Showing posts with label manufacturing. Show all posts
Showing posts with label manufacturing. Show all posts
Friday 29 March 2024
Thursday 28 December 2023
Saturday 2 December 2023
Monday 31 January 2022
The paradox that leads professionals into temptation
Andrew Hill in The FT
Before her first ward-round as a medical student, Sunita Sah watched as the consultant leading the group stuffed his pockets with branded pens and notepads from a hospital cart piled with drug company freebies.
Noting her astonishment, he remarked, “these are the only perks of the job”, and continued to stock up. “I couldn’t help but think: ‘What’s the end-effect of this?’” Sah told me.
She found part of the answer to that question when she moved from medicine into management consulting and started analysing how every interaction between healthcare companies and doctors had an impact on their prescribing habits.
Now a professor at Cornell University and an honorary fellow at Cambridge’s Judge Business School, Sah has filled in more gaps with a new study that sheds light on the dark side of professionalism and how to avoid it.
Her findings are stark and surprising. The greater a manager’s sense of professionalism, the more likely he or she is to accept a gift or bribe. Worse, high-minded professionals may be more susceptible to unconscious bias towards gift-givers, precisely because they are convinced they think they know how to ignore their blandishments.
“I NEVER turn down something for free that I know isn’t going to kill me!” retorted one manager in response to Sah’s survey. “A free lunch from someone? Go for it! If the guy is fool enough to think his free lunch/dinner/use of cabin, etc, is going to influence me, he doesn’t know me at all! People don’t influence me beyond what I, and I alone, allow!”
In the study for the Academy of Management Perspectives, Sah equates this “professionalism paradox” to the Dunning-Kruger effect, according to which poor performers lack even the ability to recognise their own hopelessness.
Sah’s study is based on surveys of managers, but some of the pernicious real-world effects of her paradox are clear. In the extreme case of the opioid epidemic, books such as Empire of Pain and Dopesick (now also a television series) have chronicled the way respected physicians were dragged into the overprescription of painkillers after receiving free gifts and conference invitations from manufacturer Purdue Pharma.
Yet their ability to self-regulate against conflicts of interest is still many professionals’ first line of defence when watchdogs and legislators start threatening to curb their autonomy with new rules.
One problem is that we are all professionals now. The term used to be almost the exclusive domain of lawyers, doctors, teachers, accountants, and others who had laboriously acquired specialist knowledge, shown integrity, and deserved an elevated status. Now the same status is loosely claimed by everyone from salespeople to, yes, journalists. The currency has been debased.
In law, behaving professionally and ethically is “part of your training, it’s part of your identity, it’s what makes you tick — which isn’t necessarily true elsewhere”, David Morley, former senior partner at Allen & Overy, says. But the head of a professional services firm adds that professionalism “can’t be an excuse or a cover story” for a lack of underlying principles.
These senior leaders are describing the difference between what Sah calls “deep” and “shallow” professionalism.
Deep professionals should recognise the risk of undue influence and avoid exposing themselves to it in the first place. Her parallel is Odysseus plugging his ears with wax to avoid falling for the sirens’ song, or, more prosaically, managers who decline all gifts, rather than relying on a corporate threshold to protect them. It is “easier for individuals to rationalise and morally disengage the acceptance of [small] gifts”, Sah writes, or even to stop noticing them altogether.
Deep professionals should embrace continued ethical training, to help embed principles, and embrace an understanding that they may be prone to bribes and influence-seeking. They should also continue to practise their values, just as a concert pianist goes on rehearsing scales.
Professionalism “isn’t an individual characteristic, or a feeling”, says Sah. Instead, she would like to redefine it as “repeated behavioural practices that demonstrate a deep understanding of the concept”, backed by appropriate rules and codes. In that form, anyone can aspire to deep professionalism.
“The law as a profession doesn’t give you some status or standing: you have to earn that,” the senior partner of another law firm told me. “We shy away from [the attitude] ‘It’s OK, we’re professionals’.” In fact, professionals who catch themselves saying or thinking anything similar should be on their guard. They may be in the ethical shallows and about to run aground.
Thursday 4 October 2018
Will Nissan stay once Britain leaves? How one factory explains the Brexit business dilemma
David Conn in The Guardian
Earlier this year, when the British government’s assessments of the economic impact of Brexit were finally published, they revealed that the north-east of England was at risk of the deepest damage. Although the region still bears scars from the decline of heavy industry in the 1980s, today the north-east is the only part of Britain that exports more to European countries than it imports. And, amid the region’s new and rebuilt industries, such as pharmaceuticals, the most significant engine of recovery has been Nissan, the Japanese carmaker, which is housed in a giant factory complex just off the A19 at Washington, near Sunderland.
The plant was opened with great ceremony by Margaret Thatcher in 1986. Sharon Hodgson, now Labour MP for Washington and Sunderland West, which includes the plant, remembers that as a teenager, she was amazed when it was announced that Nissan would be setting up there. “Growing up in the north-east then, we had seen everything close – the mines, the shipyards, so many people put out of work. It was the cruellest, most awful time,” she said. “As a young woman, I remember the feeling of hope and optimism when Nissan came, the shock and surprise that we were actually going to get something.”
Since then, Nissan’s operation has expanded to cover a 800-acre site, running two production lines that produce 519,000 cars per year – about 55% for export to other EU countries. According to the company’s most recent annual report, for 2016-17, Nissan’s UK operation generated £6.4bn from sales, employed 7,755 people and paid these workers, mostly living in the north-east, £427m in wages. Companies supplying parts to Nissan employ a further 30,000 people across Britain.
“Nissan hasn’t been able to bring full recovery to the area; decline and deprivation are still prevalent,” said Hodgson. “But they are a massive employer, providing good jobs, including the supply chain which is so important. You have father and son working there now, a real sense of pride, and that productivity and quality is why it has been so successful.”
Yet today, there is serious concern at Nissan that Brexit threatens to damage its operation in Sunderland. The clearest explanation of how its UK business depends on EU membership was provided in February 2017 by Nissan executive Colin Lawther, appearing before parliament’s international trade committee. Lawther, a chemist by training, began his career with Nissan in 1985, as one of the key workers responsible for setting up the laboratory operation in the Sunderland plant. He went on to become Nissan Europe’s senior vice-president for manufacturing, purchasing and supply-chain management, before retiring earlier this year.
To produce as many cars as it does, Lawther explained, Nissan Sunderland needs to receive and fit 5m parts each day. Of these parts, 85% are imported, mainly from Europe. The plant holds only enough parts for half a day’s production, because it is expensive to store them, so the whole multi-billion pound operation relies on these millions of parts arriving daily with no barriers or customs delays.
Because Britain is currently part of the EU, this is a straightforward process. Each of the 28 EU member states belongs to the single market, which has been designed to facilitate trade by removing tariffs, as well as other trade and customs barriers. Rather than having 28 different industrial safety regulations, for instance, there is a single set of regulations that applies across all member states. The single market means trade between 28 different countries is free, fast and “frictionless”, just as it would be if the EU were one very large country. “Frictionless trade has enabled the growth that has seen our Sunderland plant become the biggest factory in the history of the UK car industry, exporting more than half of its production to the EU,” Nissan said, in a statement for this article.
“We build two cars every minute,” Lawther told the committee in 2017. “So you have 5m parts coming in every day, and you have half a day’s worth of stock. Any disruption to that supply chain is a complete disaster.
“We are talking about plant efficiency, downtime efficiency – to be world-class, we have to be 97% efficient. We are talking about two, three, four, six minutes a day of downtime on the production line. More than that is a disaster. If you start talking about interruption of supply of parts for hours, that is completely off the scale.”
If Britain leaves the EU without securing an agreement for continued frictionless trade – the “hard Brexit” outcome – Britain’s trading relationships would be regulated by World Trade Organisation rules, which do not allow for agreed product standards, and therefore will require customs checks at the borders with Europe. The rules also impose tariffs, including 10% on cars, 4.5% on car parts. For Nissan’s Sunderland operation, Lawther told the committee, as well as likely new delays at the borders, the impact of tariffs will add up to around £500m per year of additional costs, which would be “pretty disastrous”.
According to the government’s assessments, published in March, a “hard Brexit” would lead to a 16% economic decline in the north-east. London, by contrast, with its much more varied economy and the financial power of the City, would suffer a drop of only 3%.
The key figure in deciding the fate of Nissan’s operation in Sunderland is Carlos Ghosn, a global business executive born in Brazil to Lebanese immigrant parents, then educated in France. Ghosn, who became known as “le cost killer” after he restored the fortunes of Renault in the 1990s with his relentless efficiency drives, is not only chairman of Nissan, but also chairman of Renault and Mitsubishi, and of the Renault-Nissan-Mitsubishi Alliance that allows the three companies to work together to save costs. Renault owns 43.4% of Nissan, which in turn has bought a 15% stake in Renault, and 34% of Mitsubishi.
Since the vote to leave the EU, which was a shock to Nissan and other carmaking companies, Ghosn has consistently emphasised two main points in his occasional public statements. First, Nissan will not make further investments when they do not know what Britain’s future trading arrangements will be. Second, if leaving the EU significantly raises costs and trade barriers, Nissan will consider reducing its British operations. Sunderland is by far Nissan’s largest European plant, but the company has other factories in Europe. The current priority for the alliance, overseen by Ghosn, is a €10bn (£8.9bn) global cost-cutting programme to be implemented by 2022. It is increasingly moving towards a standard manufacturing method that can make both Renault and Nissan models. Already the Renault factories at Flins and Le Mans in France are making the Nissan Micra, in huge numbers.
Although it has invested £4bn since 1986 to make Sunderland its European base, Ghosn has said it will be reviewed if Britain becomes uncompetitive due to Brexit. “I don’t think any company can maintain its activity if it is not competitive,” Ghosn said in June. “If competitiveness is not maintained, little by little you’re going to have a decline. It may take some time, but you’re going to have a decline.”
Nissan’s Washington car plant does not look grand; it is a no-frills operation. Beyond the security gates and high railings, which are punctuated with turnstiles where the workers enter, the vast site consists of blank, imposing production sheds and basic office blocks. The main reception is a bare, functional lobby that has the feel of a 1980s school entrance. There, on a shelf, sit two Japanese Daruma dolls, which by tradition had their first eye painted – by Prince Charles and his then wife, Diana – when construction began in 1984, and the second – by Margaret Thatcher – when the plant opened on 8 September 1986.
In her landmark speech that day, Thatcher portrayed Nissan’s arrival as a British victory over the rest of Europe. “It was confirmation from Nissan,” she said, “that within the whole of Europe, the United Kingdom was the most attractive country – politically and economically – for large-scale investment.”
