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.

 

UK-EU Negotiations should Start by Clearing the Fog

 

The tone of Teresa May’s letter to Donald Tusk, the president of the European Council, invoking the EU’s Article 50 to leave the EU is reminiscent of the old adage “Fog in the Channel. Continent isolated”. There is also a lot of fog around the debate in the UK especially as to what the EU’s Single Market actually means, despite the fact that the Single Market is largely a British invention. Mrs Thatcher wanted to spread her free market philosophy across the EU and to do so agreed with the then president of the European Commission, Jacques Delors, that a British expert, Lord Cockfield be appointed is Single Market commissioner to implement the Single European Act enacted by all member parliaments in 1986 which provided for majority voting to overcome resistance in countries like Germany and France where regulation of services, especially financial services, was devised in deference to the cartel power of big companies to keep out foreign companies.

 

Markets have to be regulated

It is often thought that a free market means a market unregulated by law. In fact a free market can only exist under the rule of law. A tragic example of not understanding this was the advice given to the Russian government by Western economists immediately after the break-up of the Soviet Union in 1991 to go for rapid privatization and deregulation. Deregulation in the UK and US had always been a misnomer, since under Mrs Thatcher more new legislation was passed than in any previous equivalent ten year period and the US has and remains one of the most legalistic countries in the world. But it was applied literally to Russia with the result that it became a kind of Wild East with massive new wealth and massive new poverty and unbridled corruption.

Adam Smith, the original protagonist of free economic markets, himself strongly believed in the rule of law to regulate its participants and ensure competition. He once said that rarely do men of commerce get together even for a purely social gathering than it ends up in a conspiracy against the public. So the point of the Single Market is that the rules that regulate commerce are the same throughout the participating countries so that one country’s laws cannot act as barriers to another country’s companies from trading there. Most of these rules are to those not involved in the particular sector technical and seemingly of relatively little consequence. But added together they can make the difference between an open market with a level playing field or one with a tilted playing field or sometimes even one with effective barriers to entry.

If the logic of this argument is accepted then it is should be clear that the objective of the minister for exiting the EU, David Davis, that the UK should end up with the same access to the Single Market as a participant in the Single Market can never be met however much all sides might want that. There is room for debate over much UK companies would be disadvantaged within the EU (and EU companies within the UK) but no possibility that they would not be disadvantaged at all. There is a possible approach the UK could take which would make something like an associate participant in the Single Market but that would mean Teresa May reversing her statement that the UK would not be part of any bits of the EU and would be completely untouched by EU law.  Norway is formally a participant in the Single Market but is technically not subject to decisions of the European Court of Justice but rather a special Court of Arbitration for the so called European Economic Area. However this still means it has to implement the decisions of the Court of Arbitration, decisions which themselves have to take account of the ECJ’s judgments.

 

A deep partnership cannot exist without participation in bits of the EU

Both the UK and EU-27 are taking over-rigid approaches which make any agreement keeping the UK and the EU close together in what Mrs May has envisaged as “a deep and special partnership” impossible, unless the two sides are willing to change. Mrs May said that the UK is leaving the EU completely without remaining parts of any “bits” of the EU but a real partnership should involve being part of “bits” of it. For example there is an overwhelming case from the UK’s point of view, to remain part of the research and innovation policies which give grants for joint research and innovation programmes in which institutions or companies from two or more different countries collaborate. The UK is host to more such activities than any other EU member state. Other non-EU countries are involved in these policies so UK participation without being a member of the EU should be possible.

The letter invoking Article 50 said that failure would hurt security cooperation which some saw as a threat not to collaborate informally. The government however said it related to existing EU policies on Justice and Home Affairs of which Mrs May when home secretary favoured “opting in” even though it had the choice then to opt in or opt out. If she does as implied intend to favour continuing to be part of such policies that amounts to being part of “bits” of the EU.

