the United States and then in Europe resulted in a drop in Chinese exports. This time is different. China is no longer at the margins as in 1997, nor is it an innocent bystander as in 2008. It is at the core of the current episode of financial instability. With approximately a 16 percent share of the world’s output, China is a key component of the global economy. And, with many advanced countries in the grips of the new normal of low growth and deflationary pressure, a slowdown in Chinese economic growth spells trouble throughout China’s global supply chain”.

The figures he notes are stark, “The demand for commodities by Chinese companies has dropped — imports of many industrial commodities are down for the first half of 2015,including a decline of 1 percent for iron ore, and 11 percent for copper. Recent figures on economic activity — including year-on-year declines of 0.1 percent on value-added industrial production growth, 0.2 percent in retail sales growth and 2.1 percent in fixed asset investment growth — have also dented investors’ confidence, both in China and abroad. And finally, the deep drops in Chinese stock markets and the badly timed adjustment in the value of the renminbi — allegedly to make the Chinese currency’s value more market-based — have thrown global investors off the rails”.

Correctly he makes the point that “It didn’t take a very big straw to break this camel’s back. Markets have been nervous about China for some time. After all, this is a country with murky governance and a level of indebtedness of more than 250 percent of gross domestic product, unique among middle-income countries. Limited options for savers beyond poorly remunerated bank deposits have fed bubbles — such as in the real estate sector and, more recently, in the so-called “shadow banking” sector, whereby savers are lured into high-risk wealth products by higher interest rates than those provided by bank deposits. In addition, thehuge increase in the market value of Chinese companies between May 2013 and May 2015 — more than 150 percent — appeared in suspiciously stark contrast to the smaller growth in many advanced economies. As valuations looked increasingly unsustainable, market participants were more and more sensitive to bad news that could trigger a significant adjustment”.

The never ending plan to make China consume more is harder to implement as it is “politically complex, and so far it has been messy, often with contradictory policy measures. For instance, the decision early this month to allow more flexibility in trading of the renminbi was so poorly timed that the People’s Bank of China had to intervene repeatedly to support the currency — exactly the opposite of the expected outcome. Possible explanations include a lack of experience in communicating with markets — the bank’s governor didn’t even show up for its press conference on the subject — a lack of credibility, or both. The reality is that China has become an integral part of global markets, but isn’t yet ready to play the market game. As its policymakers struggle to find their way, stock markets in the United States and Europe have felt the effects, and currencies in emerging markets economies — from Malaysia to Russia — have been abruptly punished by the renminbi’s depreciation”.

He makes the valid point that “China has some of the tools to clean up its own mess. With $3.69 trillion in foreign exchange reserves, down from a peak of $3.99 trillion in 2014, Beijing still has considerable scope for maneuvering — either by supporting the renminbi or by buying into securities markets. But this is exactly the problem. Market intervention feeds expectations for more market intervention, down into a self-fulfilling spiral that takes China further away from liquid capital and currency markets capable of solving some of their own problems. Not long ago, the discussion about China centered on its efforts to make the renminbi an international asset and a reserve currency. But how can it be, when the authorities are expected to and regularly intervene in the stock market and manage the exchange rate? China has let the genie out of the bottle and does not know how to push it back in again. So should the authorities just let markets adjust? Such an adjustment might wipe out the savings of many households, as a large proportion of China’s stock market is in the hands of retail savers. Or should the authorities intervene and, for example, put limits on share sales? This would preserve financial stability and the nation’s wealth at the costs of international credibility”.

He ends “There is no easy option. One thing, however, is for sure: China has grown into a key player in the global economy before completing the necessary rebalancing of its economy and financial reforms, and following this new road will be very bumpy for China and for the world”.

“Mockery of the EU’s innovative community”


Kathleen McNamara writes about the future of the EU after the “Greek deal“, she opens “European Union is an unparalleled historical experiment in governance. There is no other example in modern times of such an intensive effort to establish a peaceful, prosperous political community beyond the nation-state. Forged out of the ashes of two devastating world wars and a great depression, the union of nation-states has been increasingly bound together through markets, laws, and institutions. Although the trust and optimism that must underpin such a community has waxed and waned over the years, the poisonous atmosphere that has arisen in the wake of the Greek debt negotiations is remarkable, particularly as it comes on the heels of several decades of such extraordinary success”.

She argues that the EU is not collapsing but then makes the point that “the perception that Germany made a brute power play to force Greece to accept devastating bailout terms in exchange for euro membership has unleashed a backlash against that country and deepened cleavages between northern and southern Europe. In the process, the Greek negotiations have unwound the willingness of many EU citizens to join their political fates together, a commitment that constituted the heart and soul of the European project. The result may be a less cohesive Europe, one that is unwilling to act in the world as a single unit and thus less able to address the continent’s key challenges: economic stagnation and unemployment, the influx of political refugees, climate change, and political instability outside its borders. More broadly, the Greek debt crisis has demonstrated once and for all the fragility of a polity that does not rest on robust institutions and norms of legitimate democratic governance”.

She notes that “The European project has long moved forward along two separate but reinforcing tracks. The first is what scholars call “intergovernmentalism.” Over the years, a series of high-level negotiations have resulted in a half-dozen complex treaties that set the blueprint for the EU as a political actor, from the 1958 Treaty of Rome (which established the European Economic Community) to the 1992 Maastricht Treaty (which created the euro) to the 2009 Treaty of Lisbon (which upgraded the EU’s foreign policy presence). The treaties have extended the EU’s policy capacities, reorganized its institutions and actors, and enlarged the union to encompass 28 states beyond the initial core of six”.

Importantly she writes that “the second track has been one of low-level, incremental institutional development. Here, what scholars term “functionalism” has Europeanised everyday life through rules and programs that have gradually transformed what was previously national governance into EU governance. In this track, governments are not the primary actors; instead, so-called eurocrats, in partnership with national bureaucracies and societal groups, have generated the specific rules and programs to carry out the overall objectives of the treaties, creating a web of institutions and practices across Europe. From traffic laws to food safety, from healthcare rights to Internet privacy, the EU increasingly and intrusively shapes public and pri­vate life in its 28 member states and beyond. The democratic legitimacy of functionalism rests on the notion of technocratic expertise and the neutrality of law, which in its ideal form treats all Europeans the same”.

In must be stated that in some countries many of these rule would not have been brought in or even implemented without the EU. This is to the credit of the EU. However, this does not answer the fact that many of these regulations go beyond the mandate of the EU and override the democratic process in the sovereign member states which she implies has not been met. The harmonisation of the EU has not been successful, the euro which was meant to tie Germany down has only created a stronger Germany. The same currency and rules that were meant to unite “Europeans” has only made their differences more stark.

She goes on to make the point that “as the EU has taken on even more ambitious projects, such as the single currency, it has become clear that the two tracks offer too shaky a foundation for the European project. The eurozone crisis has highlighted the limits of both intergovernmentalism and functionalism as ways of governing, and it showcases the incomplete political development of the union. The EU holds the promise of profound transformation for its members. The successful transitions to democracy undertaken by member countries such as Spain (and the entire eastern flank of the EU) are intimately associated with the EU’s governance and remain both incentive and identity for the European project. The states besides Greece that suffered debt crises after the financial meltdown—Ireland, Italy, Portugal, and Spain—have been able to move forward within the broader EU framework, albeit at the cost of domestic suffering. But divisions over what to do in the Greek case seem to have presented too big a challenge for the EU to handle through its traditional means”.

This is one reading of the particular situation of the Greek crisis. Another is that the Germans wished to make a deal so punitive that the Greeks would be forced to leave the euro and thus the EU. If this is true it would make a mockery of not just the concept of solidarity but also the notion of “ever closer union” which is the endless mantra of the EU with little thought as to its political, economic and democratic implications.

She goes on to make the point “The events of the past few weeks have made a mockery of the EU’s innovative community. The one-off, intergovernmental negotiations over the terms of financing have produced a highly politicised debate over whether the rich northern European states should help out the “profligate” southern ones. Eurozone negotiations on such issues as redistribution and the collectivisation of debt form a striking contrast to the way such policymaking occurs in a national setting. In the United States, for example, when one region or state is suffering, there is a collective social safety net that will automatically, without debate, provide a shield from the harshest effects of the crisis, whether in the form of food stamps, Social Security, Medicaid, or other entitlement programs. Debt is mutualised in the U.S. Treasury bills. The EU has no equivalent EU-wide Eurobond”.

The point is noted that “the historical development of the EU, with high-level intergovernmental negotiations on the one hand and low-level incremental functionalism on the other, has not produced the mechanisms to support a political community seeking to navigate through hard times. The dream of a post-national, cosmopolitan political community, once arguably the goal of the EU, is now at stake. It has been seriously damaged by the perfect storm of a devastating transatlantic financial crisis, an inadequately designed eurozone, a clientelistic Greek political economy, a Germany unwilling to bend to keep the eurozone together, and a France unable to play its historic role balancing Germany. The events of the past month have turned the EU away from its role as a political entity with a shared collective purpose and back into its role as a straightforwardly intergovernmental negotiating body, with fears of moral hazard and financial contagion trumping European ideals”.

She ends “Everyday Europe—the layering of laws and institutions that profoundly shape the life of EU citizens and those beyond—will persist. The deep roots of the EU have reshaped Europe’s terrain irrevocably. But the events of the past few weeks have made a mockery of the EU’s innovative community. For a time, it seemed that an almost unimaginable Kantian “zone of perpetual peace” had been established in Europe, as national power politics gave way to the spirit of collective governance. No longer. For the millions that have lived under a free, stable, prosperous, and ever-expanding Europe, the divisions exposed during the Greek crisis represent a devastating turn of events. The question is whether the EU’s political community can once again reinvent itself to deal with the demands it faces”.

“Beijing must be seen to have the investors’ backs”


An article notes that reaction to China of how it has bailed out its stock market.

It begins “Like the old Wall Street saying goes, you can’t catch a falling knife — and this is a particularly sharp one. Even after deploying more than$400 billion of public money and enforcing the aid of many private firms, Beijing is having a hard time propping up share prices in Shanghai and Shenzhen. After their initial plunges, stocks are on a roller coaster ride as investors try to anticipate the government’s next buying spree. To outsiders, it seems like chaos. But to China, it makes perfect sense. Americans are plenty familiar with bailouts after the global financial crisis almost brought down giants like General Motors and AIG. But even if the Chinese bailout worked, and stock prices stabilized above their lows, economists would cry foul. By insulating investors from the ups and downs of an open market, China has essentially created an even greater appetite for risk. Confident that the government has their backs, they’ll trade even less responsibly, taking on more leverage with money they don’t have. This is moral hazard, and China is generating a lot of it”.

He goes on to make the point needless to say Chinese paranoia and opportunism play their part, “China is also doing its best to make life difficult for foreign investors. The state-controlled media has accused them — apparently without evidence — of causing the dive in share prices, in part by betting that the markets would fall further. Some foreign accounts have been frozen altogether, including one belonging to Citadel Securities, an affiliate of one of the biggest hedge funds in the United States. Yet relaxing restrictions on foreign money might have been one of the only ways to support stocks without intervening directly”.

The fear is that if this blaming of outside investors continues, then the government may be forced to eat its words by the financial community and have far greater restrictions on outside investment. This would mean less investment by non-Chinese companies which would in turn mean less growth in an economy that is already slowing quickly.

He note “As the media have been reporting for months, the majority of Chinese investors who fueled the stock bubble are poorly educated and inexperienced, with relatively small portfolios. These are exactly the people on whom Beijing’s power depends. They have experienced China’s rising economic tide, and they expect to benefit from it as well. They tend to support the government as long as they get their share of the spoils; this is the social contract upon which Beijing relies. But these Chinese haven’t received much training on how to navigate the financial system. For them, trading on the margin may have seemed like gambling with house money as the markets climbed ever higher; now they could lose their houses. If these small investors do lose everything, then the social contract — as Beijing has long led them to understand it — will have been breached. The government can’t allow that to happen”.

Crucially he makes the point that “Beijing must be seen to have the investors’ backs. And if it can cast some blame on the foreigners who would corrupt their citizens’ unsophisticated minds with notions of economic and political freedom, so much the better. The cost is almost immaterial, when the support of an entire generation may be at stake. And China’s leaders don’t care what wiser voices may say, even within the country’s own borders; the citizens who are questioning the government’s policies now probably weren’t its strongest supporters in the first place. The key is to maintain the quiescence of those who were. Won’t all this set Chinese financial development back a couple of decades? Not necessarily. China is moving through economic time at breakneck speed. Even with their restrictions on cash flows and foreign involvement, its capitalist institutions are growing so fast as to outpace the education of its people — as well as the government’s ability to monitor and regulate. Where officially sanctioned markets and exchanges haven’t yet appeared, black markets and shadow economies have”.