Within the car industry there is exasperation, and even disdain, for the pro-Brexit argument that British-based companies will be freed from ties with the EU to “go global”. Nissan and the other major manufacturers, including suppliers, are already global; they have huge plants in the US, China, Japan, Mexico, Brazil, Argentina, India and Russia. The Sunderland plant was allocated one model, the Infiniti, for export to the US, and sells some other cars around the world, but as Ghosn has emphasised, the plant is there principally to serve Europe, not to ship expensively to other continents where Nissan already has plants. Car manufacturers locate a factory in one country to serve that geographical region; Ghosn has consistently referred to Nissan’s Sunderland plant as “a European investment based in the UK”.
In September 2016, Ghosn suggested that the company’s plan to select Sunderland as the European plant to assemble its new Qashqai and X-Trail models was at risk following the referendum, and stated that the government needed to provide “commitments for compensation” if Brexit increased costs. In response, the government scurried to reassure Nissan. May met Ghosn personally, and the business secretary, Greg Clark, flew to Japan to meet senior executives. There then followed a period of correspondence that has still not been made public.
Following this government effort, on 27 October Nissan’s global headquarters in Yokohama announced that it would indeed build its new Qashqai and X-Trail models in England, “securing and sustaining the jobs of more than 7,000 workers at the [Sunderland] plant”.
Nissan has since insisted that Ghosn’s call for “compensation” was misunderstood, and was never a request for direct subsidy. However, the government has allocated considerable further UK and EU funding that has had the effect of helping Nissan. One of Nissan’s priorities, emphasised by Colin Lawther in his evidence in parliament, has been to bring more suppliers to the north-east, saving the company costs of importing and transport. In January 2017, only a few months after its intense period of correspondence with Nissan, £41m of EU funding was allocated by the north-east local enterprise partnership towards the construction of a new international advanced manufacturing park (IAMP), across the road from the Washington plant. Nissan suppliers are planned to locate on the site, where initial construction began in August.
That grant accounted for more than 80% of the £50m EU funding the local enterprise partnership had to spend in that round, so other regional infrastructure projects lost out. The chair, Andrew Hodgson, said he has never asked to see the exchange of letters between Nissan and the government, but that: “It was very clear, from a north-east perspective, we needed to invest in the IAMP.”
In March 2017, the BBC managed to uncover a small part of the correspondence between Nissan and the government. Paul Willcox, then chair of Nissan Europe, had proposed the need for more investment in electric vehicles, of which Nissan’s Leaf model is a market leader. Soon after the exchange of letters, the government announced that it would be making a multi-million pound investment in more charging points and other incentives to develop electric cars. Clark’s department for business, energy and industrial strategy has said that commitment followed general policy and was not specific to helping Nissan.
Farnsworth, the York University academic who has researched the public funding for Nissan in the UK, suggests that Brexit is already leading the British government to be defensive, desperate to keep the investment the country already has. Brexit, his report says, “gives Nissan nearly unprecedented bargaining power with the UK government. These circumstances put the government in the position of having to give Nissan exactly what it wants in order for the company to remain in the UK.”
Despite the government’s efforts to reassure Nissan, Ghosn has repeated warnings that further investment decisions are on hold. It was in June, speaking to the BBC, that he warned of gradual decline if competitiveness is damaged. “So far we have absolutely no clue how this is going to end up,” he also said. “We don’t want to take any decisions in the dark. We don’t want to take any decisions we might regret in future”.
In their statement for this article, Nissan, still quite restrained, nevertheless echoed Ghosn’s warning. “Today we are among those companies with major investments in the UK who are still waiting for clarity on what the future trading relationship between the UK and the EU will look like,” it said. “As a sudden change from those rules to the rules of the WTO will have serious implications for British industry, we urge UK and EU negotiators to work collaboratively towards an orderly, balanced Brexit that will continue to encourage mutually beneficial trade.”
Iida, at the Japanese embassy, said the priority is to avoid a hard Brexit: “Japanese companies have been seriously taking risk-hedge measures,” he said. “For example, Japanese financial institutions have already submitted business applications to cities such as Frankfurt and Amsterdam, and Japanese manufacturing companies are very quietly holding off their future investment plans.”
Since the referendum, and particularly since the publication of the government’s impact assessments earlier this year, James Ramsbotham, chief executive of the north-east chamber of commerce since 2006, has been voicing increasingly urgent warnings about the threat to the region’s economy. None of the government’s responses, or its conduct of the negotiations since, he says, have reassured him.
When I told him that Michael Heseltine had reflected on the 1980s closures of the north-east’s coal mines and heavy industry as “too unthinking”, Ramsbotham instinctively drew a parallel with Brexit: “Aren’t we in danger of doing the same unthinking thing now?” he responded. “Delivering another potentially catastrophic shock to the economy, without sufficient thinking, planning or foresight?”
Earlier this year, when the British government’s assessments of the economic impact of Brexit were finally published, they revealed that the north-east of England was at risk of the deepest damage. Although the region still bears scars from the decline of heavy industry in the 1980s, today the north-east is the only part of Britain that exports more to European countries than it imports. And, amid the region’s new and rebuilt industries, such as pharmaceuticals, the most significant engine of recovery has been Nissan, the Japanese carmaker, which is housed in a giant factory complex just off the A19 at Washington, near Sunderland.
The plant was opened with great ceremony by Margaret Thatcher in 1986. Sharon Hodgson, now Labour MP for Washington and Sunderland West, which includes the plant, remembers that as a teenager, she was amazed when it was announced that Nissan would be setting up there. “Growing up in the north-east then, we had seen everything close – the mines, the shipyards, so many people put out of work. It was the cruellest, most awful time,” she said. “As a young woman, I remember the feeling of hope and optimism when Nissan came, the shock and surprise that we were actually going to get something.”
Since then, Nissan’s operation has expanded to cover a 800-acre site, running two production lines that produce 519,000 cars per year – about 55% for export to other EU countries. According to the company’s most recent annual report, for 2016-17, Nissan’s UK operation generated £6.4bn from sales, employed 7,755 people and paid these workers, mostly living in the north-east, £427m in wages. Companies supplying parts to Nissan employ a further 30,000 people across Britain.
“Nissan hasn’t been able to bring full recovery to the area; decline and deprivation are still prevalent,” said Hodgson. “But they are a massive employer, providing good jobs, including the supply chain which is so important. You have father and son working there now, a real sense of pride, and that productivity and quality is why it has been so successful.”
Yet today, there is serious concern at Nissan that Brexit threatens to damage its operation in Sunderland. The clearest explanation of how its UK business depends on EU membership was provided in February 2017 by Nissan executive Colin Lawther, appearing before parliament’s international trade committee. Lawther, a chemist by training, began his career with Nissan in 1985, as one of the key workers responsible for setting up the laboratory operation in the Sunderland plant. He went on to become Nissan Europe’s senior vice-president for manufacturing, purchasing and supply-chain management, before retiring earlier this year.
To produce as many cars as it does, Lawther explained, Nissan Sunderland needs to receive and fit 5m parts each day. Of these parts, 85% are imported, mainly from Europe. The plant holds only enough parts for half a day’s production, because it is expensive to store them, so the whole multi-billion pound operation relies on these millions of parts arriving daily with no barriers or customs delays.
Because Britain is currently part of the EU, this is a straightforward process. Each of the 28 EU member states belongs to the single market, which has been designed to facilitate trade by removing tariffs, as well as other trade and customs barriers. Rather than having 28 different industrial safety regulations, for instance, there is a single set of regulations that applies across all member states. The single market means trade between 28 different countries is free, fast and “frictionless”, just as it would be if the EU were one very large country. “Frictionless trade has enabled the growth that has seen our Sunderland plant become the biggest factory in the history of the UK car industry, exporting more than half of its production to the EU,” Nissan said, in a statement for this article.
“We build two cars every minute,” Lawther told the committee in 2017. “So you have 5m parts coming in every day, and you have half a day’s worth of stock. Any disruption to that supply chain is a complete disaster.
“We are talking about plant efficiency, downtime efficiency – to be world-class, we have to be 97% efficient. We are talking about two, three, four, six minutes a day of downtime on the production line. More than that is a disaster. If you start talking about interruption of supply of parts for hours, that is completely off the scale.”
If Britain leaves the EU without securing an agreement for continued frictionless trade – the “hard Brexit” outcome – Britain’s trading relationships would be regulated by World Trade Organisation rules, which do not allow for agreed product standards, and therefore will require customs checks at the borders with Europe. The rules also impose tariffs, including 10% on cars, 4.5% on car parts. For Nissan’s Sunderland operation, Lawther told the committee, as well as likely new delays at the borders, the impact of tariffs will add up to around £500m per year of additional costs, which would be “pretty disastrous”.
According to the government’s assessments, published in March, a “hard Brexit” would lead to a 16% economic decline in the north-east. London, by contrast, with its much more varied economy and the financial power of the City, would suffer a drop of only 3%.
The key figure in deciding the fate of Nissan’s operation in Sunderland is Carlos Ghosn, a global business executive born in Brazil to Lebanese immigrant parents, then educated in France. Ghosn, who became known as “le cost killer” after he restored the fortunes of Renault in the 1990s with his relentless efficiency drives, is not only chairman of Nissan, but also chairman of Renault and Mitsubishi, and of the Renault-Nissan-Mitsubishi Alliance that allows the three companies to work together to save costs. Renault owns 43.4% of Nissan, which in turn has bought a 15% stake in Renault, and 34% of Mitsubishi.
Since the vote to leave the EU, which was a shock to Nissan and other carmaking companies, Ghosn has consistently emphasised two main points in his occasional public statements. First, Nissan will not make further investments when they do not know what Britain’s future trading arrangements will be. Second, if leaving the EU significantly raises costs and trade barriers, Nissan will consider reducing its British operations. Sunderland is by far Nissan’s largest European plant, but the company has other factories in Europe. The current priority for the alliance, overseen by Ghosn, is a €10bn (£8.9bn) global cost-cutting programme to be implemented by 2022. It is increasingly moving towards a standard manufacturing method that can make both Renault and Nissan models. Already the Renault factories at Flins and Le Mans in France are making the Nissan Micra, in huge numbers.
Although it has invested £4bn since 1986 to make Sunderland its European base, Ghosn has said it will be reviewed if Britain becomes uncompetitive due to Brexit. “I don’t think any company can maintain its activity if it is not competitive,” Ghosn said in June. “If competitiveness is not maintained, little by little you’re going to have a decline. It may take some time, but you’re going to have a decline.”
Nissan’s Washington car plant does not look grand; it is a no-frills operation. Beyond the security gates and high railings, which are punctuated with turnstiles where the workers enter, the vast site consists of blank, imposing production sheds and basic office blocks. The main reception is a bare, functional lobby that has the feel of a 1980s school entrance. There, on a shelf, sit two Japanese Daruma dolls, which by tradition had their first eye painted – by Prince Charles and his then wife, Diana – when construction began in 1984, and the second – by Margaret Thatcher – when the plant opened on 8 September 1986.
In her landmark speech that day, Thatcher portrayed Nissan’s arrival as a British victory over the rest of Europe. “It was confirmation from Nissan,” she said, “that within the whole of Europe, the United Kingdom was the most attractive country – politically and economically – for large-scale investment.”
