The best thing Germany could do for Europe is quit the single currency – but it won’t

Larry Elliott in The Guardian



 

‘Germany is the one country that has really benefited from the single currency.’ Photograph: Hannelore Foerster/Getty Images


Even when it was clearly in decline, the Soviet Union commanded loyal devotion. Its admirers could never quite grasp that the nation instrumental in winning the second world war had a broken economy.

The same cognitive dissonance applies to the European Union today. There is the EU as it exists in the minds of its most avid supporters: fast-growing, a defender of progressive values, fighting the good fight against Thatcherism, and marching steadfastly towards greater integration.

Then there is the EU as it really is: struggling economically; wedded to an aggressive form of neoliberal economics; insistent that there is no alternative to a top-down, ever-closer union; and spawning anti-elite parties across the continent.

Like the USSR under Gorbachev, Europe needs radical reform before it is too late because, as George Soros noted last week, everything that could go wrong has gone wrong. The EU is saddled with a single currency that doesn’t work but unable to admit it. It has forced its weaker members to suffer the consequences of the euro’s design weaknesses with austerity policies; it has told those who complain about low growth and high unemployment to sort out their own problems through structural reforms (wage cuts and privatisation); and it has failed to comprehend the anger felt at mass immigration, which has increased the pool of readily available cheap labour. 

A particularly serious form of this cognitive dissonance seems to afflict some left-leaning remainers in the UK. They appear to have forced Jeremy Corbyn and John McDonnell into softening (or fudging) Labour’s stance on the single market, even though they were two of the very few Labour MPs who rightly predicted where Europe would end up if it insisted on following rightwing economic policies.

And their insistence that the best way to help those who voted for Brexit is a reformed UK in a reformed EU glides over the fact that they rarely come up with any ideas for what these reforms might look like or how they might come about. That, of course, is because they have no plan other than to return Britain to its blissful prelapsarian state before the referendum. Gordon Brown’s plan to tackle the causes of Brexit – low wages, the sense of being cast adrift, the pressures from migration, the loss of sovereignty and concerns about the NHS – is a welcome and timely exception to this rule. But Brown’s warning that serious change is needed to prevent Britain being permanently paralysed applies equally to the rest of Europe, divided between social liberals and conservatives, between a rich north and a poorer south, and between those for whom globalisation works and those for whom it doesn’t.

Those who think that Euroscepticism is just a British phenomenon need to take a long, hard look at the populism on the march across Europe and ask themselves why it is happening. Then they need to work out what they are going to do about it.

One option, proposed by Emmanuel Macron, is to make Europe more like the US. Macron’s argument, which makes a lot of sense, is that the single currency is an unfinished and hence inherently unstable construct, which needs a much bigger budget, run by a single finance minister, to even out variations in economic performance. But there is little appetite in the rest of the EU for Macron’s plan, particularly where it really counts: in Germany.

Another option would be for Italy to precipitate change by leaving the euro. This is even less likely than adoption of Macron’s plans, because as soon as the financial markets got whiff of the idea it would result in sky-high Italian interest rates and the collapse of an already shaky banking system. Italians with savings would see their value decimated by a return to the lira. The only way Italy will leave the euro is by mistake, and then it would be catastrophic.

A third option would be for the conduct of European economic policy to become less fixated on austerity. There could be less emphasis on hitting arbitrary budget deficit targets, a move away from the neoliberal structural adjustment policies imposed on those countries seeking support, an acceptance that those countries trying to cope with migration flows across the Mediterranean need much more financial help than they are currently getting, and a Marshall plan for Africa of the sort floated by Soros. All would be welcome: all would meet with strong opposition from Angela Merkel.

By far the best option would be for Germany to take the initiative and announce that it was leaving the single currency, taking a small group of northern European countries with it. This would have a number of clear advantages. First, it would remove the stigma of leaving the euro because the decision would be taken from a position of strength not weakness. Second, the new mark would be a lot stronger than the euro and that would help iron out some of the imbalances in Europe’s economy by making German exports dearer and German imports cheaper. Third, the new hard eurozone would be more like Germany’s original vision of what it imagined monetary union would look like.

Fourth, it would breathe new life into plans for European integration because it could start small and get bigger over time. Countries such as the Netherlands and Austria would be obvious choices as founder members of a smaller club bound by common fiscal rules.

Finally, it would make a reality of a multispeed Europe in which some countries would be members of the hard eurozone, some would be actively planning to join it once their economies were ready, and some would decide they never wanted to join.

As things stand, this is just as big a fantasy as Macron’s integrationist blueprint. Germany is the one country that has really benefited from the single currency and is not going to propose a hard-mark zone that might exclude France. Macron would throw a wobbly if it did.

But if European leaders had the opportunity to turn the clock back to before the euro was introduced, this is the sort of plan they would probably come up with. And if this sort of EU had seemed feasible in June 2016, the UK would never have voted for Brexit.

In silencing Euroscepticism, Italy’s president has gifted its far right

Yanis Varoufakis in The Guardian

Italy should be doing well. Unlike Britain, it exports considerably more to the rest of the world than it imports, while its government spends less (excluding interest payments) than the taxes it receives. And yet Italy is stagnating, its population in a state of revolt following two lost decades.

Italian president names interim prime minister until fresh elections


While it is true that Italy is in serious need of reforms, those who blame the stagnation on domestic inefficiencies and corruption must explain why Italy grew so fast throughout the postwar period until it entered the eurozone. Was its government and polity more efficient and virtuous in the 1970s and 1980s? Hardly.

The singular reason for Italy’s woes is its membership of a terribly designed monetary union, the eurozone, in which the Italian economy cannot breathe and which consecutive German governments refuse to reform.

In 2015 the Greek people elected a progressive, Europeanist government with a mandate to demand a new deal within the eurozone. In the space of six months, under the guidance of the German government, the European Union and its central bank crushed us. A few months later, I was asked by the Italian daily newspaper Corriere della Sera if I thought European democracy was at risk. I answered: “Greece surrendered but it was Europe’s democracy that was mortally wounded. Unless Europeans realise that their economy is run by unelected and unaccountable pseudo-technocrats, committing one gross error after another, our democracy will remain a figment of our collective imagination.”

Since then, the pro-establishment government of Italy’s Democratic party implemented, one after the other, the policies that the unelected bureaucrats of the EU demanded. The result was more stagnation. And so, in March, a national election delivered an absolute parliamentary majority to two anti-establishment parties which, despite their differences, shared doubts about Italy’s eurozone membership and a hostility to migrants. It was the bitter harvest of absent prospects and withering hope.

After a few weeks of the kind of post-election horse-trading common in countries like Italy and Germany, the Five Star Movement and League leaders Luigi Di Maio and Matteo Salvini struck a deal to form a government. Alas, President Sergio Mattarella used the powers bestowed upon him by the Italian constitution to prevent the formation of that government and, instead, handed the mandate to a technocrat, a former IMF employee who stands no chance of a vote of confidence in parliament.

Had Mattarella refused Salvini the post of interior minister, outraged by his promise to expel 500,000 migrants from Italy, I would be compelled to support him. But, no, the president had no such qualms. Not even for a moment did he consider vetoing the idea of a European country deploying its security forces to round up hundreds of thousands of people, cage them, and force them into trains, buses and ferries before sending them goodness knows where.

No, Mattarella chose to clash with an absolute majority of lawmakers for another reason: his disapproval of the finance minister designate. Why? Because the said gentleman, while fully qualified for the job, and despite his declaration that he would abide by the EU’s rules, had in the past expressed doubts about the eurozone’s architecture and has favoured a plan of EU exit just in case it was needed. It was as if Mattarella declared that reasonableness from a prospective finance minister constitutes grounds for his or her exclusion from the post.

What is so striking is that there is no thinking economist anywhere in the world who does not share concern about the eurozone’s faulty architecture. No prudent finance minister would neglect to develop a plan for euro exit. Indeed, I have it on good authority that the German finance ministry, the European Central Bank and every major bank and corporation have plans in place for the possible exit from the eurozone of Italy, even of Germany. Is Mattarella telling us that the Italian finance minister is banned from thinking of such a plan?