The piece concludes “The main risk for Beijing now is that the oceans of cash it has plowed into stocks will end up in the wrong people’s pockets. If all those undereducated investors were driven out of the markets by falling prices and margin calls, then only the bigger and more sophisticated investors would have remained to feel the boost. As Alice de Jonge of Monash University has pointed out, the end result may just have been a huge transfer of wealth from middle- and working-class Chinese to those who were already wealthy. Then all that money would have been better spent on a boring old social safety net — something the United States learned, too, after only 150 years”.

“The Chinese government intervened ruthlessly, and recklessly”


An article argues that China has destroyed its stock market to save it, “During the Vietnam War, surveying the shelled wreckage of Ben Tre, an American officer famously remarked, “It became necessary to destroy the town to save it.” His comment came to epitomize the sort of self-defeating “victory” that undoes what it aims to achieve. Last week, China destroyed its stock market in order to save it. Faced with a crash in share prices from a bubble of its own making, the Chinese government intervened ruthlessly, and recklessly, to turn those prices around. Its heavy-handed approach seemed to work, for the moment, but only by severely damaging far more important goals and ambitions”.

The writer goes on to make the point that “Prior to the crash, China’s stock market had enjoyed a blissful disconnect from reality. As China’s economy slowed and corporate profits declined, share prices soared, nearly tripling in just 12 months. By the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above a preposterous 85-times earnings. It was a clear warning flag — one that Chinese regulators encouraged people to ignore. Then reality caught up. At first, when prices began to fall, the central bank responded by cutting interest rates and bank reserve requirements — measures to inject more money that had never failed to juice the market. But prices continued to fall. Then the government rallied the major brokerages to form a $19 billion fund to buy shares and waded directly into the market to buy stocks too. A few stocks rose, but most fell even further”.

He goes on to note that “The relentless crash was intensified by a new factor in Chinese markets: margin lending. Chinese punters were borrowing in large sums, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral. At the peak, according to Goldman Sachs, formal margin lending alone accounted for 12 percent of the market float and 3.5 percent of China’s GDP, “easily the highest in the history of global equity markets.” Margin loans served as rocket fuel for the market on its way up, but prices began to fall and borrowers received “margin calls” that forced them to liquidate their positions, pushing prices down further in a kind of death spiral”.

Interestingly after the state intervention, he notes that they “now suddenly reversed course. They waved rules requiring brokerages to ask for more collateral when stock prices fall and allowed them to accept any kind of asset — including people’s homes — as collateral for stock-buying loans. They also encouraged brokerages to securitize and sell their margin-lending portfolios to the public so that they could go out and make even more loans. All these steps knowingly exposed major financial institutions, and their customers, to much greater risk. Yet no one will borrow if no one is confident enough to buy, and the market continued to fall, wiping out nearly all its gains since the start of the year”.

He makes the point that”China’s state media was talking openly of a “war on stocks.” And in that war, China’s leaders chose to employ the nuclear option: In effect, they closed down the market and outlawed selling. As of the morning of July 10, about half of China’s 2,800 listed companies filed to suspend trading. Many of their owners had pledged shares as collateral for corporate and personal loans and were facing margin calls that would cause them to lose control of their companies”.

For years the Chinese had sneered about the West and the finanacial crash. The Chinese seemed to believe that they could control the market more than the West could. Now however such crowing should stop and with it an notion that the Chinese economy will grow forever. Secondarily it could deal a very significant blow to the credibility of the CCP but this will depend on the extent of the losses and how much longer they go on for.

The writer goes on to mention “Chinese regulators also banned major shareholders from selling any shares for the next six months. Additionally, they directed companies to start buying back their own shares and instructed state-run banks to provide whatever financing was needed. But the real turn in the market came when China’s Ministry of Public Security — the no-nonsense tough guys normally tasked with cracking down on political dissent — announced that it would arrest what it called “malicious” short-sellers. It was clear, however, that this meant anyone whose selling (not just “short” selling) interfered with the government’s efforts to boost prices. The announcement cast a chill over the market. I have heard multiple reports of Chinese brokers refusing to accept sell orders for fear of angering the authorities”.

Crucially he argues that “China’s temporary success at manipulating a share-price rebound has come at a terrible longer-term cost. Two years ago, China’s leaders adopted “market forces will be decisive” as the guiding principle behind a much-lauded push for reforms needed to reinvigorate China’s slowing economy. That principle now lies in ashes. For years, China has dreamed of Shanghai’s becoming a global financial center. Now, one analyst at the global investment firm Julius Baer told the Financial Times, “confidence in the local Chinese equity market has been shattered and is unlikely to come back anytime soon.” Just a few weeks ago, observers confidently predicted it was “inevitable” that domestic Chinese stocks would soon be added to the major global indices that serve as benchmarks for professional investors. Today, with a mere rump of China’s stock market trading at all, and with investors afraid they will be thrown in prison for selling at the wrong time for the “wrong” price, it’s inconceivable”.

He concludes “It didn’t have to be this way. Some compare China’s intervention to the U.S. Troubled Asset Relief Program (TARP), but the difference is striking. TARP didn’t try to stop market prices from falling; it focused on containing the damage. If Chinese authorities identified a large securities firm that was at risk of failing from bad margin loans and stepped in to prevent a chain reaction, that would make more sense — and do a lot less damage — than trying to prop up the entire stock market by fair means and foul. Memories are short, but in 2007, China allowed an equally large stock bubble to collapse without its economy suffering irreparable harm. Caixin, one of China’s most prominent financial magazines, argued recently that this time around, the government “had no reason to intervene” to prevent a much-needed market correction and had grossly overreacted. China needs a functioning stock market that allocates investors’ capital to the most promising enterprises. This means prices that aren’t obedient to the whims of the state, or the party. China may have arrested the stock market’s fall by threatening to arrest sellers. But when it did that, it destroyed the town it was trying to save”.

“Beijing is scrambling to control the chaos”


A report notes the ongoing collapse of the Chinese stock market and how whatever safety net is too late to save it, “China’s stock-market bubble has burst, and Beijing is scrambling to control the chaos. It’s better to stop bubbles from forming in the first place, but Beijing failed to act — perhaps because the rising markets were a rare bright spot in a period of relative economic malaise. Now, with millions of fortunes already destroyed, continuing to do nothing might be the best approach. But that hasn’t stopped the government from diving in. The crash in Chinese share prices is a symptom of a market that is serving new strata of society as it develops, just like the American bourses during the dotcom boom”.

He makes the point that it was supply and demand rather than the fundamentals of the companies that were driving up prices, “even though the last bubble and crash occurred less than a decade ago. In 2008, the Shanghai market plunged spectacularly after increasing its value five times over in the previous two years. Once the global financial crisis subsided, however, it didn’t take long for investors to pour their money back in. And in recent months, they bet that prices in the Shanghai marketand others — would continue to climb indefinitely, borrowing billions to trade on the margin. One problem is that these are not the same investors as in 2008. For the past several years, China has been the world’s primary growth market for online trading accounts. Tens of millions of people have bought stocks for the first time and discovered the wonders of margin trading. Many are members of China’s burgeoning middle class, but that doesn’t mean they’re sophisticated investors; the majority may not even have finished high school. Now, with the markets down roughly 30 percent, their heavily leveraged positions have started to crumble”.

Pointedly he writes that “The government is understandably concerned, as more than three trillion dollars in wealth on paper, which didn’t even exist last spring, has already disappeared. But it’s not taking the right steps to salvage the situation — nor does it necessarily have to take any steps at all. So far, Beijing has placed a moratorium on initial public offerings, apparently in the belief that doing so will discourage churn (and thus more selling) in the markets. In reality, the move just protects existing investors — and the bloated companies they own — at the expense of businesses raising money to expand their operations. The Chinese government is also putting together a stabilization fund, including contributions from 21 brokerage firms, to prop up blue-chip shares”.

Interestingly he argues that “it’s not even obvious that the markets are still substantially overvalued, so none of these measures may even be necessary. On the Shanghai market, price-to-earning ratios have come down from a peak in the forties (for the median share) to the upper teens, which is somewhat elevated but not crazy for an emerging economy in East Asia. In Shenzhen, the ratio was around 45 at the time of this writing. But given the higher concentration of manufacturers on the southerly exchange, this higher figure could signify lower earnings for exporters — possibly a temporary phenomenon — as well as inflated prices. If shares are nearing prices that reflect the underlying values of the companies, rather than frothy demand for stocks, then doing something may be more dangerous than doing nothing. Beijing is setting a risky precedent by acting as a backstop not just for financial stability but also for the market capitalization of publicly traded companies. In the future, with no incentive for caution, investors may adopt even riskier behavior than the kind that has landed them in their current multi-trillion-dollar hole“.

This was seen spectularly in the Eurozone, Ireland and the UK had huge liabilities and yet where brought into the public balance sheet. The real lesson was Iceland who refused to prop up the banks and let them go bust only protecting the money of people over investors. The result was enormous pain for Icelanders in the short term but long term benefits.

Clinton, the progressive with power


A piece from the Economist discusses the campaign of Hillary Clinton, “HILLARY CLINTON is a fighter. In a very long speech at the Franklin Delano Roosevelt Four Freedoms Park in New York City, where she officially re-launched her presidential campaign this weekend, she declared that she is here to fight. She is ready for battle in “four fights” in particular. There is the fight “to make the economy work for everyday Americans”; the fight “to strengthen America’s families”; and the fight to “maintain [America’s] leadership for peace, security, and prosperity”. Last, but not least, she will join the fight for “reforming our government and revitalising our democracy.” At an abstract level, this is all rather unobjectionable. But who, exactly, is Mrs Clinton fighting against? It’s not America’s external enemies she’s itching to take on. She’s not in a lather about the Islamic State. It’s the Grand Old Party she’s got a beef against, and if you’re inclined to support it, Mrs Clinton has it in for you, too”.

This summation is a tad unfair. The GOP have been consistently responsible for the many, though obviously not all of the problems in modern America, from their obsession of cutting taxes to higher rates of poverty and reduced social mobility to shutting down the government they have helped bring America to where it is today.

The piece goes on to mention “Mrs Clinton’s combative partisanship is a far cry from Barack Obama’s promises to heal the divisions of a fundamentally united nation through edifying speeches and determinedly cooperative leadership. Mr Obama cast himself as a sort of King Solomon, capable of sagely arbitrating the disputes of rival factions from a position of lofty moral as well as political authority. But it didn’t work out as Mr Obama, or his supporters, had hoped. His great achievement, the passage of Obamacare, was the result of a brute-force party-line vote. Subsequent attempts at Solomonic negotiation were repeatedly foiled by the dogged partisan unity of congressional Republicans. Mrs Clinton has advertised her disinclination to reach across the aisle only to have her hand slapped away. Her model of leadership is more General Patton than Solomon. Mrs Clinton does not promise progress through reconciliation, but Democratic victory over the forces of Republican darkness with a combination of superior strategy and force”.

This strategy could be a refreshing change from the naivety of the early Obama years where he was either stupid enough or arrogant enough to believe that he could heal the profound and in some cases, natural ideological divisions within American society. While Clinton’s approach appears, at this moment, to be more brawn it may in the end lead to more compromise with the GOP recognising her as a more serious political operator not to be ignored.

As the report adds “Mrs Clinton promises a Democratic party exhausted by Republican intransigence something much different, and much desired: victory. To Democrats fed up with congressional obstruction, and Mr Obama’s failure to blow past it, this is a most appealing message. And it’s a savvy move, too, converting Mrs Clinton’s lack of charm, and her reputation for shady dealings, into assets. She’s not here to make you like her. She’s here to make sure that you get what you’d like—if you’re a Democrat. ‘A vote for me isn’t a vote for ‘unity”, writes David Frum in the Atlantic, perceptively drawing out the subtext of Mrs Clinton’s speech. ‘It’s a vote to claim a larger piece of the nation’s dwindling resources from people you don’t like and who don’t like you. In an age of increasing partisan polarisation, Mrs Clinton’s openly hostile message verges on a refreshing frankness about the nature of politics”.

The report adds that “Voters also like to be assured that they’re doing the right thing by supporting policies which, incidentally, happen to feather their nests. Take, for instance, Mrs Clinton’s proposals to ‘make it easier for every citizen to vote’ through ‘universal, automatic registration and expanded early voting’. This is presented mainly as a defence of the ideals of democracy, not as a way of making it easier for Democrats to win elections. But she won’t mind too much if you happen to see the big picture”.

If this plan were implemented it would be a temporary loss for the GOP, yet it would also be a challenge to them. They would have to propose policies that would woo these newly enfranchised voters away from the Democrats to the GOP. This would be better both for the GOP and in the end, as Clinton says, democracy.