Margaret Thatcher painting the eye of the Daruma doll at the opening of the Nissan plant in 1986. Photograph: Alamy
Thatcher did not mention that Britain’s membership of the European Community (as the EU was then known) was crucial to Nissan’s decision. Yet she was fully aware of it, as were other government ministers. In a meticulously researched history of the plant’s funding via EU and UK government public money since the 1980s – adding up to almost £800m – Kevin Farnsworth of York University and his co-authors Nicki Lisa Cole and Mickey Conn (no relation) unearthed a 1980 memo to Thatcher from her industry minister, Keith Joseph. Nissan had by then decided to build a European plant in Britain, and Joseph explained:
“The deal [is] tangible evidence of the benefits to the UK of membership of the European Community; Nissan [has] chosen the United Kingdom because it [gives] them access to the whole European market. If we were outside the community, it is very unlikely that Nissan would have given the United Kingdom serious consideration as a base for this substantial investment.”
At that time, the north-east’s traditional industries were already being closed down. In 1980, British Steel shut its plant at Consett, putting 4,500 people out of work, a still powerfully remembered devastation. Shipbuilding on the river Tyne had long been declining and was parched of investment. Ashington, Easington and other communities built around coal, including Wearmouth colliery in Sunderland, were to suffer the agonising deprivations and defeat of the 1984-85 miners’ strike, which was called to fight closures. In 1992, Michael Heseltine, then president of the board of trade, would announce that 31 of the country’s remaining 50 pits would close, cutting 30,000 jobs.
When I spoke to Heseltine for this article, I asked if he conceded that his government was too brutal in these mass closures of longstanding industries. He reflected for a moment, then replied: “Probably it was too unthinking.” He said he regrets that there was no considered policy to improve these industries – through better management, company reforms and longer-term investment. “Unlike Germany, Japan, France, now China, there was never any stable industrial strategy. It was much easier to say ‘let the market rip’,” he said.
Against that landscape of collapses, Heseltine recalled the efforts to bring Nissan and other Japanese companies to Britain: “We were looking to attract anything that would help the economy. And it was a central part of the attraction to the Japanese that we were in the European Union.” The German and French governments were more protective of their own industries, Heseltine said, and the UK saw Japanese investment as an opportunity to get into the European market. Thatcher’s newly restrictive trade-union laws, which had been bitterly opposed by unions, were also part of her government’s pitch: that workers would be less able to strike and easier to lay off than in other European countries. The Washington plant has, however, always been strongly unionised.
For the Japanese companies, Heseltine said, the UK was the “soft underbelly” of Europe, a way in. Shinichi Iida, minister for public diplomacy and media at the Japanese embassy in London, confirmed that Japanese companies were courted by Thatcher’s government, telling me that many Japanese companies “have a strong sense that they came here at the invitation of the UK at that time”. In 1989, two other major Japanese car manufacturers followed Nissan’s lead: Honda, which now makes models of the Civic for export, about a third to the EU, from its factory in Swindon, and Toyota, which describes its car plant at Burnaston, near Derby, and its engine factory in Deeside, north Wales, as “European production centres”.
The English language was a big draw to the UK for Japanese manufacturing companies, as was its tradition of research and development, and “the very strict and open legal system”, Iida said – but it was “quite essential” that the UK was “a gateway to Europe”. Sir Ian Gibson, who was recruited by Nissan from Ford in 1984 to establish and run the Washington plant, confirms that: “The whole premise of the investment was that it was a European base; there would be free access to the European market.”
Ged Parker, who was on the negotiating team for the local regeneration authority, recalled their pitch to Nissan. They had a huge site available on an old airfield, the former RAF Usworth; they had the north-east’s industrial tradition and experienced workforce; there was proximity to the A19, the A1, Newcastle airport and – most crucially – the ports on the Tyne, Tees and Wear for shipping parts and finished cars to and from Europe.
The north of England development council had hired a representative in Japan, Ken Oshima, to drum up business, and Parker remembers the enthusiasm of the visiting Nissan executives. “The delegation were engineers – they were technical people and they had a reverence for British industry.” They could also see that the area was able to complete major construction projects; Washington new town had just been built, a planned layout of new housing, industrial estates and shops, near historic Washington village, where the first US president George Washington had his family roots.
The team deployed an array of winning tactics to impress Nissan. “The proposal document was the first we ever did on a word processor,” Parker said. The authority had bought two computers just a few weeks before Nissan’s visit. “It was leading-edge technology then.”
Crucial, though, were huge grants of public money, provided by the UK because the north-east was classified as a special development area, in need of investment. According to Farnsworth, by 1984 the government had pledged £112m from the regional development and selective financial assistance schemes, to secure and prepare the site for Nissan’s investment. The airfield was classed as agricultural land, and sold at a heavy discount.
On 30 March 1984, Nissan finally signed the agreement to invest in Washington. “It was an unbelievable feeling,” said Parker. “It was a career high for me. The north-east has always felt hard done by, and it almost changed morale overnight. What Nissan has done since, expanded so much, particularly in recent years, dragged more industry up here, spread good practice, has been huge for the region.”
The first model made at the plant in 1986, when it employed 430 people, was the Nissan Bluebird. Gibson said they began with a target of 24,000 cars a year. The Primera model replaced the Bluebird in 1990, and two years later, the plant began to make a second model as well, the Micra. By 2000, the plant was producing three models – and a total of 300,000 cars each year.
Although the financial crisis hurt Nissan and 1,200 jobs were axed in January 2009, the British plant’s fortunes recovered more quickly than others. The Juke, Leaf, Infiniti and Qashqai models were all commissioned at Washington from 2010 onwards, attracting more multi-million pound investment in plant and machinery by Nissan, and a new round of expansion.
Thatcher did not mention that Britain’s membership of the European Community (as the EU was then known) was crucial to Nissan’s decision. Yet she was fully aware of it, as were other government ministers. In a meticulously researched history of the plant’s funding via EU and UK government public money since the 1980s – adding up to almost £800m – Kevin Farnsworth of York University and his co-authors Nicki Lisa Cole and Mickey Conn (no relation) unearthed a 1980 memo to Thatcher from her industry minister, Keith Joseph. Nissan had by then decided to build a European plant in Britain, and Joseph explained:
“The deal [is] tangible evidence of the benefits to the UK of membership of the European Community; Nissan [has] chosen the United Kingdom because it [gives] them access to the whole European market. If we were outside the community, it is very unlikely that Nissan would have given the United Kingdom serious consideration as a base for this substantial investment.”
At that time, the north-east’s traditional industries were already being closed down. In 1980, British Steel shut its plant at Consett, putting 4,500 people out of work, a still powerfully remembered devastation. Shipbuilding on the river Tyne had long been declining and was parched of investment. Ashington, Easington and other communities built around coal, including Wearmouth colliery in Sunderland, were to suffer the agonising deprivations and defeat of the 1984-85 miners’ strike, which was called to fight closures. In 1992, Michael Heseltine, then president of the board of trade, would announce that 31 of the country’s remaining 50 pits would close, cutting 30,000 jobs.
When I spoke to Heseltine for this article, I asked if he conceded that his government was too brutal in these mass closures of longstanding industries. He reflected for a moment, then replied: “Probably it was too unthinking.” He said he regrets that there was no considered policy to improve these industries – through better management, company reforms and longer-term investment. “Unlike Germany, Japan, France, now China, there was never any stable industrial strategy. It was much easier to say ‘let the market rip’,” he said.
Against that landscape of collapses, Heseltine recalled the efforts to bring Nissan and other Japanese companies to Britain: “We were looking to attract anything that would help the economy. And it was a central part of the attraction to the Japanese that we were in the European Union.” The German and French governments were more protective of their own industries, Heseltine said, and the UK saw Japanese investment as an opportunity to get into the European market. Thatcher’s newly restrictive trade-union laws, which had been bitterly opposed by unions, were also part of her government’s pitch: that workers would be less able to strike and easier to lay off than in other European countries. The Washington plant has, however, always been strongly unionised.
For the Japanese companies, Heseltine said, the UK was the “soft underbelly” of Europe, a way in. Shinichi Iida, minister for public diplomacy and media at the Japanese embassy in London, confirmed that Japanese companies were courted by Thatcher’s government, telling me that many Japanese companies “have a strong sense that they came here at the invitation of the UK at that time”. In 1989, two other major Japanese car manufacturers followed Nissan’s lead: Honda, which now makes models of the Civic for export, about a third to the EU, from its factory in Swindon, and Toyota, which describes its car plant at Burnaston, near Derby, and its engine factory in Deeside, north Wales, as “European production centres”.
The English language was a big draw to the UK for Japanese manufacturing companies, as was its tradition of research and development, and “the very strict and open legal system”, Iida said – but it was “quite essential” that the UK was “a gateway to Europe”. Sir Ian Gibson, who was recruited by Nissan from Ford in 1984 to establish and run the Washington plant, confirms that: “The whole premise of the investment was that it was a European base; there would be free access to the European market.”
Ged Parker, who was on the negotiating team for the local regeneration authority, recalled their pitch to Nissan. They had a huge site available on an old airfield, the former RAF Usworth; they had the north-east’s industrial tradition and experienced workforce; there was proximity to the A19, the A1, Newcastle airport and – most crucially – the ports on the Tyne, Tees and Wear for shipping parts and finished cars to and from Europe.
The north of England development council had hired a representative in Japan, Ken Oshima, to drum up business, and Parker remembers the enthusiasm of the visiting Nissan executives. “The delegation were engineers – they were technical people and they had a reverence for British industry.” They could also see that the area was able to complete major construction projects; Washington new town had just been built, a planned layout of new housing, industrial estates and shops, near historic Washington village, where the first US president George Washington had his family roots.
The team deployed an array of winning tactics to impress Nissan. “The proposal document was the first we ever did on a word processor,” Parker said. The authority had bought two computers just a few weeks before Nissan’s visit. “It was leading-edge technology then.”
Crucial, though, were huge grants of public money, provided by the UK because the north-east was classified as a special development area, in need of investment. According to Farnsworth, by 1984 the government had pledged £112m from the regional development and selective financial assistance schemes, to secure and prepare the site for Nissan’s investment. The airfield was classed as agricultural land, and sold at a heavy discount.
On 30 March 1984, Nissan finally signed the agreement to invest in Washington. “It was an unbelievable feeling,” said Parker. “It was a career high for me. The north-east has always felt hard done by, and it almost changed morale overnight. What Nissan has done since, expanded so much, particularly in recent years, dragged more industry up here, spread good practice, has been huge for the region.”
The first model made at the plant in 1986, when it employed 430 people, was the Nissan Bluebird. Gibson said they began with a target of 24,000 cars a year. The Primera model replaced the Bluebird in 1990, and two years later, the plant began to make a second model as well, the Micra. By 2000, the plant was producing three models – and a total of 300,000 cars each year.