Beyond his moral failure, the president has made a major tactical blunder

Beyond his moral failure to oppose the League’s industrial-scale misanthropy, the president has made a major tactical blunder: he fell right into Salvini’s trap. The formation of another “technical” government, under a former IMF apparatchik, is a fantastic gift to Salvini’s party.

Salvini is secretly salivating at the thought of another election – one that he will fight not as the misanthropic, divisive populist that he is, but as the defender of democracy against the Deep Establishment. He has already scaled the moral high ground with the stirring words: “Italy is not a colony, we are not slaves of the Germans, the French, the spread or finance.”

If Mattarella takes solace from the fact that previous Italian presidents managed to put in place technical governments that did the establishment’s job (so “successfully” that the country’s political centre imploded), he is very badly mistaken. This time around he, unlike his predecessors, has no parliamentary majority to pass a budget or indeed to lend his chosen government a vote of confidence. Thus, the president is forced to call fresh elections that, courtesy of his moral drift and tactical blunder, will return an even stronger majority for Italy’s xenophobic political forces, possibly in alliance with the enfeebled Forza Italia of Silvio Berlusconi.

‘From bad to worse’: Greece hurtles towards a final reckoning

Helena Smith in The Guardian


Dimitris Costopoulos stood, worry beads in hand, under brilliant blue skies in front of the Greek parliament. Wearing freshly pressed trousers, polished shoes and a smart winter jacket – “my Sunday best” – he had risen at 5am to get on the bus that would take him to Athens 200 miles away and to the great sandstone edifice on Syntagma Square. By his own admission, protests were not his thing.

At 71, the farmer rarely ventures from Proastio, his village on the fertile plains of Thessaly. “But everything is going wrong,” he lamented on Tuesday, his voice hoarse after hours of chanting anti-government slogans.

---For Background Knowledge read:

Yanis Varoufakis and the Greek Tragedy

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“Before there was an order to things, you could build a house, educate your children, spoil your grandchildren. Now the cost of everything has gone up and with taxes you can barely afford to survive. Once I’ve paid for fuel, fertilisers and grains, there is really nothing left.”

Costopoulos is Greece’s Everyman; the human voice in a debt crisis that refuses to go away. Eight years after it first erupted, the drama shows every sign of reigniting, only this time in a new dark age of Trumpian politics, post-Brexit Europe, terror attacks and rise of the populist far right.

“I grow wheat,” said Costopoulos, holding out his wizened hands. “I am not in the building behind me. I don’t make decisions. Honestly, I can’t understand why things are going from bad to worse, why this just can’t be solved.”

As Greece hurtles towards another full-blown confrontation with the creditors keeping it afloat, and as tensions over stalled bailout negotiations mount, it is a question many are asking.

The country’s epic struggle to avert bankruptcy should have been settled when Athens received €110bn in aid – the biggest financial rescue programme in global history – from the EU and International Monetary Fund in May 2010. Instead, three bailouts later, it is still wrangling over the terms of the latest €86bn emergency loan package, with lenders also at loggerheads and diplomats no longer talking of a can, but rather a bomb, being kicked down the road. Default looms if a €7.4bn debt repayment – money owed mostly to the European Central Bank – is not honoured in July.



Farmer Dimitris Costopoulos in front of the Greek parliament in Athens. Photograph: Helena Smith for the Observer

Amid the uncertainty, volatility has returned to the markets. So, too, has fear, with an estimated €2.2bn being withdrawn from banks by panic-stricken depositors since the beginning of the year. With talk of Greece’s exit from the euro being heard again, farmers, trade unions and other sectors enraged by the eviscerating effects of austerity have once more come out in protest.

From his seventh-floor office on Mitropoleos, Makis Balaouras, an MP with the governing Syriza party, has a good view of the goings-on in Syntagma. Demonstrations – what the former trade unionist calls “the movement” – are a fine thing. “I wish people were out there mobilising more,” he sighed. “Protests are in our ideological and political DNA. They are important, they send a message.”

This is the irony of Syriza, the leftwing party catapulted to power on a ticket to “tear up” the hated bailout accords widely blamed for extraordinary levels of Greek unemployment, poverty and emigration. Two years into office it has instead overseen the most punishing austerity measures to date, slashing public-sector salaries and pensions, cutting services, agreeing to the biggest privatisation programme in European history and raising taxes on everything from cars to beer – all of which has been the price of the loans that have kept default at bay and Greece in the euro.

In the maelstrom the economy has improved, with Athens achieving a noticeable primary surplus last year, but the social crisis has intensified.

For men like Balaouras, who suffered appalling torture for his leftwing beliefs at the hands of the 1967-74 colonels’ regime, the policies have been galling. With the IMF and EU arguing over the country’s ability to reach tough fiscal targets when the current bailout expires in August next year, the demand for €3.6bn of more measures has left many in Syriza reeling. Without upfront legislation on the reforms, creditors say, they cannot conclude a compliance review on which the next tranche of bailout aid hangs.

“We had an agreement,” insisted Balaouras, looking despondently down at his desert boots. “We kept to our side of the deal, but the lenders haven’t kept to their side because now they are asking for more. We want the review to end. We want to go forward. This situation is in the interests of no one. But to get there we have to have an honourable compromise. Without that there will be a clash.”

It had been hoped that an agreement would be struck on Monday at what had been billed as a high-stakes meeting of euro area finance ministers. On Friday, EU officials announced that the deadline had been all but missed because there had been little convergence between the two sides.

With the Netherlands holding general elections next month, and France and Germany also heading to the polls in May and September, fears of the dispute becoming increasingly politicised have added to its complexity. Highlighting those concerns, the German chancellor, Angela Merkel, attempted to end the rift that has emerged between eurozone lenders and the IMF over the fund’s insistence that Greece can only begin to recover if its €320bn debt pile is reduced substantially.

In talks with Christine Lagarde, the Washington-based IMF’s managing director, Merkel agreed to discuss the issue during a further meeting between the two women to be held on Wednesday. The IMF has steadfastly refused to sign up to the latest bailout, arguing that Greek debt is not only unmanageable but on a trajectory to become explosive by 2030. Berlin, the biggest contributor of the €250bn Greece has so far received, says it will be unable to disburse further funds without the IMF on board.

The assumption is that the prime minister, Alexis Tsipras, will cave in, just as he did when the country came closest yet to leaving the euro at the height of the crisis in the summer of 2015. But the 41-year-old leader, like Syriza, has been pummelled in the polls. Persuading disaffected backbenchers to support more measures, and then selling them to a populace exhausted by repeated rounds of austerity, will be extremely difficult. Disappointment has increasingly given way to the death of hope – a sentiment reinforced by the realisation that Cyprus and other bailed-out countries, by contrast, are no longer under international supervision.

In his city centre office, the former finance minister Evangelos Venizelos pondered where Greece’s predicament was now. “[We are] at the same point we were several years ago,” he joked. “The only difference is that anti-European sentiment is growing. What was once a very friendly country towards Europe is becoming increasingly less so, and with that comes a lot of danger, a lot of risk.”

When historians look back they, too, may conclude that Greece has expended a great deal of energy not moving forward at all.

The arc of crisis that has swept the country – coursing like a cancer through its body politic, devastating its public health system, shattering lives – has been an exercise in the absurd. The feat of pulling off the greatest fiscal adjustment in modern times has spawned a slump longer and deeper than the Great Depression, with the Greek economy shrinking more than 25% since the crisis began.

Even if the latest impasse is broken and a deal is reached with creditors soon, few believe that in a country of weak governance and institutions it will be easy to enforce. Political turbulence will almost certainly beckon; the prospect of “Grexit” will grow.

“Grexit is the last thing we want, but we may arrive at a point of serious dilemmas,” said Venizelos. “Whatever deal is reached will be very difficult to implement, but that notwithstanding, it is not the memoranda [the bailout accords] that caused the crisis. The crisis was born in Greece long before.”

Like every crisis government before it, Tsipras’s administration is acutely aware that salvation will come only when Greece can return to the markets and raise funds. What happens in the weeks ahead could determine if that is likely to happen at all.

