Germany remains a beacon despite stresses

Election result was disappointing

For supporters of the values of openness, tolerance, international détente, a sense of responsibility towards the most vulnerable as exemplified by Angela Merkel’s decisive welcoming of a million mainly Syrian refugees in 2015, which 21st century Germany has come to stand for, the election result of September 24th was a disappointment. The Alternative fur Deutschland (AfD) won significantly more votes than expected at 13% and the Free Democratic Party (FDP) also achieved a major breakthrough from below the 5% proportional representation threshold to 10%. Once a champion of liberal values the FDP made its gains partly by appealing in a more palatable way to similar prejudices that drove the AfP: pandering to the tabloid view of Greece, the country which has suffered far the most from the euro zone crisis, by calling for it to be expelled from the euro zone; calling for the new wave of refugees to be sent back if and when conditions become possible (not necessarily wrong in principle but which would betray the promise made to them by Merkel); and suggesting that global warming and other environmental problems can to solved by technology alone, ie with no difficult political decisions or inconveniences to the public. Moreover, support for the Christian Democrat/Christian Social parliamentary group led by Merkel fell by 8.5 percentage points from the last election to a modest 33%, while that for the Social Democrats (SPD) fell by 5.2 points to 20.5%.

Even so, with the Greens at 8.9%, parties which clearly uphold the 21st century German values referred to above received 62% of the vote, while opinion polls suggest that, if there had been a personal vote for chancellor, Merkel would have received a little over 50% while the SPD chancellor-candidate, Martin Shultz, would have received abut 25%, a joint total of over three quarters. That is no reason for complacency. Other countries have shown how rapidly voting intentions can change.

 

Merkel’s policies have serious flaws

Moreover, both Merkel and her Germany have deep flaws (though that is surely true of any leader or any democracy, including the UK or US, at the time they were most admired). She has been too hand in glove with the powerful automotive lobby, by persuading other EU countries to ease planned environmental restraints. Even after the breaking of the scandal in which VW deliberately engineered diesel emission to tests to give misleading results, and it was revealed that tests in Europe in laboratories gave much more favourable results that actually applied on the road, she has continued to more supportive of a sector which has causing major damage to cardiovascular and pulmonary health.

With regard to Germany’s euro zone policy, Merkel has given free rein to Wolfgang Schauble as finance minister over the last eight years (he will be moved to become speaker of the Bundestag in the new parliament) to impose something of a rule of fear amongst indebted southern euro zone countries. In the early years of the crisis which broke in 2009 there was in my opinion little choice but for these countries to take tough measures to bring down deficits and to stop debt rising further but Germany should not have tried to put all the blame on southern Europe especially Greece and have admitted that the management of the euro zone had been deficient in allowing the situation to arise and that German and other banks should never have lent so much to Greece and other countries. The bail-outs were more to save north European banks and thus the stability of the euro zone as a whole than really to help the bail-out countries, Greece, Portugal and, now ended, for Ireland. Greece in particular introduced cut-backs in spending which brought about reductions in living standards unprecedented for any EU country in 60 years. There is a need to be fair to different governments and thus after an election to loosen conditions for an incoming government is unfair to the outgoing one but the conditions imposed on Greek economic and by implication social policy were very wide ranging and to refuse to give any consideration to proposals from the incoming government led by the left wing Syriza in January 2015, effectively gave the implication that as long as Greece was in its “debtors’ prison”, democracy in Greece was put on indefinite hold naturally,  led to understandable resentment.

Greece has clearly been bankrupt for the last eight years, and the fault was as much mistaken lending and poor euro zone management as foolish borrowing. Now, after the German election and with a new finance minister, must be the time for Germany, along with other creditor countries, to tackle the debt issue and give Greece a light at the end of the tunnel, just as Germany was given by debt reduction in the early 1953. There might be a request by Portugal for a more limited reduction in debt, but Italy and Spain do not have bail-out programmes and would not be justified in asking for debt relief.

President Macron has called for a euro zone budget. As the likely main contributor to such a budget, there is no chance of more than a very small budget but whether through this mechanism or others Germany should be willing to engage seriously in discussions on how to promote investment, for example by expanding on existing small but successful programmes led by the European Investment Bank and the European Investment Fund which promotes lending to small companies.

 

Difficult FDP seems essential to a coalition

In the medium term (probably before the next election in four years) Germany will have to find a replacement for Mrs Merkel. In the short time she has a very difficult challenge with forming the next coalition government. The SPD which has been the junior partner of coalitions for two Merkel’s four terms, very understandably wants to go into opposition, even though its disagreements with Merkel’s policies are not at present fundamental. Indeed precisely for this reason, it needs to establish an identity not seen as subservient to the larger coalition partner. As she would definitely not form a coalition with the AfD and it is very hard to see her doing so with the far left Die Linke, the only one left which would give her a majority is the so called Jamaica (black, green and yellow) coalition with the Greens on the left of the CDU/CSU and,  on the right, the FDP which performed much better that recently in the election.

Demands the FDP made in the election campaign such as sending back refugees in the future allowed in 2015 or expelling Greece from the euro zone should not be acceptable to Merkel. It seems that Christian Lindner, the young FDP leader who has led the party’s revival, covets the finance ministry but he could take an even harder line on Greece and the euro zone generally than Schauble did, given that doing appeals to a significant section of German voters. Unless he was willing to show a flexible approach, if he was appointed to this post he could undermine any attempt for Germany to work together with its partners in the euro zone. A possible alternative would be economics minister with a remit to improve conditions for small and medium sized enterprises, the source of most likely future growth in Germany’s economy.

 

Will the new German government look inwards or outwards?

Much will depend on the internal negotiations to form a new government, which will shape Germany’s future policies. For the moment, Germany as a broad polity still stands as a beacon in Europe and indeed the world. It is a liberal democracy committed to supporting the EU, NATO as a defensive pace and the UN and is building with difficulty but with hope an increasingly multi-cultural society. It is likely to remain a strong and stable country but whether it becomes more outward or more inward looking is an open question.

 

How are the southern euro area countries doing in tackling their weaknesses?

There has been a malaise

Overall the experience of southern European euro zone countries has not been good since the euro zone was initiated in 1999 with Portugal, Spain and Italy all founding members and Greece joining two years later. Whether or to what extent this poor performance is due to the supposed structural flaw in the euro zone (an integrated monetary area but not an integrated fiscal or political area) or due to problems in the countries themselves is open to debate. The fact that performance was not very good also in the 1990s compared with previous decades supports the view that the problems lie within the countries themselves although two countries in particular were ultimately hurt by excess borrowing resulting from the mistaken view of markets that the lending within the euro zone was safe. When the 2008-09 financial crisis came from the US to the EU the southern euro zone was hit particularly badly. Initially the worst hit countries were Greece, Portugal and Spain plus Ireland. Ireland was the first to recover while Italy’s problems including those of its banks became worse so the ungainly acronym PIGS remained appropriate swapping Italy for Ireland.

