The True Cost of Trade Embargoes/Sanctions!

 

BREXIT - The Great Taboo in British Politics

George Parker and Chris Giles in The FT

As he battled to save his job this month, Boris Johnson warned his MPs not get into “some hellish, Groundhog Day debate about the merits of belonging to the single market”. Brexit, he warned his mutinous party in a sweaty House of Commons meeting room, was settled. 

Later that day, Johnson limped to victory in a confidence vote, but only after 41 per cent of his MPs had voted to oust him from Downing Street. He is safe for now but the defining project of his premiership — Brexit — still hangs like a cloud over Britain’s fragile economy. 

Johnson may not want his party “relitigating” Brexit but neither does Sir Keir Starmer, leader of the opposition Labour party, around a third of whose supporters voted Leave in the 2016 referendum. Nor does Andrew Bailey, governor of the Bank of England. Rishi Sunak, the chancellor, would rather talk about something else. Brexit has become the great British taboo. 

But as the sixth anniversary of the UK’s vote to leave the EU approaches, economists are starting to quantify the damage caused by the erection of trade barriers with its biggest market, separating the “Brexit effect” from the damage caused by the Covid-19 pandemic. They conclude that the damage is real and it is not over yet. 

The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic; business investment, seen by Johnson and Sunak as the panacea to a poor growth rate, trails other industrialised countries, in spite of lavish Treasury tax breaks to try to drive it up. Next year, according to the OECD think-tank, the UK will have the lowest growth in the G20, apart from sanctioned Russia. 

The Office for Budget Responsibility, the official British forecaster, has seen no reason to change its prediction, first made in March 2020, that Brexit would ultimately reduce productivity and UK gross domestic product by 4 per cent compared with a world where the country remained inside the EU. It says that a little over half of that damage has yet to occur. 

That level of decline, worth about £100bn a year in lost output, would result in lost revenues for the Treasury of roughly £40bn a year. That is £40bn that might have been available to the beleaguered Johnson for the radical tax cuts demanded by the Tory right — the equivalent of 6p off the 20p in the pound basic rate of income tax. 

Despite these sobering figures, Johnson’s complaints about the prospect of “relitigating” Brexit was exaggerated, intended to portray himself as the victim of a putative plot by pro-Remain MPs. In fact, British politicians — and the wider country — are still traumatised by the bitter Brexit saga, and deeply unwilling to revisit it. 

Still, this month has seen the first stirrings of a debate that until now has been buried as the evidence of Brexit-induced economic self-harm starts to pile up. Few are talking about reversing Brexit altogether, but another question is being asked: should the UK start to explore with Brussels ways of softening its edges? 

Show, don’t tell 

Downing Street insisted this week it was “too early to pass judgment” on whether Brexit was having a negative impact on the economy, which could be heading into a recession. “The opportunities Brexit provides will be a boon to the UK economy in the long run,” Johnson’s spokesman said. 

Both Johnson and Sunak insist that it is hard at this stage to separate Brexit’s economic impact from the shock of Covid. In the meantime, the prime minister promotes the “benefits of Brexit”, such as new trade agreements with Australia and New Zealand and the freedom for the UK to set its own rules. 

Sunak has promised a reform of rules in the City of London, including reforming the EU’s Solvency II rules to allow insurers to spend more money on infrastructure projects. He has announced eight new freeports with special tax privileges. 

But economists have not yet been able to find any significant positive impacts of these policies. Some, including Johnson’s patriotic promise to put a “crown stamp” on pint glasses in pubs and to allow traders to sell their wares in pounds and ounces, are primarily symbolic. 

Critics of government Brexit policy are routinely derided. Suella Braverman, attorney-general, last week accused the ITV presenter Robert Peston of “Remainiac make-believe” after he challenged her over the government’s unilateral plan to rip up the Brexit treaty relating to Northern Ireland. Braverman claimed the so-called Northern Ireland protocol had left the region “lagging behind the rest of the UK”. In fact, Northern Ireland (the only area of the UK to remain in the EU’s single market for goods) is the best performing part of the country, apart from London. 

When Bailey appeared before the House of Commons treasury committee in mid May, the BoE governor acknowledged that his predecessor Mark Carney had made himself “unpopular” for saying Brexit would have a negative effect on trade, but that the bank held to that view. 

Kevin Hollinrake, a Tory member of the committee, says Bailey was trying to avoid becoming a political target and was “deliberately avoiding” talking about Brexit. “It’s a singular issue for the UK,” the MP says. “We have changed our immigration rules. It’s about non-tariff barriers. You’ve got to be willing to look at what’s happening on the ground.” 

While some gloomy predictions have failed to materialise, such as former chancellor George Osborne’s 2016 warning of a recession immediately after a Leave vote, there is growing evidence that Brexit is causing more lasting damage to UK economic prospects. 

Ministers are becoming more reluctant to proclaim the economic upsides of Brexit. Kwasi Kwarteng, business secretary, was asked last week at the FT Global Boardroom to list some Brexit benefits. He focused on the UK’s ability to respond swiftly to Russian aggression in Ukraine — “it has substantial benefits particularly in international policy” — rather than on business. Sunak’s allies say the chancellor’s approach is to “show, not tell” on Brexit, pushing through City regulatory reforms rather than giving boosterish speeches on its economic merits. 

The fallout in data 

The first and most obvious economic blow delivered by Brexit came when sterling fell almost 10 per cent after the referendum in June 2016, against currencies that match the UK’s pattern of imports. It did not recover. This sharp depreciation was not followed by a boom in exports as UK goods and services became cheaper on global markets, but it did raise the price of imports and pushed up inflation. 

By June 2018, a team of academic economists at the Centre for Economic Policy Research calculated that there had been a Brexit inflation effect, raising consumer prices by 2.9 per cent, with no corresponding increase in wages. 

Some households, such as those relying on state pensions, were compensated in higher benefits, but the CEPR team found no overall offset with higher incomes. “The Brexit vote delivered a swift negative shock to UK living standards,” they wrote. 

While the UK was still in the EU and during the Brexit “transition phase”, there were no significant effects on trade flows. But this has changed since stricter border controls were introduced at the start of 2021, imposing no tariffs, but significant checks and controls at the formerly frictionless border. 

Economists have used this point in time to contrast how the UK’s trade performance compares with those of other countries before and after the TCA’s imposition. The results have been increasingly ugly, especially for small companies trading with Europe. 

Red tape caused a “steep decline” in the number of trading relationships after January 2021, according to a study by the Centre for Economic Performance at the London School of Economics. The number of buyer-seller relationships fell by almost one-third, it found. 

The same group found food prices had risen as a result of Brexit. Comparing the prices of imported food such as pork, tomatoes and jam, which predominantly came from the EU, with those that came from further afield such as tuna and pineapples, it found a substantial Brexit effect. “Brexit increased average food prices by about 6 per cent over 2020 and 2021,” according to the research. 

Summing up the effects on trade in which imports from the EU have fallen while exports have not risen, Adam Posen, head of the Peterson Institute of International Economics, says “everybody else sees a recovery in trade following Covid and the UK sits flat”. 

The third visible effect of Brexit on the UK economy has been in discouraging business investment. In the first quarter of 2022, real business investment was 9.4 per cent lower than in the second quarter of 2016. That fall was mostly due to Covid, but it had flatlined since the referendum, ending a period of growth since 2010 and falling well short of the performance of other G7 countries. 

Weak investment is a particular worry for Sunak, who sees business investment as the route to greater prosperity. Before departing the BoE in 2020, Carney told a House of Lords Committee that Brexit uncertainty was holding back business investment. Worse, he said, business planning for various Brexit scenarios was taking up a lot of management effort. “Time spent on contingency planning is time not spent on strategic initiatives,” he said. 

Since then, negative perceptions of the UK have continued among business with the chancellor finding he had little bang for his £25bn buck of super deductions in corporation tax to encourage capital spending. As Bailey told MPs last month, the super-deductor was “not at the moment having the impact that was expected”. 

Complaints about high immigration was one of the most contentious issues of the referendum, with a central promise of the Brexit campaign being tougher controls over the number of people entering the country. While net immigration from EU countries has stopped, with effectively no change apparent in the two years to the end of June 2021, net immigration from non EU countries has remained high, with 250,000 in the latest year. 

Collateral damage 

There is, as yet, little appetite among Britain’s political leaders for a return to the EU — even if the other 27 member states were prepared to open the door. Even the pro-EU Liberal Democrats admit reversing course is a long-term aspiration, rather than an immediate goal. 

As part of his attempt to avert a coup, Johnson wrote to MPs this month that he had “created a new and friendly relationship with the EU”. The opposite is true. Brussels restarted legal action against the UK this week over the Northern Ireland protocol: relations are at rock bottom. 

The EU has warned that British scientists will be excluded from the €95bn Horizon research programme as “collateral damage” in the row about Northern Ireland. The prospect of any kind of rapprochement at the moment, at least while Johnson remains prime minister, seems remote. 

But in recent weeks, a tentative debate has started over whether the UK would be better off trying to reach accommodations with the EU to smooth trade in some areas, rather than launching a new front in the Brexit war with unilateral action over Northern Ireland. 

In an article much-discussed at Westminster, the pro-Leave Times columnist Iain Martin wrote this month: “To deny the downsides of Brexit on trade with the EU is to deny reality.” 