 

EU-27 claim that Internal Market is indivisible not backed up by precedent

The EU-27 has not clarified its stance on the UK playing a part on such EU policies perhaps because the British government has not made any formal requests so far. However on the matter of the Internal Market the EU-27 stance is that the market is indivisible so if the UK insists on controlling the movement of labour it cannot be part of the Market. Given that immigration, which is linked to but not the same as free movement, was the most important reason for the Leave vote in the UK referendum, it is politically essential for the UK government to win concessions on the issue. There are however precedents for the Market not being indivisible. Norway is in theory considered fully part of the Market but has its own policies for agriculture, fisheries and oil and gas extraction and production, all of which impact on the Market. Switzerland goes further by having sectoral agreements which effectively make it part of the Market in some areas, although not the key one of financial services. Even within the EU, provinces of Austria can limit investment in property, so that holiday resorts are not bought up by foreigners, provided such restrictions apply to people from other provinces in Austria. The UK can argue that it has taken, and is likely even outside the EU to continue to take more net immigration from EU countries, than most other EU member states do. It can also point out that migration where it becomes permanent has a deeper impact on a country’s society than the other three forms of movement. It could point out that Estonia now has a movement to reduce emigration.

As free movement of labour is indeed one of the four pillars of the Internal Market along with goods, services and capital, taking complete control of movement of labour would make it difficult to justify enjoying the advantages of the other three. However, it would not be reasonable in any fair partnership for the UK to insist on the right to select only those who are most desired which would imply having had the most spent on them by the other EU countries on education and training. Moreover it is evident that the UK needs immigrants for its health service, its care services, the hospitality and catering sector and research and technology. An agreement which effectively allows the UK to participate at least in parts of the EU Internal Market should therefore be possible.

UK government resistance to Court’s role must be modified if any progress is to be made

The UK government has however also made a big issue over the role of the EU’s Court of Justice (ECJ). This is a major issue for the minority of Conservative members of parliament who have always campaigned to leave the EU, but it is doubtful whether more that 2 or 3 per cent of the UK electorate could mention a single judgment of the Court which they do not like. It has also played an essential role in opening EU markets and it is not possible any international trade agreement including the World Trade Organisation without some form of arbitration. In addition to its role in the Internal Market, the ECJ also has a role in policies on cooperation on crime and security. The UK government will therefore need at least to modify its position on the ECJ if it really wants “a deep and special partnership”. It should look carefully at what issues it thinks that ECJ decisions have or could affect UK sovereignty in a way that actually matters to the electorate. It may as with Norway be possible to replace it in theory with another court but it would not be possible to pretend that such a new court would be ignore ECJ decisions.

Much has been made as to how long the negotiations will take and that they may overrun the two years envisaged in the EU Treaty’s Article 50 and the UK has argued that it wants talks on the future relationship to start before the thorny issue of settling financial accounts is complete. That is a reasonable request, but the UK will have to make a big change to the stance which it takes in some of its statements if the talks a to have a chance of achieving much more than a zero tariff agreement in non-agricultural goods. The EU-27 should also  be prepared to be more flexible than at present on participation in the Internal Market.

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.

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.

 

Referendum should not be accepted as fair democratic process but where do Remainers go from here?

Four reasons why the referendum lacks legitimacy:

We Remainers are told we should accept the result of the referendum with good grace and start thinking optimistically about the future of an isolated Britain (or England and Wales) hankering after the glories of its imperial past. There are actually four reasons why the referendum lacks legitimacy each one of which on its own would be sufficient on its own.

it undermines parliamentary sovereignty

Clem Attlee, the prime minister who created the National Health Service and greatly strengthened the welfare state said that referendums are “devices for demagogues and dictators” a phrase which was strongly endorsed by Mrs Thatcher in 1975. (To my knowledge she never did a U-turn on the matter.) Attlee it should be said was against the UK joining the forerunners of the present EU. While one can never know what a historical figure would have thought about present issues the best assumption is always that he or she would still have the same opinion so Attlee would still have thought joining the EEC in 1975 was a mistake and would have wanted to leave. But he also would have kept his opinion on referendums so he would have deplored the use of a referendum for this as for other purposes.

The campaigners to leave said that they wanted to return sovereignty to Parliament. But in fact by allowing a vote of 38% of the electorate to overturn a large majority in Parliament in favour of Remaining in the EU, the use of the vote to decide the future position of the UK in Europe and the world amounts to the biggest attack on parliamentary sovereignty since the 17th century.