From a societal point of view the biggest problem in all these countries is unemployment, especially youth unemployment. In Greece and until recently Spain youth unemployment is almost 50% (although this does not account for unregistered employment) in Italy and Portugal 40%.

Much advice on offer, perhaps too much

International organisations including the European Commission, the OECD and the IMF constantly call for reform and stipulate a wide range of such reforms. Reforms are also called for by creditor countries notably Germany and the Netherlands and the European Commission has to take account of their views in its own recommendations. The creditors recommendations are inevitably informed by their own self interest. The IMF is also a creditor of Greece and is calling for debt relief but not of its own loans.  Such self-interest is reasonable up to a point. Irresponsible borrowing should not be encouraged. But there comes a point when the pain should be shared. Irresponsible lending which assumes that government loans will always be repaid also should not be encouraged.

The biggest problem with reform recommendations is that they tend to be so wide-ranging as to be telling supposedly sovereign and democratic parliaments how to legislate over a wide range of subjects. This has particularly been the case for the hardest hit country Greece but is also a live issue in the other countries. For this reason I want to focus on those l reforms which I think most important. First are reforms to the labour market, most importantly to modify protections to employees which are perceived by employers as very  burdensome and so discourage taking on employees. The second is the pressing need in several countries to simplify regulations and reduce the cost for starting new businesses and running small businesses.  Thirdly, there is the task of making the rule of law more effective, in terms of independence and impartiality of the judiciary, effectiveness in terms of sanctions and also the time taken to bring about justice. Finally, reforms may be needed to improve the management of public finances, not least in terms of collection of taxes. Decisions about how spending is divided and how much to tax should be left to free democratic choice unless expenditure is bankrupting the country or taxes are utterly crippling economic activity remembering that some countries can be economically successful with high levels of public expenditure.

Spain has led on labour market reform key to employment creation

The most important single reform which can improve the chances that more job opportunities are provided and one which more than most others can be done through a single piece of legislation from central governments is to limit the costs and legal procedures for companies to shed employees. The reason is simply that there is much evidence gathered by a range of organisations like the OECD that, if such costs are reasonable and predictable, companies will be much more willing to take on new employees. The model to be aimed at is one in Scandinavian countries and the Netherlands where redundant employees are given adequate welfare support and crucially access to retraining. However, there has been huge resistance to such reforms in countries like Italy and France from trade unions. Trade unions are a key ingredient in a plural society and should not be lightly over-ridden, but in this instance where they are giving priority to their hold on a diminishing membership at the expense of opportunities for young people, they should be over-ridden. The best example of a country that has reformed its labour market in this way is Spain which began introducing reforms early in the last decade and enacted a major labor market reform in 2012, while in recession.  This reform permitted companies in most cases to dismiss regular contract employees with 20 days severance pay per year worked, compared to up to 48 days previously. There were high levels of job creation in Spain during the boom before the 2008 crash, but during the recession and in the wake of a reform making it easier to fire workers, it went sharply into reverse. From 2014 the economy and employment have been recovering strongly. In Italy Matteo Renzi introduced significant reforms in employment legislation when prime minister between 2014 and 2016. There has been no major impact on job creation so far, though this may be due to the fact that the economy remains weaker than the euro area average.

Such a reform to increase flexibility should not be seen as a complete deregulation of the labour market.  The UK, which has long been one of the most flexible labour markets with high levels of job creation, has kept powerful employment tribunals to protect individuals against discrimination or victimisation, although they are now weakened by cost cutting. However, in Italy a law protecting individual employees was a long cause of controversy with employers accepting paying compensation if found to have dismissed an employee unfairly but arguing that having to take the employee back was disruptive.

More can be done to make life for small businesses easier

Making life easy for people to start and run small businesses should not be controversial but is less easy in practice than might be expected. Two reasons may be postulated. One is that registration usually involves local governments, which are rightly autonomous. Secondly, some parts of southern Europe have a long established culture of non-co-operation and even antagonism between the private and public sectors. Private companies regard government as just a hindrance and don’t like paying taxes while government regards private companies as out to cheat. The resulting behavior of one side reinforces that of the other. Nevertheless there have been significant improvements according to the OECD in most OECD countries over the last eight years. In 2016 an OECD survey found that Scandinavian countries, the UK, Ireland and France were below average for both time and cost required to start a new business. Amongst southern European countries, Portugal seemed the best with well below average time and just slightly above average cost (just over 2% of income per capita). Italy was average for time but high for cost.

Another survey on overall Barriers to Entrepreneurship affecting small and medium enterprises also published by the OECD shows that both Italy and Portugal moved from being amongst the countries with the most burdensome regulations to being third and seventh best in terms of least restrictive legislation between 2008 and 2013. Spain, however, which has as noted done most to reform labour market legislation, retained in 2013 the second most burdensome other restrictions on entrepreneurship, having seen no improvement over the previous five years. Greece did improve but still scored only a little better than Spain.

It may of interest that Italy according to the OECD had just over 3.5m enterprises in 2013 more in absolute not just relative terms than any other country apart from the US (and not much less than the US). A generation ago Italy’s local networks of enterprises both cooperating and competing were seen as a model. They have been less dynamic than hoped in the intervening period but remain resilient. In particular Italy is a (possibly the) world leader in design, particularly but not only clothing, and there has been a moderate return of clothes making to Italy for those willing to pay a little more.

Quality government usually changes only gradually

On the general question of good government, a very interesting and still relevant book called Making Democracy Work: Civic Traditions in Modern Italy by Robert Putnam was published in 1993.  It takes as its starting point the major devolution of government reform which took place in 1970 following 100 years since unification of centralized government. It compared various survey measures of good government seen through the eyes of both individual citizens and businesses and measures of civic participation (partly actual participation in social groups and partly attitudes). It found that regions with a higher degree of “civicness” correlated surprisingly closely with better government performance both through objective tests and as seen by citizens. The higher degree of civicness itself was found to be linked to the history of the regions – ones that had been city states or with local autonomy hundreds of years ago showing much higher levels of civic participation than those that had been under autocracies – most notably in the south. But the book did not find that as a cause for fatalism. Both southerners and northerners were positive about the impact of devolution and improvements on the quality of government could be seen in the south as well as north between 1970 and the early 1990s. While the south remains poorer than the centre and north and with higher unemployment, its standard of living, which had remained very low during 100 years of centralised government, has increased hugely in the decades after 1970. The book is not only relevant to Italy. The differences between regions within a country are perhaps particularly strong in Italy but also exist in most other countries and should be a warning against sweeping generalisations.