Tobias Ellwood, a former Tory defence minister, suggested Britain should rejoin the EU single market to soften the cost of living crisis, and said there was “an appetite” for a rethink and claimed polling indicated “this is not the Brexit most people imagined”. And Daniel Hannan, a leading Tory Brexiter, repeated his longstanding view that Britain should have stayed in the single market under a Norway-style relationship with the EU, while adding that to rejoin it now “would be madness”. 

Anna McMorrin, Labour shadow minister, was recorded telling activists: “I hope eventually that we will get back into the single market and customs union.” She was forced to apologise by Starmer: such talk remains dangerous in political circles. 

Even so, a Starmer-led future Labour government would change UK relations with the EU. The party’s mantra has become “make Brexit work”: rejoining the single market may be off the agenda, but Labour wants to find ways to improve on the bare-bones tariff-free trade agreement Johnson negotiated with the EU. 

Rachel Reeves, the shadow chancellor, told the Financial Times last year that Labour wanted to strike a deal with the EU to reduce the most onerous paperwork and checks on food exports. The party also wants an agreement with Brussels on the mutual recognition of professional qualifications. 

Even among the Eurosceptics in Johnson’s cabinet, there is now an acceptance that the UK should be seeking to rebuild economic relations with the EU, including in areas like the Horizon programme, to avoid exacerbating the looming cost of living crisis. 

“Would I like to be in a better place on Brexit?” asked one pro-Brexit cabinet member. “Yes, absolutely. But we’ve got to find a way of doing it without it looking like we’re running up the white flag and we’re compromising on sovereignty.”

Brexit, UK, Scotland....five years on

 

Hope for Britain after Brexit

Those who predict economic Armageddon ignore the reality. The status quo wasn’t working – now there’s an opportunity for change writes Larry Elliott in The Guardian

‘The mass exodus of banks and other financial institutions from the City of London, predicted since June 2016, has not materialised.’ View over the Thames to the City. Photograph: Niklas Halle’n/AFP/Getty Images

So this is it. Forty-eight years after Britain joined what was then the European Economic Community, the fasten seatbelt signs are switched on and the cabin lights have been dimmed. It is time for departure.

Many in the UK, especially on the left, are in despair that this moment has arrived. For them, this can never be the journey to somewhere better: instead it is the equivalent of the last helicopter leaving the roof of the US embassy in Saigon in 1975.

The lefties who voted for Brexit see it differently. For them (us, actually, because I am one of them), the vote to leave was historically progressive. It marked the rejection of a status quo that was only delivering for the better off by those who demanded their voice was heard. Far from being a reactionary spasm, Brexit was democracy in action. 

Now the UK has a choice. It can continue to mourn or it can take advantage of the opportunities that Brexit has provided. For a number of reasons, it makes sense to adopt the latter course.

For a start, it is clear that the UK has deep, structural economic problems despite – and in some cases because of – almost half a century of EU membership. Since 1973, the manufacturing base has shrivelled, the trade balance has been in permanent deficit, and the north-south divide has widened. Free movement of labour has helped entrench Britain’s reputation as a low-investment, low-productivity economy. Brexit means that those farmers who want their fruit harvested will now have to do things that the left ought to want: pay higher wages or invest in new machinery.

The part of the economy that has done best out of EU membership has been the bit that needed least help: the City of London. Each country in the EU has tended to specialise: the Germans do the high-quality manufactured goods; France does the food and drink; the UK does the money. Yet the mass exodus of banks and other financial institutions that has been predicted since June 2016 has not materialised, because London is a global as well as a European financial centre. The City will continue to thrive.

If there are problems with the UK economy, it is equally obvious there are big problems with the EU as well: slow growth, high levels of unemployment, a rapidly ageing population. The single currency – which Britain fortunately never joined – has failed to deliver the promised benefits. Instead of convergence between member states there has been divergence; instead of closing the gap in living standards with the US, the eurozone nations have fallen further behind.

In their heads, those predicting Armageddon for the UK imagine the EU to still be Germany’s miracle economy – the Wirtschaftswunder – of the 1960s. The reality is somewhat different. It is Italy, where living standards are no higher than they were when the single currency was introduced two decades ago. It is Greece, forced to accept ideologically motivated austerity in return for financial support. The four freedoms of the single market – no barriers to the movement of goods, services, people and capital – are actually the four pillars of neoliberalism.

The Covid-19 crisis has demonstrated the importance of nation states and the limitations of the EU. Britain’s economic response to the pandemic was speedy and coordinated: the Bank of England cut interest rates and boosted the money supply while the Treasury pumped billions into the NHS and the furlough scheme. It has taken months and months of wrangling for the eurozone to come up with the same sort of joined-up approach.

Earlier in the year, there was criticism of the government when it decided to opt out of the EU vaccine procurement programme, but this now looks to have been a smart move. Brussels has been slow to place orders for drugs that are effective, in part because it has bowed to internal political pressure to spread the budget around member states – and its regulator has been slower to give approval for treatments. Big does not always mean better.

Leaving the EU means UK governments no longer have anywhere to hide. They have economic levers they can pull – procurement, tax, ownership, regulation, investment in infrastructure, subsidies for new industries, trade policy – and they will come under pressure to use them.

Many on the remainer left accept the EU has its faults, but they fear that Brexit will be the start of something worse: slash and burn deregulation that will make Britain a nastier place to live.

This, though, assumes that Britain will have rightwing governments in perpetuity. It used to be the left who welcomed change and the right that wanted things to remain the same. The inability to envisage what a progressive government could do with Brexit represents a political role reversal and a colossal loss of nerve.

How UK-EU trade deal will change relations between Britain and Brussels

Sam Fleming and Jim Brunsden in The FT

The future relationship deal struck between the UK and the EU (24 Dec 2020) will bring far-reaching changes, as both sides are forced to adapt to the end of Britain’s 30-year membership of the European single market

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The trade agreement between London and Brussels will offer UK and EU companies preferential access to each other’s markets, compared with basic World Trade Organization rules — ensuring imported goods will be free of tariffs and quotas. 

But economic relations between the UK and the EU from January 1, when the deal is due to take effect, will be on more restricted terms than they are now.  

“Everyone needs to get prepared for a situation next year that will be very different to today,” said an EU official. 

A trade agreement along the lines of the one negotiated between the two sides will leave Britain facing a 4 per cent loss of potential gross domestic product over 15 years compared with EU membership, according to the UK’s Office for Budget Responsibility. Failure to secure an agreement would have led to lost potential GDP of almost 6 per cent, the fiscal watchdog estimated. 

Below are some of the benefits conferred by the UK-EU future relationship deal, which also includes security co-operation — and the important areas in which Britain’s links with the bloc will fall short of existing arrangements. 

1. Trade in goods  

The EU and UK’s starting point for the future relationship talks was that they should lead to a deal with no tariffs on trade in goods between the two sides. They also wanted no quantitative restrictions on the volume of goods that could be sold free of tariffs.  

That was negotiated, meaning the deal will go beyond what the EU has done with any other advanced economy outside the European single market.  

But the agreement is still a very different state of affairs to membership of the EU single market and customs union. 

Once implemented, from January 1, a hard customs and regulatory border will exist between the EU and UK, and goods will face checks and controls that can be smoothed at the margins only by co-operation. 

The deal will include facilitations such as co-operation on trusted trader schemes, but none of these erase border checks. 

“The agreement provides for continued and sustainable air, road, rail and maritime connectivity, though market access falls below what the single market offers,” said the European Commission.

2. Fair business competition 

The EU’s offer on tariff-free trade was contingent on the UK agreeing to uphold a “level playing field” on fair business competition in areas such as environmental standards. 

Brussels was also keen to ensure the UK does not have unfettered scope to disburse state aid to prized industries, giving them a competitive advantage.  

The agreement includes common binding principles on state aid, enforceable in both sides’ courts, which would be able to recover illegal subsidies. 

It also includes a painstakingly negotiated “rebalancing mechanism” to deal with a situation where the sides’ regulations in areas such as labour rights diverge over time. 

The mechanism, which would be subject to independent arbitration, would allow the disadvantaged side to impose tariffs to restore fair competition. 

But, crucially for the UK, it will not be required to follow EU rules directly or be subject to the jurisdiction of the European Court of Justice. 

Being outside the European single market has other regulatory consequences for Britain. For example, UK businesses will no longer be able to assume that product authorisations from British watchdogs will allow their goods to be placed on the European market.  

3. Fish 

The deal creates a five-and-a-half-year transition period during which EU fishermen will have guaranteed access to UK waters. 

EU quotas in British waters will decline in the transition by 25 per cent compared with current levels, and this will have the knock-on effect of boosting how much UK fishermen can secure. EU boats currently catch about €650m of fish in British waters each year. 

Once the transition period is over, EU boats’ access to UK waters will in principle depend on annual negotiations between both sides. Those talks will also determine the overall quantities of different species that can be caught. 

Should EU boats’ access to British waters ever be revoked by the UK, the bloc will have the right to take compensatory measures. These include retaliatory closing of EU waters to UK boats, and the imposition of tariffs on British fish. 

The deal also links the UK’s access to the EU energy market to access to British fishing waters. 

The UK warded off EU demands for a cross-retaliation power to hit other parts of the British economy should a dispute over fish escalate. 