Back in Syntagma, Costopoulos the good-natured farmer ponders what lies ahead. Like every Greek, he stands to be deeply affected. “All I know is that we are all being pushed,” he said, searching for the right words. “Pushed in the direction of somewhere very explosive, somewhere we do not want to be.”

Seven changes needed to save the euro and the EU

Joseph Stiglitz in The Guardian

To say that the eurozone has not been performing well since the 2008 crisis is an understatement. Its member countries have done more poorly than the European Union countries outside the eurozone, and much more poorly than the United States, which was the epicentre of the crisis.

The worst-performing eurozone countries are mired in depression or deep recession; their condition – think of Greece – is worse in many ways than what economies suffered during the Great Depression of the 1930s. The best-performing eurozone members, such as Germany, look good, but only in comparison; and their growth model is partly based on beggar-thy-neighbour policies, whereby success comes at the expense of erstwhile “partners”.

Four types of explanation have been advanced to explain this state of affairs.Germany likes to blame the victim, pointing to Greece’s profligacy and the debt and deficits elsewhere. But this puts the cart before the horse: Spain and Ireland had surpluses and low debt-to-GDP ratios before the euro crisis. So the crisis caused the deficits and debts, not the other way around.

Deficit fetishism is, no doubt, part of Europe’s problems. Finland, too, has been having trouble adjusting to the multiple shocks it has confronted, with GDP in 2015 around 5.5% below its 2008 peak.

Other “blame the victim” critics cite the welfare state and excessive labour-market protections as the cause of the eurozone’s malaise. Yet some of Europe’s best-performing countries, such as Sweden and Norway, have the strongest welfare states and labour-market protections.

Many of the countries now performing poorly were doing very well – above the European average – before the euro was introduced. Their decline did not result from some sudden change in their labour laws, or from an epidemic of laziness in the crisis countries. What changed was the currency arrangement.

The second type of explanation amounts to a wish that Europe had better leaders, men and women who understood economics better and implemented better policies. Flawed policies – not just austerity, but also misguided so-called structural reforms, which widened inequality and thus further weakened overall demand and potential growth – have undoubtedly made matters worse.

But the eurozone was a political arrangement, in which it was inevitable that Germany’s voice would be loud. Anyone who has dealt with German policymakers over the past third of a century should have known in advance the likely result. Most important, given the available tools, not even the most brilliant economic tsar could not have made the eurozone prosper.

The third set of reasons for the eurozone’s poor performance is a broader rightwing critique of the EU, centred on the eurocrats’ penchant for stifling, innovation-inhibiting regulations. This critique, too, misses the mark. The eurocrats, like labour laws or the welfare state, didn’t suddenly change in 1999, with the creation of the fixed exchange-rate system, or in 2008, with the beginning of the crisis. More fundamentally, what matters is the standard of living, the quality of life. Anyone who denies how much better off we in the west are with our stiflingly clean air and water should visit Beijing.

That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. The euro was flawed at birth. Even the best policymakers the world has ever seen could not have made it work. The eurozone’s structure imposed the kind of rigidity associated with the gold standard. The single currency took away its members’ most important mechanism for adjustment – the exchange rate – and the eurozone circumscribed monetary and fiscal policy.

In response to asymmetric shocks and divergences in productivity, there would have to be adjustments in the real (inflation-adjusted) exchange rate, meaning that prices in the eurozone periphery would have to fall relative to Germany and northern Europe. But, with Germany adamant about inflation – its prices have been stagnant – the adjustment could be accomplished only through wrenching deflation elsewhere. Typically, this meant painful unemployment and weakening unions; the eurozone’s poorest countries, and especially the workers within them, bore the brunt of the adjustment burden. So the plan to spur convergence among eurozone countries failed miserably, with disparities between and within countries growing.

This system cannot and will not work in the long run: democratic politics ensures its failure. Only by changing the eurozone’s rules and institutions can the euro be made to work. This will require seven changes:

• abandoning the convergence criteria, which require deficits to be less than 3% of GDP

• replacing austerity with a growth strategy, supported by a solidarity fund for stabilisation

• dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism

• better burden-sharing during adjustment, with countries running current-account surpluses committing to raise wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits;

• changing the mandate of the European Central Bank, which focuses only on inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well

• establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a “banking union”

• and encouraging, rather than forbidding, industrial policies designed to ensure that the eurozone’s laggards can catch up with its leaders.
From an economic perspective, these changes are small; but today’s eurozone leadership may lack the political will to carry them out. That doesn’t change the basic fact that the current halfway house is untenable. A system intended to promote prosperity and further integration has been having just the opposite effect. An amicable divorce would be better than the current stalemate.

Of course, every divorce is costly; but muddling through would be even more costly. As we’ve already seen this summer in the United Kingdom, if European leaders can’t or won’t make the hard decisions, European voters will make the decisions for them – and the leaders may not be happy with the results.

Brexit won’t shield Britain from the horror of a disintegrating EU

Yannis Varoufakis in The Guardian


Leave won because too many British voters identified the EU with authoritarianism, irrationality and contempt for parliamentary democracy while too few believed those of us who claimed that another EU was possible.

I campaigned for a radical remain vote reflecting the values of our pan-European Democracy in Europe Movement (DiEM25). I visited towns in England, Wales, Scotland and Northern Ireland, seeking to convince progressives that dissolving the EU was not the solution. I argued that its disintegration would unleash deflationary forces of the type that predictably tighten the screws of austerity everywhere and end up favouring the establishment and its xenophobic sidekicks. Alongside John McDonnell, Caroline Lucas, Owen Jones, Paul Mason and others, I argued for a strategy of remaining in but against Europe’s established order and institutions. 

Against us was an alliance of David Cameron (whose Brussels’ fudge reminded Britons of what they despise about the EU), the Treasury (and its ludicrous pseudo-econometric scare-mongering), the City (whose insufferable self-absorbed arrogance put millions of voters off the EU), Brussels (busily applying its latest treatment of fiscal waterboarding to the European periphery), Germany’s finance minister Wolfgang Schäuble (whose threats against British voters galvanised anti-German sentiment), France’s pitiable socialist government, Hillary Clinton and her merry Atlanticists (portraying the EU as part of another dangerous “coalition of the willing") and the Greek government (whose permanent surrender to punitive EU austerity made it so hard to convince the British working class that their rights were protected by Brussels).
The repercussions of the vote will be dire, albeit not the ones Cameron and Brussels had warned of. The markets will soon settle down, and negotiations will probably lead to something like a Norwegian solution that allows the next British parliament to carve out a path toward some mutually agreed arrangement. Schäuble and Brussels will huff and puff but they will, inevitably, seek such a settlement with London. The Tories will hang together, as they always do, guided by their powerful instinct of class interest. However, despite the relative tranquillity that will follow on from the current shock, insidious forces will be activated under the surface with a terrible capacity for inflicting damage on Europe and on Britain.

Italy, Finland, Spain, France, and certainly Greece, are unsustainable under the present arrangements. The architecture of the euro is a guarantee of stagnation and is deepening the debt-deflationary spiral that strengthens the xenophobic right. Populists in Italy and Finland, possibly in France, will demand referendums or other ways to disengage.

‘The markets will soon settle down, and negotiations will probably lead to something like a Norwegian solution that allows the next British parliament to carve out a path toward some mutually agreed arrangement.’ Photograph: Leon Neal/AFP/Getty Images

The only man with a plan is Germany’s finance minister. Schäuble recognises in the post-Brexit fear his great opportunity to implement a permanent austerity union. Under his plan, eurozone states will be offered some carrots and a huge stick. The carrots will come in the form of a small eurozone budget to cover, in some part, unemployment benefits and bank deposit insurance. The stick will be a veto over national budgets.

If I am right, and Brexit leads to the construction of a permanent austerian iron cage for the remaining EU member states, there are two possible outcomes: One is that the cage will hold, in which case the institutionalised austerity will export deflation to Britain but also to China (whose further destabilisation will have secondary negative effects on Britain and the EU).