 

One option was clear, the other encompassed contradictory aims

Second, the referendum was presented as a binary choice between Remain and Leave. But in fact while the choice to Remain was for a very clear known outcome, the choice to Leave opens at least two entirely different options. One is that the UK should remain a country of high immigration, but with the larger amount the comes from outside the EU being increased in relation to that from in the EU and with the UK moving forward on the basis of competition in open markets despite the evident costs to those left behind struggling in low wages and with inadequate public services. The other is of a country drastically reducing immigration so as to protect those with poor education and skills who have found it difficult to compete in open labour markets and have lost jobs due to competition from countries with much lower labour costs. If the referendum had separated these very sharply different visions of the future for the UK outside the EU and thus given the electorate three choices it is almost certain that Remain would have come out top of the three in a first post the post election. Even if the Alternative Vote system was used allowing a second choice to be used to decide between the two front runners it is very unlikely that most of those who voted for one Leave option (free labour and other markets as opposed to measures to protect British workers from competition) would have put the opposite option as their second choice.

The vote divides the generations

Third the referendum was intended as determining the future of the country for a period of 30 years or more, a very different proposition than a general election whose outturn lasts for a maximum of five years. The fact that all surveys show a large majority of those under 40 who will live longer with the consequences voted to Remain is an unacceptable binding of their future by an older generation.

Voters were misinformed in some cases deliberately

Fourth, the British people were misled and in several instances told outright lies by the Leave campaigns.

First, they were told that Turkey IS joining the EU in large posters prominently displayed. Turkey IS NOT joining the EU. Eleven years since negotiations opened in 2005 Turkey has completed only one of the 35 chapters which are preconditions for being considered for accession. Turkey as other countries can never join the EU without the parliamentary approval of every member country including not only the UK but also Germany, France and Austria where opposition to Turkish membership has traditionally been far greater than in the UK. (In fact British governments have long supported the principle of the possibility of Turkish membership and this position was not questioned by the Leave members of the British government before the referendum campaign).

There is no possibility in the near future that Turkey could come to a position in which member parliaments would be asked even to consider it for membership. This was a very distant prospect in 2010 and since then President Erdogan has made a large steps away from meeting EU membership criteria related to human rights, freedom of speech, rule of law and treatment of minorities. .

 

Second, the people were told that Leaving would give Britain control of its borders. In fact Britain has control of its borders: people coming into the country go through passport control. The UK can and has turned back people, including EU nationals,with criminal records or considered a threat to security. Whether the new electronic system is effective is open to question but that was always a choice only for the British government. To significantly strengthen such controls would require either a massive increase in border staff to subject travellers to intense scrutiny and long queues or some way of cutting the number of visitors.

Third, the Leave campaign’s battle bus was emblazoned with a statement that Britain would save £350m a month by leaving the EU and that this will be used to increase funding for the NHS. When Dr Sarah Wollaston, a Conservative MP and medical doctor, changed sides from Leave to Remain during the campaign in disgust at this flagrant lie, the Leave campaign announced that their position had not changed and the sum to go to the NHS remained on their bus. Immediately after the campaign it was dropped like a hot cake because they know that leaving the EU will save less than half the £350m and given other demands no government could afford to increase spending on the NHS to that extent without raising taxes.

Where now?

Those amongst the 48% who voted Remain who feel strongly about the matter should never accept the Referendum as a legitimate exercise of democratically accountable governance for the reasons given in the article and particularly because far from returning sovereignty to Parliament it critically undermines the sovereignty of Parliament by pressuring MPs to vote contrary to their own judgment on a matter of fundamental importance to the future of the country and possibly even the very existence of the country. One reason for non-acceptance is to try to prevent it acting as a precedent for referendums both in principle and in the manner of their conduct on other issues in the UK and across Europe.

However saying this provides little guidance of how Remainers should act in the coming months and years. Despite the reluctance of leading Brexiteers to move quickly to activate Article 50 of the Lisbon Treaty to set in motion divorce proceedings it remains probable that the UK or what remains of it will leave the EU in due course. It must require an Act of Parliament but probably enough MPs have promised to follow the referendum outcome rather than their own judgment so probably passing such an Act.