Although the financial crisis hurt Nissan and 1,200 jobs were axed in January 2009, the British plant’s fortunes recovered more quickly than others. The Juke, Leaf, Infiniti and Qashqai models were all commissioned at Washington from 2010 onwards, attracting more multi-million pound investment in plant and machinery by Nissan, and a new round of expansion.
Nissan workers prepare doors for the Qashqai car in Sunderland. Photograph: Reuters
When Nissan needs to decide on new investments, such as where new models are to be built, individual plants mount competing internal bids to the main board. “The plants with the best claim get the investment,” Gibson explained. “And the ones with the best claim have the least friction and risk. Sunderland, for a long time, was the best claim.”
Inside the basic, shed-like structure that houses the production lines is dizzyingly intricate, hugely expensive technology geared towards the “just in time” assembly of a car, mostly Qashqais, every minute. One of the Unite officials described the job on the line as “very hard, physically demanding”, and it looks it. The workers, mostly men, are on their feet throughout an eight-hour shift, tightly focused on machine-fitting engines, doors, dashboards and windscreens to the car bodies that come along the line each minute. Overhead, another line is sending down finished wheels, to be attached at the end of the process. Another team carries out rapid tests on the cars, then transporters take them out and to the port.
The Sunderland factory does not go in much for the modern trend of decorating the workers’ areas with ambient colours or motivational slogans, but there is one small sign next to the production lines. It says: “Nissan Sunderland Plant: SECOND TO NONE.”
In the months before the EU referendum, the Labour party’s official remain campaign, led by the former home secretary Alan Johnson, approached Nissan to ask if it could stage its north-east launch event at the Washington plant. The politicians wanted to showcase an economic, industrial and employment success that had clearly been built on EU membership.
Nissan declined. Despite the impact Brexit was likely to have on their businesses, senior executives at most major companies took the view that it was unlikely voters would decide to leave, and there was little to be gained by being too forthright on a political issue. When Nissan finally did make a statement, it was an exercise in restraint. “Our preference,” it said, “is, of course, that the UK stays within Europe – it makes the most sense for jobs, trade and costs. For us a position of stability is more positive than a collection of unknowns. While we remain committed to our existing investment decisions, we will not speculate on the outcome nor what would happen in either scenario.”
When Nissan needs to decide on new investments, such as where new models are to be built, individual plants mount competing internal bids to the main board. “The plants with the best claim get the investment,” Gibson explained. “And the ones with the best claim have the least friction and risk. Sunderland, for a long time, was the best claim.”
Inside the basic, shed-like structure that houses the production lines is dizzyingly intricate, hugely expensive technology geared towards the “just in time” assembly of a car, mostly Qashqais, every minute. One of the Unite officials described the job on the line as “very hard, physically demanding”, and it looks it. The workers, mostly men, are on their feet throughout an eight-hour shift, tightly focused on machine-fitting engines, doors, dashboards and windscreens to the car bodies that come along the line each minute. Overhead, another line is sending down finished wheels, to be attached at the end of the process. Another team carries out rapid tests on the cars, then transporters take them out and to the port.
The Sunderland factory does not go in much for the modern trend of decorating the workers’ areas with ambient colours or motivational slogans, but there is one small sign next to the production lines. It says: “Nissan Sunderland Plant: SECOND TO NONE.”
In the months before the EU referendum, the Labour party’s official remain campaign, led by the former home secretary Alan Johnson, approached Nissan to ask if it could stage its north-east launch event at the Washington plant. The politicians wanted to showcase an economic, industrial and employment success that had clearly been built on EU membership.
Nissan declined. Despite the impact Brexit was likely to have on their businesses, senior executives at most major companies took the view that it was unlikely voters would decide to leave, and there was little to be gained by being too forthright on a political issue. When Nissan finally did make a statement, it was an exercise in restraint. “Our preference,” it said, “is, of course, that the UK stays within Europe – it makes the most sense for jobs, trade and costs. For us a position of stability is more positive than a collection of unknowns. While we remain committed to our existing investment decisions, we will not speculate on the outcome nor what would happen in either scenario.”
Nissan Qashqais and Leafs being inspected at the port of Tyne before export. Photograph: Bloomberg via Getty
Unite also told its members that the union favoured remaining in the EU. “The damage Brexit can do is a massive concern, and we did campaign to remain,” says Tony Burke, Unite’s assistant general secretary with responsibility for manufacturing. One Unite official at the plant, who did not want to be named due to the sensitivity, still, of talking about Brexit, said he felt Nissan’s statement was “very neutral” and did not communicate to the workers how much was at stake. He said they did their best with Unite’s message, but it was “just one voice, one hit, in months of hysteria ramped up by the media, particularly about hostility to immigrants. That’s what people were listening to.”
Politically, Sunderland is overwhelmingly Labour: its three constituency MPs all represent the party, and in 2016, Labour won 67 of the 75 seats on Sunderland city council. The MPs and council campaigned for Britain to remain in the EU, but on the doorsteps, they found that people were planning to vote leave in large numbers.
In the referendum, 61% of Sunderland’s voters chose leave. When I visited the plant recently, I talked to several workers as they came off a shift. Most had voted leave. One young man, 24, who, like the others I spoke to, did not want to be named, said he had voted remain because he preferred stability and he “thought we’re fine as we are”, but that older workers around him had voted leave. “They said that they didn’t see a change from before and after we joined the EU, and some said they didn’t like the EU making rules for us.”
An older man, 55, pointed to one of the huge sheds behind us and said, like others, that Nissan’s multi-million pound investment in it shows the Sunderland plant is secure. He said he had voted leave to stop immigration, “EU interference”, and because the north-east gets “bugger all money” from the EU.
In fact, after Cornwall, the north-east receives England’s second-highest amount of EU structural funding proportionate to its population, according to a report compiled before the referendum for Sunderland’s public and private sector partnership, the Economic Leadership Board. The current round of EU funding, being managed by the region’s local enterprise partnership, is £437m between 2014 and 2020. Nissan itself, according to Farnsworth’s research, has received £450m in loans from the European Investment Bank, and £347m in grants and other public funding, from the UK and EU.
Another Nissan worker, 63, sitting on a barrier waiting for his lift home, said he had voted leave, like many of his colleagues, because he was “sick of the EU deciding our laws”. I asked him if he accepted that leaving was damaging to the car industry, and to Nissan. He did, he replied, then smiled, and said that would still not prompt him to change his mind.
Since the referendum, Nissan’s chairman, Ghosn, has regularly made public warnings that the operations in Sunderland will be reduced over the long term if Brexit makes the UK uncompetitive. Gibson says Britain’s lack of preparation and chaotic political process is creating “a terrible impression” with the Japanese.
Gibson knows the company intimately. After helping to establish the Sunderland plant, he went on to become president of Nissan Europe, and the first European to join the main Nissan board in Japan. “Of course, it is realistic that Nissan could stop investing in the plant; it’s the most likely outcome,” he said. “Now it is a three-company alliance; there are lots of Renault plants screaming out for future models, and Nissan plants in Spain. Why go to Sunderland, which will have more frictions and risk, and be isolated?”
Unite also told its members that the union favoured remaining in the EU. “The damage Brexit can do is a massive concern, and we did campaign to remain,” says Tony Burke, Unite’s assistant general secretary with responsibility for manufacturing. One Unite official at the plant, who did not want to be named due to the sensitivity, still, of talking about Brexit, said he felt Nissan’s statement was “very neutral” and did not communicate to the workers how much was at stake. He said they did their best with Unite’s message, but it was “just one voice, one hit, in months of hysteria ramped up by the media, particularly about hostility to immigrants. That’s what people were listening to.”
Politically, Sunderland is overwhelmingly Labour: its three constituency MPs all represent the party, and in 2016, Labour won 67 of the 75 seats on Sunderland city council. The MPs and council campaigned for Britain to remain in the EU, but on the doorsteps, they found that people were planning to vote leave in large numbers.
In the referendum, 61% of Sunderland’s voters chose leave. When I visited the plant recently, I talked to several workers as they came off a shift. Most had voted leave. One young man, 24, who, like the others I spoke to, did not want to be named, said he had voted remain because he preferred stability and he “thought we’re fine as we are”, but that older workers around him had voted leave. “They said that they didn’t see a change from before and after we joined the EU, and some said they didn’t like the EU making rules for us.”
An older man, 55, pointed to one of the huge sheds behind us and said, like others, that Nissan’s multi-million pound investment in it shows the Sunderland plant is secure. He said he had voted leave to stop immigration, “EU interference”, and because the north-east gets “bugger all money” from the EU.
In fact, after Cornwall, the north-east receives England’s second-highest amount of EU structural funding proportionate to its population, according to a report compiled before the referendum for Sunderland’s public and private sector partnership, the Economic Leadership Board. The current round of EU funding, being managed by the region’s local enterprise partnership, is £437m between 2014 and 2020. Nissan itself, according to Farnsworth’s research, has received £450m in loans from the European Investment Bank, and £347m in grants and other public funding, from the UK and EU.
Another Nissan worker, 63, sitting on a barrier waiting for his lift home, said he had voted leave, like many of his colleagues, because he was “sick of the EU deciding our laws”. I asked him if he accepted that leaving was damaging to the car industry, and to Nissan. He did, he replied, then smiled, and said that would still not prompt him to change his mind.
Since the referendum, Nissan’s chairman, Ghosn, has regularly made public warnings that the operations in Sunderland will be reduced over the long term if Brexit makes the UK uncompetitive. Gibson says Britain’s lack of preparation and chaotic political process is creating “a terrible impression” with the Japanese.
Gibson knows the company intimately. After helping to establish the Sunderland plant, he went on to become president of Nissan Europe, and the first European to join the main Nissan board in Japan. “Of course, it is realistic that Nissan could stop investing in the plant; it’s the most likely outcome,” he said. “Now it is a three-company alliance; there are lots of Renault plants screaming out for future models, and Nissan plants in Spain. Why go to Sunderland, which will have more frictions and risk, and be isolated?”
During his time at Nissan – he left in 2001, after 17 years – Gibson was struck by the way Japanese business culture focused single-mindedly on careful scrutiny of the data. “They have a very rational decision-making culture,” he said. “They examine the evidence, and have a very tough debate to reach a rational conclusion.” Iida, the Japanese embassy minister, agreed with Gibson’s assessment: “It takes time for them to take a decision, but once they do, they simply don’t waver it so easily.”
Within the car industry there is exasperation, and even disdain, for the pro-Brexit argument that British-based companies will be freed from ties with the EU to “go global”. Nissan and the other major manufacturers, including suppliers, are already global; they have huge plants in the US, China, Japan, Mexico, Brazil, Argentina, India and Russia. The Sunderland plant was allocated one model, the Infiniti, for export to the US, and sells some other cars around the world, but as Ghosn has emphasised, the plant is there principally to serve Europe, not to ship expensively to other continents where Nissan already has plants. Car manufacturers locate a factory in one country to serve that geographical region; Ghosn has consistently referred to Nissan’s Sunderland plant as “a European investment based in the UK”.