Another possibility is that the cage will be breached (by Italy or Finland leaving, for instance), the result being Germany’s own departure from the collapsing eurozone. But this will turn the new Deutschmark zone, which will probably end at the Ukrainian border, into a huge engine of deflation (as the new currency goes through the roof and German factories lose international markets). Britain and China had better brace themselves for an even greater deflation shock wave under this scenario.

The horror of these developments, from which Britain cannot be shielded by Brexit, is the main reason why I, and other members of DiEM25, tried to save the EU from the establishment that is driving Europeanism into the ground. I very much doubt that, despite their panic in Brexit’s aftermath, EU leaders will learn their lesson. They will continue to throttle voices calling for the EU’s democratisation and they will continue to rule through fear. Is it any wonder that many progressive Britons turned their back on this EU?

EU referendum full results – find out how your area voted



While I remain convinced that leave was the wrong choice, I welcome the British people’s determination to tackle the diminution of democratic sovereignty caused by the democratic deficit in the EU. And I refuse to be downcast, even though I count myself on the losing side of the referendum.

As of today, British and European democrats must seize on this vote to confront the establishment in London and Brussels more powerfully than before. The EU’s disintegration is now running at full speed. Building bridges across Europe, bringing democrats together across borders and political parties, is what Europe needs more than ever to avoid a slide into a xenophobic, deflationary, 1930s-like abyss.

George Soros on the consequences of Brexit

George Soros in The Guardian

David Cameron, along with the Treasury, the Bank of England, the International Monetary Fund and others have been attacked by the leave campaign for exaggerating the economic risks of Brexit. This criticism has been widely accepted by the British media and many financial analysts. As a result, British voters are now grossly underestimating the true costs of leaving.

Too many believe that a vote to leave the EU will have no effect on their personal financial position. This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously. It would also have an immediate and dramatic impact on financial markets, investment, prices and jobs.

As opinion polls on the referendum result fluctuate, I want to offer a clear set of facts, based on my six decades of experience in financial markets, to help voters understand the very real consequences of a vote to leave the EU.

The Bank of England, the Institute for Fiscal Studies and the IMF have assessed the long-term economic consequences of Brexit. They suggest an income loss of £3,000 to £5,000 annually per household – once the British economy settles down to its new steady-state five years or so after Brexit. But there are some more immediate financial consequences that have hardly been mentioned in the referendum debate.

To start off, sterling is almost certain to fall steeply and quickly if there is a vote to leave– even more so after yesterday’s rebound as markets reacted to the shift in opinion polls towards remain. I would expect this devaluation to be bigger and more disruptive than the 15% devaluation that occurred in September 1992, when I was fortunate enough to make a substantial profit for my hedge fund investors, at the expense of the Bank of England and the British government.

It is reasonable to assume, given the expectations implied by the market pricing at present, that after a Brexit vote the pound would fall by at least 15% and possibly more than 20%, from its present level of $1.46 to below $1.15 (which would be between 25% and 30% below its pre-referendum trading range of $1.50 to $1.60). If sterling fell to this level, then ironically one pound would be worth about one euro – a method of “joining the euro” that nobody in Britain would want.

Brexiters seem to recognise that a sharp devaluation would be almost inevitable after Brexit, but argue that this would be healthy, despite the big losses of purchasing power for British households. In 1992 the devaluation actually proved very helpful to the British economy, and subsequently I was even praised for my role in helping to bring it about.

But I don’t think the 1992 experience would be repeated. That devaluation was healthy because the government was relieved of its obligation to “defend” an overvalued pound with damagingly high interest rates after the breakdown of the exchange rate mechanism. This time, a large devaluation would be much less benign than in 1992, for at least three reasons.

First, the Bank of England would not cut interest rates after a Brexit devaluation (as it did in 1992 and also after the large devaluation of 2008) because interest rates are already at the lowest level compatible with the stability of British banks. That, incidentally, is another reason to worry about Brexit. For if a fall in house prices and loss of jobs causes a recession after Brexit, as is likely, there will be very little that monetary policy can do to stimulate the economy and counteract the consequent loss of demand.

Second, the UK now has a very large current account deficit – much larger, relatively, than in 1992 or 2008. In fact Britain is more dependent than at any time in history on inflows of foreign capital. As the governor of the Bank of England Mark Carney said, Britain “depends on the kindness of strangers”. The devaluations of 1992 and 2008 encouraged greater capital inflows, especially into residential and commercial property, but also into manufacturing investments. But after Brexit, the capital flows would almost certainly move the other way, especially during the two-year period of uncertainty while Britain negotiates its terms of divorce with a region that has always been – and presumably will remain – its biggest trading and investment partner.

Third, a post-Brexit devaluation is unlikely to produce the improvement in manufacturing exports seen after 1992, because trading conditions would be too uncertain for British businesses to undertake new investments, hire more workers or otherwise add to export capacity.

For all these reasons I believe the devaluation this time would be more like the one in 1967, when Harold Wilson famously declared that “the pound in your pocket has not been devalued”, but the British people disagreed with him, quickly noticing that the cost of imports and foreign holidays were rising sharply and that their true living standards were going down. Meanwhile financial speculators, back then called the Gnomes of Zurich, were making large profits at Britain’s expense.

Today, there are speculative forces in the markets much bigger and more powerful. And they will be eager to exploit any miscalculations by the British government or British voters. A vote for Brexit would make some people very rich – but most voters considerably poorer.

I want people to know what the consequences of leaving the EU would be before they cast their votes, rather than after. A vote to leave could see the week end with a Black Friday, and serious consequences for ordinary people.

The progressive argument for leaving the EU is not being heard

Larry Elliot in The Guardian


It is now nearly nine years since the problems of three hedge funds heralded the arrival of global financial and economic chaos. Britain’s EU referendum this week is the latest manifestation of that crisis.

That is not the way the debate in the UK has been framed. For one side, the decision is all about taking back control, especially over immigration. For the other, it is about the potential consequences for the economy in general and individuals in particular.

This narrow focus reflects the fact that the referendum has been a contest between two wings of the Conservative party, neither of which has any great love for the EU. Few of the bigger themes have been drawn out by this blue-on-blue affair.

There is, however, an obvious reason why immigration has proved an effective weapon for the leave side. Life is tougher for millions of Britons on modest incomes than it was a decade ago.

Contrast the state of the UK when the accession to the EU of Poland and other former Soviet bloc countries led to strong net migration in 2004. At that time, average earnings were growing by 4-5% a year, the Labour government was investing heavily in schools and hospitals and the eurozone appeared to be over its initial problems.

A second big increase in net migration has occurred since the great recession of 2008 and 2009, but the economic and political environment has changed. Real earnings have been squeezed, the expansion of the public sector has been halted and the eurozone has been in a state of permanent crisis.

The British economy has become increasingly dominated by the fortunes of the financial sector, with the bankers responsible for the worst slump since the 1930s escaping pretty much scot free. London and the rest of the UK have become two countries, which explains why hostility to the EU increases with distance from the capital.

Nor is this phenomenon confined to the UK. It has become commonplace to bracket growing support for leave in poorer parts of Britain with Donald Trump’s emergence as the Republican candidate in this year’s US presidential election, but populist and anti EU sentiment is on the rise across Europe.

The US research company Pew conducted a survey earlier this year to test sentiment towards the EU. In Britain, 48% said they had an unfavourable view of the EU and 44% said they had a favourable view. In France, the anti-EU sentiment was much more pronounced at 61% and 38% in favour, while in Germany there had been an eight-point drop in support for the EU in the past year, leaving those in favour only narrowly ahead at 50% against 48% .
The impact of the great recession in Europe has been exacerbated by monetary union, a policy blunder of catastrophic proportions. The euro has been responsible for the slow growth and high unemployment that has angered the French, and the high debts and that have alarmed the Germans. Stir in the unexpectedly large flows of refugees from the Middle East and North Africa, and you have a toxic mix.