 

Maintaining any special access to single market will be difficult outside the EU

Then will follow negotiations on leaving and subsequent economic relations with the EU. The least bad outcome from the point of view of Remainers of such negotiations would be to retain substantial access to the single market. But this will be highly difficult to obtain. Since the UK will now refuse full access to the single market for other EU workers—given that this was the biggest substantive issue in the campaign, it must inevitably accept limitations on its own access to the market in the 27 remaining member states. A new government may still hope that it can negotiate access to important parts of the single market like financial services and the digital economy but it will not be at all easy. Any deal requires the agreement of every one of 27 countries all subject to their own pressures and lobbies. If the UK was negotiating with the German Industry Association (BDI) which has called for a good deal for the UK the task might be easy. But it is not. Even the German government if it had sole negotiating rights would want to maintain a rules-based single market, and Germany is not able to dictate to other countries despite the myth to that effect in the UK. With regard to euro zone bail-outs it has much power as the leading creditor but that power does not extend to other policy areas as seen in its attempt to push for a common sharing of refugees across the EU.

At present more access to the single market than countries like the US and Canada (in the present situation with as yet no TTIP) seems impossible as all EU countries and institutions are taking an all or nothing approach. In my opinion the other EU countries were a bit too rigid in what they allowed David Cameron in his renegotiations. However, there are in fact very good reasons for the EU’s apparent rigidity. The EU is not, as portrayed in the British media, a monolithic entity but a framework for achieving the very difficult task of enabling 28 independent member states to work and cooperate in some areas as well as compete fairly in others. The fear of those who want to hold the EU and its single market together is that, once one breach in a rulebook is made, there is a high risk that other countries will want their own exceptions eventually making the single market a shell with more holes than substance.

It seems that many Leave voters did see their vote as compatible with a close relationship with the single market. If such an agreement can be reached it could gain political and popular support in England and Wales, provided it included a significant restriction to free movement (probably a cap, a points system to cherry pick migrants would not be likely to be acceptable). However, if no such agreement can be reached, the UK will be faced with a stark choice of having at best the same access to the single market as the US or Canada, or and arrangement like Norway’s or Switzerland’s that does not achieve any of the major aims of Brexiteers. By then the impact of Brexit on the UK economy may be more visible especially if investors begin to expect no or few remaining privileges for the UK to be agreed.  Brexiteers might present this as the EU punishing the UK but in fact it would just reflect the normal self-interest of parties to any negotiations. It is precisely to overcome the stumbling blocks that arise when negotiations are based only on each country looking after its self -interest that the structures of the EU were created. The Conservative government should be held to account by pro-EU opposition parties – acting with at least some cooperation – for the consequences for the British economy of every disinvestment or other adverse consequence brought about by the referendum result.

 

The forgotten parts of England and Wales that turned the vote

One domestic aspect of the June 23rd vote is particularly notable . It was always expected that prosperous rural and many suburban areas that usually return Conservative MPs would vote Leave. What was less expected were the Leave majorities in poorer parts of England and Wales that have lost mining or manufacturing industry over the last 30 to 40 years. Most larger towns, apart from Birmingham, voted Remain. But smaller depressed post-industrial towns that have long been safe Labour constituencies voted Leave, a good example being the first significant Leave vote in Sunderland in the north-east, but included towns in the West Midlands, Lancashire, Yorkshire and South Wales. A Panorama programme on BBC on July 4th gave some glimpses of the way people in these towns feel. They feel left out and forgotten and the phrase “Give me my country back” appeared to resonate, but what do they mean by that? It appeared to be a nostalgia for when the towns were thriving manufacturing centres and the high streets full of local shops. There was almost nothing these respondents said in the programme that actually had anything to do with the EU, (such towns are not major magnets for immigration) but nevertheless they appeared not just to be giving a protest vote but to actually believe that leaving the EU would lead to a revival of their towns. Somehow it would seem that UKIP and possibly even Conservative campaigners found ways of raising such hopes. Such hopes are not going to be fulfilled by UKIP and probably not by the Conservatives, but others particularly Labour politicians cannot just wait and let them experience another disillusion. There does need to be concerted efforts made to give back hope to these towns. It should be based on encouraging local initiatives supported from outside. At least for another two years some outside money may continue to come from the EU.

The vote clearly reveals that many English and Welsh people are deeply discontented and implies that the UK’s apparent success in terms of job creation and low overall levels of unemployment hide a labour market which is not functioning as well as people in all major parties have believed. This applies both to areas of high immigration and economically-depressed areas. Minimum wages paid holidays and rights for part-time and temporary employees (some derived from EU legislation) need to be better enforced.