Often taking for granted when it operates well, the effectiveness of a country’s legal system including the objectivity and independence of the judiciary, is essential to a good environment for businesses of all sizes to operate and so to economic development. Companies need to be able to enforce contracts and be able to operate without fear of criminals particular mafia-type organisations which have in southern Italy particularly conducted widespread extortion.  In Spain and Italy the judiciary is independent and has been a thorn in the side of allegedly corrupt politicians in both countries, including members of the governing Popular Party in Spain. On the other hand, the system can be very slow, especially in Italy. As is well known Sicily and southern Italy are where the word mafia originated and particularly in Sicily, Calabria and around Naples has had a vice-look grip on parts of the economy. Due to the dedication and bravery of police, public prosecutors and judges, and also the co-operation of businesses in resisting extortion, the power of the mafias especially in Sicily have been reduced though they remain a major challenge and have indeed spread into the north.

In overall terms, I think the four countries I have discussed are all making changes for the better albeit slowly and unevenly and subject to the normal political shenanigans of any democratic country. The devolution of power in Italy has been very beneficial, although inevitably it means differences in quality of government between the regions. It has also overall been beneficial in Spain, despite some bad examples of corruption associated with speculative building in some regions. Outright independence for any region would be a step backwards. Although independence is favoured by many in Catalonia, a geographically small but economically important autonomous community in Spain, I don’t think the majority exists to bring it about.

The issues here discussed are in my opinion more important for the countries’ future than whether or not they remain members of the euro zone, though leaving would cause a lot of disruption and no significant benefit. Criticisms made of euro area policies towards countries dependent on the backing of creditors and of the European Central Bank are mostly valid but their claim that a softer policy would have enormous benefits is exaggerated. Once country Greece is being unjustly treated by Germany and the Netherlands taken into account how much pain it has suffered in the last nine years, the fact that it finds itself host to more refugees relative to its population than any other EU member and the fact that lenders and EU decision makers acted just as irresponsibly as Greek governments, but even in this case the answers to Greece’s economic travails lie more inside Greece than outside.

 

 

2017 will be risky year for EU (less the UK) but there are also reasons for hope

 

The year 2017 will be an eventful and important year for the EU. The expectation that the UK will set in motion in March a process to leave the EU in two years is a blow – the first time that a full country has decided to leave the EU (Greenland an autonomous region with a link to Denmark had previously left) and one that might suggest the possibility of further countries leaving. The immediate aftermath of the UK according polls conducted by the German Bertelsmann Institute was a strengthening of pro-EU feeling in all other countries and there does not appear to be any country with a majority in favour of leaving the EU. Nevertheless there are strong movements in many remaining member states which are either in favour of outright departure or want to weaken the EU; there is also increased opposition to euro membership in Italy.

With the governments of all other major countries either weak or unstable and with many of their economies still struggling, Germany has in recent years played a leading role, and this will be even more the case in 2017 with the UK having decided to leave. The coming election there in September is likely to see the Christian Democrats re-elected as the largest party and therefore the leading party in a coalition, which could be again with the Social Democrats (SPD) or other parties. Whatever the criticisms made of her, Angela Merkel as the unchallenged leader of the CDU will very probably be re-appointed as chancellor.

 

Italy with caretaker prime minister faces election by March 2018

Within the euro zone Italy had since Matteo Renzi became prime minister in 2014 had a stronger and for Italy relatively long-lasting government. For a time Renzi seemed the most effective leader after Merkel, but he resigned in December as a result of a badly misjudged referendum on constitutional reform. If the overall aim of the reform – to change Italy’s costly and unwieldy bicameral system – was a good one, details were flawed and it became associated with a separate electoral reform, which could have given excessive power to the largest party even if it had well below majority support. In addition, having promised to resign as prime minister if he lost, Renzi had to do so. As a result Italy faces a new period of political instability with elections likely in 2017 and necessary by March 2018. There is a possibility that the Five Star Movement (M5S) might come to power. It can be described as populist but is not as anti-immigrant as other populist movements. It has said that it would have a referendum on euro membership. The leader, Beppe Grillo, is hyper-critical of the other main parties, particular the Democratic Party (PD), which is still led by Renzi, but M5S’s own performance in city governments has been mixed and particularly poor so far in Rome.

 

Spain with new minority government stages economic recovery

Spain, following a year with only a caretaker government, now has one led by the previously incumbent right-of-centre Popular Party (PP), which has been given conditional support by the opposition Socialists (PSOE) and opposed by the newer and more left wing Podemos, as well as being challenged by Catalan nationalism. In the last year the economy has finally, seven years after its collapse in 2008-09, staged an impressive recovery with over half a million extra jobs created in 2016. This seems likely to continue meaning that despite political difficulties Spain is no longer a weak link in the euro zone.

 

First 2017 elections to take place in Netherlands

Elections will take place in the Netherlands in March when the performance of the virulently anti-Muslim party the PVV led by Geert Wilders will be watched. Netherlands’ governments have always been coalitions but the other main parties have said they will not form a coalition with the PVV. Such a strategy may seem right in principle but has the disadvantage that the PVV has been becoming the main opposition.

 

French elections in May should lead to stronger president

The next major EU elections in 2017 will probably be those for the French president and parliament in May. At present there are three leading candidates each with about a quarter of likely votes according to opinion polls: Marine Le Pen leader of the Front National, Francois Fillon, the choice of the right of centre, and Emmanuel Macron, a centrist who was minister in the Socialist government before resigning to declare his independent candidacy. President Hollande is not standing. The Socialist Party is holding a primary to choose its official candidate but none of the potential official Socialist candidates looks likely to rival Macron. Macron has been making speeches emphasizing his difference with Le Pen by giving full-hearted support to the EU and declaring that France should be open and multi-cultural. Fillon on the other hand may try to win over potential Le Pen voters by being more sceptical of the EU (though not in favour of a referendum on it) and appealing to identity politics. He has also called for drastic cuts in the size of the public sector, one of the largest in Europe relative to the economy, by reducing state employment by half a million. As a declared admirer of Mrs Thatcher, he may also pursue policies which increase inequality. Even if these succeed in helping the development of private sector enterprise,they could increase the number of people who feel left out and so could be vulnerable to Le Pen.

At the moment opinion polls suggest that in the second round of presidential elections between the two leading candidates in the first round, assuming Le Pen comes first or second, that either Fillon or Macron would win by between 60 and 65% of the vote against 35-40% for Le Pen. Given the surprise Leave vote in the EU and the Trump victory in the US, there is no room for complacency that this apparently comfortable lead will be reflected in the final vote.

If Fillon or Macron can win by a reasonably strong majority his government will at least for a time have the potential to be a near-equal partner with Germany led by Merkel, a role that President Hollande has not been able to fulfill. Unlike Hollande, both Macron and Fillon argue that difficult and painful reforms are needed to revive the French economy and to strengthen the fiscal position. They are not therefore setting themselves up for a dramatic decline in support when it becomes apparent that they cannot meet promises made during the campaign as happened with Hollande.