Still, the deal does provide a last-resort “safeguard” option that would allow either side to take emergency measures to protect coastal communities, subject to dispute-settlement arrangements in the agreement. 

The deal enshrines the principle that Britain is now outside the EU’s common fisheries policy: an independent coastal state with sovereignty over its waters. 

4. Financial services 

The City of London will exit the EU’s single market for financial services at the end of the Brexit transition period on December 31. 

Both sides have said that the new market access arrangements for UK and EU financial services companies should be based on unilateral decisions by Britain and the bloc, rather than be provided for in the trade agreement. 

These so-called equivalence decisions involve each side evaluating whether the other’s financial services regulations are as tough as its own. 

Banks and traders have acknowledged that the proposed system is more piecemeal than existing arrangements, and less stable. The EU did not announce any fresh equivalence decisions on UK access to the bloc’s markets alongside the trade agreement on Thursday, resulting in uncertainty in key areas including share trading and derivatives. 

The two sides plan to put in place a regulatory dialogue on financial services based on a separate memorandum of understanding. 

5. Migration 

Current British and EU expatriates have their rights safeguarded by the UK’s 2019 withdrawal agreement with the bloc, but big changes to migration arrangements take effect from January 1. 

Britons will no longer have the benefit of European freedom of movement: the right to go to any EU member state and seek to work and live there on the same basis as the country’s own citizens.  

Instead, Britons will rely on a visa-waiver programme to travel to the EU for short stays, and on member states’ national rules for the right to work.  

Ending free movement for EU nationals in the UK was identified by the British government as one of the benefits of Brexit, allowing the country to devise a new immigration system.  

6. Security 

The EU and UK have been at pains to emphasise the importance of continuing co-operation in the fight against terrorism and organised crime, although talks in this area were complicated by Britain’s determination to escape the ECJ’s jurisdiction. 

But ahead of the deal being finalised, EU chief negotiator Michel Barnier confirmed the sides had found ways to maintain “close co-operation” on crucial matters including the work of the bloc’s crime-fighting agencies Europol and Eurojust, and the sharing of criminals’ DNA data. 

Brussels said the deal “builds new operational capabilities, taking account of the fact that the UK, as a non-EU member . . . will not have the same facilities as before”.  

The deal establishes that security co-operation can be suspended if the UK breaks away from the European Convention on Human Rights. 

German court decides to take back control with ECB ruling

Martin Wolf in The Financial Times 

The 75th anniversary of the defeat of Nazi Germany was May 8. The 70th anniversary of the Schuman declaration, which launched postwar European integration, was May 9. Just days before both, the German constitutional court launched a legal missile into the heart of the EU. Its judgment is extraordinary. It is an attack on basic economics, the central bank’s integrity, its independence and the legal order of the EU. 

The court ruled against the ECB’s public sector purchase programme, launched in 2015. It did not argue that the ECB had improperly engaged in monetary financing, but rather that it had failed to apply a “proportionality” analysis, when assessing the impact of its policies, on a litany of conservative concerns: “public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies”. 

Monetary policies are necessarily economic policies. But the ECB’s policies, including asset purchases, are justified by the fact that it was — and is — failing to achieve its treaty-mandated “primary objective”, which is “price stability” defined as inflation “below, but close to, 2 per cent over the medium-term”. The EU treaty says other considerations are secondary. 

The court also decreed that “German constitutional organs and administrative bodies”, including the Bundesbank, may not participate in ultra vires acts (those outside one’s legal authority). Thus, the Bundesbank may not continue to participate in the ECB’s asset purchase programmes, until the ECB has conducted a “proportionality assessment” satisfactory to the court. 

Yet the EU treaty states that “neither the ECB, nor a national central bank . . . shall seek or take instructions . . . from any government of a member state or from any other body [my emphases].” The court’s instruction puts the Bundesbank into a conflict of laws. 

The court is also assailing the right of the ECB to make its policy decisions independently. Germany fought hard to install central bank independence within the monetary union. Now, its constitutional court has decreed that unless the ECB satisfies the justices that it has taken full account of a highly political list of side-effects of monetary policies, asset purchases are impermissible. Courts in other member countries may see fit to decree that their national central banks cannot participate in policies they dislike. Pretty soon, the ECB will have been sliced and diced into a nullity. 

Above all, the German court decreed that it can ignore an earlier ruling of the European Court of Justice in favour of the ECB, because the former “exceeds its judicial mandate . . . where an interpretation of the Treaties is not comprehensible and must thus be considered arbitrary from an objective perspective.” This is an act of judicial secession. 

The EU is an integrated legal system, or it is nothing. It rests on the acceptance by all member states of its authority in areas of its competence. In a press release after the constitutional court’s judgment, the ECJ rightly responded that “the Court of Justice alone . . . has jurisdiction to rule that an act of an EU institution is contrary to EU law. Divergences between courts of the member states as to the validity of such acts would indeed be liable to place in jeopardy the unity of the EU legal order and to detract from legal certainty.” Imagine if the courts of every member state were able to decide that ECJ rulings were “arbitrary from an objective perspective”. 

What are the implications? 

If the German court is ultimately satisfied that the ECB adequately assessed the economic impact of its purchases, the PSPP might continue. But the courthas reduced the ECB’s future flexibility by limiting its holdings of any member country’s debt to 33 per cent of the outstanding total and insisting that asset purchases be allocated according to member states’ shares in the ECB. 

In the absence of other eurozone support programmes, the chance of defaults has jumped. Indeed, spreads on Italian government bonds have duly risen a little since the court’s announcement. A crisis might ultimately ensue, with devastating effects; perhaps even a break-up of the eurozone. 

Others might follow Germany in rejecting the jurisdiction of the ECJ and EU. Hungary and Poland are obvious candidates. Future historians may mark this as the decisive turning point in Europe’s history, towards disintegration. 

What can be done? The ECB cannot be accountable to a national court. But the Bundesbank could provide the court with the proportionality analysis. Maybe that would be enough, albeit also a bad precedent. Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. Alternatively, the ECB could just abandon efforts to rescue the eurozone and accept whatever outcome emerges. 

The EU could initiate an infringement proceeding against Germany. But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other. It could not change the ruling. 

More radically, the EU could act to create the needed degree of fiscal solidarity. But the obstacles to this are large. A new treaty looks out of the question in today’s environment of intense mutual distrust. Finally, Germany could boldly secede from the eurozone. Yet, before it makes such a decision, one hopes it, too, will be required to do a full analysis of whether that would be “proportionate”.

One point is clear: The constitutional court has decreed that Germany, too, can take back control. As a result it has created a possibly insoluble crisis.

Coronavirus: Is Europe losing Italy?

Furious at their plight being ignored and over resistance to coronabonds, Italians’ sense of betrayal deepens writes   Miles Johnson, Sam Fleming and Guy Chazan in The FT  

A year ago Carlo Calenda ran in European parliamentary elections in Italy under the slogan “We are Europeans”, a rallying cry to defend his country’s place in the EU at a time of rising nationalism. 

Now even Mr Calenda, a 46-year-old former minister and Italian permanent representative to the EU, is experiencing a crisis of faith in an idea he has spent a lifetime fighting for.  

“This is an existential threat, I am not sure if we are going to make it,” he says. “You have to consider my party is one of the most pro-European parties in Italy and I now have members writing to me saying: ‘Why do we want to stay in the EU? It is useless.’”  

As Italy faces its most severe crisis since the second world war, with more than 15,000 deaths from coronavirus and its economy on course to suffer the deepest recession in its modern history, there is a rising feeling among even its pro-European elite that the country is being abandoned by its neighbours.  

A massive, massive shift is happening in Italy. You have thousands of pro-Europeans moving to this position,” says Mr Calenda, who leads the recently formed liberal Action party. 

Last month Sergio Mattarella, Italy’s softly-spoken 78-year-old president, and the man its establishment has relied on to safeguard its constitution and international alliances, warned the future of Europe was at stake if its institutions did not show solidarity with their country.  

“I hope that everyone fully understands, before it is too late, the seriousness of the threat to Europe,” he said in an evening television address beamed into the homes of millions of Italians. 

Many in Rome now feel that unless bold action is taken by northern European countries, they risk Italy turning its back on the European project forever.  

There are already signs that Italian faith in the EU has been damaged. In a survey conducted last month by Tecnè, 67 per cent of respondents said they believed being part of the union was a disadvantage for their country, up from 47 per cent in November 2018. 

Donald Tusk, the former European Council president, told the FT the situation today was much more worrying than during the euro crisis — both politically and economically.   

Southern European expectations of a rapid demonstration of solidarity from the rest of the EU early in the pandemic were not met, even if the bloc has subsequently ramped up its assistance including financial aid and equipment.  

“I hope everything can be fixed, but the loss of reputation is huge,” says Mr Tusk, who is now president of the European People’s party, the centre-right political alliance. “We must save Italy, Spain and the whole of Europe and not be afraid of extraordinary measures. This is a state of emergency.”  

Mr Tusk says the EU’s assistance for Italy and other hard-hit countries is vastly more substantial than that from China and Russia, but he warns that “in politics perception can be more important than fact”.  

In 2018 Italy became the first founding member to elect a government hostile to the EU, with Matteo Salvini, the anti-immigration League leader and then deputy prime minister of the coalition government, raging against “the Brussels bunker”.  