In September 2016, Ghosn suggested that the company’s plan to select Sunderland as the European plant to assemble its new Qashqai and X-Trail models was at risk following the referendum, and stated that the government needed to provide “commitments for compensation” if Brexit increased costs. In response, the government scurried to reassure Nissan. May met Ghosn personally, and the business secretary, Greg Clark, flew to Japan to meet senior executives. There then followed a period of correspondence that has still not been made public.
Following this government effort, on 27 October Nissan’s global headquarters in Yokohama announced that it would indeed build its new Qashqai and X-Trail models in England, “securing and sustaining the jobs of more than 7,000 workers at the [Sunderland] plant”.
Nissan has since insisted that Ghosn’s call for “compensation” was misunderstood, and was never a request for direct subsidy. However, the government has allocated considerable further UK and EU funding that has had the effect of helping Nissan. One of Nissan’s priorities, emphasised by Colin Lawther in his evidence in parliament, has been to bring more suppliers to the north-east, saving the company costs of importing and transport. In January 2017, only a few months after its intense period of correspondence with Nissan, £41m of EU funding was allocated by the north-east local enterprise partnership towards the construction of a new international advanced manufacturing park (IAMP), across the road from the Washington plant. Nissan suppliers are planned to locate on the site, where initial construction began in August.
That grant accounted for more than 80% of the £50m EU funding the local enterprise partnership had to spend in that round, so other regional infrastructure projects lost out. The chair, Andrew Hodgson, said he has never asked to see the exchange of letters between Nissan and the government, but that: “It was very clear, from a north-east perspective, we needed to invest in the IAMP.”
In March 2017, the BBC managed to uncover a small part of the correspondence between Nissan and the government. Paul Willcox, then chair of Nissan Europe, had proposed the need for more investment in electric vehicles, of which Nissan’s Leaf model is a market leader. Soon after the exchange of letters, the government announced that it would be making a multi-million pound investment in more charging points and other incentives to develop electric cars. Clark’s department for business, energy and industrial strategy has said that commitment followed general policy and was not specific to helping Nissan.
Farnsworth, the York University academic who has researched the public funding for Nissan in the UK, suggests that Brexit is already leading the British government to be defensive, desperate to keep the investment the country already has. Brexit, his report says, “gives Nissan nearly unprecedented bargaining power with the UK government. These circumstances put the government in the position of having to give Nissan exactly what it wants in order for the company to remain in the UK.”
Despite the government’s efforts to reassure Nissan, Ghosn has repeated warnings that further investment decisions are on hold. It was in June, speaking to the BBC, that he warned of gradual decline if competitiveness is damaged. “So far we have absolutely no clue how this is going to end up,” he also said. “We don’t want to take any decisions in the dark. We don’t want to take any decisions we might regret in future”.
In their statement for this article, Nissan, still quite restrained, nevertheless echoed Ghosn’s warning. “Today we are among those companies with major investments in the UK who are still waiting for clarity on what the future trading relationship between the UK and the EU will look like,” it said. “As a sudden change from those rules to the rules of the WTO will have serious implications for British industry, we urge UK and EU negotiators to work collaboratively towards an orderly, balanced Brexit that will continue to encourage mutually beneficial trade.”
Iida, at the Japanese embassy, said the priority is to avoid a hard Brexit: “Japanese companies have been seriously taking risk-hedge measures,” he said. “For example, Japanese financial institutions have already submitted business applications to cities such as Frankfurt and Amsterdam, and Japanese manufacturing companies are very quietly holding off their future investment plans.”
Since the referendum, and particularly since the publication of the government’s impact assessments earlier this year, James Ramsbotham, chief executive of the north-east chamber of commerce since 2006, has been voicing increasingly urgent warnings about the threat to the region’s economy. None of the government’s responses, or its conduct of the negotiations since, he says, have reassured him.
When I told him that Michael Heseltine had reflected on the 1980s closures of the north-east’s coal mines and heavy industry as “too unthinking”, Ramsbotham instinctively drew a parallel with Brexit: “Aren’t we in danger of doing the same unthinking thing now?” he responded. “Delivering another potentially catastrophic shock to the economy, without sufficient thinking, planning or foresight?”
Tuesday 21 June 2016
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.
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.
Wednesday 18 May 2016
Making things matters. This is what Britain forgot
Ha-Joon Chang in The Guardian
The neglect of manufacturing and over-development of the financial sector is the cause of the economy’s decline, not fear of leaving the EU.
The production line at the Rolls-Royce factory in Derby. Photograph: Bloomberg via Getty Images
It’s being blamed on the Brexit jitters. But the weakness in the UK economy that the latest figures reveal is actually a symptom of a much deeper malaise. Britain has never properly recovered from the 2008 financial crisis. At the end of 2015, inflation-adjusted income per capita in the UK was only 0.2% higher than its 2007 peak. This translates into an annual growth rate of 0.025% per year. How pathetic this performance is can be put into perspective by recalling that Japan’s per capita income during its so-called “lost two decades” between 1990 and 2010 grew at 1% a year.
At the root of this inability to stage a real recovery is the serious imbalance that has developed in the past few decades – namely, the over-development of the UK financial sector and the atrophy of manufacturing. Right after the 2008 financial crisis there was a widespread recognition that the ballooning financial sector needed to be reined in. Even George Osborne talked excitedly for a while about the “march of the makers”. That march never materialised, however, and the share of the manufacturing sector has stagnated at around 10% of GDP.
This is remarkable, given that the value of sterling has fallen by around 30% since the crisis. In any other country a currency devaluation of this magnitude would have generated an export boom in manufactured goods, leading to an expansion of the sector.
Unfortunately manufacturing had been so weakened since the 1980s that it didn’t have a hope of staging any such revival. Even with a whopping 30% devaluation, the UK’s trade balance in manufacturing goods (that is, manufacturing exports minus imports) as a proportion of GDP has hardly budged. The weakness of manufacturing is the main reason for the UK’s ever-growing deficit, which stood at 5.2% of GDP in 2015.
It’s being blamed on the Brexit jitters. But the weakness in the UK economy that the latest figures reveal is actually a symptom of a much deeper malaise. Britain has never properly recovered from the 2008 financial crisis. At the end of 2015, inflation-adjusted income per capita in the UK was only 0.2% higher than its 2007 peak. This translates into an annual growth rate of 0.025% per year. How pathetic this performance is can be put into perspective by recalling that Japan’s per capita income during its so-called “lost two decades” between 1990 and 2010 grew at 1% a year.
At the root of this inability to stage a real recovery is the serious imbalance that has developed in the past few decades – namely, the over-development of the UK financial sector and the atrophy of manufacturing. Right after the 2008 financial crisis there was a widespread recognition that the ballooning financial sector needed to be reined in. Even George Osborne talked excitedly for a while about the “march of the makers”. That march never materialised, however, and the share of the manufacturing sector has stagnated at around 10% of GDP.
This is remarkable, given that the value of sterling has fallen by around 30% since the crisis. In any other country a currency devaluation of this magnitude would have generated an export boom in manufactured goods, leading to an expansion of the sector.
Unfortunately manufacturing had been so weakened since the 1980s that it didn’t have a hope of staging any such revival. Even with a whopping 30% devaluation, the UK’s trade balance in manufacturing goods (that is, manufacturing exports minus imports) as a proportion of GDP has hardly budged. The weakness of manufacturing is the main reason for the UK’s ever-growing deficit, which stood at 5.2% of GDP in 2015.
UK trade deficit with EU hits new record
Some play down the concerns; the UK, we hear, is still the seventh or eighth biggest manufacturing nation in the world – after the US, China, Japan, Germany, South Korea, France and Italy. But it only gets this ranking because it has a large population. In terms of per capita output, it ranks somewhere between 20th and 25th in the world. In other words, saying that we need not worry about the UK’s manufacturing sector because it is still one of the largest is like saying that a poor family with lots of its members working at low wages need not worry about money because their total income is bigger than that of another family with fewer, high-earning members.
Another argument is that we now live in a post-industrial knowledge economy, in which “making things” no longer matters. The proponents of this argument wheel out Switzerland, which has more than twice the per capita income of the UK, despite – or rather because of – its reliance on finance and tourism.
However Switzerland is actually the most industrialised country in the world, measured by manufacturing output per head. In 2013, that manufacturing output was nearly twice the US’s and nearly three times the UK’s. The discourse of post-industrial knowledge economy fundamentally misunderstands the role of manufacturing in economic prosperity.
First of all, despite the relative increase in the importance of services, the manufacturing sector is still – and will always be – the main source of productivity growth and economic prosperity. It is a sector that is most open to the use of machines and chemical processes, which raises productivity. It is also where most research and development, which generates new technologies, is done. Moreover, it is a sector that produces inputs that raise productivity in other sectors. For example, the recent rise in productivity in the service sector has happened mainly because it is using more advanced inputs produced in the manufacturing sector – computers, fibre-optic cables, routers, GPS machines, more fuel-efficient cars, mechanised warehouses and so on.
Second, many knowledge-intensive services, such as research, engineering and design, that are supposed to be new have always been there. Most of them used to be conducted by manufacturing firms themselves and have become more “visible” recently largely because they have been “spun off” or “outsourced”. We should not confuse the changes in firms’ organisation with the changes in the nature of economic activities.
All of those supposedly knowledge-intensive services sell mostly to manufacturing firms, so their success depends on manufacturing success. It is not because the Americans invented superior financial techniques that the world’s financial centre moved from London to New York in the mid-20th century. It is because the US became the leading industrial nation.
The weakness of manufacturing is at the heart of the UK’s economic problems. Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.
Friday 30 August 2013
Practise swadeshi, save the rupee
By Kingshuk Nag in the Times of India
The only way to save the rupee and to prevent its free fall is to start practising swadeshi all over again. Yes, you read it correctly. As a nation we are living beyond our means and you can’t continue doing so unless we want India to crash (and not the rupee alone). That is exactly what is happening: the crash of the rupee is a symptom of the problems that ail the economy. Although sarkari economists et al are trying to explain away the problem by changes in the Fed rates in the US and a revival in the US economy this is a very shallow explanation. Just because the Indonesian rupiah, the South African rand and the Brazilian real have been competing with the rupee in depreciating against the US dollar, there is no reason to wish away our problems.
------
Also read
Next time you bite corn produced in Australia, oranges raised in California and apples from god knows where, think deeply whether as a nation we can afford this. Maybe middle class and upper middle class consumers can afford these imported fruits at an individual level, but certainly not as a nation. When India’s foreign exchange earnings are not enough to cover our imports, it is a no-brainer that we cannot. Stopping such imports and also of other edibles like cheese is not going to make any one worse off. The question that we should ask ourselves is: cannot good quality fruits be grown in the country that we have to spend precious foreign exchange to import them?