Last summer, when the Greek debt crisis was at its most intense, Europe’s leaders came up with a plan. The “five presidents’ report” laid down a step-by-step approach to a United States of Europe, with banking union followed by a common budget and finally political union. Getting even the least controversial part of this agenda – banking union – past sceptical European electorates has proved impossible. Yet the alternative approach, breaking up the euro and giving countries more control over their own economic destiny, is seen as not just potentially dangerous but also a betrayal of the idea of ever-closer union.

When Britain first sought to join the Common Market in the 1960s it did so for pragmatic, not ideological reasons. There was no great desire to pool sovereignty in pursuit of wider political goals, merely a feeling that Germany, France and the Netherlands were growing faster and had more modern economies. After Britain finally became a member of the European club in 1973, there was admiration for Germany’s control of inflation. In the 1980s, the UK left wing changed sides because it saw Europe as a bulwark against Margaret Thatcher. European solidarity was advocated in the 1990s as the best defence against the forces of global capitalism unleashed by the end of the cold war, which is why many on the left wanted Britain to join the single currency.

Times have changed. Even with a welcome pickup in activity in the past year, Europe’s growth performance since the launch of the euro has been pitiful. Talk of protecting workers’ rights is meaningless unless you have a job, and millions of Europe’s citizens do not. The structural adjustment programmes forced on those countries that have required financial bailouts have involved savage attacks on workers’ rights, including collective bargaining. The EU has not taken the fight to multinational capital. Rather, Brussels has become a honeypot for corporate lobbyists demanding deregulation and the transatlantic trade and investment partnership (TTIP).

One of the great ironies of the UK’s referendum debate is that Europe, with its austerity programmes and its drift towards neoliberalism, has been moving in a direction that rightwing Conservatives would tend to support. Just as in the UK in the 1980s, unemployment has weakened the power of organised labour and the trend is for more competition and for free markets.

There is a modern and progressive argument for leaving the EU, but it has struggled to be heard during this dispiriting campaign. It is that Europe is unable to deliver because it is wedded to backward-looking ideas. Or to adapt the words that David Cameron used on his first outing as Conservative leader to taunt Tony Blair, it was the future once.

There is a leftwing case for staying in too. This accepts that the EU is far from perfect and must change, but says the answer is to work for a kinder, gentler, greener and more equal Europe from within. Exit, by contrast, would be the catalyst for a breakup of the EU that would give rise to aggressive nationalism and leave Britain at the mercy of rightwing Conservatives who would have the wherewithal to cause immense damage before there was a chance to get rid of them at an election.

Yet, it is stretching a point to argue that the treatment of Greece has much to do with the theories of Maynard Keynes or that TTIP would sit comfortably with Fritz Schumacher’s “small is beautiful” vision. Europe has been going in an entirely different direction, which is why aggressive nationalism will continue to be a problem even if Britain votes to remain. That’s because Europe’s economic model isn’t working and hasn’t been working for a long time. Bad economics leads to bad politics. Always has, always will.

Why the economic consensus on Brexit is flawed

Ashoka Mody in The Independent

Consensus amongst economists quickly unravels. In April 1999, “Britain’s top academic economists” voted strongly in favour of switching from the pound to the euro. Mercifully, the government had better sense.

In August 2008, Olivier Blanchard, then a professor at Massachusetts Institute of Technology, reported that economists shared a common vision of macroeconomics “because”, he said, “facts do not go away.” But in 2014, reflecting on the failures of macroeconomics, Blanchard conceded that economists were “fooled” because they were not looking at the right facts.

In the past few weeks, virtually all official agencies have insisted that leaving the European Union — a British exit or “Brexit” — will impose enormous costs on the British. Indeed, these agencies have competed with each other in escalating the cost estimates.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), pithily summarised the consensus: the consequences of Brexit, she said, would be “pretty bad to very, very bad”.

The UK Treasury, the Organisation for Economic Cooperation and Development (OECD) and the IMF say it is a “fact” that Britain will be permanently poorer because it will trade less with the EU. In a terrifying warning, the Bank of England added that financial markets will panic and create senseless havoc.

Adding comic relief, George Osborne predicts that house prices will fall by 18 percent. Not to be outdone, G7 leaders say that the world economic system, as we now know it, will fall apart if Britain exits the EU.

Michael Mussa, my first boss at the IMF, used to say that a number must pass the “smell test” if it is to be used for making decisions. Conducting a “smell test” requires going back to core principles. When we do that, we reach a humbler conclusion: economics is neutral on whether to leave or remain. The battle for Brexit must be fought on other grounds.

All economists – not just the current protagonists – agree that a country gains by increasing its overall international trade. Greater trade makes it possible to produce more of and export what the country does best (its comparative advantage) and import what it does less well. Everyone gains.

But there is no gain in exporting to Germany, Spain and Poland rather than to the United States, Korea and China. In fact, if preferential access diverts trade away from the United States to Germany, then departure from the country’s comparative advantage hurts rather than helps, as Columbia University’s trade theorist Jagdish Bhagwati has long argued.

So the claim that Brexit will impose a huge cost rests on the twin beliefs that British trade with Germany will go down sharply and trade with the United States will not increase. Is that reasonable?

First, British trade with Germany will not decline significantly. As economists have long known, trade is embedded in business and social networks into which partners invest enormous social capital. Studies repeatedly show that businesses make accommodations in profit margins to retain the benefits of trust and reliability.

For this reason, all productive trading relationships will remain intact. For this reason too, German Finance Minister Wolfgang Schaeuble’s threat that renegotiation of Britain’s trade arrangements with the EU would be “most difficult” and “poisonous” is bluster. Germans run a trade surplus with Britain. Mr Schaeuble can humiliate the IMF, but he dare not hurt the interests of his exporters (or his importers).

And even if British trade with the EU falls, trade with other regions will undoubtedly increase. Because Europe has been growing at a slower pace than the rest of the world, trade has been shifting away from Europe for years.

With Europe rapidly aging and struggling to revive productivity growth, the shift to non-European markets is bound to continue. Most firms already sell to multiple markets and Brexit will prompt them to strengthen their non-European networks.

What about costs of transition? Britain exports 13 percent of its GDP to the EU. Say about a quarter of those export products – about 3 percent of GDP – have to eventually be sold either in Britain or outside Europe.

If the adjustment each year costs somewhere between one-tenth and one-fifth of 3 percent of GDP, it is possible that GDP will be lower by about half-a-percent in the peak transition year. Thus the costs will be modest and short-lived.

So how do the Treasury, OECD and the IMF conclude that Brexit could reduce GDP by between 6 and 10 percent forever? The vast bulk of those large estimates come from the further assumption that reduced trade will shrink British productivity growth. This is disingenuous. There is simply no evidence that less trade lowers productivity growth – and there is not even a logical connection between productivity growth and a shift in trade from Germany to the United States.

More trade has been associated with higher productivity growth when countries have emerged from economic isolation. But for the sophisticated British economy, this possibility should be completely dismissed.

The Bank of England’s claims are the most outrageous of all. The Bank says that fear of Brexit is holding investment back and, thus, causing growth to slow down in anticipation. How can it know that? British GDP is slowing for so many reasons.

The economy has moved faithfully with the magnitude of fiscal austerity: gratuitous austerity delayed recovery from the Great Recession, brief fiscal easing in 2014 helped achieve a short-lived rebound, and now the IMF projects more austerity in the pipeline and slower growth. Meanwhile, the world economy is slowing: the United States had a weak first quarter, China is struggling and world trade is barely crawling forward. The Bank of England is cynically exploiting its authority by claiming to detect Brexit-induced anxiety in the cloud of short-term data.

But more outrageous is the Bank’s warning of mayhem if Britain votes to leave. Nobel Laureates George Akerlof and Robert Shiller have explained that people act in accordance with the narratives they live. The Bank is, in effect, building a narrative of panic, which could become self-fulfilling. The central bank’s proper role is to reassure and stand-by to stem panic.

Since 2010, official agencies have repeatedly promised global recovery. The forecasts fail because they all disregard inconvenient evidence. Now, the official consensus on the economic costs of Brexit has crossed the line into groupthink. A numerical illusion is masquerading as a “fact.” And when those in authority distort facts, they also subvert the cause of democracy.