The following year that government fell, and Mr Salvini was banished to opposition, giving pro-Europeans hope that the nationalist threat had faded. But many believe bitterness felt from events over the past month could permanently alter the country’s politics in Mr Salvini’s favour. 

“There was a feeling before that the political system had marginalised the anti-EU forces,” says Lorenzo Pregliasco, a pollster at YouTrend. “Now if pro-European party activists and politicians are no longer so sure how they feel, imagine what the voters think.” 

At the core of the argument is a bitter divide over the extent to which euro area countries should be pursuing a far more unified economic response to the crisis. Finance ministers will meet on Tuesday to attempt to agree a package of measures aimed at marshalling greater Europe-wide fiscal firepower. 

Italy is among the member states that are pushing for the euro area to be far more ambitious by collectively selling bonds to help fund the massive economic rebuilding efforts that lie ahead.  

The discussions mark just the latest iteration of a longstanding dispute over collective fiscal action that economists call debt mutualisation — and which many see as the biggest missing element of the single currency.  

The EU does have a rescue fund called the European Stability Mechanism which countries can use. But despite assurances to the contrary from the ESM’s managing director, Klaus Regling, many Italians still fear lending from the institution would come with tough conditions attached and would stigmatise the country. It would feel to many that their country was being punished for a disaster that was outside of its control. 

Roberto Gualtieri, Italy’s finance minister, has said that Italian gross domestic product is likely to fall by 6 per cent this year. Other economists believe this may be a conservative estimate. With the country entering the crisis with a debt-to-GDP ratio already at 136 per cent, there is a real threat that Italy’s debt reaches a level that brings into question its sustainability.  

In March, with the virus already ripping through southern Europe, nine euro members led by France, Italy and Spain signed a joint letter pushing for so-called coronabonds — jointly issued debt backed by all euro countries including deep-pocketed Germany — to help pay for the recovery effort.  

The depth of divisions over the topic was exposed at a tough EU leaders’ video conference call in late March in which the Italian prime minister Giuseppe Conte and his allies pushed hard for the door to be opened to coronabonds.  

Mr Conte said the euro area’s bailout instruments had been developed for the last crisis and were ill-suited to the current symmetric shock hitting the entire continent. “What will we tell our citizens if Europe does not prove capable of a united, strong and cohesive reaction in the face of a symmetrical, unpredictable shock of this historical magnitude?” he asked.  

Leaders eventually struck a compromise and issued a statement using vague language that effectively kicked deliberations in to Tuesday’s eurogroup meeting of finance ministers.  

But the truce did not last long. Ursula von der Leyen, the European Commission president and a former German defence minister, appeared to use dismissive language in an interview, describing coronabonds as a slogan and appearing to express sympathy with Germany’s concerns about the idea.  

The language provoked immediate rebukes from Mr Conte and Mr Gualtieri, forcing the commission to issue a late-night statement that vowed to leave open all options that are compatible with the EU treaty.  

Ms Von der Leyen’s shifting positions reflected in part sharp divisions among her commissioners as well as the EU as a whole over the idea of coronabonds.  

While the discussion over which financial instruments can be used to help Italy is technical, the tone of the debate has become emotionally charged in both southern Europe and in the north, where the Netherlands has sided with Germany in opposing coronabonds. 

Mr Calenda last week took out a full-page advert in the German daily Frankfurter Allgemeine Zeitung, signed by himself and a number of leftwing mayors and governors from the regions worst-hit by the outbreak.  

In it they attacked the Dutch position as “an example of a lack of ethics and solidarity”, called the country a tax haven and compared German reluctance to support joint European debt with the partial cancellation of Nazi war debts by European countries including Italy after the second world war. 

“Germany could never have paid it,” the letter said. “Your place is with the Europe of institutions, of values of freedom and solidarity. Not following small national egoisms.” 

“They shouldn’t be using such emotional arguments,” says Eckhardt Rehberg, a German MP in Chancellor Angela Merkel’s Christian Democratic Union. “Every country should ask itself whether it bears some responsibility for the situation it is in. Look at Italy’s health system. You cannot blame all your difficulties on Europe and Germany. As a German politician, I find that unfair.”  

The current German-Italian tensions are part of a much longer dispute, stretching back to the eurozone sovereign debt crisis of 2010-12.  

Even back then, many in southern Europe saw eurobonds as a potential solution. But Ms Merkel was always opposed, saying in 2012 that there would be no such instruments “as long as I live”. For the chancellor and her CDU party, the EU treaties were sacrosanct: and they expressly forbade the mutualisation of debt. The rule was clear: states cannot finance each other. 

Yet in the eurozone more broadly, her reputation suffered. Southerners increasingly saw her as Europe’s great disciplinarian. Posters appeared in Greece showing her with a Hitler moustache. She was depicted as a witch, a dominatrix or a wicked stepmother, and accused of trying to subjugate the whole continent. 

In Italy the hostility to her was fanned by the media empire of then prime minister Silvio Berlusconi. Records of bugged phone calls emerged in which he referred to the chancellor in extremely disparaging terms. In August 2012 the newspaper Il Giornale, owned by Mr Berlusconi’s brother, had a front-page picture of Ms Merkel raising her hand in a vaguely fascist salute, accompanied by an article claiming Italy was “no longer in Europe, it is in the Fourth Reich”.  

The crisis has emboldened politicians on Italy’s right who sense the mood in the country is shifting against Brussels, as well as becoming more anti-German.  

“The EU has gone from doing absolutely nothing to some trying to profit from the difficulties we are facing,” says Giorgia Meloni, leader of the far-right Brothers of Italy, which has made significant gains in opinion polls to become the second most popular rightwing party after Mr Salvini’s League. 

“There are people who are trying to use the virus to speculate. There is a game to weaken Italy and buy its strategic assets,” she told the FT. “While we are counting our dead, they are counting the risk of losing interest on their bonds.” 

Claudio Borghi, a League MP who has led a ferocious campaign against Italy accepting money from the ESM — arguing it would be tantamount to a surrender of sovereignty — this week posted an Italian Fascist era poster with a smiling German soldier extending his hand. The text reads “Germany is truly your friend”. Mr Borghi wrote: “Time goes on, but the tactics are always the same.”

Franziska Brantner, a German Green MP, says the Italians she has spoken to see themselves as “a laboratory for corona”, adding: “[They feel] Germany is just watching them and trying to learn from their experience. There is real bitterness among my pro-European friends in Italy. They’re saying what have we done to the Germans to make them treat us like this?” 

Italy’s pro-Europeans are hoping that the mounting shock from the Covid-19 crisis will jolt recalcitrant northern European countries into making a large enough gesture of solidarity to repair the damage that has been done.  

In recent days opponents of collective fiscal action have been on the defensive as the sheer scale of the economic slump has become clearer. In the Netherlands, the government of prime minister Mark Rutte last Wednesday proposed a solidarity fund worth €20bn, with cash transfers set to go straight to the coffers of Rome and Madrid to fund emergency medical spending.  

His finance minister Wopke Hoekstra had been criticised in the south after he called on Brussels to investigate why some economies did not have fiscal buffers to see them through a crisis. Portugal’s prime minister António Costa called the remarks “repulsive”.  

Mr Rutte’s proposal would only fill a small part of the gap given the vertiginous public finance challenges facing Italy and Spain, but the very fact that a country that has traditionally been a vociferous opponent of any fiscal transfers between euro area members should make such a suggestion is indicative of the changing public mood.  

Bruno Le Maire, France’s finance minister, on Thursday laid out plans for an “exceptional and temporary” joint fund that would help countries kick-start their recoveries. This would issue bonds with the joint guarantee of all EU member states and be operated by the European Commission.  

“Solidarity means to be able to pull together our resources to cope with the aftermath of the crisis,” he said. “Let’s avoid any ideological debates on eurobonds or coronabonds. There is one single political question: shall we stand together or not?” 

For Mr Tusk there is now little time left for the EU’s richest nations to come forward with bold and positive initiatives and avoid instilling any sense of humiliation in countries that needed help. “People are suffering now — it is not a political game,” he says. “People have to feel that we are a real community and a real family in such a time.”

Farewell Europe: the long road to Brexit

Toby Helm in The Guardian


Last week, with the end of the UK’s 47-year membership of the club of European nations just days away, I looked back at some newspaper cuttings from my time as a Brussels correspondent. A picture of worried-looking farmers eyeing up their cattle at a market in Banbury stared out alongside banner headlines. “British beef banned in Europe. Cattle prices fall. School meals hit. EU ‘rules’ broken.” Among the many crises in British relations with the EU down the years – from Margaret Thatcher’s bust-up over the European budget in the early 1980s to the UK’s exit from the ERM in 1992 – the beef war between London and Brussels ranks among the biggest.

It was 29 March, 1996, and the European commission had just announced a worldwide ban on the export of British beef. The EU’s executive opted for decisive action after the Tory government admitted there could be a link between “mad cow” disease and the mutant strain of Creutzfeldt-Jakob disease which could kill humans. I had been in Brussels less than three months. It was a huge story, and reading through articles I had written at the time, it felt like yesterday. But what was most striking, as my mind fixed again on events of 24 years ago, was how relevant that one prolonged and tortuous episode seemed today, in the context of Brexit.