 

Merkel likely to remain chancellor after September election

Germany’s election takes place, as is traditional there, in September. The far-right party, the Alternative fur Deutschland, at present polling at 13%, is less of a threat there to the mainstream parties than similar parties are in the many other EU countries, despite the bold decision of Angela Merkel to welcome over a million refugees in 2015. Still, the far-right will for the first time in post-Second World War Germany have seats in the federal parliament, and its presence there is likely to be quite significant.

If she can hold the far-right opposition to its present level of support, Merkel is likely to achieve another convincing electoral victory. Her ability to remain an authoritative but not authoritarian chancellor after 13 years in the post is remarkable but at present she faces no major challenge from any competitor for the post. Germany led by Merkel has been a lynchpin of stability and liberal multi-culturalism in the EU as a whole.

 

Criticism of Germany’s fiscal policy are valid but should not be exaggerated

On the other hand Germany’s finance minister, Wolfgang Schauble, has been accused of dictating harshly restrictive monetary and fiscal policies which have served its interests more than its euro area partners. Schauble is the second most powerful figure in German politics. His popularity means that Merkel would find it very hard to overrule him and risk provoking his resignation.

In fact the monetary policy of the European Central Bank, in promising if required unlimited intervention to keep key countries in the euro area and keeping interest rates close to zero has been highly criticized both by Schauble and by the Bundesbank. In fiscal policy Schauble has largely got his own way which has is in some respects been excessively harsh, especially in still refusing to write off un-repayable Greek and Portuguese debt and being unwilling to take into account the pressures on Italy’s public finances by the need to tackle the bulk of the cross-Mediterranean migrant flow in the last 12 months and suffering severe earthquakes. On the other hand, German policy has been consistent with holding the euro area together, and, whatever happened the post-2008-09 crash period would have been a difficult one inside the euro area as it has been outside the euro area. While some criticisms of German policy are justifiable it is not helpful to suggest that the difficulties of other countries should be solved more in Germany than domestically. Ireland has for several years shown that a euro zone crisis country could recover and in 2016 Spain recovered with the addition of over half a million extra jobs.

 

Role of EU institutions is important but likely to remain low profile

Given the upsets in the UK and the US in 2016 and the substantial support for right wing populist parties in many EU countries there are clearly risks that the cohesion of the EU apart from the UK. However, there are also grounds for hope that it can hold together despite both internal strains and unpredictable policies of the US and Russia, as well as the possibility of large new flows of refugees via Turkey or Libya. The ability to do so depends primarily on what happens in member states. The performance and decisions of the EU institutions, the Commission, Parliament and Court of Justice are important in the longer term but it is unlikely that they will do anything in the coming 12 months which has a decisive impact on the EU’s prospects. Following the departure of the Socialist Martin Schulz to return to German politics, the new president of the European Parliament, Antonio Tajani a member of the centre-right European Peoples’ Party is likely to have a lower profile. The European Commission, headed by Jean-Claude Juncker, has kept a generally low profile and is likely to do so.

One delicate issue is how far to go in criticizing authoritarian governments in Poland and Hungary for actions that seem to come into conflict with commitments made at the time of EU entry on principles like the independence of the judiciary. Overall, the EU institutions are unlikely to and should not push for more power since this could provoke a backlash in countries other than the UK  but they will still have important roles to play in keeping the EU functioning in very difficult circumstances.

Italy’s referendum and the Brexit vote: a comparison

Parallels have been drawn between the June 23rd UK referendum on leaving the EU and the December 4th Italian one on domestic constitutional changes. Do such links have any validity?

Similarities:

Both attracted voters who wanted to protest specifically against the government and generally against the political class. As a result they both gave opportunities for tub-thumping anti-establishment politicians, such as Nigel Farage and Beppe Grillo to increase their profile.

The campaigns for the winning side in both cases included a very wide disparity of political opinions from the far left to the far right and many opinions between the two.

The result of both votes was a negative-not to be part any longer of the EU and to reject proposed constitutional reforms. Neither gave any idea of what the alternative might be, in the case of the UK what the future relationship with the EU would be, and in the case of Italy how the constitution might be reformed although there is widespread agreement that some reforms are needed.

Both led to the resignation of prime ministers and thereby created concerns over political stability.

Differences:

The Italian referendum was a domestic one, not one about its international relations. There are possible implications for Italy’s position in the EU as Renzi though highly critical of actual EU policies is fundamentally pro the EU and the euro, while one opposing group the Lega Nord is anti-EU while another the Movimento 5 Stelle is ambiguous about the EU and wants a referendum on euro membership. Nevertheless the euro and the EU were far from being uppermost in voters’ minds and any possible impact on these is only speculative at this stage.

The UK referendum was a voluntary choice of David Cameron whereas Matteo Renzi had according to the country’s 1948 constitution to get endorsement for his proposed reforms to that constitution because he only had simple majorities in both houses of parliament for the reforms. He would have needed two-thirds majorities to avoid the need for a referendum. However, Renzi did make the choice to package several reforms in one referendum and also to put his own job on the line thereby personalizing the referendum.

While Cameron chose subsequently to resign as a member of parliament and thereby to end his political career Renzi could still play an important role in the future.

Domestic repercussions of the vote will probably be less than those from UK referendum

We know that beyond the change of prime minister, the UK referendum has already had major implications for all political parties. It led immediately to a challenge to the leadership of the main opposition party, the Labour Party and although Jeremy Corbyn was subsequently re-elected by a large majority of the membership, the divisions within the parliamentary party have not been mended.

It is clearly possible five months after the UK referendum to know more at the political impact on the UK that two days after the Italian referendum. But there are at present no firm reasons to suppose that the consequences will go beyond the replacement of the prime minister. An election must in any case take place by March 2018. The result of that election was and remains highly uncertain but the departure of the prime minister could as easily help the Partito Democratico as hinder it since Renzi’s popularity had fallen sharply over the last 12 months. It is at present not known whether he will stay as leader of the PD. Even if he does his profile will be lower and he will have little choice but to adopt a more compromising approach. Renzi’s fall is indeed important but its impact on political stability is likely to be less dramatic than many commenters perceive. Italian governments have lasted little more than a year on average over the last 60 years.

 There is no direct impact on position in EU and any indirect impact is speculative

The referendum is only important for the EU insofar as it may prove bad for the pro-euro PD. At present its main competitor is M5S, which, if at the head of the government, could pull Italy out of the euro. Such a scenario after the next election is a possibility but that was so before the referendum. Because M5S proved able to motivate voters against the reforms and against Renzi does not mean that it will be able to motivate them to the same extent in favour of M5S and its leader, the comedian Beppe Grillo at a general election.

Some commentators have at times suggested that leaving the euro would imply leaving the EU but this would only be the case if the other leading members of the EU decided in effect to expel Italy, which is not likely. M5S is not calling for Italy to leave the EU.

A small piece of good news for the EU: the agreement with Canada

Although there are 16 million people in the UK who voted to remain in the EU and would do so again even amongst them there is a feeling that things are going badly not just for the UK but for the other 27. So a piece of good news that the governments of all 27 countries and some country important regions have agreed to an ambitious new agreement on overall economic relations with Canada (although parliaments still have to ratify it). The difficulties with Wallonia shows that this kind of region (almost a country, since Belgium is little more than the shell of a country) has to be taken seriously but in this case they were preferred to negotiate rather than destroy the deal.