Brexit may be the best answer to a dying eurozone

Larry Elliott in The Guardian

Staying in the EU means hitching ourselves to an undemocratic project run by and for a remote elite

 

Illustration by Ellie Foreman-Peck

The elephant in the room. Everybody knew what Mark Carney meant when he paused halfway through his regular three-monthly update on the state of the economy: the implications of Brexit.

The governor of the Bank of England did not pull any punches. He warned of a potential run on the pound and of possible problems financing the UK’s whopping balance of payments deficit. He said the Bank expected growth to be materially lower and inflation to be notably higher. Voters trust the Bank of England. They sat up and took notice. The opinion polls started to move in favour of remain. When the history of the referendum campaign is written, Carney’s may be seen as the decisive intervention.

In truth, there was more than one elephant in the room. Carney was right when he said there was a risk that the upheaval caused by Brexit could tip an already weakening economy into recession. But as elephants in the room go, this was the smaller, Indian version. The equivalent of the bigger, African elephant was the shocking state of the eurozone after the failure of the single currency experiment. This went unremarked by Carney, although it is relevant to the debate aboutEurope.

Why? Because, although Britain is likely to stay in the EU, Brexit will remain a live issue unless the eurozone can sort itself out. That means either admitting that the euro has been a terrible mistake, or going the whole hog and integrating further, with a single banking system, a Europe-wide treasury, and a democratically elected finance minister with the power to raise money in Germany and spend it in Greece. This is not going to happen any time soon, and perhaps never. Countries that joined the eurozone gave up a considerable amount of economic power when they adopted the euro, but they retained the right to raise their own taxes and make their own spending decisions.

Britain is not in the euro, for which we should all be thankful. But let’s be clear: staying in the EU means hitching the wagon to a currency zone unable to go forwards or backwards, and which will continue to struggle as a result.

The euro brought to fruition the idea of ever-closer union, a plan that dates back to the early 1950s. Lots of things considered good ideas back then are no longer considered quite so clever: system-built high-rise flats as the answer to slum housing; nuclear power to meet energy needs. Put ever-closer union in the same category as the Birmingham inner-city ring road: it seemed a good idea at the time.

Dan Atkinson and I spent the winter working on a book about the single currencycommissioned in the wake of last summer’s Greek crisis. The brief was to look at what had gone wrong from a left-of-centre perspective; to explore the widespread disquiet about the way in which a country that voted in January 2015 for an end to austerity ended up seven months later being forced to accept even deeper cuts in wages and spending.
The eurozone crisis is about more than Greece. It is about Italy, where the economy is barely any bigger now than it was when the single currency was introduced. And France, where unemployment is double the level of the UK or the US. And Finland, one of the most tech-savvy countries in Europe, where the economy is 7% smaller than it was before the start of the financial crisis. And even Germany, where an export boom and high corporate profits have been paid for by workers in the form of below-inflation pay increases.

Our investigations took us back to the last time Britain held a referendum on EU membership, when during the cabinet discussions Tony Benn warned that Britain was signing up for something that was undemocratic, deflationary and run in the interests of big business. “I can think of no body of men outside the Kremlin who have so much power without a shred of accountability for what they do,” Benn said.

Benn’s dystopian vision proved entirely accurate. When the architects of the new Europe looked to the future, they envisaged a new and better version of the United States of America. Europe would have all the good bits about the US – such as the economic dynamism, a large barrier-free market and a single currency – without any of the bad bits: the inequality, the high levels of incarceration, the poverty and the inadequate welfare safety net. 

This dream lives on. Yanis Varoufakis, the deposed finance minister of Greece, thinks the eurozone could be recast along Keynesian lines, with the rich and strong countries obliged to provide financial help to the poor and weak. Good luck with getting Germany to agree to that.
Economic policy has been relentlessly deflationary. The interests of bankers have been given a higher priority than workers’. Greece, Ireland, Portugal, Cyprus and Spain have been the laboratory mice in a continent-wide neoliberal experiment of a sort Tea Party Republicans in the US can only fantasise about.

Given the obscene level of long-term unemployment, the idea of Europe as the guardian of labour rights is laughable. The gap between the US and Europe has widened, not narrowed, since the launch of the single currency. Populist parties of both left and right are gaining in support. One left-of-centre argument against Brexit is that it would result in the breakup of the euro and by doing so set off a chain reaction that would lead to the next global crisis: a perfectly fair point. Those who fear that another recession and even higher levels of joblessness would threaten a return to the totalitarian politics of the 1930s are right to highlight the risks. Some on the left who want Brexit say that the time is not yet ripe.

The left-of-centre case for divorce is that Europe doesn’t work, is not remotely progressive and is heading for an existential crisis anyway. Last year’s threat was Grexit. This year’s threat is Brexit. Next year’s threat will be something else: Italy leaving the single currency, perhaps, or Marine Le Pen’s tilt for the French presidency.

This presents an opportunity for those who believe that the way ahead still involves closer integration. Jean Monnet, the godfather of the EU, always said that ever-closer union would be forged through crises, which is what Brexit would undoubtedly trigger.

If the polls are right, Britain seems unready to trigger this act of creative destruction and it will be left to Varoufakis to do out of office what he could not do in power: prove a different Europe is possible.

A different Europe is needed, but it is stretching credibility to imagine that the Europe of Greece and the Transatlantic Trade and Investment Partnership can easily morph into America with the nice people in charge. The eurozone is economically moribund, persists with policies that have demonstrably failed, is indifferent to democracy, is run by and for a small, self-perpetuating elite, and is slowing dying. The wrong comparison is being made. This is not the US without the electric chair; it is the USSR without the gulag.

The things economists know. . . and don’t know about Brexit

Roger Bootle in The Telegraph

Last week we were treated to a fine exhibition of the economist’s art. I refer to the Treasury study of the economic impact of Brexit, which told us that in 15 years’ time, on a central view, the average British household would be worse off by £4,300 a year. This episode has prompted me to think about what it is that economists know – and what they don’t.

It is clear that economists’ prognostications have, at best, a mixed record. Not only can economists not reliably tell you what GDP is going to be in two or three years’ time but, as a group, they seem pretty bad at anticipating major developments.

Although some economists did foresee the financial crisis, as a whole they did not. Nor did most foresee the emergence of a zero inflation/deflation world.

Let me say, though, that of its type, last week’s Treasury document was a fine specimen. A large team of economists has been working on it for the best part of a year, and these are good, professional people who have not simply been doing what they were told by their political bosses. Nevertheless, that doesn’t mean that what they have produced is of serious value. 

The problem with much of economics is that what we can readily measure, even when it is tendentious, is often the minor part of the question. Yet there is a natural tendency to measure what is measurable and to leave to one side, or to downplay, the things that are not.
The Treasury study concentrated on the effects of a Brexit on UK trade and the consequences for GDP and investment on a static “other things equal” basis. It assumed that we would be unable to secure any more favourable trade agreements with non-EU countries.

Interestingly, it did not begin to quantify the possible economic gains from a policy of radical deregulation. The reason is apparently that it is not clear that we would repeal and rescind EU legislation and directives and, in any case, the UK is a relatively lightly-regulated economy. The implication is that there is next to nothing to be gained from deregulation.

This is, to put it mildly, a rather odd stance to take – certainly if you were trying to be fair across all sides of the debate. After all, those economists who think that there is much to be gained economically from leaving the EU tend to rest their case mainly on large potential gains from EU deregulation.

Moreover, umpteen businesses across the country bemoan the costs of regulation on their operations. It is not that their case has been disproved by last week’s study; it has simply been ignored. 

The study, in accordance with convention, took a static approach to how the EU might evolve. True, this excluded some of the potential benefits of remaining in the EU from the extension of the single market. But it also excluded some of the most important negative possibilities.

Once the UK referendum is out of the way, if we vote to stay in, it is likely that the EU will turn quite nasty towards us. This will not only be because the EU’s leaders will be cheesed off with us, although they most certainly will be.

More importantly, they will think that we have shot our bolt. In particular, we would probably find that, far from rejoicing in the City’s role as Europe’s financial centre, the EU would renew its attempts to undermine it.