When the European commission dropped its bombshell, France and Germany had already imposed their own unilateral bans on British beef. UK ministers had announced that millions of cattle across the UK would have to be slaughtered. Thousands of schools took meat off their lunch menus. Beef prices tumbled. Inevitably, in those testy post-Maastricht days of Tory rows over Europe, Eurosceptic MPs blamed the Europeans. The late Sir Teddy Taylor, a hardline anti-EU campaigner on the Conservative backbenches, urged retaliation in the form of a ban on French wine and French beef, while Bill Cash, still a Tory MP to this day, wanted to take the European commission to court.

Throughout that spring and summer, the crisis widened. This was a time when the ambitions of the EU’s true believers in Brussels, Bonn and Paris were at their height. Helmut Kohl and Jacques Chirac were planning the launch of the euro, for the big leap towards political and monetary union that the Maastricht treaty had charted a course. Europe’s leaders were preparing also to admit several countries of former communist eastern Europe. The enlargement project was one of which the UK thoroughly approved. The British government believed in a Europe that was “wider not deeper”.

But John Major, who had launched his premiership in 1990 with a promise to put Britain “at the heart of Europe”, found himself trapped politically as the BSE disaster worsened. The rightwing tabloids were in full anti-EU cry, demanding he fight the beef ban like he was Margaret Thatcher. In an editorial at the end of March, the Sun warned that the survival of an independent UK, no less, was at stake: “If Brussels has the power to stop Britain from selling a product anywhere in the world, then we are no longer an independent sovereign nation with control over our own affairs,” the paper said. “We are just one of the herd. John Bull has been neutered.”

Back home, Tony Blair and New Labour were racing ahead in the polls. On 21 May, Major went for broke and, to try to calm the “bastards” in his own party, announced that the UK would refuse to co-operate in EU meetings until further notice. British non-co-operation with Europe – and its policies – had become official policy.

FacebookTwitterPinterest 16 April 1975 “We are inextricably part of Europe. Neither Mr Foot nor Mr Benn nor anyone else will ever be able to take us ‘out of Europe’, for Europe is where we are and where have always been.”
Margaret Thatcher addressing the Conservative Group for Europe in thes referendum campaign. Photograph: AP

It was no small move to make. In areas where British ministers had a veto in council meetings, non-co-operation meant they would effectively be blocking EU decisions, thwarting European plans for deeper integration. In mid-May 1996 Major told the House of Commons: “Without progress towards lifting the ban we cannot be expected to cooperate normally on other Community business. We cannot continue business as usual within Europe when we are faced with the clear disregard by some of our partners of reason, of common sense and of Britain’s national interest.”

Non co-operation quickly took relations between London and Brussels to a historic low. For the first time in more than two decades serious questions were being asked about Britain’s membership, publicly, by senior British and European politicians. The beef crisis in itself was an isolated, very specific issue. But the way it had spiralled had highlighted deep faultlines in a relationship between a member state determined not to cede powers, and much of whose media was virulently anti-Brussels, and the proponents of a postwar European project that had as its entire purpose the unification of Europe, and the necessary surrender by participants of ever more sovereignty to the centre.

EU leaders were beginning to wonder if the UK could continue as a full member if it was prepared to put spanners in the works of integration whenever it had a grievance. In a newspaper article in early June 1996 the then European commission president Jacques Santer warned that “l’heure de vérité” was approaching. The late Sir Leon Brittan, then the UK’s commissioner, sensing a potentially disastrous breach, told UK businessmen in the same week to start speaking up for Europe “if we are not to be lured, step by insidious step, on the dangerous path towards leaving the European Union”.

This coming Friday, 31 January, at midnight in Brussels, and 11pm UK time, it will all be over. The worst fears of the pro-Europeans here and on the continent will have been realised. The Union flag will be lowered overnight, discreetly at the European parliament buildings in Brussels and Strasbourg and at the UK representation in Brussels. The UK will be out. The flag that will fly until Friday in the EU capital’s parliament building will be moved to the House of European History museum nearby. British membership will thereafter be a piece of history on display. In London, Boris Johnson’s Conservative government will project the moment as the beginning of a new dawn. No 10 will stage a special lights display at 11pm. Ten million commemorative 50p coins will come into circulation before the end of the year. Johnson will be one of the first to receive one.

For those of us who have spent so many years watching the UK’s relationship with the EU closely, the final act of leaving will be hard to take in. In the minds of everyone in the EU who had always wanted the relationship to succeed, there will always be deep regrets, and questions that can never fully be answered. Could it have worked? If so, was the EU or the UK, or were both, to blame? Which British and EU leaders fell short? Or was it always doomed to failure?

FacebookTwitterPinterest October 1992 John Major calls for the UK to remain at the heart of Europe in his leader’s speech at Tory conference.“There is nothing that can stir the heart like the history of this country. But it’s a different world now. Our families … know we can’t pull up the drawbridge and live in our own private yesterday. Change isn’t just coming, it’s here. I want Britain to mould that change, to lead that change in our own national interest. That’s what I mean by being at the heart of Europe.” Photograph: David Levenson/Getty Images

As we prepare to leave, I asked diplomats, politicians, journalists on both sides of the channel why they thought Brexit had come to pass and they cited a multitude of reasons. The deep differences in postwar attitudes between the UK and its European partners; poor leadership in the EU and UK; a constantly hostile British media, and sheer bad luck and timing.

Sir Nigel Sheinwald, a former UK ambassador to the EU and Washington, believes all these factors played their parts. “Europe always seemed a matter of choice, not necessity for the UK, unlike for France and Germany,” he said. “Successive generations of British political leaders failed to explain the realities and the centrality of our membership, preferring to live with, rather than confront, decades of British media little-Englandism. Then the short-term perfect storm – the impact of the financial crisis, the anti-establishment mood, and the open goal left by Cameron’s casual failure of leadership and Corbyn’s Euroscepticism.

“Brexit was never inevitable, and the irony is that we are leaving an organisation more aligned than at any time since we joined with the British priorities of free trade, competition, active and responsible international policies, and cooperation on security.”

The German MP Norbert Röttgen, who chairs the foreign affairs committee in the Bundestag, suggested the idea of the UK leaving was always so alien and nightmarish for EU leaders that they blinded themselves to the warning signals. By the time of the 2016 referendum the chance to find compromise had been lost.

“For the EU it was unimaginable that a country might choose to leave the union,” Röttgen said. “As a consequence they underestimated the severity of the situation and gave David Cameron nothing to work with during the referendum. To be fair, given all the opt-outs the UK already had, that would not have been easy, but the EU’s lack of trying was a mistake.” The German MEP David McAllister, born to a Scottish father and German mother, and who was bought up in West Berlin, says the UK’s decision to opt out of the euro and Schengen open borders agreement was a turning point which took the UK down a road to disengagement from the core. “The beginning of the end was Maastricht. Not joining the two biggest projects, the joint currency and Schengen.” But enlargement to the east – which, ironically, the UK had championed – also played its part, he believes, creating huge new issues around freedom of movement which the UK could not resolve with its partners before the eventual referendum. “Free movement was vital for those new members and they did not want to give way.”

As in any marriage there were happier times. After Edward Heath had taken the UK into the European Economic Community in 1973, successive prime ministers – Thatcher, Major, Blair, Gordon Brown – all entered office proclaiming themselves strong Europeans. Even Cameron said he wanted his party to stop “banging on” about Europe. In 1975, addressing the Conservative Group for Europe, before the confirmatory referendum later that year, Thatcher proudly proclaimed her pro-EC views, and taunted Labour over its European divisions. “We are inextricably part of Europe,” she said. “Neither Mr Foot nor Mr Benn nor anyone else will ever be able to take us ‘out of Europe’, for Europe is where we are and where have always been,” she declared.

But for every UK prime minister since the 1970s, rows with Europe were always round the corner. In her first years in No 10 Thatcher fought and won a bruising battle to cut the UK’s payments to the European budget, before securing the EU rebate at Fontainbleu in 1984. After that, however, she was a tireless champion of the European single market, before falling out with Jacques Delors and Helmut Kohl over their plans for full monetary union in the late 1980s.

FacebookTwitterPinterest 23 January 2013 David Cameron announces a referendum on the UK’s membership of the European Union.“We will give the British people a referendum with a very simple in or out choice. To stay in the EU on these new terms, or come out altogether. It will be an in-out referendum.” Photograph: Oli Scarff/Getty Images

Charles Powell, her foreign policy adviser at the time, says her European enthusiasm went in phases. “Rather like Picasso she had her blue and her pink phases,” Powell says. “For five-and-a-half years she was very awkward over the budget. After 1984, however, it was more positive as she drove the single market forward. Then she felt betrayed over the single currency.” But he insists she never contemplated leaving the EU.

Many in the EU believe it was Thatcher who set the direction of travel. Guy Verhofstadt, the former Belgian prime minister, says she introduced the idea of “exceptionalism” (rebates and opt-outs) which undermined Europe’s unity and efficiency.

“It started with the rebate of Thatcher,” he said. “By granting something like the rebate you encourage those who don’t want or like the basic story of the European Union. The consequence is that the EU is not effective because of these exceptions. It cannot act there, it can only partially act here. That then fuels the Eurosceptics again, who say ‘you see it doesn’t work!’ By creating these exceptions we planted a seed to make the EU ineffective, and for the exiteers to make their case.”