The report adds “To understand the particular combination of pugnacity and idealism in Mrs Clinton’s announcement speech, it is necessary to understand how the rising influence and confidence of the progressive left is reshaping both the rhetoric and moral worldview of the Democratic Party. The 1990s ‘new liberalism’ of Bill Clinton, a former president and Mrs Clinton’s husband, was a Democratic version of the sunny view, normally associated with the right, that a rising tide raises all boats. The displacement of Bill Clintonian ‘liberalism’ by ‘progressivism’ brought about by the financial crisis and increasing inequality has led to a decline on the left of harmonious ideals of in-it-together mutual benefit. In is place is a combative, zero-sum conception of politics that combines the lofty rhetoric of social and economic justice with a disenchanted view of democracy as smashmouth sectarian conflict. Mrs Clinton is ably capitalising on this development”.

Interestingly the article goes on to note that “Although the populist progressivism touted by such figures as Elizabeth Warren may seem to present a challenge to the relatively conservative Mrs Clinton, it has actually handed her a very powerful weapon. Progressives wax idealistic about democracy, but their implicit notion of practical politics is class war by electoral means. This allows the powerful Mrs Clinton to position herself as her party’s only real hope, while lending moral dignity to otherwise baldly transactional promises to her party’s constituencies. If politics is war, then Democratic success in national politics requires a battle-tested leader mighty enough to vanquish the amassed forces of plutocracy and right-wing reaction. Bernie Sanders, a professorial Vermont senator and, so far, Mrs Clinton’s most significant left-wing challenger, may be able to state the problems, and articulate attractively progressive answers. But he cannot be the progressive answer. What can sweet Bernie Sanders do to the Koch brothers? Throw spare copies of “Manufacturing Consent” at them? Progressivism in both its moderate and extreme versions implies the need for a leader who is a heavyweight slugger, willing to fight at least a little dirty”.

It concludes “This is why, as long as progressivism is ascendant within the Democratic party, Mrs Clinton need not fear a progressive insurgency. In announcing her candidacy by picking fights in terms appealing to progressives, Mrs Clinton has reminded her party that, even if she’s not the progressive hero they might want, she alone has the knockout power they need”.

“United Kingdom’s outsized and overleveraged financial sector made the nation suffer disproportionately”


A report in Foreign Affairs discusses the recent British general election. It argues that both main parties mislead the public about their economic policies.

It opens “This May’s general election wins for British Prime Minister David Cameron and his Conservative Party confounded opinion pollsters and surely surprised Cameron himself. Despite presiding over five years of budgetary austerity and welfare cuts, a drop in wages by over eight percent from their 2007 peakzero growth in national productivity (which reflects the growth of part-time low-skill employment since the crisis), and missed budgetary targets, the electorate punished not Conservatives but rather their junior coalition partner, the Liberal Democrats, who lost all but eight of their 57 seats in the House of Commons. The Labour Party’s failure to improve significantly on its weak 2010 performance, paired with the quirks of the United Kingdom’s first-past-the-post electoral system, did the rest of the work needed to secure a Conservative victory”.

The author correctly notes that “Commentators on the right have been quick to interpret this result as a triumph for austerity politics and fiscal rigour over supposedly anticapitalist (or at least pro-Keynesian) policies advocated by former Labour Party leader Ed Miliband, who resigned following the results. The Conservatives’ political message throughout the election revolved around the “tough decisions” it had made to cut government programs in order to reduce the budget deficit left behind by the previous Labour administration. Meanwhile, on the center-left, Labour’s failure is seen as proof that it should never have abandoned Tony Blair’s “third way” strategy of socially progressive neoliberalism, which had successfully attracted aspirational middle-class voters”.

He goes on to argue that “A closer look at this election’s results suggests that both of these interpretations are off the mark. Although Labour gained only 700,000 votes since 2010, the true cause of the Conservatives’ success is the spectacular collapse of the Liberal Democrats. By associating with the Conservatives’ austerity policies, the Liberal Democrats forfeited some 4.5 million votes—two-thirds of its vote share. The Conservatives’ real vote share—although the party claimed that it provided Cameron with a mandate to govern—only increased by half a percent”.

As ever in UK politics the major culprit for these skewed figures is the wacky electoral system of fptp, a system that should only ever by used in a two party system. Now however the two party system is dead but the two main parties are trying desperately to cling onto it instead of having some form of PR and a more representative and democratic system of electing MPs.

He mentions that “Cameron’s party may have another five years in power, but the real winners of this year’s election were fringe parties such as the UK Independence Party, which advocates a freeze on immigration and an exit from the European Union, and the Scottish National Party, which wants Scottish independence and an end to austerity. Both of these parties took millions of votes that Labour was hoping to claim, clearing a path for Cameron’s victory despite most of the British public actively rejecting his party’s policies”.

Pointedly he argues that for all the talks about cutting the deficit the Tories did not really do want they proudly said they would, “Despite Conservative spending cuts, the United Kingdom’s deficit was reduced by only half of what the party anticipated when it took office in 2010. The nation’s economy did not start to grow until late 2013, after a panicked treasury minister, George Osborne, relaxed austerity measures. The United Kingdom’s economic problems, the Conservatives maintained, were the result of Labour’s supposed profligacy in running budget deficits during the boom years of the early 2000s, leaving the economy exposed to the financial crisis. This, they argued, made draconian spending cuts inevitable. However, as the crisis hit in 2007, the United Kingdom had the lowest debt to GDP ratio in the G7, lower than when Labour had taken power a decade earlier. And if Labour was supposedly running excessive deficits, the markets remained strangely unconcerned, with market rates on British bonds running close to pre-collapse lows. This left many wondering why the British budget exploded in 2008 and what it might say about coalition rule in the United Kingdom”.

The writer makes the excellent point that “Cameron did not discuss why the United Kingdom’s outsized and overleveraged financial sector made the nation suffer disproportionately from the worst financial crisis since the 1930s. Financial deregulation and the unsustainable growth in private, not public, credit fatally exposed the United Kingdom’s banks to the United States’ subprime credit crisis. The collapse in credit growth in 2007–09 hurt the United Kingdom’s budget not because the Labour government was too deep in debt but because the national economy was more dependent on financial activity than elsewhere. By 2007, the British Exchequer was taking nearly 25 percent of total tax revenue out of the financial sector just prior to the crisis, which was a mere ten percent of the economy. With the financial crisis, these revenues plummeted, leaving the government short of cash and needing to borrow heavily”.

He correctly writes that the poor suffered most under the government, “The Conservative–Liberal Democratic coalition diagnosed the nation’s woes as symptoms of Labour spending excessively on welfare and wealth redistribution. The government then set about reducing the deficit by slashing social programs and public employment. Austerity policies very quickly pushed the economy back to a near recession, averted only by slowing the pace of deficit reduction and encouraging private sector credit growth through government guarantees on home loans. The coalition’s spending cuts were never reinstated once the economy began to recover, and its austerity policies were politically selective. Health care and pensions were spared the ax—programs that disproportionately benefit older citizens who tend to vote Conservative. The government focused its cuts instead on the younger end of the working population. Spending on these groups was already lower than on the elderly, which required cuts to be deeper in order to provide substantial savings”.

He concludes “The economic crisis that hastened New Labour’s demise had nothing to do with overspending and everything to do with its uncritical acceptance of twenty-first-century financial innovation and its excesses. Before analysts conclude that Labour has no choice but to shift to the right, we need to remember the lessons of the global financial crisis: a balanced budget will not save a government from the failures of a banking sector that is too big to bail out, and mere economic facts seldom defeat ideologies”.

“Long-term causes that will only have long-term solutions”


A piece from Foreign Policy argues that the “bailouts” Greece has received from the troika are unhelpful.

It opens “The Greek bailouts have been incredibly stupid. There, I’ve said it. Let’s put aside the debate over whether rescuing Greece was a bad idea in the first place; a complete collapse of its economy might well have led to social unrest and even conflict. But how the Europeans and their cohorts at the International Monetary Fund (IMF) bailed out Greece was amazingly, insufferably stupid”.

He goes on to explain “The world has seen plenty of bailouts in the past, some that worked and others that didn’t. Argentina’s by the IMF in 2000 and 2001 didn’t work, because the peso was so overvalued that there was no way to make the country’s debts sustainable. Ireland’s bailout by the European Union in 2010 succeeded, in the sense that the country paid its way out of the program on schedule three years later, though its economy was still on a fragile footing. But Greece is neither Argentina nor Ireland. As a percentage of the economy, its public debt is much higher than Argentina’s was. Its business environment is nowhere near as dynamic as Ireland’s in the views of the World Bank and the World Economic Forum. And Greece’s shadow economy — the portion that doesn’t pay taxes — may be the biggest of the three”.

Yet even this misses serious errors. Ireland may be technically out of the IMF programme but the debt is still vast, indeed so vast that if things worsen in the Eurozone as the are expected to, another “bailout” is probably necessary.

He goes on “None of these problems has a short-term solution, and yet that is exactly the template that both of Greece’s bailouts have taken. Greece is still in crisis talks with its creditors because the payments it has been expected to make and the reforms it has been expected to implement have corresponded to unreasonable short-term expectations. Put simply, the problems in Greece have long-term causes that will only have long-term solutions. A public debt as big as Greece’s — currently more than 170 percent of its GDP — does not go away overnight, even with the harshest austerity measures. It will only erode during an extended period of robust economic growth as well as restrained spending. Austerity might make it possible for Greece to meet its payment obligations in the short term, but what’s the point if the economy is crippled in the long term? Greece’s climate for business won’t turn into a world-beater in just a few years, either”.

He makes the point that “Improving protections for investors, curtailing corruption, strengthening property rights, and — crucially — enhancing the enforceability of contracts are all on Athens’s to-do list, but the cultural and legislative changes they require will take time. Indeed, it would be a mistake to rush hastily written laws on such fundamental matters through the Greek parliament, especially without building widespread public understanding and support”.

He argues that “it’s foolish to believe that Greece will turn into a nation of chastened and loyal taxpayers in just a few short years. Tax avoidance and evasion have a variety of deep social roots; they can be affected by factors as diverse as religiosity, class divisions, individual psychology, and perceptions of fairness. Though some incentives can increase compliance with the tax system in the short term, the commitment to pay taxes has more to do with a feeling of stakeholdership and justice — something Greece, with its fractured politics and current disillusion, will need time to manifest”.

He concludes “the bailout backers set their criteria based on what they thought Greece should do, rather than what Greece was capable of doing. They were also preoccupied with ensuring Athens would work hard for each tranche of bailout funds, rather than ensuring Greece’s process of reform would be as smooth as possible. Given these disjoints, it’s no surprise that Greece may need a third bailout to avoid defaulting on its debts. A series of short-term cures will never solve a long-term problem. But officials in Frankfurt, Brussels, and Berlin never showed enough interest in the overarching challenges in Greece’s economy. Their goal all along has been to maintain the integrity of the eurozone, despite its flaws, as well as their own infallibility. Ironically, they might have been closer to their goal had they thought less about themselves and more about the Greeks”.

The myth of German foreign policy


Following on from reports about the debt in Germany and long term economic problems an article from Foreign Affairs argues that Germany is not as powerful as it seems, “This June, the G-7 will meet in an opulent castle near Germany’s highest mountain, the Zugspitze. It was initially built, according to the host’s website, for an “egocentric zealot” who sought to convert Jews to Christianity. Schloss Elmau has since become a spa and cultural center, but the lofty location seems somehow like an appropriate reflection of the inflated discussion in recent years about Germany’s role in the world. Many observers have rushed to proclaim Germany’s rise to prominence. U.S. academic Walter Russell Mead recently ranked Germany as the second most powerful member of the G-7. A survey by the British magazine Monocle determined that Germany’s “soft power” rivals that of the United States. Most recently, Germany’s own renewable energy transition has prompted columnist Tom Friedman to praise the country as the world’s first “green superpower.” It is indeed a good time to be a Germanophile. The country remains Europe’s largest market and now exports as many goods as the United States. Berlin has played the key role in managing Europe’s financial crisis as well as its security crisis with Russia. Germany’s national soccer team is also the reigning world champion (no small matter to most countries outside of North America). Chancellor Angela Merkel is regarded as the top-performing democratic leader in the world”.

He correctly writes that “Germany’s recent success has led to unrealistic expectations about its power. Its strong economic ties with Russia and China have done little to hinder those countries’ authoritarian turns and military assertiveness. Its energy transition toward renewables (Energiewende) has remained popular at home, but by itself, it has not fundamentally transformed international energy markets or convinced other countries to abandon nuclear power. Nor can Germany truly shape, let alone protect, open markets for its goods without the backbone of U.S. military power”.

The article adds “Germany has excelled for decades at developing its soft power. It is known for its luxury automobiles, chemical products, and high-tech machinery. But its “softer” exports—such as its approach to education, energy, finance, law, and scientific research—have won it fans as well. Funding for cultural, academic, and technical exchanges boosts its popularity and also complements German commercial interests”.