In the good old days, students used to travel abroad for higher studies after they completed their MA to take admission in PhD and other such programs in top universities. The learning in these top universities would be far superior to what could be had in high institutions in the country. But things have changed in the last two decades: these days you can find parents sending their children abroad to do their undergraduate degrees. Why? This is possibly because it has become a fad to send children abroad. Parents say that they have the money so they will send their children abroad. While this may be true, the fact of the matter is that as a nation we cannot afford precious foreign exchange to spend on children studying at the undergraduate level and doing basic technical courses. A pertinent question to ask is whether the education infrastructure is so poor that there are no colleges in the country to impart a basic degree. So the issue is why this fad for a foreign education?
However you would not have seen any economist or politician who waxes eloquent on TV holding forth on the rupee speak anything about all this. Most of their conversation revolves around the tight monetary policy of the RBI and the decline in growth impetus, etc This misses the real issue. The fact of the matter is that the process of liberalization that was kick-started in 1991 is so lopsided that it promoted the culture of consumption without any breaks. (Editor's comment - i.e. the Kerala model, but Kerala has the advantage of foreign remittances to pay for the consumption culture.) True, before liberalization the economy was in shackles and the consumption in the country was artificially restricted. This was by way of import curbs and by the process of licensing. Thus things like washing machines were treated as luxuries although in reality it was a great boon for families especially those with working women.
Liberalization provided a great opportunity to break the shackles and set up a modern, efficient manufacturing base in India. Well that really did not happen adequately. Had that happened India would have become a major exporter of manufactured goods that would have been enough to take care of India’s import requirements (of which oil imports is a major component). But India continued to be an exporter of raw material. For example till the ban in exports of iron ore, the country was exporting iron ore to China. A country which is focused on its growth (like China is) would have instead tried to manufacture steel from this iron ore which could have been exported instead. This would have resulted in more foreign exchange earnings. But India had no such strategy in place.
Instead of exporting manufactured goods, India has become an importer of raw materials. A good example is coal that is imported into the country for fuelling thermal power stations. This is in spite of the fact that India sits on reserves of billions of tons of coal reserves. India spent $18 billion in coal imports in the last fiscal year 2012-13. This is by no account a small sum.
But while exports did not go up, imports of not only coal and petroleum products (valued at $169.25 billion in the last fiscal year) but other consumer goods also went up.
World class manufacturing facilities did not come up in India due to many reasons. But primarily the culprit is the policy paralysis in the country for many years that resulted in inadequate infrastructural facilities whether it was electricity generation, port facilities or proper roads. Bureaucratic hassles and widespread corruption in granting permissions played a none-too-insignificant role in this process.
Entrepreneurs finding a bleak scenario soon realized that realty was a booming sector where large profits could be made without much hassles. As a result entrepreneurs of all hues and colors turned to realty. This includes top names in the Indian corporate sector. Even many IT companies started dabbling in real estate. With politicians joining in the game, realty became the name of the game. Thus the high growth evidenced in the country in the period 2000-2009 and especially between the years 2005-2008, is nothing but an indication of the rapid growth in the real estate sector that led to bourgeoning cities (never mind the poor infrastructure). But the increase in the growth of the realty sector is an artificial growth that may add to national income yet doing nothing to increase India’s exports. A huge middle class, which has earned moolah through direct speculation in realty or by working in companies whose profits have soared due to their investments in real estate, started feeling empowered. And this empowerment was reflected through increased consumption. This has led to spiralling imports. It may not be out of place that India’s savings rate has plummeted in the last five years. From 36.9 per cent in fiscal year 2007-08, it tumbled to 30.8 in 2012-13 and is expected to go down to 30 per cent by the end of fiscal year 2013-14.
The rupee may have tumbled in the last two weeks, but the signals were there for anybody to see for the last few months. In the last fiscal year India’s imports of gold soared to $50 billion. This was not due to the proclivity of the Indian consumers to own the yellow metal. Rather it was a signal from the market that the rupee could not be trusted to hold its value. Gold was being imported, because people preferred to hold their savings in the form of the yellow metal than in the form of the Indian rupee in banks or investments.
Whether it is an individual, household or a nation, nobody can live beyond their means. You have to cut the coat according to the cloth that you have. Thus there is no other way for India and as Indians we have to learn to live within our means. The time has come to reduce to zero the imports of inessentials and restrict the imports to the essentials. The control raj came with a lot of ills, but independence also comes with responsibilities. From 1991 to 2013, the pendulum has swung from one extreme to the other. It is time to restore balance in our lives, think in terms of age old concepts like import substitution and check the rampant spread of this consumerist culture. Otherwise doomsday is not far away.
The only way to save the rupee and to prevent its free fall is to start practising swadeshi all over again. Yes, you read it correctly. As a nation we are living beyond our means and you can’t continue doing so unless we want India to crash (and not the rupee alone). That is exactly what is happening: the crash of the rupee is a symptom of the problems that ail the economy. Although sarkari economists et al are trying to explain away the problem by changes in the Fed rates in the US and a revival in the US economy this is a very shallow explanation. Just because the Indonesian rupiah, the South African rand and the Brazilian real have been competing with the rupee in depreciating against the US dollar, there is no reason to wish away our problems.
------
Also read
Gresham’s Law in Present day India
-----
Next time you bite corn produced in Australia, oranges raised in California and apples from god knows where, think deeply whether as a nation we can afford this. Maybe middle class and upper middle class consumers can afford these imported fruits at an individual level, but certainly not as a nation. When India’s foreign exchange earnings are not enough to cover our imports, it is a no-brainer that we cannot. Stopping such imports and also of other edibles like cheese is not going to make any one worse off. The question that we should ask ourselves is: cannot good quality fruits be grown in the country that we have to spend precious foreign exchange to import them?
In the good old days, students used to travel abroad for higher studies after they completed their MA to take admission in PhD and other such programs in top universities. The learning in these top universities would be far superior to what could be had in high institutions in the country. But things have changed in the last two decades: these days you can find parents sending their children abroad to do their undergraduate degrees. Why? This is possibly because it has become a fad to send children abroad. Parents say that they have the money so they will send their children abroad. While this may be true, the fact of the matter is that as a nation we cannot afford precious foreign exchange to spend on children studying at the undergraduate level and doing basic technical courses. A pertinent question to ask is whether the education infrastructure is so poor that there are no colleges in the country to impart a basic degree. So the issue is why this fad for a foreign education?
However you would not have seen any economist or politician who waxes eloquent on TV holding forth on the rupee speak anything about all this. Most of their conversation revolves around the tight monetary policy of the RBI and the decline in growth impetus, etc This misses the real issue. The fact of the matter is that the process of liberalization that was kick-started in 1991 is so lopsided that it promoted the culture of consumption without any breaks. (Editor's comment - i.e. the Kerala model, but Kerala has the advantage of foreign remittances to pay for the consumption culture.) True, before liberalization the economy was in shackles and the consumption in the country was artificially restricted. This was by way of import curbs and by the process of licensing. Thus things like washing machines were treated as luxuries although in reality it was a great boon for families especially those with working women.
Liberalization provided a great opportunity to break the shackles and set up a modern, efficient manufacturing base in India. Well that really did not happen adequately. Had that happened India would have become a major exporter of manufactured goods that would have been enough to take care of India’s import requirements (of which oil imports is a major component). But India continued to be an exporter of raw material. For example till the ban in exports of iron ore, the country was exporting iron ore to China. A country which is focused on its growth (like China is) would have instead tried to manufacture steel from this iron ore which could have been exported instead. This would have resulted in more foreign exchange earnings. But India had no such strategy in place.
Instead of exporting manufactured goods, India has become an importer of raw materials. A good example is coal that is imported into the country for fuelling thermal power stations. This is in spite of the fact that India sits on reserves of billions of tons of coal reserves. India spent $18 billion in coal imports in the last fiscal year 2012-13. This is by no account a small sum.
But while exports did not go up, imports of not only coal and petroleum products (valued at $169.25 billion in the last fiscal year) but other consumer goods also went up.
World class manufacturing facilities did not come up in India due to many reasons. But primarily the culprit is the policy paralysis in the country for many years that resulted in inadequate infrastructural facilities whether it was electricity generation, port facilities or proper roads. Bureaucratic hassles and widespread corruption in granting permissions played a none-too-insignificant role in this process.
Entrepreneurs finding a bleak scenario soon realized that realty was a booming sector where large profits could be made without much hassles. As a result entrepreneurs of all hues and colors turned to realty. This includes top names in the Indian corporate sector. Even many IT companies started dabbling in real estate. With politicians joining in the game, realty became the name of the game. Thus the high growth evidenced in the country in the period 2000-2009 and especially between the years 2005-2008, is nothing but an indication of the rapid growth in the real estate sector that led to bourgeoning cities (never mind the poor infrastructure). But the increase in the growth of the realty sector is an artificial growth that may add to national income yet doing nothing to increase India’s exports. A huge middle class, which has earned moolah through direct speculation in realty or by working in companies whose profits have soared due to their investments in real estate, started feeling empowered. And this empowerment was reflected through increased consumption. This has led to spiralling imports. It may not be out of place that India’s savings rate has plummeted in the last five years. From 36.9 per cent in fiscal year 2007-08, it tumbled to 30.8 in 2012-13 and is expected to go down to 30 per cent by the end of fiscal year 2013-14.
The rupee may have tumbled in the last two weeks, but the signals were there for anybody to see for the last few months. In the last fiscal year India’s imports of gold soared to $50 billion. This was not due to the proclivity of the Indian consumers to own the yellow metal. Rather it was a signal from the market that the rupee could not be trusted to hold its value. Gold was being imported, because people preferred to hold their savings in the form of the yellow metal than in the form of the Indian rupee in banks or investments.
Whether it is an individual, household or a nation, nobody can live beyond their means. You have to cut the coat according to the cloth that you have. Thus there is no other way for India and as Indians we have to learn to live within our means. The time has come to reduce to zero the imports of inessentials and restrict the imports to the essentials. The control raj came with a lot of ills, but independence also comes with responsibilities. From 1991 to 2013, the pendulum has swung from one extreme to the other. It is time to restore balance in our lives, think in terms of age old concepts like import substitution and check the rampant spread of this consumerist culture. Otherwise doomsday is not far away.
Saturday 13 April 2013
Throw out the myths about Margaret Thatcher
The reality was that Thatcher was neither popular nor successful economically. Labour must make a clean break with her policies
A North Sea oil rig off the Scottish Coast, pictured in 1988: 'During Thatcher's time in office, government oil receipts amounted to 16% of GDP.' Photograph: George Steinmetz/ George Steinmetz/Corbis
It is a truism that history is written by the victors. As Margaret Thatcher's economic policies were continued after she left office, culminating in economic catastrophe in 2008, it is necessary to throw out the myths peddled about her. The first is that she was popular. The second is that she delivered economic success.
Unlike previous governments, Thatcher's never commanded anything close to a majority in a general election. The Tories' biggest share of the vote under her was less than 44% in 1979, after which her vote fell. The false assertions about her popularity are used to insist that Labour can only succeed by carrying out Tory policies. But this is untrue.