Meanwhile, the EU would have to embark on truly momentous changes in order to make the eurozone work. Banking union, fiscal union and political union must be put in place for the euro to survive.

We don’t know what effects this cocktail of changes will have upon European politics and economic performance – and hence on us.

The overwhelming majority of the EU will be inside the euro, and what needs to be done to make the euro work would be the EU’s leading concern.

We do not know what things will be forced upon us by qualified majority voting. Moreover, with the referendum behind us, there is a good chance of a renewed push to get the UK into the euro. What have the calculations that produce the figure £4,300 a year got to say about this? The answer, of course, is precisely nothing.

And all this is before we take account of the dynamic effects and their political consequences. Perhaps after a Brexit our leaders would become enmeshed in rivalrous infighting and it would be impossible to put together an economic programme for national renewal.

But there is surely a good chance, as Michael Gove suggested last week, that by contrast EU departure would be the equivalent of a shot in the arm.

Nor did the study have anything to say about the congestion and social costs implied by uncontrolled immigration, which are at the heart of so many people’s concerns about the EU.

Although the future is beset with uncertainty, about this issue we do know some things. We know that over recent decades the EU has been a comparative economic failure.

We know that unless something really radical happens, it is set to fall sharply in relative economic performance over the decades to come. We know that the EU is set to embark on a course of integration from which we aim to stand aside. We know that inside the EU we do not have full control of our destiny.

We know that inside the EU but outside the eurozone we will be marginalised.

I cannot say what all this means in terms of pounds per annum for the UK average household in 15 years’ time. But I can recognise the difference between a situation of opportunity and a pig in a poke.

Portugal's anti-euro Left banned from power

Constitutional crisis looms after anti-austerity Left is denied parliamentary prerogative to form a majority government


Ambrose Evans Pritchard in The Telegraph

Portugal has entered dangerous political waters. For the first time since the creation of Europe’s monetary union, a member state has taken the explicit step of forbidding eurosceptic parties from taking office on the grounds of national interest.


Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika.


He deemed it too risky to let the Left Bloc or the Communists come close to power, insisting that conservatives should soldier on as a minority in order to satisfy Brussels and appease foreign financial markets.

  “In 40 years of democracy, no government in Portugal has ever depended on the support of anti-European forces, that is to say forces that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as to dismantle monetary union and take Portugal out of the euro, in addition to wanting the dissolution of NATO,” said Mr Cavaco Silva.








“This is the worst moment for a radical change to the foundations of our democracy.

"After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets,” he said.

Mr Cavaco Silva argued that the great majority of the Portuguese people did not vote for parties that want a return to the escudo or that advocate a traumatic showdown with Brussels.

This is true, but he skipped over the other core message from the elections held three weeks ago: that they also voted for an end to wage cuts and Troika austerity. The combined parties of the Left won 50.7pc of the vote. Led by the Socialists, they control the Assembleia.

The conservative premier, Pedro Passos Coelho, came first and therefore gets first shot at forming a government, but his Right-wing coalition as a whole secured just 38.5pc of the vote. It lost 28 seats.

Newly re-elected Portuguese prime minister Pedro Passos Coelho

The Socialist leader, Antonio Costa, has reacted with fury, damning the president’s action as a “grave mistake” that threatens to engulf the country in a political firestorm.

“It is unacceptable to usurp the exclusive powers of parliament. The Socialists will not take lessons from professor Cavaco Silva on the defence of our democracy,” he said.

Mr Costa vowed to press ahead with his plans to form a triple-Left coalition, and warned that the Right-wing rump government will face an immediate vote of no confidence.

There can be no fresh elections until the second half of next year under Portugal’s constitution, risking almost a year of paralysis that puts the country on a collision course with Brussels and ultimately threatens to reignite the country’s debt crisis.

The bond market has reacted calmly to events in Lisbon but it is no longer a sensitive gauge now that the European Central Bank is mopping up Portuguese debt under quantitative easing.

Portugal is no longer under a Troika regime and does not face an immediate funding crunch, holding cash reserves above €8bn. Yet the IMF says the country remains “highly vulnerable” if there is any shock or the country fails to deliver on reforms, currently deemed to have “stalled”.

Public debt is 127pc of GDP and total debt is 370pc, worse than in Greece. Net external liabilities are more than 220pc of GDP.



The IMF warned that Portugal's “export miracle” remains narrowly based, the headline gains flattered by re-exports with little value added. “A durable rebalancing of the economy has not taken place,” it said.

“The president has created a constitutional crisis,” said Rui Tavares, a radical green MEP. “He is saying that he will never allow the formation of a government containing Leftists and Communists. People are amazed by what has happened.”

Mr Tavares said the president has invoked the spectre of the Communists and the Left Bloc as a “straw man” to prevent the Left taking power at all, knowing full well that the two parties agreed to drop their demands for euro-exit, a withdrawal from Nato and nationalisation of the commanding heights of the economy under a compromise deal to the forge the coalition.


President Cavaco Silva may be correct is calculating that a Socialist government in league with the Communists would precipitate a major clash with the EU austerity mandarins. Mr Costa’s grand plan for Keynesian reflation – led by spending on education and health – is entirely incompatible with the EU’s Fiscal Compact.

The secretary-general of the Portuguese Socialist Party, Antonio Costa, appears on Saturday after the election results are made public Photo: EPA

This foolish treaty law obliges Portugal to cut its debt to 60pc of GDP over the next 20 years in a permanent austerity trap, and to do it just as the rest of southern Europe is trying to do the same thing, and all against a backdrop of powerful deflationary forces worldwide.

The strategy of chipping away at the country’s massive debt burden by permanent belt-tightening is largely self-defeating, since the denominator effect of stagnant nominal GDP aggravates debt dynamics.

It is also pointless. Portugal will require a debt write-off when the next global downturn hits in earnest. There is no chance whatsoever that Germany will agree to EMU fiscal union in time to prevent this.

What Portugal needs to pay off (Source: Deutsche Bank)

The chief consequence of drawing out the agony is deep hysteresis in the labour markets and chronically low levels of investment that blight the future.

Mr Cavaco Silva is effectively using his office to impose a reactionary ideological agenda, in the interests of creditors and the EMU establishment, and dressing it up with remarkable Chutzpah as a defence of democracy.

The Portuguese Socialists and Communists have buried the hatchet on their bitter divisions for the first time since the Carnation Revolution and the overthrow of the Salazar dictatorship in the 1970s, yet they are being denied their parliamentary prerogative to form a majority government.

This is a dangerous demarche. The Portuguese conservatives and their media allies behave as if the Left has no legitimate right to take power, and must be held in check by any means.

These reflexes are familiar – and chilling – to anybody familiar with 20th century Iberian history, or indeed Latin America. That it is being done in the name of the euro is entirely to be expected.

Greece’s Syriza movement, Europe’s first radical-Left government in Europe since the Second World War, was crushed into submission for daring to confront eurozone ideology. Now the Portuguese Left is running into a variant of the same meat-grinder.

Europe’s socialists face a dilemma. They are at last waking up to the unpleasant truth that monetary union is an authoritarian Right-wing enterprise that has slipped its democratic leash, yet if they act on this insight in any way they risk being prevented from taking power.

Brussels really has created a monster.

Greek debt crisis: A tale of ritual humiliation

Mark Steel in The Independent

What a relief that the Greeks have finally seen sense, and agreed to Angela Merkel’s demand that their Prime Minister Alexis Tsipras must scrub Berlin with a dishcloth, and crawl along the banks of the Rhine in a thong barking like a dog.

The week before he’d agreed to dress as a fairy and sing “The Good Ship Lollipop” while German children poked him with stinging nettles, but now that isn’t enough. So he has to accept even more measures essential to stabilising the Greek economy, such as being hosed down with kebab fat while naming the German squad that won the 1954 World Cup.

Otherwise, as EU leaders made clear, there would be no way Greece could stay inside the solar system; they’d have to orbit a different star in a faraway galaxy, which could be extremely damaging to the Greek tourist industry.