The question Where Now? has only been very partially addressed and will have to be addressed again in the future

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.

 

 

 

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.

Game of brinkmanship between Greece and rest of euro zone may be at decisive stage

Neither side is being responsible

The game of brinkmanship between the Greek Syriza government and the other euro zone countries, together with the EU institutions and IMF, has been going for nearly five  months since the January Greek election and the best that looks likely to be realistically hoped for in the coming months is that it continues without Greece falling out, or being pushed out, of the euro. It is not an edifying spectacle on either side. Alexis Tsipiras, Yannis Varoufakis and their colleagues have shown no sign of being able to manage an economy of any kind, whether communist, socialist of capitalist, let alone one in the condition of the Greek economy. But the posturing on the other side has been equally unhelpful and has indeed encouraged the government to go on playing to the gallery rather than knuckling down to deal with the real problems. It is quite unreasonable to expect a country on its knees to achieve the size of primary surplus on its government accounts of the likes of 3.5% of GDP which is being asked of it and demanding that it does so provides the excuse for the Greek government to go on arguing rather than addressing the problem of maintaining a small primary surplus up to 1.5% of GDP which is itself hard enough given the massive decline in the tax base due to both falling GDP and increased tax evasion and the pressures on social services and maintaining livable incomes for pensioners and others. Spread out between the other euro zone members most of them much richer and many much larger than Greece the difference is negligible, far less that the potential costs of Greece leaving. It is not necessary to insist that Greece reform its pension. This may be advised but if the government refuses and then finds it cannot meet its pension or other domestic commitments that is the responsibility of the Syriza government to explain to the Greek electorate.

 

Creditors should admit they have also made mistakes

The issue of moral hazard may be raised, the principle that economic actors should not be able to walk away from the consequences of reckless actions. But that should apply as much to those who have made foolish loans as those who have borrowed too much. While the present Syriza government can only be held responsible for the mistakes since it was elected, the rest of the euro zone is responsible for:

1)   letting Greece into the euro zone without a proper look at its accounts;

2)   the ECB’s failure to warn bank lenders that the risk premium on lending to Greece should have been far higher and also for not highlighting the country’s massive current account deficits;

3)   the failure of national regulators and national central banks in countries like Germany, France and the Netherlands including not to warn of the same hazards;

4)   the decisions by other euro zone government in 2010 and 2012 to bail out the private sector lenders so letting them get away with reckless lending and  transferring the losses to the public sector while not addressing Greece’s evident bankruptcy;

5)   the failure of Eurostat and the European Commission to question figures from the Greek statistical office including allowing an  increase of the GDP estimate, not only before the collapse of the Greek economy;

6)   the continued unwillingness to admit that the money lent to Greece is already lost due to the above mistakes because of not being prepared to admit such mistakes and instead placing all the blame on the Greeks.

Greek politicians administrators and the Greek electorate have indeed to take a lot of blame but they have suffered unprecedented declines in income, one of the two major parties that have dominated Greek politics since the end of the military dictatorship in 1974 has been virtually destroyed and the other ND is now out of office. The new government has been elected on the unrealistic claim that austerity can be abolished (which would not happen even if all Greek debt was wiped out). It needs to admit that not all its rhetoric is actually applicable to the condition of the Greek economy. But if the other side (the rest of the euro zone and the EU institutions) were to accept responsibility for their mistakes they would be in a better position to argue that the Syriza government takes a responsible approach to the challenges it faces.

 

Stop pretending that Greece is being helped

The rhetoric of the institutions and other member states should also be changed to point that since Greece will have to run primary surpluses, even small ones, it is not in fact being offered any more help. The only help it was ever provided was the poisoned help of cheap loans before the crisis. Not surprisingly if the false picture is given that Greece is taking more and more help, the taxpayers of other member states will protest. But the money Greece was lent is already clearly unrepayable. To pretend otherwise is far from helping Greece. It is making any chance of the Greek economy’s recovery more difficult and distant.

 

None of this is to defend the Greek government’s policy prescription. But the lack of reality in the external demands made on it is doing nothing to help it face domestic economic realities.

 

A Greek exit default, leading to a Greek exit from the euro zone, may be imminent. That would look bad from the euro zone, but much worse would be a Greek exit from the EU. If Greece does exit the euro zone the Greek question will not have gone away.