He adds implausibly, “The country’s influence is strongest within Europe, but even there it may find itself powerless to prevent Greece or the United Kingdom from leaving the EU. Germany has thus largely succeeded in boosting its international image as a benign and competent country, but it is difficult to see how its soft power has led to actual outcomes. For one, all of this exchange has not necessarily increased interest in the country’s language or culture—over the past 15 years (since 2000), there has been a 25 percent drop in the number of German-language learners worldwide”.

Whatever about the weaknesses of soft power on the international stage or the myth of a German foreign policy or leadership, on EU matters if Germany wishes to keep both Greece and the UK inside the EU badly enough then it will do want is needed. If these countries leave the EU it will be largely, though obviously not entirely, the fault of Germany.

On more serious matters he argues “the government’s most recent foreign policy doctrine states the relatively grand aim of adapting the existing global order to the interests of new Gestaltungsmächte (shaping powers). Dialogue with these regional powers will eventually convince them of European values, to “crave a sense of Ordnung [orderliness],” and lead to a convergence of interests. Yet the strategy says little about how to persuade, let alone force the participation of, actors with limited interest in a Western-led order. Neither Russia nor China seems particularly keen to uphold the carefully built institutions and norms established after World War II, especially when those norms conflict with their regional interests. Middle Eastern states are fixated on their own internal conflicts and maintaining a regional balance of power. In these contexts, international institutions must be continually shaped to meet new realities”.

Not surprisingly he makes the point that “Explanations for German foreign policy vary. A cynical view would suggest that German leaders are captive to the country’s business lobby, which will lead it to simply bow to the preferences of important export markets. The country’s self-perception as “Europe’s chief facilitator” also means that it tries to be perceived as not dominating the EU’s 28 member states (but ask a Greek about Germany’s success in that regard). Germany naturally protects its business interests and prefers “leading from the middle,” but its caution in responding to crises reflects a leadership that is simply unprepared to take the risks needed to address them. Given the difficulties of prioritising crises in a chaotic international environment and the limitations of traditional German foreign policy, it is little wonder that the leadership defaults to a reactive posture”.

Tellingly he argues, “Speeches by others in the German cabinet, however, have focused more on simply living up to “what others expect of us” rather than setting out the country’s priorities. Merkel has characteristically let others do the talking and, even after a decade in office, has not offered a wide-ranging foreign policy speech. Although Merkel may have taken on the role as the West’s interlocutor with Russian President Vladimir Putin, she is likely waiting to see if the public will accept much more. She may have to wait a while. A majority of the German public for the first time favors an “independent approach” from the United States. Yet besides spending more on foreign aid, most prefer to “continue to exercise restraint” in dealing with international crises, and there is a deep ambivalence about the use of military force or sanctions. Although it is true that Germany remains constrained by its past, its recent success may have also instilled in it a sense of complacency. For example, Germany is often singled out for its meager defence spending. Although Finance Minister Wolfgang Schäuble recently announced a six percent increase in defense spending over the next five years, much of this will replace aging equipment and infrastructure, and overall spending will remain small relative to the country’s size. More frustrating to American observers, however, is the government’s reluctance to openly discuss security challenges and commit to planning for future contingencies. This is odd given that Germany provided the third-largest contingent of troops in Afghanistan and well over 200,000 soldiers to international peacekeeping missions since 1993″.

He concludes “In the short term, the best Germany can do is follow the advice of its own president, who challenged his countrymen last year to “do more to guarantee the security that others have provided it for decades.” For the G7 summit, Berlin has set an ambitious agenda, with security and energy policy at the top of the list owing to Russia’s annexation of Crimea and use of oil as a political tool. It will have to show how summitry and proclamations can be translated into action. In the longer term, Germany must recognise that it can no longer simply remain a convening power and rely on the initiative of other “shaping powers,” the European Union, or the United States. It will have to better articulate and publicly defend its foreign interests. Meekly reflecting on its limitations is an excuse to avoid responsibility and take concrete steps when international rules are ignored. If Germany wants to forge a stronger Europe and a peaceful world order, it needs to ignore the hype about its power and think more courageously about how to use it”.




Conservative victory


In a mix of pathetic pleading and bullying in the day before the general election David Cameron has “urged the British public not to “do something you’ll regret” as voters head to the polls for the closest general election in a generation. With the final round of opinion polls showing Labour and the Conservatives neck and neck, the Prime Minister uses a Telegraph interview to urge voters to reflect in the “solemn quiet” of the polling booth before casting their ballot. Mr Cameron says that the 2015 general election will “define this generation” with major constitutional and economic issues at stake for the country. The last round of opinion polls and forecasts from bookmakers suggests that the election will lead to a chaotic result – with Labour and the SNP vying with the Conservatives, propped up by the Liberal Democrats, to form the next Government. Senior Conservatives privately hope that, as in 1992, the opinion polls are not reflective of the nation’s mood and that so-called “shy Tories” or people having last-minute doubts over Labour’s credibility could yet swing behind Mr Cameron. On current polling, the Tories are hopeful of winning at least 290 seats – potentially as many as 300. They require at least 323 seats to claim a majority in the House of Commons and would therefore need the support of at least one other party under this scenario”.

These gains have come at the expense of both Labour and the Liberal Democrats. The Lib Dems went from nearly 60 seats to less than 10. Reports indicate that “Nick Clegg is expected to resign as leader of the Liberal Democrats after the party slumped to its worst ever showing at a general election. After narrowly hanging on to his Sheffield Hallam seat with a much reduced majority, Mr Clegg said he would make an announcement about his future after meeting with colleagues today. Nick Clegg came under heavy fire from Labour, which hoped to decapitate the Lib Dem leadership. In the event, Mr Clegg held on, albeit with a reduced majority”.

At the same time as the Lib Dem wipeout the Labour Party has been destroyed in Scotland. The Guardian reports that the SNP “has won an extraordinary landslide victory in the general election in Scotland after the Scottish National party crushed Labour, inflicting a series of humiliating defeats on the party’s leadership. In a series of dramatic victories for the SNP that left Scottish Labour effectively decapitated and the Liberal Democrats reduced to a tiny handful of seats, Sturgeon’s party was on the brink of securing nearly all of Scotland’s 59 Westminster seats. The SNP swept aside once-unassailable majorities for Labour with swings as high as 35%, as voters threw out Jim Murphy, the Scottish Labour leader, its former deputy leader, Anas Sarwar, and Margaret Curran, the shadow Scottish secretary. The avalanche also carried off Douglas Alexander, Labour’s shadow foreign secretary who had been in charge of Ed Miliband’s general election campaign. He was defeated by Mhairi Black, a 20-year-old politics student who has yet to finish her degree and who is now the youngest MP elected since 1667. Alexander admitted Scotland’s voters had lost trust in the Labour party, which had started the campaign defending 41 seats”.

Related to this is the loss of many high profile names, “During a night that saw the Scottish National Party wipe Labour off the map in Scotland and a huge decline in support for the Liberal Democrats there were many big name MPs that could not hold onto their seats. Chief Secretary to the Treasury Danny Alexander was the highest ranking politician to lose his seat in the general election. The Liberal Democrat, who was at the heart of the coalition government, is one of many who have been ousted from office in the wake of the SNP’s historic landslide. Vince Cable blamed a campaign of “fear” by the Tories for a “terrible night” for the Liberal Democrats as he became the latest in a string of high-profile party figures to lose their seats. The Business Secretary was defeated by Conservative Tania Mathias by 25,580 votes to 23,563 in the seat he had held since 1997″.

The piece adds later that “Former Liberal Democrat leader Charles Kennedy lost his seat of Ross, Skye and Lochaber. Mr Kennedy has endured the highs and lows of political life. Having taken his party to its best election result since the 1920s, his leadership ended in ignominy when he was forced to quit after admitting a drink problem. But the Liberal Democrats were not the only party to lose high profile figures. Esther McVey, the Conservatives’ employment minister and one of the most prominent female figures in the Cabinet, lost the key marginal of Wirral West to Labour’s Margaret Greenwood by just 417 votes. It had been a bitter campaign, with anti-Tory activists labelling her “evil in its purest form” and “the smiling, jack-vooted assassin of welfare reform”.

In an image reminiscent of Margret Thatcher’s 1979 victory where she promised to “bring healing” and did the exact opposite, Cameron said that “David Cameron has said he wants to govern for “everyone in our United Kingdom” amid growing fears for the future of the Union after Labour was virtually wiped out in Scotland by the SNP. Alex Salmond warned that Mr Cameron will have “no legitimacy whatsoever in Scotland” after he became one of 56 SNP MPs in Scotland. Only four seats went to other parties. The rise of the SNP saw Labour lose Douglas Alexander, the party’s election chief and shadow foreign secretary, and Jim Murphy, Labour’s leader in Scotland. The Liberal Democrats lost Danny Alexander, the former chief secretary to the Tresury”.

The piece adds “Boris Johnson, the Mayor of London and new Tory MP for Uxbridge, said that the Conservatives will need to make a “federal offer” to Scotland. He said: “Everybody needs to take a deep breath and think about how we want the UK to progress. “I think even most people in the SNP, probably in their heart of hearts, most people who voted SNP tonight, do not want to throw away absolutely everything.” Philip Hammond, the Foreign Secretary, said that the Conservatives will continue with plans to devolve more powers to Scotland and also press ahead with plans for English votes for English laws. He emphasised that Scotland decided to remain in the Union amid fears that the SNP is now likely to use its mandate to push for a second referendum on Scottish independence”.

A piece notes that “The Conservatives are expected to get a 37% share of the national vote, Labour 31%, UKIP 13%, the Lib Dems 8%, the SNP 5%, the Green Party 4% and Plaid Cymru 1%. Ed Miliband steps down after a “difficult and disappointing” night for Labour which saw Ed Balls lose and Jim Murphy and Douglas Alexander defeated by the SNP. Nick Clegg said he would quit as leader after a “crushing” set of losses, which saw Vince Cable, Danny Alexander, David Laws, Simon Hughes and Charles Kennedy among a slew of Lib Dem casualties. George Galloway, who was reported to the police for retweeting an exit poll before voting ended, has lost to Labour in Bradford WestNigel Farage has quit as UKIP leader after failing to be elected – although he may stand in the ensuing leadership contest. Douglas Carswell retained his Clacton seat. Conservative minister Esther McVey was the highest-profile Tory loser, defeated by Labour in Wirral West. The Green Party gets one seat after Caroline Lucas retains the Brighton Pavilion constituency she won in 2010″.




Economist 2015:Cuts and savings


Continuing the coverage of the Economist of the UK general election. It notes the differences of the parties on the economy. It begins “ALL the big political parties agree: Britain badly needs to get its public finances in order. The country probably borrowed about £90 billion, or 5% of GDP, in the 2014-15 fiscal year—more than Italy, France or even Greece. Yet the parties do not agree in the slightest on how much further borrowing ought to fall, or how to bring it down. The Conservative-Liberal Democrat coalition came to power in 2010 declaring that deficit reduction was “the most urgent issue facing Britain” and that it should be achieved mostly by cutting spending, not by raising taxes. Barely a month into his new job, the flinty Conservative chancellor, George Osborne, laid out a bold plan to do this. It turned out to be considerably more flexible than he implied”.

It goes on to mention “Osborne set out two targets. First and most important, the structural current deficit—that is, the deficit adjusted to reflect the economic cycle, and excluding investment—would be forecast to be in balance five years in the future. Second, national debt would fall as a percentage of GDP by 2015-16. At the time both targets sounded like a plan to finish the job of deficit reduction in one parliament. A euro crisis and sluggish growth quickly messed it up. The Treasury brought in less tax revenue than it had expected and had to spend more on benefits. As a result, borrowing stayed high”.

The author seems to think that this was all out of Osborne’s control. He could have easily borrowed less or taxed more but instead he was too afraid to do either of these as it would cut against his narrative of “fixing the country”. The result was the worst of both worlds.

The writer does admit that “ever more of the output lost to the recession was written off as gone forever, making more of the deficit look structural. Mr Osborne could have got back on track by cutting spending more deeply or raising taxes. Instead, he quietly allowed the completion date to slip. As long as the job was still forecast to be completed five years in the future, he had not missed his main goal”.