The reason for the parliamentary landslide in 1983 was not Thatcher's popularity – her share of the vote fell to 42% – but the loss of votes to the defectors of the SDP and their alliance with the Liberals. Labour's voters did not defect to the Tories, whose long-term decline continued under Thatcher.
Nor did Thatcher deliver economic success, still less "save our country" in David Cameron's silly and overblown phrase-mongering. In much more difficult circumstances in 1945, the Labour government, despite war debt, set itself the task of economic regeneration, introduced social security and pensions, built hundreds of thousands of homes and created the NHS. In the 31 years before Thatcher came to office the economy grew by about 150%; in the 31 years since, it's grown by little more than 100%.
Thatcher believed that the creation of 3 million unemployed was a price worth paying for a free market in everything except labour. Thatcher's great friend Augusto Pinochet used machine guns to control labour, whereas Thatcher used the less drastic means of anti-union laws. But their goal was the same, to reduce the share of working class income in the economy. The economic results were the reason for Thatcher's falling popularity. As the authors of The Spirit Level point out, the inequality created led to huge social ills, increases in crime, addictions of all kinds and health epidemics including mental health issues.
Thatcher's destruction of industry, combined with financial deregulation and the "big bang", began the decline of saving and accumulation of private- and public-sector debt that led directly to the banking crisis of 2008. The idea that bankers would rationally allocate resources for all our benefit was always a huge lie. Now the overwhelming majority are directly paying the price for this failed experiment through the bailout of bank shareholders.
Thatcher was sustained only by one extraordinary piece of luck. Almost the moment she stepped over the threshold of Downing Street the economy was engulfed in an oil bonanza. During her time in office, government oil receipts amounted to 16% of GDP. But instead of using this windfall to boost investment for longer-term prosperity, it was used for tax cuts. Public investment was slashed. By the end of her time in office the military budget vastly exceeded net public investment.
This slump in investment, and the associated destruction of manufacturing and jobs, is the disastrous economic and social legacy of Thatcherism. Production was replaced by banking. House-building gave way to estate agency. The substitute for decent jobs was welfare. Until there is a break with that legacy there can be no serious rebuilding of Britain's economy.
The current economic crisis is already one year longer than the one Thatcher created in the early 1980s. In effect the policies are the same now, but there is no new oil to come to the rescue.
Labour will win the next election due to the decline in Tory support, which is even lower under Cameron than Thatcher. But Labour must come to office with an economic policy able to rebuild the British economy – which means a clean break with the economic policies of Thatcher. Labour can build an alliance of the overwhelming majority struggling under austerity: a political coalition to redirect resources towards investment and sustainable prosperity using all the available levers of government.
We can succeed by rejecting Thatcherism – the politics and economics of decline and failure.
Sunday 20 May 2012
It will be Smarter to learn from the Germans
Easy to blame the Germans. Smarter to learn from them
Other leaders are being hypocritical when they shove all the responsibility for the euro crisis on to Angela Merkel
Chancellor Angela Merkel with David Cameron. Photograph: Michel Euler/AP
As Noël Coward didn't quite sing, do let's be beastly to the Germans.
This bitter tune is heard not just in Greece, but also in the corridors
of Number 10, the Elysée Palace and the White House. Casting around for
someone to blame for the crisis, the fingers of accusation point at Germany and its chancellor, Angela Merkel.
The jabbing fingers are furiously angry ones on the streets of Athens where German flags are burnt and the newspapers dress Ms Merkel in Nazi uniform. The jabbing continues in editorials in the American press, which charges Berlin with being single-handedly responsible for taking the world economy to the brink of the abyss. The jabbing is dressed in the language of diplomacy at this weekend's G8 summit where Barack Obama, François Hollande and David Cameron have ganged up on the German chancellor.
The American Democrat, British Conservative and French Socialist may not agree on much else, but on this, at least, they are together. It is one second to midnight in the eurozone because a recalcitrant and miserly Germany has refused to step up to its historic responsibility to do what is necessary to save the single currency. If the eurozone implodes, and carries away the global economy with it, the buck will stop in Berlin.
Let us begin by acknowledging that Germany does deserve a big helping of blame for the very scary state of the eurozone. Berlin shares, principally with Paris, responsibility for the original sin. That was to construct a badly designed and over-stretched single currency area containing contradictions that would explode under stress. In the pursuit of a European ideal, Germany forgot its usual prudence when Berlin nodded and winked at the admission of countries – Greece being the most extreme example – for whom euro membership was not only inappropriate but very dangerous.
It is fair enough also to observe that Germany has repeatedly failed to offer leadership that rises to the scale of the present crisis. When Germany has led, it has not always been in a well-judged direction. The austerity programme imposed on the Greeks as the price for continued membership of the euro was too draconian to be implemented in a democracy. The voters would surely revolt and they duly have.
The European Central Bank has been denied the necessary firepower to get ahead of events because the Germans wouldn't allow it. Ms Merkel has never been a very easy partner for her peer group. One of Gordon Brown's officials who had a ringside seat during the negotiations at the London G20 describes her thus: "Incredibly stubborn. Immovable. She simply digs in." One of David Cameron's team says dealing with the German chancellor is "like trying to squeeze blood from the proverbial stone".
I expect she will concede just enough to the growth agenda being pushed by other G8 leaders for them to cobble together an end-of-summit communiqué that pretends they are all agreed. There will be a further attempt to reconcile the German insistence on fiscal discipline with the French call for measures to promote growth when the EU heads of government meet in Brussels on Wednesday. One proposal would see the European Investment Bank receive an additional €10bn in funding. The leaders are also likely to back a European Commission plan to issue "project bonds" – debt backed by all 17 eurozone countries to raise funds for infrastructure programmes in depressed regions. All of which will give them something to justify meeting and none of which is anything like sufficient to ease an immediate crisis of such magnitude that €10bn is peanuts.
Germany must take her portion of the blame for the calamities in the eurozone and the cataclysm that now threatens to unfold. But the more I hear people being beastly about the Germans, the more I see all the responsibility being shoved in their direction, the more my sympathies begin to lean towards Angela Merkel's dilemmas and her people's concerns. When Barack Obama calls for "decisive action" to save the eurozone, Germans hear him saying that they should write yet more large cheques to bail it out. When François Hollande demands a growth package, Germans ask who but they will pay for it when everyone else in Europe is broke. When David Cameron tells the eurozone to "put its house in order", Germans perceive a peremptory request for them to throw more good money after bad. Germany will probably end up picking up most of the bill for this disaster, but you can see why they are tired of being told to do so.
The demand has to be particularly galling when it comes from David Cameron, the prime minister of a country that is not a member of the euro and who leads a party that wills it to fail. Angela Merkel is entitled to feel that being told to relax on fiscal discipline is particularly cheeky – a kinder word than hypocritical – coming from Mr Cameron. In speeches to home audiences, the prime minister insists that he must defy "dangerous voices calling on us to retreat" and stick with his government's austerity programme on the grounds that: "You can't borrow your way out of a debt crisis." Yet when lecturing the Germans, Mr Cameron recommends that they should turn on the spending taps to get the eurozone out of its debt crisis.
His aides say that the prime minister wants to make common cause with Monsieur Hollande in pressing Chancellor Merkel for a more growth-orientated strategy in Europe. That would be the same Monsieur Hollande whom the prime minister would not deign to meet before he was elected to the Elysée, the same Monsieur Hollande who was badmouthed by Tories as a crazy leftie who would lead his country to ruin – Ed Balls in a beret.
The reason why Germany has found herself in this isolated position boils down to this: she has money and everyone else does not. Her economy is growing, her unemployment rate is much lower and her debts are under control. She is a rich country among paupers because Germany has been much better governed than her peer group. Some reckless German financiers laid stupid bets, but her banks were not allowed to hazard the rest of the economy in quite such a shocking way as banks were in Britain and America.
Germany took care of her finances much more prudently than her European neighbours. She has a welfare state, public services and infrastructure that provoke jealousy in any visitor from Britain. But she did not make the mistake of trying to buy them on the never-never. Germany did not build up the mountains of debt, both private and public, which bear down on Britain and others. As a result, German households and firms can borrow without being punished by the bond market vigilantes.
It is true that the Germans have had a fantastic deal out of the euro; a much better one than either they or anyone else anticipated when they thought they were sacrificing their beloved deutchsmark in the cause of European unity. The theory at the time was that the euro would help the less impressive economies to catch up and create, in Helmut Kohl's phrase, "a strong Germany in a strong Europe".
The actual result has turned out to be a strong Germany in a weak Europe. The euro has certainly boosted their exports-driven economy, which is one reason why Germans should be very fearful of its implosion. But it was not the euro that made them a great exporting nation in the first place. They were extremely accomplished at selling things when they were priced in the powerful deutchsmark because postwar Germany has been brilliant at manufacturing goods that others want to buy.
It was announced last week that Vauxhall will be building its new model of Astra at Ellesmere Port in Cheshire rather than in a German factory. This news was regarded as so remarkable that two cabinet ministers were sent north to mark it. While Vince Cable paid a celebratory visit to the plant, David Cameron made a speech in Manchester applauding a renaissance in the car industry. It is very good news for British manufacturing – so long as you don't linger too long over the caveat that Vauxhall is owned by General Motors of America. But such a fuss over one announcement draws attention to the rarity of Britain beating Germany at car-making since 1945.
The usual mode of British politicians is to be envious of what Germany has achieved. Ed Miliband commends the German model of industrial relations, in which workers are represented on company boards, as a restraint on the corporate excesses we have seen in Britain. With its record of investment in high-value industries and emphasis on making quality goods that the world wants to own, German strength is based on the solid prosperity that coalition ministers aspire to create when they talk about "rebalancing" the British economy.
Germany has its flaws. Angela Merkel has made her fair share of mistakes. But this is no time for contempt, especially not from Britain, for a country that is enviably competitive, rich, stable, free and socially and environmentally progressive. If there is a long-term solution to the miseries of the rest of Europe, it doesn't lie in being beastly to the Germans. It would be a better idea to try to learn from them.
The jabbing fingers are furiously angry ones on the streets of Athens where German flags are burnt and the newspapers dress Ms Merkel in Nazi uniform. The jabbing continues in editorials in the American press, which charges Berlin with being single-handedly responsible for taking the world economy to the brink of the abyss. The jabbing is dressed in the language of diplomacy at this weekend's G8 summit where Barack Obama, François Hollande and David Cameron have ganged up on the German chancellor.
The American Democrat, British Conservative and French Socialist may not agree on much else, but on this, at least, they are together. It is one second to midnight in the eurozone because a recalcitrant and miserly Germany has refused to step up to its historic responsibility to do what is necessary to save the single currency. If the eurozone implodes, and carries away the global economy with it, the buck will stop in Berlin.
Let us begin by acknowledging that Germany does deserve a big helping of blame for the very scary state of the eurozone. Berlin shares, principally with Paris, responsibility for the original sin. That was to construct a badly designed and over-stretched single currency area containing contradictions that would explode under stress. In the pursuit of a European ideal, Germany forgot its usual prudence when Berlin nodded and winked at the admission of countries – Greece being the most extreme example – for whom euro membership was not only inappropriate but very dangerous.