 

Deal is opposed by some on the left

There has been an ongoing campaign against the deal by leftwing campaigners in several countries whose comments plucking emotional rather than rational strings curiously echo those on the right who have campaigned against the EU in the UK. They claim that social and environmental standards are being sacrificed to the interests of multinationals but provide very little argument to back this up other than concerns which are legitimate but should not be deal-breaking on the tribunal intended to arbitrate on possible disputes between companies and governments. The principles in the agreement are very similar to those applying in member states and the EU itself namely that governments can introduce legislation to secure any social, environmental or other public policy goal, but such measures should not be grossly disproportional to their stated objectives, should not discriminate against companies from other countries compared to domestic companies, and should not amount to expropriation without compensation; in the latter case companies can be taken over by the state but fair compensation is required as in all EU member states and as is reasonable given that most companies include large shareholdings of pension funds insurance companies etc.

 

Dispute resolution will remain an issue

The problem is how to resolve disputes if companies or governments complain that the other party is not abiding by the above principles. In the case of many countries the courts of the country should be able to resolve disputes fairly but it seems that there is not sufficient confidence that this would always apply. So an arbitration panel has been agreed on. An important concession is that cases will be held in public not in secret. However there is probably no way of ensuring with absolute certainty that the method (or any method) of choosing judges is such as absolutely to exclude the possibility of any bias.

What is certain is that the deal and how it works out in practice will remain subject to scrutiny and debate but that if it is to be effective the sovereignty of the EU and its member states on the one hand and Canada on the other will be compromised. If the UK wishes to have as open economic relations with the EU, or indeed with Canada, it will have to compromise its sovereignty.

What Future for the EU of 27?

Echoes of UK anti-EU opinion are found in the 27

The UK was never a lynchpin of the EU and the immediate effect of its vote to leave has been to strengthen pro-remain opinion in other countries. However, there are strong anti-EU sentiments in many member states and there is a notable lack of solidarity amongst the 27 in facing current issues, so there is no room for complacency. The British desire to blame the problems of modern life on “Brussels bureaucrats” has echoes in many other countries and there are strong parties which like UKIP play on nationalism “we against them” in France, Netherlands, Germany and many other countries. But at present emotions in the 27 are stirred almost entirely against would-be immigrants or asylum-seekers from outside the EU, particularly Muslims, partly because except in Germany there is less movement of intra-EU labour into any of the 27 than into the UK. Moreover no other country has any equivalent of the UK’s anti-EU press (Sun, Daily Mail, Daily Express and Daily Telegraph).

 

A divide remains between east and west

There are two fault lines through the EU-27, that of the former divide between communist eastern Europe and western Europe and that between north and south. The one between east and west reflects the fact that there is much less ethnic diversity in the east and consequently a fear of the consequences of any immigration from outside Europe and the ability of their societies to cope. This explains why there has been such strong resistance to any refugee quotas despite the fact that the numbers being asked of them are tiny compared with the million refugees taken in by Germany in 2015.  Two eastern European countries, Hungary and Poland, have also witnessed a worrying retreat from principles such as independent judiciary and a free and diverse press, which were part of the criteria for their entry to the EU, although the Polish Law and Justice Party is having to contend with a loss in popularity.

 

Another is between north and south

The second divide is across the euro zone where southern countries are struggling with high debt and stagnant economies, while Germany and some smaller countries are doing much better economically and have their public finances under tighter control. (France is only partly a southern country but does have some of the same problems.) It may well be the case that some of their difficulties would have been mitigated had southern countries not joined the euro zone at the start as this led to rising public and private borrowing from 2000 to 2008 encouraged by low interest rates and excessive confidence. But that does not mean that anything would be gained by breaking up the euro zone now. Croatia which is not in the euro zone has similar problems to countries that are in the zone. Short term growth might be achieved by currency depreciation and monetary accommodation of the consequent inflation but at some inflation would have to be brought under control. The labour market problems notably in Spain and Portugal existed before joining the euro. In Spain there was a big rise in employment after 2000 but much of the increase was due to the excessive boom particularly in construction backed by private sector borrowing. The recession in Spain brought about a big rise in public borrowing to a country whose public finances had been exemplary. In contrast Italy, Portugal and Greece were all crippled by high public debt already before the introduction of the euro.

 

Germany has taken role of disciplinarian

Germany has acted as a strict disciplinarian, not because it is trying to exercise power but because it believes that is the right policy for all countries and essential for the stability of the euro zone. It acknowledges a mea culpa in breaking the fiscal rules which Germany itself had insisted on as a foundation of the currency union in 2002-03 which undermined efforts to promote fiscal discipline in other countries during years of relatively strong demand. It has reacted by trying very hard to impose very tight fiscal discipline on itself, perhaps excessively especially in prioritising such discipline over infrastructure repair and improvement. It has a point in not excluding investment from fiscal targets since this can result in unnecessary investment, which will not lead to increased revenue in the future. It should, however, engage in debate on prioritising investment that is either going to become essential soon in the future or which can bring in revenue through fares, road tolls or other charges.

 

Renzi would like more flexibility

At present, the government of Matteo Renzi in Italy can claim to be the main spokesperson for southern Europe, given that his government has by Italian standards lasted a long time (just over two and a half years) and the next largest country, Spain, has been without a parliamentary-backed government for the whole of this year. But he is holding a referendum on December 4th on major constitutional reforms designed to produce a less costly and more effective parliament. He had earlier said he would resign if the reforms are defeated although he has recently been reticent about this. The reforms can be criticized in detail but are part of a wider reform programme that is trying to bring about changes that have long been recommended by organisations like the OECD, IMF, the European Commission, and indeed Germany, to reduce the cost of public sector administration while safeguarding key services like health and education, reduce regulatory and tax disincentives to establishing new businesses or increasing their size by hiring more employees. Renzi is straining at the leash of the fiscal rules to, on the one hand, try to help companies take on more employees by reducing labour taxes and the other to boost public investment; one need is to rebuild after the earthquake around Amatrice in August with buildings able to withstand future earthquakes.

 

On refugees Germany is closer to Italy and Greece than to many other countries

Despite tensions on fiscal policy, Germany is actually closer to Italy and to Greece in that both southern countries are like Germany struggling to take a degree of moral responsibility for the migrants risking their lives in crossing the sea. In the case of those coming to Italy a substantial number are from sub-Saharan Africa. In some cases they are fleeing from war or terrorism instigated by Boko Haram or other insurgents but where only a limited part of a country is so affected they should in theory be able to be returned to another part of the country. However, the process is costly and difficult and should perhaps be accompanied by financial aid. In Greece most migrants are from countries to which return is impossible. Germany is provided some financial aid to Greece to help it make living conditions bearable its many asylum seekers who are no longer able to continue to another country.