The piece goes on to mention that “Beyond the protective “ring-fence” the coalition erected around the NHS, schools and international aid, departmental budgets have been slashed by 21% on average. Local government is getting by on two-thirds of its pre-austerity budget. Public-sector employment has fallen from 6.3m to 5.4m. Civil servants’ pay was frozen for three years and then rose by only 1%. The government saved about £25 billion from the welfare budget, mainly by limiting annual increases and means-testing child benefit, a previously universal handout. (Other welfare reforms grabbed headlines without saving much money.) But an ageing population and generous increases in the state pension—which accounts for 40% of the welfare budget—have offset these savings. Overall, welfare spending has barely changed since 2010”.
This means that the cuts inflicted were worst on areas like defence, where the UK still insists on thinking of itself as a great power when it is really nothing of the sort. The refusal to cut the international aid budget is laughable but seems to be based wholly on polling data. The refusal of both main parties to cut it and transfer the money to defence or have smaller cuts elsewhere has not been countenanced. At the same time the savage cuts to welfare and the refusal to tax the richest in society has made this “rebalancing” not only immoral but in the long run dangerous. It has transferred vast amounts of wealth to the richest in society in the wrong belief that it will “trickle down” and all of society will therefore somehow benefit.

The piece adds “If the Tories win, Mr Osborne must do it all again. Provided the recovery is sustained, the chancellor wants a £7 billion overall surplus by the end of the parliament in 2020. Current government plans imply a further cut of 16% to departments outside the ring-fence, according to the Institute for Fiscal Studies, a think-tank. That will be tough, for three reasons. First, the easiest cuts have been made. It is hard to see local government repeating the big savings made during this parliament, for example: councils will soon run up against their legal obligations to provide services. Reforms to university funding, which provided the bulk of the business department’s savings, were a one-off. Second, holding down public-sector salaries will become harder as private-sector pay rises. Third, the population is older and needier. The NHS says a freeze in its budget will not do—it wants an £8 billion boost”.

He goes on to note that “Labour promises only a surplus on the current budget, excluding investment—which on current plans will be £30 billion in today’s money (or 1.4% of GDP) in 2019-20. The party has not specified when exactly it would achieve this. By contrast, both coalition parties want current balance in 2017-18, which would demand deep cuts for two years. From then on, the Lib Dems would borrow about half the investment budget, putting them, as so often, in a middle ground. The SNP does not want to cut at all, and instead suggests a 0.5% annual boost to departments’ budgets. That would leave a small current budget deficit in 2020”.

The piece concludes “The gap between Labour and the Tories is huge—£30 billion amounts to about a quarter of the entire health budget. The IFS reckons Labour could, as a result, make no cuts and instead raise departmental budgets by 2%. The two parties have not been so far apart on fiscal policy for at least five elections. Labour does not emphasise this difference, for fear of looking spendthrift. But the choice facing voters is stark”.

Economist 2015:Economy


The Economist has published a series of reports on the UK general election which is to take place on 7th May. The piece begins “LISTEN to a Conservative politician for more than one minute and he or she is sure to utter the words “long-term economic plan”. The slogan is projected behind them when they give speeches and plastered across their campaign literature. It has been shoehorned into any number of policy announcements, no matter how uncomfortably. A scheme to give miscreant drivers 10 minutes’ grace before they are slapped with parking tickets, for example, was said to be part of a long-term economic plan. The phrase bores Tories to tears—yet it might win them the election. Just two and a half years elapsed between the run on Northern Rock bank, which marked the start of Britain’s financial crisis, and the formation of the coalition government in May 2010. In the meantime the economy took a huge hit. From the peak in early 2008 to the trough in 2009, GDP per person fell by 6.9%”.

The author notes “The new government promptly dedicated itself to fixing the resulting hole in the public finances (see article). But the big economic problem was weak demand. Fearing for their jobs, consumers were paying down debt rather than splashing out on new cars or televisions. Businesses were not investing. Unemployment rose to 8.5%—lower than in other wealthy countries, but still painfully high. And many of those in work had too little of it: part-time jobs and self-employment had replaced many full-time jobs. Then, just as things began to look up, the euro crisis crushed Britain’s biggest export market. By 2013 the IMF was complaining that Britain remained “a long way from a strong and sustainable recovery”. Moody’s, a credit-rating agency, downgraded the country’s debt from AAA to AA1, citing “continuing weakness” in growth. And the Labour Party, which had lost economic credibility during the financial crisis, began to close the gap with the Conservatives on economic competence”.

Predictably with the Economist everything and everyone is boiled down to numbers. The fact that the author tries to minimise the 8.5% unemployment figure shows where its priorities lie. The closeness of the Tories to the banking sector, having sold Northern Rock cheaply to Richard Branson and let the taxpayer taken the hit does little to help their economic reputation. At the same time the cuts they inflicted have been criticised on both the left and the right. The real point however was that it was the worst of both worlds. They did not commit fully to their (savage) cuts and have firm ideological principles, nor did they admit that their cutting was mitigated by massive borrowing. They had the worst of both worlds and now are only associated with cuts to the great annoyance of a raft of academic economists and many in the public.

The article chimes with the Tories excuse of blaming the euro zone crisis but the fact that they expected the economy to improve in time for the 2015 general election and held off shows that they are little more compentent than Labour. The veneer of competence given to them by being allied to the banking industry, that supports them heavily, shows their competence is really only a vested interest in the City of London at the expense of a more mature, rounded economics.

The author goes on “Then things began to turn round. The economy grew by 1.6% in 2013. The next year, growth accelerated to 2.8%—faster than any other member of the G7 group of rich countries. On the way Britain created a million net new jobs, taking the employment rate to its highest ever level, 73.3%, and unemployment back down to 5.7%. In January Christine Lagarde, head of the IMF, praised Britain’s leadership as “eloquent and convincing”. The recovery would appear to set the Conservatives on course to win the election. Voters often tell pollsters that they are most concerned about things like immigration and health care, but their behaviour suggests economics trumps such worries: Labour won big victories in the 2000s despite dire ratings on immigration, for example. And the public is crediting the Tories. David Cameron and George Osborne, the chancellor of the exchequer, have a 15- to 20-point lead on economic competence over Ed Miliband, Labour’s leader, and Ed Balls, his economics spokesman. But it is not as simple as that, because Britain’s recovery has been so joyless”.

Pointedly the author writes that “Real wages had already been falling for two years when Mr Osborne entered the Treasury. For most of the 2010-15 parliament they continued to decline. This was all the more painful because Britons had become accustomed to steady rises in living standards. From the turn of the millennium to the eve of the crash, real earnings had grown by an average of 2.6% per year. Since then they have fallen by an average of 1.2% a year, putting Britons through the longest period of real wage falls since records began in 1855, according to the Bank of England’s data”.

He notes “Much of this was caused by imported inflation. The tumble of the pound after the crisis made imports more costly, before energy and food prices soared in 2011-12. In the government’s first two years, inflation was more than a percentage point above its 2% target for 22 of 24 months. Little could be done about this: tighter monetary or fiscal policy would have strangled a weak economy and further pummeled wages”.

The piece does make the fair point that “Labour and the Conservatives go into this election talking across each other. The Conservatives argue that the economy is recovering. Labour says that households are struggling. Both are right. Yet this is something of a puzzle when one considers what has driven Britain’s growth over the past few years. A few years ago it was an article of faith among all the major parties that the economy would have to be sustained by something less gluttonous than consumer spending. There was talk of Britain paying its way in the world through stronger exports, and of a manufacturing revival. That has not happened. Instead, the recovery has been domestic. Since 2013 consumer spending has grown at a healthy annualised rate of 2%. Buoyed by the return of consumer confidence, firms have boosted investment in tandem”.

He does thankfully admit that “Another, classically British, stimulus kicked in at about the same time. House prices went up by 5.5% in 2013 and by another 9.8% in 2014. In crowded London they have risen by 27% in the last two years. This made household finances healthier and may have given consumers the confidence to open their wallets. The sober-headed will not celebrate that trend. Young people—nicknamed “generation rent”—find it ever harder to buy a home. To address this, in 2013 the coalition launched a scheme—named “help to buy”—to top up some mortgages with government loans and guarantee others. That, of course, probably pushed prices even higher. In his final budget, Mr Osborne announced subsidies for those saving for a first home. That would be likely to create still more demand. The fundamental problem is too few houses: in the decade to 2014 only 176,000 were built per year on average, when perhaps 240,000 were needed. Antiquated planning regulations constrain supply, especially in the prosperous south-east. Britons are ever more desperate to get on the housing ladder before it is pulled up out of reach. As a result, the Bank of England worries about a debt-fuelled bubble and in 2014 intervened in the mortgage market to curb excessive lending”.

In a damning indictment of the Tories he writes “Britain has returned to its old ways: growth has been led by consumers and fuelled by house-price increases. Net trade has in fact made a slightly negative contribution since 2009, as British firms have struggled to export to a Eurozone that is only starting to recover. British consumers, meanwhile, continue to import aplenty. This, together with a drying up of income on Britain’s overseas investments, has pushed the current-account deficit to fully 5.5% of GDP”.

He ends “A consumer-driven recovery is not necessarily a concern. There is nothing inherently good about exports or inherently bad about consumption. But in the long run, more household spending must be funded by wage rises, not declining saving or a boom in house prices. The next government’s main challenge will to boost productivity rather than demand. That will require careful thought, targeted investment, and an acknowledgment that cutting the budget deficit is not the be-all and end-all of economic policy”.

Labour seeks tax justice


As the 2015 UK general election continues it seems the voters have a stark choice. The Labour Party has said it will abolish the role that allows those that are not domiciled in the UK, and therefore pay no real taxes. The Tories meanwhile have said nothing about the patently immoral rule that benefits only the tiniest portion of the wealthiest.

A report from the Guardian notes “Labour has accused the Tories of deliberately misleading voters by editing an interview with Ed Balls as a row broke out over a pledge by Ed Miliband to abolish the non-domicile tax status for anyone living in Britain for more than three years. The Tories moved to unpick the announcement by the Labour leader by releasing a video of a BBC interview back in January in which the shadow chancellor said that abolishing non-dom status might lead to a fall in tax revenue. But the Tories edited out a crucial final sentence in which Balls told BBC Radio Leeds on 9 January: “But I think we can be tougher and we should be and we will.” Labour seized on the Tory editing of the Balls interview to accuse the Tories of misleading people to defend their refusal to tackle tax avoidance. The shadow chancellor blogged: “The Tories have edited my words from January in an attempt to deliberately mislead people because they can’t defend their own refusal to act on tax avoidance”.

Labour have a point. When the Tories should be agreeing with Labour to abolish this unjust and immoral rule that seeks to have people in London in the hope that their wealth would “trickle down” they in fact are more comfortable to play politics than seek the common good and protect those who do pay taxes and protect the poorest in society.

The report goes on to mention “The row has lit up Britain’s general election campaign after Miliband promised to abolish the non-dom rule, which allows many of Britain’s richest permanent residents to avoid paying tax in the UK on their worldwide income, for those who are based in Britain for more than two to three years. Labour said the rule, introduced by William Pitt the Younger in the late 18th century, has been open to abuse and offends the moral basis of taxation. Everyone who has made the UK their permanent home should pay full UK tax on all their income and gains, Miliband argued”.

The piece adds “George Osborne, conscious of poll findings that the Tories are seen as the party of the rich, realised overnight that he had to tread carefully in response to a Labour plan to crack down on multi-millionaires. Osborne therefore moved to unpick the announcement by saying that Labour was merely planning to tinker with the non-dom tax status on the grounds that the rule would remain in place for beneficiaries who stay in the UK for under two to three years. The Tories then released a video of the shadow chancellor’s January interview in which Balls suggested that abolishing the non-dom rule could lower tax revenues by encouraging some wealthy people to leave the UK. The edited video shows Balls saying: “I think that it is important that you make sure the non-dom rules work in a fair way. I think they were too lax in the past. Both the last Labour government and this Conservative government have tightened them up”.

In an attempt to defend these people who generally do not pay tax and yet use all the services in the UK some have argued that there will be a flight from the UK. However, this argument overlooks the obvious fact that they pay only £90,000 a year, at most, on an income that is millions a year. Whatever “loss” to the coffers of the state would be minimal as so little money is raised anyway. Labour should have launched this policy years ago but all the Tories could do was pick at a few words while avoiding the larger issue.

Germany needs to leave the euro


A piece  by Patrick Chovanec argues that Germany needs to leave the Eurozone.

It opens “Last year, Germany racked up a record trade surplus of 217 billion euros ($246 billion), second only to China in global export dominance. To some, this made Germany a bright spot in an otherwise anemic eurozone economy — a “growth driver,” as the German finance minister, Wolfgang Schäuble, puts it. In fact, Germany’s chronic trade surpluses lie at the heart of Europe’s problems; far from boosting the global economy, they are dragging it down. The best way to end this perverse situation is for Germany to leave the eurozone. Germans usually respond to such charges with a kind of hurt confusion. We run trade surpluses, they patiently explain, because we are simply much more competitive than most of our trading partners. Can you blame us, they ask, if the world prefers to buy superior German goods (and has nothing we want in return)? So goes the argument: The rest of the world just needs to up its game, get its house in order, and become a bit more like Germany”.