It is fair enough also to observe that Germany has repeatedly failed to offer leadership that rises to the scale of the present crisis. When Germany has led, it has not always been in a well-judged direction. The austerity programme imposed on the Greeks as the price for continued membership of the euro was too draconian to be implemented in a democracy. The voters would surely revolt and they duly have.
The European Central Bank has been denied the necessary firepower to get ahead of events because the Germans wouldn't allow it. Ms Merkel has never been a very easy partner for her peer group. One of Gordon Brown's officials who had a ringside seat during the negotiations at the London G20 describes her thus: "Incredibly stubborn. Immovable. She simply digs in." One of David Cameron's team says dealing with the German chancellor is "like trying to squeeze blood from the proverbial stone".
I expect she will concede just enough to the growth agenda being pushed by other G8 leaders for them to cobble together an end-of-summit communiqué that pretends they are all agreed. There will be a further attempt to reconcile the German insistence on fiscal discipline with the French call for measures to promote growth when the EU heads of government meet in Brussels on Wednesday. One proposal would see the European Investment Bank receive an additional €10bn in funding. The leaders are also likely to back a European Commission plan to issue "project bonds" – debt backed by all 17 eurozone countries to raise funds for infrastructure programmes in depressed regions. All of which will give them something to justify meeting and none of which is anything like sufficient to ease an immediate crisis of such magnitude that €10bn is peanuts.
Germany must take her portion of the blame for the calamities in the eurozone and the cataclysm that now threatens to unfold. But the more I hear people being beastly about the Germans, the more I see all the responsibility being shoved in their direction, the more my sympathies begin to lean towards Angela Merkel's dilemmas and her people's concerns. When Barack Obama calls for "decisive action" to save the eurozone, Germans hear him saying that they should write yet more large cheques to bail it out. When François Hollande demands a growth package, Germans ask who but they will pay for it when everyone else in Europe is broke. When David Cameron tells the eurozone to "put its house in order", Germans perceive a peremptory request for them to throw more good money after bad. Germany will probably end up picking up most of the bill for this disaster, but you can see why they are tired of being told to do so.
The demand has to be particularly galling when it comes from David Cameron, the prime minister of a country that is not a member of the euro and who leads a party that wills it to fail. Angela Merkel is entitled to feel that being told to relax on fiscal discipline is particularly cheeky – a kinder word than hypocritical – coming from Mr Cameron. In speeches to home audiences, the prime minister insists that he must defy "dangerous voices calling on us to retreat" and stick with his government's austerity programme on the grounds that: "You can't borrow your way out of a debt crisis." Yet when lecturing the Germans, Mr Cameron recommends that they should turn on the spending taps to get the eurozone out of its debt crisis.
His aides say that the prime minister wants to make common cause with Monsieur Hollande in pressing Chancellor Merkel for a more growth-orientated strategy in Europe. That would be the same Monsieur Hollande whom the prime minister would not deign to meet before he was elected to the Elysée, the same Monsieur Hollande who was badmouthed by Tories as a crazy leftie who would lead his country to ruin – Ed Balls in a beret.
The reason why Germany has found herself in this isolated position boils down to this: she has money and everyone else does not. Her economy is growing, her unemployment rate is much lower and her debts are under control. She is a rich country among paupers because Germany has been much better governed than her peer group. Some reckless German financiers laid stupid bets, but her banks were not allowed to hazard the rest of the economy in quite such a shocking way as banks were in Britain and America.
Germany took care of her finances much more prudently than her European neighbours. She has a welfare state, public services and infrastructure that provoke jealousy in any visitor from Britain. But she did not make the mistake of trying to buy them on the never-never. Germany did not build up the mountains of debt, both private and public, which bear down on Britain and others. As a result, German households and firms can borrow without being punished by the bond market vigilantes.
It is true that the Germans have had a fantastic deal out of the euro; a much better one than either they or anyone else anticipated when they thought they were sacrificing their beloved deutchsmark in the cause of European unity. The theory at the time was that the euro would help the less impressive economies to catch up and create, in Helmut Kohl's phrase, "a strong Germany in a strong Europe".
The actual result has turned out to be a strong Germany in a weak Europe. The euro has certainly boosted their exports-driven economy, which is one reason why Germans should be very fearful of its implosion. But it was not the euro that made them a great exporting nation in the first place. They were extremely accomplished at selling things when they were priced in the powerful deutchsmark because postwar Germany has been brilliant at manufacturing goods that others want to buy.
It was announced last week that Vauxhall will be building its new model of Astra at Ellesmere Port in Cheshire rather than in a German factory. This news was regarded as so remarkable that two cabinet ministers were sent north to mark it. While Vince Cable paid a celebratory visit to the plant, David Cameron made a speech in Manchester applauding a renaissance in the car industry. It is very good news for British manufacturing – so long as you don't linger too long over the caveat that Vauxhall is owned by General Motors of America. But such a fuss over one announcement draws attention to the rarity of Britain beating Germany at car-making since 1945.
The usual mode of British politicians is to be envious of what Germany has achieved. Ed Miliband commends the German model of industrial relations, in which workers are represented on company boards, as a restraint on the corporate excesses we have seen in Britain. With its record of investment in high-value industries and emphasis on making quality goods that the world wants to own, German strength is based on the solid prosperity that coalition ministers aspire to create when they talk about "rebalancing" the British economy.
Germany has its flaws. Angela Merkel has made her fair share of mistakes. But this is no time for contempt, especially not from Britain, for a country that is enviably competitive, rich, stable, free and socially and environmentally progressive. If there is a long-term solution to the miseries of the rest of Europe, it doesn't lie in being beastly to the Germans. It would be a better idea to try to learn from them.
Sunday 8 January 2012
Germany once admired British workmanship – but that was a long time ago
Over the North Sea lies the richest country in Europe, its success built on the manufacturing industry that Britain has spurned
'The war hadn't been over 10 years and somehow Germany was making model trains more convincing than our own'
We all want to be Germans now: to make, to sell and not to yield. We would like to earn some respect, not least self-respect, and have some idea of our national future. The UK will never replace Germany as the world's second largest exporter, but we can surely manage to manufacture a few more things and "rebalance the economy", as the saying goes, to shrink the influence of the City of London.
So many people have had this dream recently – Vince Cable, of course, and Lord Glasman, no doubt, but also George Osborne when he made his fatuous speech about the "march of the makers". And there over the North Sea is the richest country in Europe: exemplary Germany, with its technical schools and apprenticeships, its respect for engineers, and its layer of family businesses known as the Mittelstand that puts long-term reputation above short-term profit by making the specialised parts that industry everywhere needs. How foolish we were to imagine that national prosperity could be spun from figures on a computer screen, out of thin air. How silly to despise the making of three-dimensional objects as a lowly process that had quit the west for the east. And how wise it would be (so the dream goes) to take a leaf from Germany's book and make manufacturing a much larger slice of the economy, therefore returning Britain to an earlier and possibly more solid version of itself.
That self is a long time ago. I remember watching Edgar Reitz's long and haunting film Heimat in the mid 1980s. Through the life of one family, the history of Germany in the 20th century was related in all its difficulty. At one point in the second world war, two characters find part of an aircraft or a bomb (I can't recall which) in a field. "Look," says one to the other as he handles the object, "such fine English workmanship." There was no irony, though it seemed hardly credible that British engineering could have been prized in Germany only 40 years before, given that at that Thatcher moment the typical British workshop was being sold abroad as scrap.
Germany's technical superiority was plain to see by the 1960s, but my own enlightenment came rather earlier, when I was eight or nine and the recipient of German gifts at Christmas. These came from two sources. In 1945, my family had befriended a prisoner-of-war and stayed in touch with him when he went home to Hamburg. We sent parcels of coffee beans, while a small box of marzipan or a bottle of eau-de-cologne came in the other direction. But as the years passed, the German presents grew more sophisticated. For me, a toy fire engine with a working water pump; for my parents, topographical books of black and white photographs printed on cream paper that felt like velvet. Perhaps these luxuries could also be found in Britain, but we had never seen them.
These were portents. The epiphany – not that I thought of it like that at the time – arrived when my older brother came home on leave from national service in Germany. He was the second source of gifts, and once, from his kitbag, produced two model railway coaches, gauge 00 to match my Hornby set but made by the German toymakers, Marklin. Their detail was superb. My tinplate Hornby carriages relied on painting to produce an effect of windows and door handles, but on their Marklin equivalents the windows really were transparent and the pattern of rivets below them stood out in relief. The war hadn't been over 10 years, and somehow Germany was making things as inconsequential as model trains that were more convincing than our own. Suddenly "Made in England" no longer suggested a singularly high quality, not that in 1954 it was easy in Britain to find goods made anywhere else.
Fear and envy of German manufacturing prowess began a long time before, as any economic history will tell you. Together with the US, Germany began to displace Britain as the world's foremost industrial nation well before the close of the 19th century. Books and newspaper articles sounded the alarm ("American furniture in England – a further indictment of the trade unions," read a Daily Mail headline in 1900), but did little to prevent Britain falling further behind in the new industries that became so important in the 20th century. Germany established a clear lead in chemicals, electrical engineering, optics and instrument-making. At the outbreak of war in 1914, the British government found that every magnet in the country came from Stuttgart, while German chemical works supplied all the khaki dye for British military uniforms.
To a large extent, British decline was inevitable: other nations had learned how to make things and export markets would naturally shrink. But the particular contrast with Germany was instructive when it came to scientific education and the social position of manufacturers and engineers. According to Peter Mathias's classic economic history, The First Industrial Nation, only a dozen students were reading for a degree in natural sciences at Cambridge in 1872. Germany, meanwhile, had 11 entire universities devoted to science and technology. Its educational system embraced the idea of manufacturing, while England's public schools and ancient universities held it at arm's length.
Finance became the acceptable business profession for gentlemen. In the words of another historian, Martin Wiener, finance "involved the extraction of wealth by associating with people of one's own class in fashionable surroundings, not by dealing with … the working and lower-middle classes". In this way, the City became part of the elite and "could call upon government much more effectively than could industry to favour and support its interests".
This is a familiar and by now hardly controversial diagnosis of the British malaise, and every so often a government or a politician promises a fundamental reform in political attitudes, praising the country's long tradition of scientific discovery and technical invention. A few television programmes endorse the same point; Sir James Dyson appears with his vacuum cleaner. But, beyond that, nothing much happens. Look around the frontbenches on both sides of the Commons. Who there dares upset the City? Who there ever made anything three-dimensional, or even had a parent who did? Which of them would risk the chamber pot of failed hopes being emptied over their heads by calling for a national industrial strategy?
It would be lovely to emulate the industrial success of the Germans, but so much history is very hard to undo. The one cheerful note (or perhaps more a vengeful one) is that Marklin, which made my memorable little carriages, is now owned by a private equity company based in London.
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