 

In the end EU will survive only if it can act as a community

Although aspects of the EU involve a legal framework of rules and enforcement, an equally important aspect is that it is a community of nations trying to act together and share political and ethical objectives. In a way it is a pity that the word Community was replaced by Union in the organisation’s title by the 1992 Maastricht Treaty. In any case, the EU’s leaders should not forget that acting as a community remains essential to its effectiveness and possibly its survival and that not everything can be done through rules or joint institutions, for which there is little appetite amongst public opinion in most member states.

 

Guest article by Mark Hudson: The Immigration Myth

Arguably, voting on June 23rd for most people will be dominated by fear. Either fear about the economy or fear about immigration. One of these will trump the other.

Of course there are lots of other issues, but when they are alone at the booth, faced with putting an ‘X’ in one space or another, most voters will fall back on what they fear most. Most people are not passionate about this issue one way or the other.

It is in this context that it is worth stressing that the real immigration issue in Britainif one is worried about immigration (which is not a major issue for me) – is immigration into the UK from non-EU countries. This key point has not been picked up by the Vote Remain camp.

These are the facts, sourced from government and anti-migration sources (see below).

1. Non-EU immigration accounts for more than half of immigration into the UK - which is entirely within the control of the UK Parliament, subject to national opinion.

The anti-migration website Migration Watch shows that even today more than half of immigrants into the UK still come from outside the EU (177,000 from non-EU in calendar 2015 against 170,000 from the EU.)

Between the 2001 and 2011 censuses the UK population grew from 58.8 million to 61.7 million. Over this time the non-EU born population grew by 1.5 million to 4.9 million (8% of the total) while the EU-born (excluding UK-born) population in the UK grew by 1.1 million to 2.6 million (4% of the population). So while immigration from the EU grew over this decade, the majority or 56% of the growth in the foreign-born UK population was due to the 1.5 million extra non-EU immigrants.

According to the Office for National Statistics (ONS) Labour Force Survey estimates for 2015, there are 3.3 million EU citizens in the UK – 1.6 million from the EU14, 1.3 million from the EU8, 300,000 from Romania and Bulgaria and the remainder from the other EU countries of Malta, Cyprus and Croatia[1]. There are 2.1 million UK citizens living in other EU countries (http://www.migrationwatchuk.org/briefing-paper/354) so the net effect of EU migration is to increase the UK population by only 1.2 million.

 

2. The real cultural challenge is in integrating non-EU peoples.

I would argue that what is sparking most concern in the UK regarding immigration is the recent wave of Muslim immigrants into Europe (from Syria, Afghanistan and Africa), their relative lack of integration and the connection in many people’s minds with fanatic terrorism. This is allied to ongoing worries about the relative isolation of the large Pakistani, Bangladeshi, Somali and other Muslim communities in the UK.

There are now 3 million Muslims in the UK (5% of the total population), around half of whom were born in the UK. This is a fact which we cannot ignore or wish away, even if we were so inclined. The real challenge for the UK is how to welcome and facilitate the deeper integration of Muslims into UK life, involving compromise on both sides, and including full acceptance of key European values of tolerance, equal treatment of women and LGBTs, the paramountcy of secular law and respect for human rights.

However, this is completely irrelevant as far as the EU Referendum is concerned, since immigrants from the EU are from a European cultural and Christian heritage. There are no EU rules about non-EU migration and virtually no Muslim migrants from within the EU.

 

3. EU immigrants are not generally competing for housing

The majority of immigrants from EU countries do not compete with UK national for council accommodation, but go for private rented accommodation. This is because:

- they stay generally for less than 5 years (though of course others stay longer or permanently), and so it is not worth applying for council housing. Studies show that one third of EU immigrants return home after less than a year (typically, farm-workers, students, bar-istas) and more than half return home before they get to pension age.

- many are wealthier and/or get better paid jobs.

 

4. The NHS, schools and welfare would be worse off without EU immigrants

A persistent scare story is that EU immigrants are straining the UK’s health, welfare and education services.

This is simply wrong:

-       Study after study has shown that EU immigrants contribute much more in taxes than they take in benefits, and proportionately more so than UK citizens. The UK is a net gainer in budgetary terms. EU citizens come here overwhelmingly to work, not to scrounge or get healthcare.

-       EU immigrants help support the NHS since they contribute more taxes; and two thirds are in work and so use the NHS less, proportionately, than the UK-born or non-EU born populations. It should be  added that the NHS would also be much worse off without non-EU immigrants, who make up a big chunk of the workforce

-       EU immigrants arrive having left school and often are university-educated, so they are not using the education system. EU students are of course paying their way (through the nose).

-       EU immigrants are for the most part better educated than the UK average and therefore have a broadly positive impact on the quality of the UK workforce.

 

Sources: https://en.wikipedia.org/wiki/Foreign-born_population_of_the_United_Kingdom; various FT articles; http://www.migrationwatchuk.org/statistics-net-migration-statistics; the ONS.



[1] The ONS Labour market statistics estimate that of the EU born migrants in the UK, 2.1 million were working.

 

 

 

To remain or leave: the case to stay taking account of arguments to leave

One argument of leave campaign is not true

A letter which I have recently received from Leave.EU, and has presumably been sent to millions of other potential voters, starts with a statement which is not true, namely that “in 1975 we voted for a Free Trade Area known then as the Common Market”. Although the sub-clause that it was informally called the Common Market is true, the reality is that the UK had previously been a member of the European Free Trade Area (EFTA) which consisted of six countries, the UK, Denmark, Sweden, Norway, Finland and Iceland, before it joined what was then  the European Economic Community. The EFTA countries including the UK had Free Trade arrangements with the EEC so in effect the UK was already part of a wider free trade area. It specifically decided to leave the free trade area in order to join the EEC because the EEC had moved to a deeper degree of economic integration, which was underpinned by profound political commitment aimed at making war between its member states impossible. One motivation in the UK for joining was that the deeper level of economic integration was perceived as a reason for the much faster growth—at the time—of the six original EEC member states that that of the UK. But many supporters of entry in the UK also believed in the political purpose of the EEC, not least the prime minister of the time Ted Heath who had experienced war between European countries first hand. If the UK was merely entering a slightly different form of Free Trade Area than the one of which it was already a member, how could it have inspired the passionate opposition of prominent politicians like Enoch Powell and Tony Benn?

But complete honesty is not easy for either side in this campaign

It is not just important  that this Leave.EU statement is untrue but also that it takes a leading role in their campaign. Regrettably the long campaign with proponents of each side scraping around for something new to motivate potential voters is likely to lead to more and more assertions whose truth is at least tendentious and at worst completely absent.  Although this post is passionately committed to the UK remaining part of the EU, it will attempt to respect the truth and separate opinion from fact.