He goes on to make the valid argument that “Contrary to popular mythology, however, there’s absolutely no reason why being “competitive” should mean running a trade surplus. As far back as 1817, the economist David Ricardo pointed out that the optimal basis for trade is comparative, not absolute, advantage. In other words, even if a country is better at everything, it should export what it is best at, and import what it is less better at. Having an across-the-board advantage does not imply that it makes good economic sense to produce everything yourself, much less to sell more than you want in return”.

Here is yet another example of the supposedly rational market doing what is “best”. Germany, instead of doing what is rational (economically at least) and buying the products of others, seeks its own interest like a classical realist and embarks on a kind of self-sufficiency gone to extremes. Germany is happy to trade with the world, as long as it has no need to buy the products of other countries.

The writer adds, “Trade surpluses take place when a country chooses to spend less than it produces — when it has excess savings, beyond its domestic need for credit. It lends that excess savings abroad, financing another country’s ability to spend more than it produces and, by running a trade deficit, purchase the lender’s excess production. It’s true that a highly productive country might have the wherewithal to conjure up excess savings, while a less productive country might be inclined to borrow rather than scape up the savings it needs. But fundamentally, trade imbalances arise not from competitive advantage but from choices about how much to save, and where that savings should be deployed — at home or abroad”.

He goes on to argue that imbalances do make sense, “In the 19th century, Britain’s Industrial Revolution enabled it to reap vast earnings from expanded output, some of which it invested in the United States. The money lent to a rapidly growing American economy generated higher returns than it would have back home, while creating a market for British-made goods. The potential productivity gains made it a win-win: it made sense for the Americans to borrow, and for the British to lend. But the case also highlights something that’s easy to forget: running a trade surplus means financing someone else’s trade deficit.The eurozone crisis is often called a debt crisis. But, in fact, Europe as a whole did not have an external debt problem, but an internal one: German surpluses and mounting debt in Europe’s periphery were two sides of the same coin. Germans saved (a lot) and the single currency induced them — rather than save less or invest it at home — to lend it to their eurozone trading partners, who used the money to buy German goods”.

He mentions that “each country would pursue its own monetary policy, relying on exchange rate adjustments to shift the locus of demand from those who could not afford it to those who could. Under a single currency, though, this could not happen. Instead, Europe’s debtors were forced to slash demand, through a combination of fiscal austerity and debt deleveraging. Their trade deficits with Germany fell dramatically — but by buying less, not selling more. All of the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) saw their total trade with Germany shrink — in the case of Greece and Ireland, by more than one-third. So, to the extent Europe rebalanced, it did so at the cost of growth”.

He makes the simple point that “The eurozone was caught in a trap. Its countries needed to move in two separate directions, but under a single currency, they could only move in lockstep. A Europe that lived within its means meant a Germany that continued to save more than it spent, rather than driving much-needed demand. Thus came monetary easing — and a weaker euro — which merely redirected Europe’s internal imbalances outward”.

Now it is clearer than ever that the euro was a political project masked in economics and convenience. The people of the European continent were told they could move from Madrid to Brussels to Rome to Lisbon all in a single currency. Yet, the construction was so obviously flawed the EU elites were either incompentent, or wilfully malevolent. It is possible they were the former but probable they were the latter. They expected growth to keep going and an eventual currency union (and thus political union) to take place slowly, right under the eyes of the people of Europe.

He goes on to argue that “The best solution — and perhaps thus the least likely to be adopted — is for Germany to leave the euro, and let a reintroduced deutschmark appreciate. Here, the experience of the 1986 Plaza Accord offers some encouragement. While a stronger yen made barely a dent in Japan’s structural trade surplus, German behaviour proved far more responsive to the incentives embodied in a stronger mark. In the past year, German politicians have proven far more willing to try boosting demand by raising the minimum wage, cutting the retirement age, and increasing pensions — moves that may work, but risk harming productivity, which is ultimately the source of Germany’s capacity to consume. Perversely, those same politicians refuse to cut taxes or boost public spending, which in 2014 resulted in Germany posting its first balanced federal budget since 1969, a year earlier than planned”.

He ends “To most Germans, any suggestion that they should relax this fiscal discipline smacks of Greek-style profligacy, but there’s another way to think about it. The excess savings are already there; the only question is where to lend it. Borrowing it domestically to drive a genuine European recovery might be preferable to (once again) throwing it at foreigners to buy things they really can’t afford”.


End of the House of Borbon?


A misguided article posits the theory that the end of the Spanish monarchy is in sight.

It begins, “It seems highly plausible that the reign of Spain’s Felipe VI, who came to the throne last June, will be a blameless one. What also seems increasingly likely, however, is that it will be brief. Long before his father, Juan Carlos I, announced on June 2, 2014, his decision to abdicate, the royal family had fallen from grace in the eyes of most Spaniards. Once a source of unity in post-fascism Spain, the monarchy has now joined the mire of discredit in which the rest of the country’s political institutions find themselves. Today, the throne is in a crisis from which it may not be able to recover — and young King Felipe may be the one to pay the price”.

There are historical similarities to this case. Victor Emmanuel III of Italy did the same in a time of crisis and abdicated in favour of his son, Umberto II at the end of the war. However, it was too late and the monarchy was abolished just weeks later. Yet this anology is not accurate. Victor Emmanuel left it too late and thus doomed his son, and his House to abolition. Juan Carlos took a regrettable action but it may well have saved the House of Borbon. King Philip has cut spending and cut his own salary. He has taken action to reconnect with the Spanish people.

The writer adds “The throne’s fate hinges on the outcome of Spanish elections, scheduled to be held before the end of the year, either in November or December. Just as in Greece, where voters racked by years of stagnation and austerity policies placed a far-left party in power in recent elections, Spain, too, is poised for a dramatic leftward shift. The country’s economic crisis is entering a seventh year. The two major parties — the center-left Socialists (PSOE) and the center-right Popular Party (PP) — which have alternated in power since the end of the fascist era are, for the first time, facing a genuine challenge. A ragtag party started by leftist university lecturers only a year ago, called Podemos (“We Can”), is riding the surge of indignation to the top of the polls. A Podemos victory would be more than a challenge to austerity policies: If elected, Podemos is promising to stage a referendum on whether Spain — a monarchy since the country was unified in 1492, with the exception of two brief republics and a few decades under fascism — should have a king no more”.

Yet, Podemos has the support of people not because of its republicanism but because of its economic policies. The danger for Podemos is that they overplay their hand and focus on extraneous matters rather than important issues like the Spanish unemployment levels or dealing with Germany. The party, still young and full of anti-establishment vigour could be turned around and made to see sense. The monarchy is the only thing that is keeping modern Spain together.

He continues praising the new king, “Felipe, 47, is an earnest and well-prepared sovereign who speaks English, French, and Catalan and has a master’s degree in international relations from Georgetown. In his coronation speech, Felipe pledged a “new era for the monarchy” and, alongside his media-savvy wife, Queen Letizia, he has attempted to reshape the crown for a 21st-century Spain. One of his early official engagements as king, for instance, was holding a first-ever royal meeting in heavily Catholic Spain with representatives of the country’s gay and lesbian community. Felipe has also shown a particular sensitivity for the distinct nature of Catalonia as the region’s leaders continue their struggle to hold a binding referendum on independence, and he has drawn up an in-house code of transparency that will see the palace accounts fully opened to external scrutiny for the first time, through a government-led audit”.

The writer attempts to smear King Philip by association with his sister, “Even prior to the sudden rise of Podemos, the monarchy seemed headed for a breaking point. Central to the monarchy’s crisis are the troubles of Felipe’s elder sister, Cristina de Borbón, who has been embroiled in a major corruption scandal for the past three years and in December was ordered to stand trial for tax fraud. The king has kept his sibling at arm’s length, not once offering a word of public support. He even went so far as to banish her from his coronation day. But Cristina, who is currently sixth in line to the throne, is stubbornly refusing to fade quietly from the limelight. Her lawyers pestered the courts with spurious attempts to prevent her from being tried alongside her husband, Iñaki Urdangarin, the duke of Palma de Mallorca. Even now that all appeal options have run out, she is steadfastly ignoring a consensus among politicians and commentators of all stripes that she should at least renounce her right of succession. At this point, however, the final verdict and possible sentencing in Cristina’s trial will matter little. The damage has been done, and an institution which, since the end of fascism in Spain, has stood out as a rare source of solidarity and gravitas in Spain’s rambunctious political scene, is showing signs of rot”.

This is a short term view. The trail of Infanta Cristina should not blind Spaniards to the both the usefulness and need for the monarchy. The scandals of King Juan Carlos will soon be forgotten in light of the work he did to save Spanish democracy during the 1981 attempted coup.

He continues “Felipe is well aware of the problems his less principled family members present to his reign. In his second keynote speech as king, on Christmas Eve, he looked straight into the camera and intoned grimly, “We must not hesitate to cut corruption at its roots.” But it may be too late. At the same time that the embattled king found himself facing historically low approval ratings, the leaders of both of Spain’s traditionally dominant parties, the PP and the PSOE, were embroiled in their own respective corruption scandals. The PP was exposed when its former treasurer, now in jail, leaked ledgers in February 2013 showing an established regime of kickbacks and illegal financing implicating many of the party’s top brass, while the Socialists were mortified by the emergence in August that same year of a decades-old system of subsidy syphoning in the party’s fiefdom of Andalusia”.

The writer again places emphasis on Podemos and its popularity. Yet, the election is months away and much can happen between now and then, including Merkel seeing sense and attempting to defuse the crisis by assisting Spain before the election.

He charts the rise of Podemos “In the May 2014 European elections, a five-month-old Podemos took a startling 8 percent of the vote, while the PP and PSOE failed to garner 50 percent between them. (For the past 25 years, Spain’s dominant political parties had always accounted for over 70 percent of the vote in all national elections.) Under public pressure, a frail and exhausted Juan Carlos announced his decision to abdicate a week later. Even retirement has not spared the old king from scrutiny: Since he stepped down — and thus lost his full immunity from lawsuits and prosecutions — Spain’s Supreme Court has agreed to hear a paternity suit filed against the king by a Belgian woman born in 1966 who claims to be his daughter”.  

Interestingly he writes “A poll last June showed most Spaniards support the idea of a referendum on the crown, though the poll also suggested that Felipe might just survive the eventual decision. Asked late last year whether a Podemos government would call a referendum on the future of the Spanish monarchy, party leader Pablo Iglesias measured his reply with characteristic guile: ‘I wouldn’t ask a question about monarchy or republic, but rather whether in a normal democracy the head of state should be chosen on the basis of his blood or at the ballot box.’ Since its impressive showing in last year’s European elections, Podemos has continued its steady rise”.

He ends “Felipe VI’s best-case scenario may be a Socialist-led leftist government that shields the monarchy from the indignant masses while taking steps to root out corruption and ease the pain of social inequality. The king has shown his willingness to take action, even if this means freezing out members of his own family. But by this point, even the most dramatic royal gesture may not be enough to hold off the day of reckoning. The state may simply be too rotten to bear the stamp of a fine young king”.

“His sixth State of the Union”


President Obama, last night, delivered the State of the Union. Much of the speech was on the financial crisis with smaller amounts on foreign policy and then education.

A piece from the Washington Post notes that, “President Obama, who took office six years ago amid a historic recession and two U.S. wars, declared unequivocally Tuesday that the nation had clawed its way out of those dire straits, praising Americans for their resilience but also pointedly taking credit for leading the way. ‘America, for all that we’ve endured; for all the grit and hard work required to come back; for all the tasks that lie ahead, know this: The shadow of crisis has passed,’ Obama said in his sixth State of the Union address to the nation and a joint session of Congress in the House chamber. After years of fighting with Republicans over where to take the country, Obama delivered an hour-long defense of his policies that at times sounded like a victory lap. He asserted that the brightening economic picture — including accelerating job growth, more people with health insurance and lower gas prices — had proved that he was right, and his adversaries misguided, all along”.

The report goes on to make the point that “The president had been cautious over the past two years not to gloat over news of fitful economic growth, mindful that the economy remained tenuous and public confidence uneasy. But with the jobless rate well below 6 percent, the stock market nearing record highs and his job-approval ratings rebounding, Obama on Tuesday night dropped his veneer of reserve and appeared to delight in having proved his critics wrong”.

The piece adds that “Obama chided Republicans to help improve Washington’s political discourse. He harked back to the themes of national unity that helped him get elected in the first place in 2008 and called for more bipartisan cooperation on key issues. But in doing so, Obama also served to remind the GOP of the reasons their relationship is so fraught — pausing at one point from his prepared text to deliver a spontaneous, and quite partisan, barb. When Republicans jokingly applauded after Obama noted that he had run his last campaign, the president quipped: “I know because I won both of them.” Obama took the spotlight in front of Vice President Biden and House Speaker John A. Boehner (R-Ohio) intent on proving that he would remain relevant in the final quarter of his presidency as the race to replace him next year begins”.