For Major, who succeeded Thatcher, the crises never ceased. The UK’s exit from the ERM in autumn 1992 was one from which he never really recovered. He fought and secured the single currency opt-out from Maastricht but the “bastards” in his party never let up. In the later days of his administration he tried to convince EU leaders to adopt ideas for a two-speed Europe in which the UK would be in the slower lane but, by that stage, they were waiting for Blair to win the 1997 election and open a new period of positive relations.

I can remember the excitement in EU circles at Blair’s first European summit in late May 1997 after 18 years of Thatcher and Major. At that meeting in Noordwijk in the Netherlands the Italian news agency, Ansa, headed its main report “Tony Blair, Superstar” and Italian journalists called it “Blair day in Europe”. Labour’s election manifesto had left open the possibility of the UK joining the euro when the conditions were right. Blair was genuine and serious about wanting to change the mood.

But he had won the support of Rupert Murdoch’s newspapers, including the Sun, for the 1997 election and Alastair Campbell clearly spotted danger. Campbell arrived on the European scene appearing disdainful, no doubt deliberately, of many of the EU’s complex and arcane debates, describing them as “eurobollocks”, because he feared a tabloid backlash if Blair was too pro-EU.

At the same meeting in Noordwijk he accused me of “going native” for writing about voting systems in the EU, which he had not by then got his head around.

There was a smugness about the Blair administration – remarked on by his own officials at the time – in its early dealings with the EU, which infuriated European leaders. Within months, rows blew up between Blair and Brown on the UK side, and Kohl and Chirac on the other, as the UK demanded the right to be present at meetings of European finance ministers whose countries had agreed to join the euro, despite the UK having refused to commit itself to entry.

At one summit in Luxembourg, Chirac became so irritated that he told Blair he would have to learn to bow his head three times to the tricolore before he could earn his spurs in the EU. The greatest frustration came when EU leaders realised that Brown had, with his adviser Ed Balls, designed a foolproof means of blocking Blair from joining the euro, through his five tests. Verhofstadt and other leaders say Blair, whose relations with Chirac and others deteriorated further with the Iraq war, had a chance to change the course of history but fell short.

And so after Brown’s difficult premiership, in which he promoted his ideas of Britishness far more than any European vision, came Cameron, who had launched his bid for the Tory leadership with a pledge to take the UK out of the main centre-right grouping, the European People’s party, positioning himself initially as a firm Eurosceptic. When he called the 2016 in/out referendum he promised to renegotiate a better deal for the UK in the EU that he hoped would persuade people to vote to remain. The rest is history.

He failed to secure sufficient concessions from the EU to win over fellow Tories, including Boris Johnson and Michael Gove who would campaign to leave. Cameron opened the door to a British exit and the British people walked through it on 23 June, 2016.

Cameron is the name most often cited in the EU as people search for individuals to blame for Brexit. Röttgen says: “At a critical time, when the UK needed true leadership it had poor political personnel in place. David Cameron proved to be a coward, lacking the kind of statesmanship John Major had demonstrated during his term.”

But Röttgen knows, as does everyone, that it was the entire European political class that failed to stop the “unimaginable” happening. His fellow countryman McAllister – with British and German roots – is more mournful ahead of Brexit day. “It will be very sad,” he says. “I hardly know anyone who welcomes this and who will not miss the British, their pragmatism, their humour, their knowledge. January 31 will be a very emotional day. I do not want to be in Brussels on the day the Union Jack is taken down.”

America is not the land of the free but one of monopolies so predatory they imperil the nation

Its growing economic crisis is in contrast to a thriving and newly innovative Europe writes Will Hutton in The Guardian


  

Illustration by Dom McKenzie


Tomorrow, President Trump arrives in London for the annual Nato summit. Despite the boasting and the trappings of superpower status, he is an emissary from a country whose economy and society are in increasing difficulty, and whose global leadership is under challenge not just from the usual suspect, China, but from Europe. With the unerring capacity to be wrong that defines the Brexit right, Britain is about to decouple itself from a continental economy beginning to get things right, and hook up with one that is palpably beginning to fail.

This is not the conventional wisdom. The EU is sclerotic, undynamic, stifled by quasi-socialist red tape, and hostile to insurgent startups. It is so degenerate it cannot even defend itself – as Trump will undoubtedly remind its leaders over the next two days. The US is the mirror opposite. A free trade agreement post 31 January with the US is the number one strategic policy aim for Brexit Britain – unshackling the UK from the declining old, and embracing the English-speaking, dynamic new. Best be nice to “the Donald”.

Except the latest research demonstrates the reverse is true. Britain is about to make a vast mistake. In the recently published The Great Reversal, leading economist Thomas Philippon of New York University and member of the advisory panel of the New York Federal Reserve, mounts a devastating attack on the conventional wisdom, so perfectly embodied by the witless Boris Johnson. The news is that over the last 20 years per capita EU incomes have grown by 25% while the US’s have grown 21%, with the US growth rate decelerating while Europe’s has held steady – indeed accelerating in parts of Europe. What is going on?

Philippon’s answer is simple. The US economy is becoming increasingly harmed by ever less competition, with fewer and fewer companies dominating sector after sector – from airlines to mobile phones. Market power is the most important concept in economics, he says. When firms dominate a sector, they invest and innovate less, they peg or raise prices, and they make super-normal profits by just existing (what economists call “economic rent”). So it is that mobile phone bills in the US are on average $100 a month, twice that of France and Germany, with the same story in broadband. Profits per passenger airline mile in the US are twice those in Europe. US healthcare is impossibly expensive, with drug companies fixing prices twice as high or even higher than those in Europe; health spending is 18% of GDP. Google, Amazon and Facebook have been allowed to become supermonopolies, buying up smaller challengers with no obstruction.

This monopolising process gums up everything. Investment in the US has been falling for 20 years. Because prices stay high, wages buy less, so workers’ lifestyles, unless they borrow, get squeezed in real terms while those at the top get paid ever more with impunity. Inequality escalates to unsupportable levels. Even life expectancy is now falling across the US.

But why has this happened now? Philippon has a deadly answer. A US political campaign costs 50 times more than one in Europe in terms of money spent for every vote cast. But this doesn’t just distort the political process. It is the chief cause of the US economic crisis.

Corporations want a return on their money, and the payback is protection from any kind of regulation, investigation or anti-monopoly policy that might strike at their ever-growing market power. Boeing, for example, ensured – as one of the US’s biggest lobbyists – that regulation was friendly to its plans to shoehorn heavier engines on to a plane not designed for them – the fatal shortcut behind the two crashes of the 737 Max 8. Philippon shows this is systemic; how both at federal and state level ever higher campaign donations are correlated with ever fewer actions against monopoly, price fixing and bad corporate behaviour.

In Europe, the reverse is true. It is much harder for companies to buy friendly regulators. The EU’s competition authorities are much more genuinely politically independent than those in the US – witness the extraordinary fines levied on Google or the refusal this February to allow Siemens to merge with the French giant Alstom. As a result, it is Europe, albeit with one or two laggards such as Italy, that is bit by bit developing more competitive markets, more innovation and more challenge to incumbents while at the same time sustaining education and social spending so important to ordinary people’s lives.

Even starting up businesses is now easier. France is generating multiple hi-tech startups, with unemployment falling. Parts of Paris, Barcelona, Amsterdam or even Milan are now rivalling San Francisco’s Bay area.

The EU’s regulations are better thought out, so in industry after industry it is becoming the global standard setter. Its corporate governance structures are better. And last week, to complete the picture, Christine Lagarde, the incoming president of the European Central Bank, in the most important pronouncement of the year, said the environment would be at the heart of European monetary policy. In other words, the ECB is to underwrite a multitrillion-euro green revolution. In short – bet on Europe not the US.

Thus Jeremy Corbyn, seizing on leaked documents showing how US trade negotiators want UK drug prices to rise to US levels, is on to something much bigger than the threat to the NHS, fatal though that is. Any trade deal with the US will require the UK to accept the protections that are making US capitalism so sclerotic, predatory and high priced – while dissociating itself from a European capitalism that is not only beginning to outperform America’s, but so much better reflects our values.

This election is set to seal not just the geopolitical but geo-economic mistake of Britain’s recent history. The tragedy is that our national conversation is hardly aware of how high the stakes have become.

The Buddha Speaks - Brexit: How do you interpret a referendum?

Why we must not let Europe break apart

The European project is in big trouble – but it’s worth defending. By Timothy Garton Ash  in The Guardian



It’s time to sound the alarm. Seven decades after the end of the second world war on European soil, the Europe we have built since then is under attack. As the cathedral of Notre Dame burned, Marine Le Pen’s Rassemblement National was polling neck and neck with Emmanuel Macron’s movement for what he calls a “European renaissance”. In Spain, a far-right party called Vox, promoting the kind of reactionary nationalist ideas against which Spain’s post-Franco democracy was supposedly immunised, has won the favour of one in 10 voters in a national election. Nationalist populists rule Italy, where a great-grandson of Benito Mussolini is running for the European parliament on the list of the so-called Brothers of Italy. A rightwing populist party called The Finns, formerly the True Finns (to distinguish them from “false” Finns of different colour or religion), garnered almost as many votes as Finland’s Social Democrats in last month’s general election. In Britain, the European elections on 23 May can be seen as another referendum on Brexit, but the underlying struggle is the same as that of our fellow Europeans. Nigel Farage is a Le Pen in Wellington boots, a True Finn in a Barbour jacket.