EU membership does have its costs

There are three main arguments used by opponents of EU membership. These are the budgetary cost, the inability to reduce immigration from other EU member states and the loss of sovereignty. They are all valid ones. EU membership is not a free lunch. However, all three are being routinely exaggerated by many on the Leave side.

The budgetary cost in net terms is about £7bn a year, 0.5% of GDP or 1.2% of public expenditure. It is normally presented in gross terms by EU opponents which is about double the figure but the absence of EU expenditure in the UK would have consequences if not replaced which and these consequences are not spelled out by the Leave campaign. For example would the UK government decide that farmers who have received substantial public funding since well before the UK joined the EEC, be left to sink or swim with EU funding not replaced at all? Would scientific and technological research funding (the UK receives more such funding than in other EU member state) be slashed?

According to official figures which are based on samples and so not precise net immigration to the UK is running at around at around 325,000 a year, of which about 175,000 comes from the EU, which is a reasonable concern given we are already quite densely populated. About 190,000 come from outside the EU and therefore would not be affected directly by leaving the EU. Given that there is substantial net inward immigration from outside the EU due to such factors as family reunions and business needs for highly skilled personnel, it is reasonable to suppose that unless there was a deliberate policy of discrimination against the EU, there would be substantial inward net migration from the EU even if the UK left as long as the relative job-creating dynamic of the British economy continued. Nevertheless leaving the EU would make it possible to reduce net inward EI migration by 50-100,000 a year. This would not be likely to reduce pressure on the health and care sectors since some of the people excluded would be likely to include those coming to work as doctors, nurses, other hospital workers or carers. Nor would it relieve pressure on housing since many workers from eastern Europe work in the building sector. It would however help a little to reduce pressure on school places and also a little on the need to build on green spaces.

The third argument about sovereignty is a valid one in terms of principle but much less so in terms of its practical impact. The theoretical underpinning of the EU, and its predecessors, since 1951, has been based on the idea of a pooling of national sovereignty to make war between member states impossible. Those who believe that national sovereignty is a principle that overrides other policy aims could never have supported UK membership in the 1970s and could not have done so whatever David Cameron had been able to achieve in renegotiating the terms of membership. However, the practical impact of EU legislation on individuals and businesses is hugely exaggerated. In most areas of health and safety legislation the UK goes further than required by EU law. On environmental legislation few people are calling for dirtier bathing or drinking water or more air pollution. There is a long list of supposed regulations interfering with daily life from children playing with balloons to women’s institutes recycling jam jars, but most on close examination turns out to be either a complete invention or an addition to EU requirements made by British lawmakers or officials. Indeed I am not aware of any such complaint that has real substance, though some probably do exist since the EU is certainly not perfect.

Political arguments are more important for those with strongest views, but economic ones may sway more voters

Given that there are costs to membership, what are the arguments for paying those costs? They are both economic and political. In my opinion, the political arguments are the more important, but the economic arguments may sway more voters. Attempts have been made by various studies to quantify the economic impact on output and jobs of leaving, in contrast to remaining. However, there are so many variables involved that any such estimate is really little more that an informed guess. It is better to try to analyse the impact and let the reader draw his or her conclusions. Opponents of EU membership assert that it will be possible to negotiate a free trade area. This may be true as affects goods trade. There is no very good reason why the EU should impose tariffs on UK exports if the UK does not do so on EU exports to the UK. However, if the possibility of anti-dumping duties was to be avoided there would have to be rules on state aids. There would also be a risk that some of the non-tariff barriers due to discriminatory regulation which existed before 1986 could re-emerge.

Lack of single market would most affect services exports

The clearest change would be that there would no longer be a single market in the provision of services. The legal provisions needed to enable free trade in financial, legal, accounting, engineering, IT, architecture and other services have proven substantial and 24 years after the supposed completion of the single market programme, many barriers have been removed but there is much still to be done. What can be said is that leaving the single market would mean that the process of removing barriers to services trade between the UK and the rest of the EU would be reversed instead of continuing if the UK remained in the single market. It is possible to leave the EU while still being in the single market as is the case with Norway and to a large extent with Switzerland, but in order to remain in the single market, these countries must implement EU legislation, allow free movement of people and pay into the EU budget. Since the absence of these are the main arguments for leaving the EU, it would make little sense to leave the EU but remain in the single market. Services trade would therefore be adversely affected, also because British citizens would no longer be free to work in the EU.

The view of businesses

That is the broad picture. In detail the experience of EU membership is different for every different type of business dealing with conditions and regulations relevant to it. There does appear to be a very large majority of businesses which want to stay in the EU. From the CBI 80% favour staying in and 5% want to leave. Admittedly the CBI is an overtly pro-EU organization. The Federation of Small Businesses (FSB) is more neutral. Even so its policy director, Mike Cherry states on the FSB website that : “Small firms seek measures to boost cross-border trade and economic growth – the completion of the single market, simplification of VAT, a smarter approach to regulation and protection of the opt-out under the Working Time Directive”. The completion of the single market would not be possible outside the EU and it is hard to see how cross-border trade could be boosted. The opt-out from the Working Time Directive is protected and inside the UK has had success in pushing for smarter regulation (the volume of new legislation being proposed by the present Commission has been greatly reduced compared to previous ones) and can work to simplify VAT. The latest survey of members by the British Chambers of Commerce, which is also neutral as an organisation, shows 59.5% intend to vote to remain while 30.1% intend to vote to leave.

Ultimately, it is the ability of the UK to influence the political future of Europe that is in question

The political argument in favour of staying in the EU is the most important one. For those whose ideal is a theoretically sovereign UK acting on its own to protect its interests in a globalised world, economic costs are worth paying. The case in favour of EU membership is that we will have an ongoing role in an endeavour that has achieved 70 years of peace and a fair degree of prosperity. Whether a member or not, what happens in countries across the Channel is bound to matter for the UK. NATO, which is mentioned by EU membership opponents as an alternative, is an alliance designed to defend its members against potential outside threats but it is not able to make a significant contribution to stable and harmonious relations between its own members. In addition, the UK can exercise more influence on the world beyond the EU’s frontiers by working with neighbours than trying to act on its own. It is true that the influence that the EU has been able to exert to spread peace and stability beyond its borders towards the east and south has recently been a failure. But to start to unravel the EU’s own structure would risk undermining any chance of coherent policies.

With the EU in crisis Commission and other member states should show more solidarity with Greece

 Asylum crisis threatens to weaken EU 

In an interview with the BBC, Manuel Valls, the French prime minister, said that the EU itself was under threat from the crisis posed by pressure of refugee seekers. This on the face of it would seem exaggerated. If some member states are more generous than others in accepting refugees why should that undermine their capacity to work together within the framework of the EU treaties? The Schengen system of borderless travel across most EU member states has already partially broken and could completely break down as member states try to stop or regulate the flows of external migrants. This is a serious blow given the impact of the Schengen agreement on everyday life and symbolism in breaking down barriers. It does not mean that end of the EU, but the fact that people like Mr Valls are talking in these terms is evidence of a deep crisis.