This is one of the key problems not just with the GOP. The paper is quite right to point out the desire of Obama to be bipartisan. However, it was the GOP that gave President Obama the opportunity to make his immature comment. If they had not applauded the remark would probably not have been said. Instead, the GOP look childish and partisan as does Obama for stooping to their level. Both need to grow up.

The article goes on to mention that “Just two months after Democrats suffered a severe blow in the midterm elections, when voters handed control of both chambers to the GOP for the first time during his tenure, Obama’s speech came amid warnings from Republicans to avoid divisive rhetoric and policies. ‘Tonight isn’t about the president’s legacy. It’s about the people’s priorities,’ Boehner said in a video posted to YouTube on Tuesday. ‘Making the government bigger isn’t going to help the middle class. More growth and more opportunity will help the middle class, and those are the Republican priorities.’ But Obama had told allies that he would not kowtow to GOP demands despite the party’s new majorities. The president announced early in his speech that he would focus less on the usual laundry list of new proposals — the White House had revealed most of them ahead of time — and instead focus on the ‘values at stake’ for the American people moving forward”.

The piece notes that “Obama laid out proposals to revamp the tax code by raising taxes and fees on the wealthiest Americans and largest financial institutions — and using the money to pay for free tuition for two years of community college and for a $500 tax credit for married couples in which both spouses have jobs. Though the White House knew the ideas have a slim chance of being approved by lawmakers, the point was to start a debate on Obama’s terms. And the president and his advisers were determined to begin to frame his legacy as having delivered on his promise to improve the lives of ordinary Americans”.

Naturally none of these will be passed, which is a great pity, but it is as much legacy building as setting the ground for his successor, most likely Clinton in 2016.

The report adds that “On foreign policy, Obama sought to build on the idea, first enunciated during a lengthy speech at West Point last spring, of a ‘smarter kind of American leadership’ in which the United States balances military intervention with diplomacy and coalition-building. Obama has made the case in recent weeks, as he marked the end of U.S. combat operations in Afghanistan, that the nation is safer after more than a decade of combat abroad — even though he authorized renewed U.S. military operations in Iraq and Syria to combat the Islamic State militant group. American leadership ‘is stopping ISIL’s advance,’ Obama said, using an acronym for the group. But such a declaration seemed premature, set against images Tuesday of two orange-clad Japanese hostages kneeling in the desert before a black-robed militant”.

This is where reality and President Obama diverge. His desire for a smarter leadership is commendable but it is increasingly looking like a half baked isolationism, at least when it comes to the Middle East. This means that it is the worst of both worlds. Obama neither has the satisfaction of ignoring the problem, yet nor has he the courage of giving it his full attention. It is true that the advance of ISIS has been stopped but they still hold territory and the airstrikes have not been successful in rolling back their gains.

The article continued, “Obama was determined to project an optimistic view of the nation’s future, and he maintained faith that the country could rise above its divisions. He alluded to his own diverse upbringing in Hawaii and Chicago and cited his keynote address as an Illinois state senator at the 2004 Democratic National Convention, which launched him on the national political radar as a bright young prospect for higher office. ‘A better politics isn’t one where Democrats abandon their agenda or Republicans simply embrace mine,’ Obama said Tuesday. ‘A better politics is one where we appeal to each other’s basic decency instead of our basest fears.’ The president acknowledged that he had heard the political pundits declare since he took office six years ago that he had failed to make good on his vision at a time when ‘our politics seems more divided than ever. It’s held up as proof not just of my own flaws — of which there are many — but also as proof that the vision itself is misguided, and naive.’ To the contrary, Obama insisted, as he pledged to keep working to change Washington, even as he was, in many ways, declaring victory over his rivals”.
In a related article the confidence of Obama is noted, “Seventy seven days ago, Barack Obama’s party lost control of Congress — largely due to his unpopularity nationwide. You’d have never known it watching the president deliver his sixth State of the Union address to a joint session of Congress Tuesday night. From start to finish, Obama was supremely confident, challenging — and mocking — Republicans at every turn. Touting the turnaround of the economy, Obama turned to Republicans, who, in classic State of the Union symbolism, had refused to deliver a standing ovation, and joked “That’s good news, people.” On Cuba, Obama challenged those who disagreed with his Administration policies; “When what you’re doing doesn’t work for fifty years, it’s time to try something new,” he said”.

It goes on to mention “more than the words on the page, it was Obama’s tone and overall demeanor that absolutely oozed confidence. He winked. He laughed at his own jokes. And he ad-libbed. Repeating his “I’ve run my last campaign” line, Obama was clearly irked by the sarcastic applause from Republicans in the audience. “I know because I won both of them,” he added, in a rare moment of candour”.

It adds “Obama is quite clearly feeling a renewed sense of purpose and mission — bolstered by the strengthening economy and poll numbers that reflect that growing confidence from the American public. This was the same Obama on display in his end-of-the-year press conference. Supremely confident in his own views, largely dismissive of his Republican critics”.

Welby poses some questions


An article in the Daily Telegraph has reported on a new book launched as the 2015 General Election campaign begins, informally at least.

The piece starts “Britain under the Coalition is a country in which the poor are being “left behind” and entire cities “cast aside” because politicians are obsessed with Middle England, the Church of England says today in a damning assessment of the state of the nation. In a direct and unapologetically “political” intervention timed for the beginning of the General Election campaign, the Archbishops of Canterbury and York, warn party leaders are selling a “lie” that economic growth is the answer to Britain’s social problems”.

Yet the same newspaper defends the fact that the Church of England is a state church. At the same time they moan that the Church of England has a voice in politics. Which is it to be? The other alternative interpretation is that they are against those with religious views having a say in the public sphere at all.

The real reason for the paper’s reaction was the questioning by the Church of England of a bankrupt economic theory that has destroyed the world and brought misery to millions, while making a small elite even wealthier. This is the true reason for the reaction of the paper to the comments by the bishops.

The report goes on to note that the prelates were “Questioning David Cameron’s slogan “we’re all in this together” they condemn inequality as “evil” and dismiss the assumption that the value of communities is in their economic output as a “sin”. Britain, they argue has been “dominated” by “rampant consumerism and individualism” since the Thatcher era, while the Christian values of solidarity and selflessness have been supplanted by a new secular creed of “every person for themselves”. And while London and the South East forge ahead, much of the rest of the country is still “trapped in apparently inevitable decline”, they argue”.

It is true that the South East has been almost recession proof, apart from the parts that are already deprived which will soon be filled with wealthy people and push those who have been living there for years out, but this is not the fault of Cameron per se but is more down to geography and other long held factors that he has chosen not to fix. In reality the point of the bishops is correct. A toxic individualism has prevailed and is bearing its rotten fruit in the form of societal decay and sin.

The piece adds that “The challenge to politicians and voters alike is contained in a new volume of essays to be published next week, edited by the Archbishop of York, Dr John Sentamu, and including lengthy contributions from the Archbishop of Canterbury, the Most Rev Justin Welby, the former Labour Cabinet minister Lord Adonis and others. It sets out an excoriating critique of a country “ill at ease with itself” amid a widening “gulf” between rich and poor, between the capital and the rest of the country and between politicians and voters. The book, entitled “On Rock or Sand?”, explicitly invites comparisons with Faith in the City, the Church of England report published 30 years ago which was attacked by Conservatives as “pure Marxist theology””.

Yet this is exactly the kind of thing Rush Limbaugh said about Pope Francis. All this has done however is made fools of those who attack the Gospel and its values while they try and defend greed, sin, gross inequality, materialism and excess.

The article ends “The book characterises the welfare state as the embodiment of the Christian command to “love thy neighbour” and warns that people should not rely on what the founding father of free-market capitalism Adam Smith called the “invisible hand” of the market to create a fair society”.

It closes “Archbishop Welby provides a bleak assessment of the economic recovery in Britain claiming that “entire towns and regions” have been excluded and “trapped in an apparently inescapable economic downward spiral”. “Our economy appears to be, in one sense, a tale of two cities – one being a growing and constantly improving London (and the South East generally), and the other being most, but not all, other cities, alike in that they are each trapped in apparently inevitable decline,” he writes. Spending cuts have, he adds, helped widen that gap. “The hard truth is that many of these cities are in what appear to be lose-lose situations”.

The report concludes “But the archbishops go on to reject what they characterise as an obsession with economic growth as the solution to social problems. “There is a general social assumption that the economy has the power to dictate what is and is not possible for human beings,” Archbishop Welby writes. “We believe that if we can fix the economy, the fixing of human beings will automatically follow. “That is a lie. “It is a lie because it is a narrative that casts money, rather than humanity, as the protagonist of God’s story.” Dr Sentamu adds that a post-war vision through which the welfare state and NHS developed has “given way to an individualist and consumerist vision, with public goods such as health … and education … increasingly becoming privatised, where society has become a market society, with everything going to the highest bidder and the poor being left behind in the unceasing drive to increase the nation’s Gross Domestic Product.” Setting out his own vision, Archbishop Welby adds: “Our human journey is not a journey of individuals, it is a journey held in common, and no individual can safely be left behind”.

In a related article, though hardly a surprise, David Cameron defends a system based on radical inequality, mass poverty, unemployment, deprivation and greed, “David Cameron has said that he “profoundly disagrees” with the leaders of the Church of England after they accused the Coalition of creating a country in which the poor are being “left behind”. The Prime Minister pledged to speak “vigorously in defence” of his Government’s economic record after the Archbishops of Canterbury and York accused him and Britain’s other political leaders of selling a “lie” that economic growth is the answer to social problems”.

The sad fact is that all the figures say that Cameron is wrong. They all point to the fact that poverty levels are rising and people are being punished for being poor with all the ignorance that comes with this. They are accused of being lazy but politicians in safe seats with half a dozen directorships to top up their income are in no way fit to judge in such harsh terms the lives of others.

The report mentions that “Cameron insisted that the Coalition has is successfully tackling poverty and that improving people’s lives across the country can only be done when the economy is strong. He said: “Also, we are tackling poverty by giving 1.75million more people a job in our country. Actually under this Government inequality has fallen so I don’t think the picture they paint is accurate. “I look forward to debating and discussing it with them. They have a right to speak out as long as they don’t mind when I speak pretty vigorously in defence of the excellent economic and social record of this government. “The fact is you can’t do any of these things in terms of tackling poverty, growing opportunity, rebalancing the economy unless you have a strong economy and we have restored or are restoring the strength of the British economy.” The Archbishops said that Britain has been “dominated” by “rampant consumerism and individualism” since the Thatcher era”.

“A different kind of slowdown”


Simon Cox argues that the lower growth rates in China are far below the expectations of the CCP.

He starts, “China’s economy must become more innovative, Its leaders insist. But the same is not true of its economic slogans, it seems. If anything, they are becoming more derivative. Over the last few months, China’s officials have referred relentlessly to the “new normal,” an economic catchphrase that is as fresh as the air in as the air in Hebei. The term was popularized back in 2009 by Mohamed El-Erian, the former CEO of Pimco (and who once had a regular column in Foreign Policy called “The New New Normal”). He used it to describe the world’s feeble recovery from the global financial crisis, which, he feared, would inflict lasting economic damage, even after calm returned to the financial markets”.

He goes on to write “El-Erian was more optimistic about the big emerging economies. The only one to repay that confidence fully was China. Thanks to a (much-maligned) stimulus effort, its economy grew by over 9 percent in 2009, according to the country’s National Bureau of Statistics (NBS), and by double digits the following year. The financial shock in September 2008 made a mockery of most pre-crisis predictions. But China’s economy managed to live up to people’s prelapsarian hopes. Its 2013 GDP turned out to be bigger than the International Monetary Fund had predicted it would be in its pre-crisis April 2008 forecast. No member of the G7 can say the same. Having escaped El-Erian’s new normal, why are China’s leaders now embracing the term? In their distinctive usage, it describes a different kind of slowdown”.

Crucially he adds that “China’s underlying rate of growth is easing not because of a financial disaster, but because of three deeper trends. Its population is aging (the cohort that will turn 16 over the next five years is 15 percent smaller than the cohort that will turn 60, according to the census), its economy is maturing (services, which are 20 percent more labor-intensive than industry, now account for a bigger share of its GDP, according to the NBS) and the aspirations of its citizenry are broadening, encompassing safer food and cleaner air, as well as higher incomes. China’s leaders in Beijing seem to accept this slowdown. In describing it as “normal” (albeit new), they imply that it is here to stay and nothing much to worry about. China need not grow as fast as it did to maintain high employment, which is Beijing’s chief concern, and it cannot grow as fast as it did, if the environment is to improve”.