Meanwhile, to mark the 30th anniversary of the velvet revolutions of 1989, Poland’s ruling Law and Justice party has denounced a charter of LGBT+ rights as an attack on children. In Germany, the Alternative für Deutschland successfully deploys a völkisch rhetoric we thought vanquished for good, although now it scapegoats Muslims instead of Jews. Remember Bertolt Brecht’s warning: “The womb is fertile still/ from which that crawled.” Viktor Orbán, the young revolutionary hero of 1989 turned bulldog-jowled neo-authoritarian, has effectively demolished liberal democracy in Hungary, using antisemitic attacks on the billionaire George Soros and generous subsidies from the EU. He has also enjoyed political protection from Manfred Weber, the Bavarian politician whom the European People’s party, Europe’s powerful centre-right grouping, suggests should be the next president of the European commission. Orbán has summed the situation up like this: “Thirty years ago, we thought Europe was our future. Today, we believe we are Europe’s future.”

Italy’s Matteo Salvini agrees, so much so that he is hosting an election rally of Europe’s rightwing populist parties, an international of nationalists, in Milan later this month. To be sure, the spectacle of a once-great country reducing itself to a global laughing stock, in a tragic farce called Brexit, has silenced all talk of Hungexit, Polexit or Italexit. But what Orbán and co intend is actually more dangerous. Farage merely wants to leave the EU; they propose to dismantle it from within, returning to an ill-defined but obviously much looser “Europe of nations”.

Wherever one looks, old and new rifts appear, between northern and southern Europe, catalysed by the Eurozone crisis, between west and east, reviving the old stereotypes of intra-European orientalism (civilised west, barbaric east), between Catalonia and the rest of Spain, between two halves of each European society, and even between France and Germany.

For anyone who takes a longer view, these mounting signs of European disintegration should not be a surprise. Isn’t this a pattern familiar from European history? In the 17th century, the horrendously destructive thirty years war was concluded by the peace of Westphalia. At the turn of the 18th to the 19th, the continent was torn apart by two decades of Napoleonic wars, then stitched together in another pattern by the Congress of Vienna. The first world war was followed by the Versailles peace. Each time, the new post-war European order lasts a while – sometimes shorter, sometimes longer – but gradually frays at the edges, with tectonic tensions building up under the surface, until it finally breaks apart in a new time of troubles. No European settlement, order, empire, commonwealth, res publica, Reich, concert, entente, axis, alliance, coalition or union lasts for ever.

Set against that historical measuring rod, our Europe has done pretty well: it is 74 years old this week, if we date its birth to the end of the second world war in Europe. It owes this longevity to the miraculously non-violent collapse in 1989-91 of a nuclear-armed Russian empire that had occupied half the continent. Only in former Yugoslavia, and more recently in Ukraine, have we witnessed what more normally follows the fall of empires: bloody strife. Otherwise, what happened after the end of the cold war was a peaceful enlargement and deepening of the existing, post-1945 west European order. Yet maybe now the muse of history is shouting, like some grim boatman from the shore, “come in Number 45, your time is up!”

 

Santiago Abascal, the leader of Vox, a far-right party in Spain. Photograph: Pablo Blázquez Domínguez/Getty

In one respect, however, this time is different. For centuries, Europe kept tearing itself apart, then putting itself together again, but all the while exploiting, colonising and bossing around other parts of the world. With the European civil war that raged on and off from 1914 to 1945, once described by Winston Churchill as a second thirty years war, Europe deposed itself from its global throne. In act five of Europe’s self-destruction, the US and the Soviet Union strode on to the stage like Fortinbras at the end of Hamlet. Yet, Europe was at least still the central stage of world politics throughout the cold war that followed. Europeans made history once again for a brief shining moment in 1989, but then Hegel’s Weltgeist, the “world spirit”, moved rapidly on from Berlin to Beijing.

Today, Europe struggles to remain a subject rather than becoming merely an object of world politics – with Beijing hungry to shape a Chinese century, a revanchist Russia, Donald Trump’s unilateralist US, and climate change threatening to overwhelm us all. Both Russia and China merrily divide and rule across our continent, using economic power to pick off weaker European states and disinformation to set nation against nation. In the 19th century, European powers engaged in what was called the scramble for Africa; in the 21st, outside powers engage in a scramble for Europe.

Of course, Europe means many different things. It is a continent with ill-defined borders, a shared culture and history, a contested set of values, a complex web of institutions and, not least, hundreds of millions of people, all with their own individual Europes. Nationalists like Le Pen and Orbán insist they just want a different kind of Europe. Tell me your Europe and I will tell you who you are. But the central institution of the post-1945 project of Europeans working closely together is the European Union, and its future is now in question.

None of this radicalisation and disintegration is inevitable, but to avert it, we have to understand how we got here, and why this Europe, with all its faults, is still worth defending.

It is 1942. In a tram rattling through Nazi-occupied Warsaw sits an emaciated, half-starved 10-year-old boy. His name is Bronek. He is wearing four sweaters, yet still he shivers despite the August heat. Everyone looks at him curiously. Everyone, he is sure, sees that he is a Jewish kid who has slipped out of the ghetto through a hole in the wall. Luckily, no one denounces him, and one Polish passenger warns him to watch out for a German sitting in the section marked “Nur für Deutsche”. And so Bronek survives, while his father is murdered in a Nazi extermination camp and his brother sent to Bergen-Belsen.

Sixty years on, I was walking with Bronek down one of the long corridors of the parliament of a now-independent Poland. Suddenly he stopped in his tracks, turned to me, stroked his beard and said with quiet passion: “You know, for me, Europe is something like a Platonic essence.”

In the life of Prof Bronisław Geremek, you have the essential story of how, and why, Europe came to be what it is today. Having escaped the horrors of the ghetto (“the world burned before my eyes”), along with his mother, he was brought up by a Polish Catholic stepfather, served as an altar boy and was taught by an inspiring priest in the Sodality of the Blessed Virgin Mary. So he had also, in his bones, Europe’s deep and defining Christian heritage. Then, at the age of 18, he joined the communist party, believing it would build a better world. Eighteen years later, stripped of his last illusions by the Soviet invasion of Czechoslovakia in 1968, he resigned from that same party in protest and returned to his professional life as a medieval historian. But politics somehow would not let him go.

I first encountered him during a historic occupation strike in the Lenin Shipyard in Gdańsk in August 1980, when the leader of the striking workers, Lech Wałęsa, asked Geremek to become an adviser to the protest movement that would soon be christened Solidarity. Over the subsequent decade I would visit him, whenever I got the chance, in his small apartment in Warsaw’s Old Town, which had been razed to the ground by the Nazis, then rebuilt stone upon stone by the Poles. As he puffed away at his professorial pipe, he shared with me his pellucid analysis of the decline of the Soviet empire, even as he and his comrades in Solidarity helped turn that decline into fall. For in 1989, he was the intellectual architect of the round table talks that were the key to Poland’s negotiated transition from communism to democracy, and Poland was the icebreaker for the rest of central Europe.

Ten years on, he was the foreign minister who signed the treaty by which Poland became a member of Nato. When I visited him in the foreign ministry, I spotted on his mantelpiece a bottle of a Czech vodka called Stalin’s Tears. “You must have it!” he exclaimed. “A Polish foreign minister cannot keep Stalin in his office!” And so that bottle of Stalin’s Tears stands on my mantelpiece in Oxford as I write. In memory of Bronek, I will never drink it.

 

Lech Wałęsa speaks to workers during a strike at the Gdańsk shipyard in 1980. Photograph: Erazm Ciołek/Forum/Reuters

Having been instrumental in steering his beloved country into the European Union, he subsequently became a member of the European parliament, that same parliament to which we are electing new representatives this month. Tragically, but in a way symbolically, he died in a car accident on the way to Brussels.

Geremek’s story is unique, but the basic form of his Europeanism is typical of three generations of Europe-builders who made our continent what it is today. When you look at how the argument for European integration was advanced in various countries, from the 1940s to the 1990s, each national story seems at first glance very different. But dig a bit deeper and you find the same underlying thought: “We have been in a bad place, we want to be in a better one, and that better place is called Europe.” Many and diverse were the nightmares from which these countries were trying to awake. For Germany, it was the shame and disgrace of the criminal regime that murdered Bronek’s father. For France, it was the humiliation of defeat and occupation; for Britain, relative political and economic decline; for Spain, a fascist dictatorship; for Poland, a communist one. Europe had no shortage of nightmares. But in all these countries, the shape of the pro-European argument was the same. It was an elongated, exuberant pencilled tick: a steep descent, a turn and then an upward line ascending to a better future. A future called Europe.

Personal memories of bad times were a driving force for three distinctive generations. Many of the founding fathers of what is now the European Union were what one might call 14ers, still vividly recalling the horrors of the first world war. (The 14ers included the British prime minister Harold Macmillan, who would talk with a breaking voice of the “lost generation” of his contemporaries). Then came the 39ers like Geremek, indelibly shaped by traumas of war, gulag, occupation and Holocaust. Finally, there was a third cohort, the 68ers, revolting against the war-scarred generation of their parents, yet many of them also having experience of dictatorship in southern and eastern Europe.