 

At a time of several other difficulties 

The challenge of the asylum seekers is highlighting the differences between and within EU countries and comes on top of several other problems. One of these is the forthcoming UK referendum on whether to stay in the EU, with UK opinion polls suggesting that those likely to vote to stay in or leave are quite evenly divided. A vote to leave would deprive the EU of a major player, which has made a particularly important contribution to the development of the EU’s single market. Furthermore its departure would set a precedent, which would give impetus to anti-EU sentiment on other countries where it is already strong including France, Italy and Poland.

Another major problem is posed by the fact that some of the countries that acceded to the EU in 2004, notably Poland and Hungary have weakened their compliance with political criteria under which they were allowed to join, such as the impartial rule of law, as for example in the packing of Poland’s constitutional court with its own sympathisers by the newly elected Law and Justice government. The attempt by the European Commission to monitor such measures has provoked increased hostility to the EU in Poland and Hungary, and this has become meshed up in hostility to the EU’s strongest country, Germany.

A third problem is the euro zone crisis. Although the threatened departure of Greece from the euro zone was averted last year there are still considerable tensions between countries of the south with high debts and northern countries. Recently there has been an increase in tensions between Italy on the one hand and Germany and the European Commission on the other.

Differences over how to tackle the refugee influx is exacerbating the other differences. There is no simple answer: one policy extreme would mean that the EU abandons any pretence to stand up for human rights of those not already EU residents; the opposite of free entry for all genuine refugees would create unsupportable social and political tensions even in countries like Germany with an initially welcoming attitude. A muddled middle way is the only one that can hope to avoid one or other such consequence.

 

Commission takes wrong approach to Greece

But there are ways in which the EU could do better. In particular the key role of Greece in the crisis should be acknowledged. On January 27th the Commission published a report highly critical of Greece, threatening to expel in from the Schengen zone if it did not do better. This followed a proposal to help Macedonia man its frontier with Greece without consulting the Greek government. Even if the Greek economy were not experiencing the most severe economic crisis any member state has experienced since the early days of the EU, it or any other country would struggle to cope in a humane manner with the huge numbers crossing the sea onto Greek islands. In contrast to the Commission’s attitude a group of academics have put forward islanders that have rescued and helped refugees forward has a candidate for the Nobel Peace Prize.

 

Greece should be praised for what it has done rather than rebuked for what it has not done, and given far more funding to help it manage camps and processing centres to separate refugees from economic migrants and provide migrants in Greece with basic needs in the meantime. It may be that it is will be no longer practical to keep fully open frontiers with Greece given the amount of migrants arriving there, but this should not be portrayed as a punishment but rather as an unavoidable necessity in which Greece needs far more support from its partners.

 

 

Can Spain’s new parties bring new vigour to Spanish politics or will there be deadlock?

 

On January 13th, the new Spanish Parliament, the Cortes, met for the first time following the election of December 20th which gave significant numbers of seats to two completely new parties formed since the previous election, the left wing Podemos (“We can”) and the centre-right anti-corruption Ciudadanos (“Citizens”). The emergence of one, let alone two, new nationwide parties winning substantial numbers of members of parliament, is a rare event in Europe (or outside Europe). The only other example in a large European country this century is the Movimento 5 Stelle (M5S) in Italy. The formation of new parties, despite making government formation more difficult is in the opinion of InsightEU, a positive development which has the potential to re-invigorate democracy. The ability of the two parties to continue to flourish is therefore important for Spain and indeed for the EU as a whole. To do so they have to steer a difficult passage between being simply a protest party determined not to sully itself with real life compromise and treating the pilloried establishment parties with the modicum of respect needed for any negotations and being sucked into coalitions where they have to share responsibility for government and its inevitable failures and in a worst case scenario come to be seen as complicit in a system which they have been able to do little to change. M5S has avoided the latter but at the cost of remaining essentially a protest movement. But the Italian electoral system has meant that M5S is in any case an opposition party. In Spain the electoral result on December 20th and the refusal of the leader of the established Socialist Party (PSOE) to form a coalition with the party governing Spain until the December 2015 election (and still the provisional government) the right-of-centre Popular Party (PP), mean that the two new parties’ choices will be key to determining whether a government can be formed and win a vote of confidence or whether as must happen if no government is formed within two months of parliament reconvening, another election is called. In the latter event it would be likely that voters would move towards the PP as the largest party and therefore the one most likely to provide a majority government.

 

Sub-plot in Catalonia could prevent progress in Madrid

Pedro Sanchez came back from an early Janurary visit to Portugal extolling the recently formed coalition there between the Portuguese Socialist Party and two parties further to the left including the Portuguese Community Party. Sanchez has called for a left wing coalition in Spain, as was suggested as a likely outcome in our post of December 24th, but this now looks very difficult. The Catalan nationalist parties, which have just formed a new regional government, are set on their demands for a referendum on outright independence. Podemos favours such a referendum but the PSOE has promised to oppose it. Thus a coalition including the PSOE and the Catalan parties is impossible, while one including both the PSOE and Podemos looks very difficult. Not only is there the inevitable mistrust between two parties competing for the left wing vote, but there is also the whole issue of the future survival of Spain as a nation. Moroever, without the Catalan parties, Ciudadanos would have to be included to make a majority in the Cortes.

 

Can Podemos compromise enough to allow for new government?

It is to be hoped that Podemos is willing to modify its position on a referendum in the near term. It would be very unfortunate if a new party formed to combat the injustices of a 21st century economy were to be diverted onto the path of supporting nationalism of a kind little different in essence from the 19th century nationalist movements. There is some right and wrong on both sides of the referendum argument. On the one hand, the Spanish establishment needs to understand that if the majority of Catalans feel over a long period that they are not respected in Spain and are thwarted from fulfilling reasonable expectations as resulted from the constitutional court’s overruling of an agreement with the previous PSOE government for increased devolution, this will undermine the legitimacy of Spain. On the other hand, where pro and anti independence opinion is quite evenly divided and also volatile, a referendum which gave a little over 50% to a pro-independence question on one day but could be different if held a few years earlier or later, is a very flimsy basis on which to overturn the 524 years of unity since the merger of the Kingdoms of Aragon and Castile in 1492.

Whatever the pros and cons of the argument for Catalan independence it is almost irrelevant to the issues of inequality and lack of opportunity which affect all parts of Spain (as indeed many other countries).

Ciudadanos appears more willing to take the risks of entering a coalition government than Podemos. A possible way forward, though not one likely to guarantee a government to last the four-year parliamentary term, would be a minority coalition between the PSOE and Ciudadanos backed from outside government by Podemos, in return for meeting the two immediate demands that Podemos has made: a halt to banks repossessing homes from those unable to meet mortgage servicing commitments and free medicines for the elderly. Such demands should be possible to meet without endangering the credibility of Spain’s fiscal policy.