Instead of inviting further chaos by leaving Greece in the hands of the Greeks, their finances have been handed over entirely to the only people we can trust to behave responsibly at all times: the banks. Thank the Lord we’ve got at least one institution that has never behaved irresponsibly or recklessly in any way.

Perhaps the Greeks should have gone to Brussels and said they were rebranding Greece, so it’s no longer a country, but a bank. They’d have been bailed out by lunch and given a free set of steak knives as an extra gift. Instead they’ve got to sell off their entire country. By Christmas you’ll be able to buy a family ticket for 300 quid to visit the Domino’s Parthenon, where you can watch a parade of philosophers dressed as your favourite pizzas, with Pythagoras pepperoni proving a particular favourite, then scream your way down the Acropolis on a log flume.

One of the main demands in the final deal is that the Greek state must sell off €50bn-worth of its assets, which amounts to everything it has. This is part of the drive to make the economy stable and efficient. This works as long as you assume privatisation unarguably makes an industry more efficient. Obviously there are examples such as the railways in Britain, where privatisation has resulted in cheap reliable trains on which you can always get a seat, it’s easy to buy tickets across different rail networks, and customers are even offered delightful unscheduled 40-minute stops outside London Bridge station to give you the opportunity to paint the view of a gasworks in Bermondsey.

The demands placed on Greece are so extreme that even the International Monetary Fund has declared them “unsustainable”. The IMF is the body that has spent 50 years forcing countries such as Tanzania and Haiti to cut wages and sell off its possessions, in return for loans it needs so it can pay off the interest on the last lot of money it borrowed (from the IMF). So when it says the demands on Greece are too harsh, it’s like making the leader of Isis say, “Steady on, that’s a bit too Islamic”.

Still, someone has to tell the Greeks they can’t expect to carry on getting something for nothing. And the European Central Bank and national central banks – who, according to the Jubilee Debt Campaign, “stand to make between €10bn and €22bn out of Greek repayments” – are exactly the right people to deliver that stern but fair message.

Christine Lagarde, managing director of the IMF, is paid a salary of €550,000 a year, and by special arrangement pays no tax on that whatsoever. So she’s certainly the right person to lecture the Greeks, because she’s never been behind on her tax payments once. Every month she dutifully pays her nothing bang on time; she understands the importance of behaving responsibly with public money.

The most perplexing part of this story is that, a few days ago, it seemed as if Alexis Tsipras and his party, Syriza, were set to resist the orders being thrown at them, especially as they’d gone to the trouble of winning a referendum on whether to accept the EU demands. I suppose Tsipras thought that when the majority of Greeks voted against, it was because they felt those demands weren’t harsh enough, and they deserved to be punished much more severely as they’d all been very naughty.

Because Tsipras went into negotiations making it clear he was desperate to keep Greece in the eurozone, the EU could demand whatever it liked, knowing he’d accept anything rather than abandon the euro.

That sounds like going into a car showroom and saying, “I desperately need a car right now and I’ll have anything rather than leave without one”. A salesman could say, “We’ve only got this one, it’s got no engine and the windscreen’s made of wood and it pongs as a family of weasels live on the back seat and the bonnet’s on fire, it’s £10,000”, and you’d have no choice but to take it.

But maybe he did have a choice, to tell the banks they’ve made plenty out of Greece as it is and so, on balance, the elected government had decided to go along with what the Greeks voted for twice in a few months – wasting their money on schools and old people in villages, rather than do the sensible thing and hand over every coin as interest payments to institutions such as Goldman Sachs.

They’d have been kicked out of the eurozone, and probably out of Uefa and the Eurovision Song Contest, and scratched off the Inter-rail map too. But they’d have been a little beacon for everyone across Europe who feels the banks aren’t acting entirely in our interests, probably enough people to worry Angela Merkel just a bit.

The World Today - GREECE: A PEOPLE BETRAYED

The moral crusade against Greece must be opposed

Zoe Williams in The Guardian


 

‘Greece is being sacrificed to maintain a set of delusions that enfeebles us all.’ Illustration by Robert G Fresson


‘This is our political alternative to neoliberalism and to the neoliberal process of European integration: democracy, more democracy and even deeper democracy,” said Alexis Tsipras on 18 January 2014 in a debate organised by the Dutch Socialist party in Amersfoort. Now the moment of deepest democracy looms, as the Greek people go to the polls on Sunday to vote for or against the next round of austerity.

Unfortunately, Sunday’s choice will be between endless austerity and immediate chaos. As comfortable as it is to argue from the sidelines that maybe Grexit in the medium term won’t hurt as much as 30 years’ drag on GDP from swingeing repayments, no sane person wants either. The vision that Syriza swept to power on was that if you spoke truth to the troika plainly and in broad daylight, they would have to acknowledge that austerity was suffocating Greece. 

They have acknowledged no such thing. Whatever else one could say about the handling of the crisis, and whatever becomes of the euro, Sunday will be the moment that unstoppable democracy meets immovable supra-democracy. The Eurogroup has already won: the Greek people can vote any way they like – but what they want, they cannot have.

On Saturday the Eurogroup broke with its tradition of unanimity, issuing a petulant statement “supported by all members except the Greek member”. Yanis Varoufakis, the Greek finance minister, sought legal advice on whether the group was allowed to exclude him, and received the extraordinary reply: “The Eurogroup is an informal group. Thus it is not bound by treaties or written regulations. While unanimity is conventionally adhered to, the Eurogroup president is not bound to explicit rules.” Or, to put it another way: “We never had any accountability in the first place, sucker.”

More striking still is this line of the statement: “The Eurogroup has been open until the very last moment to further support the Greek people through a continued growth-oriented programme.” The measures enforced by the troika have created an economic contraction akin to that caused by war. With unemployment at 25% and youth unemployment at nearly half, 40% of children now live below the poverty line. The latest offer to Greece promises more of the same. The idea that any of this is oriented towards growth is demonstrably false. The Eurogroup president, Jeroen Dijsselbloem, has started to assert that black is white.

And that brings us to the crux of the troika’s programme: what is the point of reducing this country to rubble? The stated intention at the start of the austerity package was to restore order: allow Greece to take a short hit to its GDP in the interests of building a stronger, more balanced economy in the long run. As it became clear that growth was not restored and that even on its own terms – the creditor must come first – the plan was failing, the line changed. It became a moral crusade, a collective punishment of the Greeks.

In 2012 the head of the IMF, Christine Lagarde, said in an interview with this newspaper, “Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax. And I think they should also help themselves collectively.” How? “By all paying their tax.” At the time, it sounded strange: how, in a country of cripplingly high unemployment, with whole families living off the depleted income of one pensioner, was the answer going to come from tax?

She was offering not a solution but a narrative: the Greeks were in this situation because they were bad people. They wanted a beneficent state, but they didn’t want to pool their resources to create one. The IMF was merely the instrument of a discipline they dearly needed. This line has broadly held – the debtors are presented as morally weaker than the creditors. To give them any concessions would be to reward their laziness and selfishness. The fact that debt is a two-way street – that the returns on debt exist because of the risk that the money might be lost, and creditors have their own moral duty to accept losses when they arise – is erased by this telling of the events.

Also airbrushed out of that story is what the late economist Wynne Godley called (in 1992!) the “lacuna in the Maastricht programme”: that while its single-currency proposal made provision for a central bank, it had nothing to say on the matter of what would replace the democratic institutions – the national governments whose power, once they had no control over their own currency, would be limited. Now we have our answer: the strongest takes control. At the moment, Germany knows best. How do we know they know best? Because they are the richest. The euro was founded on the idea that the control of currency was apolitical. It has destroyed that myth, and taken democracy down with it.

These talks did not fail by accident. The Greeks have to be humiliated, because the alternative – of treating them as equal parties or “adults”, as Lagarde wished them to be – would lead to a debate about the Eurogroup: what its foundations are, what accountability would look like, and what its democratic levers are – if indeed it has any. Solidarity with Greece means everyone, in and outside the single currency, forcing this conversation: the country is being sacrificed to maintain a set of delusions that enfeebles us all.