He mentions “Policymakers in Seoul were faced with a secular slowdown, which they misinterpreted as a cyclical dip. Their efforts to keep growth unsustainably high only made things worse, culminating in a crisis and crunching recession eight years later. That was a macroeconomic blunder. It is, however, possible to make the opposite mistake. It is possible to misinterpret cyclical weakness as structural decline. Slowing growth, after all, can have many causes. It can reflect inadequate demand as well as flagging supply, fading animal spirits as well as diminishing productive powers. The economic engine can suffer from a lack of gas, as well as a lack of capacity”.

Yet there is some uncertainty that the CCP will assume the economy has “structural decline”. Having been listening for nearly a decade of those predicating “American decline” the most likely path they will take is an overcorrection.

He goes on to argue “If, on the other hand, growth ebbs and inflation does the same, the slowdown could represent something else: a cyclical lack of demand. Downward price pressure is a sign that spending is too weak to keep the economy operating at full capacity. China’s slowdown is a mixture of both, it seems to me. Its growth is falling short of its natural, warranted rate, which is itself slowing. This weakness is increasingly evident in its inflation figures: consumer-price inflation has remained below the government’s target for almost three years, according to the NBS, which also reports that producer prices fell by as much as 3.3 percent in December compared with a year earlier”.

Interestingly he continues “The chief economist of China’s central bank, Ma Jun, has forecast that the economy will grow by 7.1 percent this year. But, as he and his colleagues acknowledge, that will not be enough to reflate the economy. He foresees a further 0.4 percent fall in producer prices in 2015. A year ago, in his previous role at Deutsche Bank, Ma argued that China would have to grow as fast as 8.5 percent to stabilize producer-price inflation at a more reasonable range of 2 percent. Critics of Beijing’s economic stewardship argue that this decline in producer prices is itself structural. It is, indeed, a delayed consequence of China’s stimulus efforts after the financial crisis. That investment spree made wasteful additions to capacity in property, coal, steel, aluminum, and other industries”.

He ends “This easy money would allow other parts of the economy to expand, buoying prices in those sectors even as steel prices fall. For China’s critics, stimulus is often characterized as a clumsy communist maneuver, dragooning the economy into a Soviet-style growth drive. But this kind of easing is really just textbook macroeconomic management. Beijing, in my view, is right to embrace its “new normal” of slower trend growth. But falling prices suggest it is also facing something worse: a new subnormal of below-trend growth. That is worth resisting by stimulating demand (especially consumer spending). China’s growth rate must slow by as much as the arithmetic of population and productivity dictates. But by no more than that”.


A very German protest party


A piece in Foreign Affairs by Paul Hockenos discusses AfD.

He begins “For years, Germany has enjoyed the noble distinction of being the only major European country without a significant right-wing, anti-euro party. But far from celebrating their country’s sudden status as the continent’s exemplary democracy, many German observers suffered from a certain degree of angst. It was only a matter of time, they believed, before a talented populist—someone charismatic, highly educated, and professionally accomplished—found a formula that appealed to the German public. After all, surveys have consistently shown that Germans are just as likely to harbour EU-antagonistic, foreigner-unfriendly, and Islamophobic sentiments as their counterparts in the Netherlands, Scandinavia, and elsewhere in Europe, where right-wing parties regularly capture up to a quarter of the vote—and even join coalition governments. Those premonitions have now been fulfilled”.

In some ways, while many rightly celebrate German democracy, it is somewhat of a relief that a party like AfD has come to the fore. Now Germany must prove it is a mature democracy and answer the concerns expressed by the party and not by dismissive of them and those who vote for it. If it does this then there will not only be a weakening of support for AfD but at the same time the EU will be a stronger, more coherent and stable grouping of independent countries. If on the other hand, the German elite and Dr Merkel either belittle AfD or ignore it, the former being the far worse in the short term, then this same elite will only get what it deserves. Support for this new party will grow, only partly as a result of its platform. Others will vote for it because they see the CDU/CSU and the SDP as being unable to meet their needs or being unable to represent them. Then the movement will become larger an perhaps worse.

The writer goes on to note “The Alternative for Germany (AfD) burst onto Germany’s political stage this year by winning ten percent of the vote or slightly more in three regional elections in eastern Germany and seven percent in the EU parliament election this spring. Founded in 2013, the AfD now regularly polls over ten percent in country-wide surveys, even though it has yet to breach the Bundestag. (In last year’s national election, it barely missed clearing the five-percent hurdle to enter parliament.) It’s clear that the phenomenon of the AfD isn’t a flash-in-the-pan. It may never govern directly, but is sure to have a profound impact on German politics”.

He gives important background, “The party owes its breakthrough to its unlikely leader, Bernd Lucke. Lucke—a squeaky-clean 52-year-old father of five and professor of economics from Hamburg—has managed to articulate a style of national populism perfectly suited to the constraints of German politics. He has positioned the AfD to the right of Chancellor Angela Merkel’s center-right Christian Democrats and at the same time kept the party at a long arm’s length from the sort of crude nationalism”.

Thus, AfD is a very German protest party. They do not imitate Nigel Farage and UKIP, they avoid all talk of nationalism and they are very serious about policy. It would be unlikely for an English or American party to be founded, let alone run by an economic professor.

To reinforce this point the writer adds that the “AfD, by contrast, has decorated its frontline with one-time members of the German political establishment who say old-fashioned fiscal conservatism is their passion. One of Lucke’s most-prominent backers is Hans-Olaf Henkel, a former IBM executive, one-time director of Germany’s powerful Federation of German Industries, and current member of the pro-business Free Democratic Party (FDP). A handful of other respectable, experienced politicians—including a number of familiar faces from the Christian Democrats—have pledged their support to Lucke”.

Importantly he continues “The AfD’s central argument is that Germany has been a clear victim of the euro crisis, compelled against its will—and all common sense—to continually bail out debt-strapped southern Europeans. The architects of the euro-crisis fixes duped the German public, making it pay for the sins of the free-spending southern Europeans. The only responsible policy for maintaining Germany’s long-term competitiveness on the global market is to push for the dismantling of the eurozone and, eventually perhaps, the reinstatement of the deutschmark. AfD officials admit that for southern Europeans, the common currency has been even more catastrophic”.

Yet, it is vital to note that the same German obsession with legalism in evident in AfD, who see the problem with the bailouts as being as much a legal problem, breaking the Maastricht Treaty, then any economic theory. This results in the odd situation where they are against the bailouts but also for a smaller Eurozone with just a core of northern European countries as members. Though in reality the end result of this would be the end of the euro in toto.

The author mentions that “AfD does not fulminate against the EU as such or Germany’s membership in it. But the party certainly envisions a Germany that sheds its longstanding postwar strategy of serving as a humble, selfless guarantor of European unity and embraces its own self-interest. The party believes that Germany should no longer ignore its immediate needs for the sake of a common European project”.

Naturally, what has happened is that Germany has done what suits itself but has done the bare minimum in keeping the EU together, leading to neither party being wholly satisfied.

Interestingly he writes “Germany-first fiscal policies alone can’t account for the party’s success. Indeed, as a single-issue party, the AfD initially got off to a slow start. It wasn’t until the group broadened its scope and adopted an anti-immigrant, law-and-order, and Islamophobic agenda that it began to garner support. Party officials recognised that Merkel’s modernising reforms within her own party—including the abolishment of military conscription, the embrace of some equal protections for gays and lesbians, support for a minimum wage, the abandonment of nuclear power, and outreach to Muslims in Germany—left many traditional social conservatives searching for an alternative”.

He notes “Germany’s next regional vote is in early 2015 in Hamburg. If the AfD’s rise continues unabated, Germany’s political playing field will be significantly transformed—with implications for all of Europe. For one, Merkel’s party will have to move boldly to the right to recapture the voters it has lost. Until now, it has tried to portray the AfD as beyond the pale—Finance Minister Wolfgang Schäuble has lashed out at the AfD for propagating xenophobia, dishonestly deploying crime statistics, and denigrating the EU’s internally open borders—but that strategy hasn’t worked. At the least, the AfD’s rise may force Merkel to abandon any attempts to pursue desperately needed immigration reform”.

He ends “In fact, the Christian Democrats, who have ruled out forming a coalition with the AfD, might be left without a future coalition partner at all. Their partner of choice had long been the FDP, with whom they governed during much of the 1980s and 1990s and even as recently as 2009–13. But the FDP, which was on the ropes even before the AfD came along, is now facing an existential crisis, after struggling repeatedly to clear the five-percent hurdle to qualify for national and state parliaments. The rise of the AfD surely hammers another nail or two into its coffin, leaving the Christian Democrats and the AfD as the only viable parties on the right side of Germany’s political landscape. Merkel’s only available partner is thus the Social Democrats, in the form of a grand coalition like the one now governing in Berlin. But that would designate the SPD as the country’s new political kingmaker, giving it the option of forming future coalitions with either the Christian Democrats, or with the Greens and the Left Party. This latter constellation recently announced its first regional government in the southeastern state of Thuringia, where the Christian Democrats, despite receiving by far the most votes, were snubbed by the much-weaker SPD. The Social Democrats felt they were offered a better deal on the left—and took it”.

“Pessimism and widespread hostility toward the euro”


With the impending Greek elections  some have been discussing the possibility of the exit of Greece from the Eurozone, others have been questioning this assumption. In a piece in Foreign Policy an article raises the problem of Italy.

He opens “As the new year begins to unfold, political instability coupled with ingrained economic malaise is likely to conjure up a perfect storm in the eurozone. If 2014 was the year when the world pretended to ignore Europe’s problems, 2015 will be when Europe hits the headlines again. And the euro will be at the center of it all. Hostility towards the euro is on the rise in the countries that have been severely affected by the continent’s economic and financial crisis. In Italy, only 54 percent of people surveyed in the latest Eurobarometer poll support Europe’s single currency. In Cyprus, only 51 percent do. And in Portugal and Greece as many as 35 percent would like to scrap the euro altogether”.

He makes the point that “In Italy, the Northern League and the Five-Star Movement, both openly anti-euro, together hold about 30 percent of the votes. In Greece, Syriza, the party that is due to win the snap general election at the end of this month, is prepared to live with the euro, but advocates a radical change in the economic policies that underpin Europe’s monetary union”.

He goes on to note “Having moved in synch with the euro area during the crisis years from 2008 to 2010, since 2011 the United States has been growing steadily. In 2014, the U.S. economy expanded at 2.2 percent — a good performance relative to that of other advanced economies — and is expected to hit 3.1 percent this year. The eurozone’s GDP, by contrast, will grow by 1.3 percent this year, from 0.8 percent in 2014. But even this modest growth is far from certain. In its latest World Economic Outlook, the International Monetary Fund suggests that the euro area faces a 40 percent chance of returning to recession in 2015 and a 30 percent chance of deflation”.

This however is not to be seen as a justification for the brand of economics that has been wholly discredited and was largely adopted not just in America but whole swathes of the European continent. Indeed it was the US system where the current crisis began when, in a desire for ever greater profits irrespective of the social costs, worthless debt was graded at the highest grade. The fact that the United States is growing again is certainly welcome but should not be taken as a sign that it is the economic model to follow.

The writer continues, “Across the eurozone, the unemployment rate stands at approximately 10 percent, with peaks of almost 13 and 26 percent in Italy and Greece, respectively. For the respondents to the Eurobarometer, unemployment is by far the most pressing concern (45 percent) followed by the economic situation (23 percent). Yet more worrying is the sense that there is no improvement down the road: 45 percent of people in the Eurobarometer survey do not expect any significant economic recovery. Economic malaise is now so deeply rooted in some areas of Europe that rekindle domestic demand has become almost a titanic task”.

He rightly asks “Should we be worried? Deep-seated pessimism and widespread hostility toward the euro could produce a potentially destabilizing mix in both Italy and Greece, where political restlessness could spill over into the economy and seriously undermine Europe’s monetary union. In both countries, the forthcoming elections of heads of state have opened a number of uncertain scenarios. The likely victory of Syriza will push Greece to renegotiate the terms of its bailout. In Italy, Matteo Renzi, the prime minister, needs all help he can possibly get to elect the new president, and he may be tempted to promise a dilution of fiscal discipline for support to ease this process. But, with Italy’s debt at more than 132 percent of GDP and the deficit close to the 3 percent threshold, any suggestion for more flexible fiscal adjustment will fall on deaf ears in Germany”.

He concludes “Italy is the country that will determine the future of Europe’s single currency. Popular discontent is directly correlated with prolonged economic problems. The current recipe does not work and continuing to ignore the evidence is unwise and potentially very disruptive. But for Germany and other member states, tough fiscal rules are the only way to frame unpredictable domestic politics. Political stability and institutional regeneration are therefore essential to put Italy’s economy back on track”.