The trouble starts when you have arrived in the promised land. Now, for the first time, we have a generation of Europeans – let’s call them the 89ers – who have known nothing but a Europe of closely connected liberal democracies. Call it a European empire or commonwealth, if you will. To be sure, “Europe whole and free” remains an ideal, not a reality, for millions who live here, especially those who are poor, belong to a discriminated minority or seek refuge from across the Mediterranean. But we are closer to that ideal than ever before.

It would be a parody of middle-aged condescension to say “these young people don’t know how lucky they are!”. After all, younger voters are often more pro-European than older ones. But it would not be wrong to say that many 89ers who have grown up in this relatively whole and free continent do not see Europe as a great cause, the way 39ers and 68ers did. Why be passionate about something that already exists? Unless they have grown up in the former Yugoslavia or Ukraine, they are unlikely to have much direct personal experience of just how quickly things can all unravel, back to European barbarism. By contrast, many of them do know from bitter experience how life got worse after the financial crisis of 2008.

On the walls of Al-Andalus, a tapas bar in Oxford, depictions of flamenco dancers and bullfights embrace cliche without shame. Here, when I first met him in 2015, Julio – dark-haired, lean and intense – worked as a waiter. But serving tourists in a tapas bar in England was not what he expected to be doing with his life. He had just finished a master’s degree in European studies at Computense University in Madrid. It was the Eurozone crisis – which at its height made one in every two young Spaniards unemployed – that reduced him to this. Looking back, Julio describes his feelings when he had to make this move abroad: “Sadness, impotence, solitude.”

Across the continent there are many thousands of Julios. For them, the tick line has been inverted: it started by going steadily up, but then turned sharply downwards after 2008. Ten years ago, you and your country were in a better place. Now you are in a worse one, and that is because Europe has not delivered on its promises.

Here is the cunning of history: the seeds of triumph are sown in the moment of greatest disaster, in 1939, but the seeds of crisis are sown in the moment of triumph, in 1989. With the benefit of hindsight, we can see that many of the problems haunting Europe today have their origins in the apparently triumphant transition after the fall of the Berlin Wall. A few far-sighted people warned at the time. The French political philosopher Pierre Hassner wrote in 1991 that, even as we celebrated the triumph of freedom, we should remember that “humankind does not live by liberty and universality alone, that the aspirations that led to nationalism and socialism, the yearning for community and identity, and the yearning for solidarity and equality, will reappear as they always do”. And so they have.

The events of 1989 opened the door to an unprecedented era of globalised, financialised capitalism. While this facilitated great material progress for a new middle class in Asia, in the west it generated levels of economic inequality not seen since the early 20th century. A divide also opened up between those with higher education and international experience, and those in the less fortunate other halves of European societies. The latter felt an inequality of attention and respect from the former. Barriers to freedom of movement between European countries were eliminated while little thought was given to what Europe would do if large numbers of people wanted to enter through the outer frontier of the Schengen zone. What followed was problems of large-scale emigration, for the poorer countries of eastern and southern Europe, and of immigration for the richer ones of northern Europe – be it the internal movement of more than 2 million east Europeans to Britain or the influx of more than 1 million refugees from outside the EU to Germany.

When the global financial crisis hit, it exposed all the inherent flaws of a halfway-house Eurozone. Hastened into life as a political response to German unification, the Eurozone that we have today, a common currency without a common treasury, hitching together such diverse economies as those of Greece and Germany, had been warned against in vain by numerous economists. Absent a decisive, far-sighted response from northern Europe, and especially from Germany, the impact on southern Europe was traumatic. Not only did the Eurozone crisis drive Julio to that dreary tapas bar and people in Greece to desperate hardship; it kick-started a new wave of radical and populist politics, on both left and right, and with mixtures of left and right that don’t easily fit into that old dichotomy.

Populists blame the sufferings of “the people” on remote, technocratic, liberal elites. Europe, or more accurately “Europe”, is particularly vulnerable to this attack. For most officials in Brussels are quite remote, quite technocratic and quite liberal. Although members of the European parliament are directly elected, that parliament can at times seem like a bubble within the Brussels bubble. Although their remuneration is peanuts compared to that of the bankers who nearly crashed the globalised capitalist system, EU leaders, parliamentarians and officials are very well paid. Watching them jump out of a chauffeur-driven BMW to deliver another smooth, visionary speech about the future of Europe, before jumping back into the BMW to be swept off to another nice lunch, it is not surprising that many less privileged Europeans say: “Well, they would praise Europe, wouldn’t they?”

Earlier this year, in a shabby office in Westminster, I was talking to someone who, like me, passionately wants a second referendum on Brexit, in which the majority votes to remain in the EU. What should be our campaign slogan? Among others, he suggested “Europe is great!” I winced. Why? Because this calls to mind the toe-curling British government national promotion campaign built around the motto “Britain is GREAT”. Countries that feel the need to proclaim in capital letters that they are great probably no longer are. But also because of all these problems that have accumulated across Europe during the 30 years of peace since 1989. Europe is great for us, the educated, privileged, mobile and gainfully employed, but do you really feel like saying “Europe is great!” with a straight face to the unemployed, unskilled worker in the post-industrial north of England, the southern European graduate who can’t find a job, or the Roma child or the refugee stuck in a camp?

We are only credible if we acknowledge that the European Union is now passing through an existential crisis, under attack from inside and out. It is paying the price both for past successes, which result in its achievements being taken for granted, and past mistakes, many of them having the shared characteristic of liberal over-reach.

The case for Europe today is very different from that of a half-century ago. In the 1970s, people in Britain, Spain or Poland looked at countries like France and West Germany, just coming to the end of the trente glorieuses – the three postwar decades of economic growth – in the then much smaller European Community, and said “we want what they’re having”. Today, the case starts with the defence of a Europe that already exists, but is now threatened with disintegration. If the construction were so strong that we could without hesitation say “Europe is great!”, it would not need our support so badly.

Since its inception, the European project has had a future-oriented, teleological rhetoric, all about what will come to pass one fine day, as we reach some ideal finalité européenne. These habits die hard. Driving through Hannover recently, I saw a Green party poster for the European elections that declared “Europe is not perfect – but it’s a damned good start”. Pause to think for a moment, and you realise how odd this is. After all, we don’t say “Britain is not perfect, but it’s a damned good start”. Nor do most 74-year-olds say “my life is not perfect, but it’s a good start”. The European Union today, like Germany or France or Britain, is a mature political entity, which does not need to derive its legitimacy from some utopian future. There is now a realistic, even conservative (with a small c) argument for maintaining what has already been built – which, of course, necessarily also means reforming it. If we merely preserved for the next 30 years today’s EU, at its current levels of freedom, prosperity, security and cooperation, that would already be an astonishing achievement.

 

The fall of the Berlin Wall in 1989. Photograph: Alamy

In a long historical perspective, this is the best Europe we have ever had. I challenge you to point to a better one, for the majority of the continent’s countries and individual people. Most Europeans live in liberal democracies that are committed to resolving their differences by all-night meetings in Brussels, not unilateral action, let alone armed force. This European Union is not a country, and will not become one any time soon, but it is much more than just an international organisation. The former Italian prime minister Giuliano Amato describes it as an unidentified flying object. It may be short on mystique, on emotional appeal, but it is not lacking that entirely. The heart can lift to see European flags fluttering beside national ones, and certainly to the strains of the European anthem, Beethoven’s setting of the Ode to Joy.

For everyone who is a citizen of an EU member state, this is a continent where you can wake up on a Friday morning, decide to take a budget airline flight to the other end of the continent, meet someone you like, settle down to study, work and live there, all the time enjoying the rights of a European citizen in one and the same legal, economic and political community. All this you appreciate most, like health, when you are about to lose it. Small wonder that marchers at the huge pro-European demonstration in London on 23 March this year wore T-shirts proclaiming “I am a citizen of Europe”.

So here’s the deepest challenge of this moment: do we really need to lose it all in order to find it again? Born in the depths of European barbarism more than 70 years ago, tipped towards crisis by a hubris born of that liberal triumph 30 years ago, does this project of a better Europe really need to descend all the way down to barbarism again before people mobilise to bring it back up? As personal memories like those that inspired the European passion of Bronisław Geremek fade away, the question is whether collective memory, cultivated by historians, journalists, novelists, statespeople and film-makers, can enable us to learn the lessons of the past without going through it all again ourselves.

Julio thinks we can learn. That is why, having resumed his academic career in Spain, he is now standing in the European elections for a radical, transnational pro-European party called Volt. “The generation that I represent,” he wrote to me in a recent email, “has observed the beginning of the disintegration of the EU, because of the triumph of the Brexit referendum. Imagine exit referendums across the EU in the next 10 or 20 years; the EU could easily be dismantled … So nothing will stand if we don’t defend what we have achieved after so many generations of sacrifice.”

You don’t have to subscribe to the electric radicalism of Volt’s pan-European federalist programme to appreciate the force of Julio’s appeal. I myself think more gradualist recipes for EU reform are more realistic. There are multiple variants of pro-Europeanism on offer from different parties in this month’s European elections, most of them acknowledging the need for reform. In Britain, five parties (not including Labour) are unambiguously in favour of the country staying in the EU. What is clear is that for once, and at last, these European elections really are about the future of Europe. Across 28 countries, new parties and old ghosts compete for the hearts of voters, with close to 100 million of them still undecided how they will vote. What is called for now, in every corner of our continent, is the defence of our common European home, not with arms but through the ballot box. Your continent needs you.