France is in the grip of social breakdown, with financial chaos looming. The urgent question now is: could it spread? A leading expert on Europe and its discontents, Wolfgang Münchau explores how the next debt crisis might start — and how it could both destroy the eurozone and scar Britain’s economy. 

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“The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish finance minister said last week that Spain is not Portugal.” I wrote these words in the Financial Times over 15 years ago, as the eurozone sovereign-debt crisis raged. Fast forward to today, and the big news is that Belgians are not French. Expect, soon enough, to hear that Italians are not Belgian. With all eyes currently on France, on the violence, the protests, and the rising possibility of a genuine financial crisis, the key question now is how such a crisis might spread.

The first eurozone country in the firing line today is Belgium. Like the French, the Belgians allowed their budget deficit to rise, and the national debt to soar. To be fair, the country’s leaders are aware of the risks. To quote Bart De Wever, Belgium’s prime minister and one of Europe’s smarter leaders: “We absolutely must distance ourselves from the French situation to prevent it from spreading to us.” He might as well be telling us that “Belgians are not French”.

In the event, I worry De Wever will have less control over the situation than he thinks. That’s partly because Belgium’s debt-to-GDP ratio — at 108% — is so high. But also because the other two countries in the danger zone are France and Italy: respectively the EU’s second and third-largest economies, and two of the most indebted countries in the bloc.

At the moment, French costs on 10-year bonds is over 5%, with the Italian rates a little lower. To be clear, neither of these rates are in crisis territory just yet — but they are getting closer. Once interest rates exceed a certain threshold, a doom loop sets in. Higher interest rates raise debt servicing costs, which drives up the budget deficit, which drives up borrowing, and which again drives up interest rates.

No one can tell when, exactly, a crisis might arrive: it depends on the country and its politics. Yet once investors conclude that a country cannot conceivably afford to pay the debt, interest rates will surely start to jump, the mechanism through which practically every financial crisis plays out. We are in the phase where everybody still pretends that the situation is under control, and that all that needs to happen is for governments to save a bit of money here and there. In practice, though, ministers of all stripes find this hard.

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Just recall that France is in its current mess because of Emmanuel Macron. Who could have predicted that his decade-long presidency would end with his country in flames, and with a financial crisis looming? Yet the policies Macron pursued earlier in his tenure nonetheless led him here. The austerity imposed by his government bred more violence, while cuts in public investment deterred private investors.

Looking at the presidential candidates in France today ahead of the election next April, I struggle to see how the country will end up with a government that succeeds in doing all of the following: bringing the budget deficit under control; avoiding social unrest; complying with European rules; and staying in the eurozone. Something has to give here.

Nobody, not even leading French candidate Marine Le Pen, wants to quit the eurozone. Nor, for that matter, does Jean-Luc Mélenchon. If you thought Brexit was disruptive, a euro exit would be on a different order of magnitude. Yet what many Europeans, including politicians, don’t understand is the relationship between debt and membership of the eurozone. Put simply: you can’t default on your debt and expect to keep the euro. Debt serves as collateral for the money the banking system gets from the ECB. If a country defaults on its debt, the banking system inevitably freezes up.

Given these fundamentals, how might a eurozone crisis actually play out? Le Pen, even more likely to win the presidency now that Paris is burning, is probably crucial here. One option is that, notwithstanding her rhetorical largesse on the campaign trail, she decides to impose austerity once in the Élysée. Her popularity ratings would soon slump, and would likely not recover. You might think this is totally irrational, but we saw this pattern repeat itself over and over again during the eurozone crisis.

Alternatively, Le Pen might conclude that France cannot service its debt if interest rates stay high. She could therefore ask the European Central Bank for a bailout. If the ECB refused — helping France would drive inflation up for everyone — a President Le Pen might instruct her finance minister to default on a payment to bondholders.

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In the short-term, at least, there are advantages to such an approach. First, it would free Le Pen up to default on more foreign debtors. That, in turn, could allow her to impose less austerity than she might otherwise have had to. France also would benefit from lower debt-servicing costs, and a more competitive exchange rate, making French companies more competitive against the rest of the world. And perhaps most importantly, France will have its own central bank, one able to set interest rates suited to the country’s economy, and which could be relied upon to act as a backstop in a crisis.

All the same, France defaulting on its debt would likely lead to a French exit from the euro. Should we ever get to this point, the ensuing financial crisis would dwarf everything we have ever experienced. Financial institutions would fail all over the world. For its part, the eurozone might not survive, as other countries default on their debts and crash out in turn. Ironically, one of the European countries most affected in this scenario would be the UK. Despite not being a member of the EU, let alone the eurozone, Britain’s capital market would be deeply vulnerable to chaos across the Channel.

You might well wonder why anyone in their right mind would choose this scenario. The problem is that we’d only get to the implosion of the European financial system after several other things happened first. No one would choose it from a menu.

I’m not saying that there’s no way out. But none of the alternatives are obvious or easy. Leaving the eurozone might well end up being the easiest option, especially if you don’t care about the consequences for the rest of the world.

Having spent a good part of my career writing about the eurozone’s financial crisis, and its ongoing economic decline, I concluded that the one big mistake the EU committed was to choose a monetary union without installing the necessary political infrastructure first: a fiscal union, a single capital market, and a single sovereign debt instrument. The introduction of the euro was the crowning achievement of Europe’s political integration in the Eighties and Nineties. Then it stopped.

This is not an argument about the pros and cons of European integration as such. If you oppose political integration, you should not join the euro. The UK’s opposition to the euro was internally coherent. Poland is an example of a country that would not dream of leaving the EU, but it, too, chose not to join the euro. But what we’ve learned in the last 15 years is that if you join a single currency, you don’t want to stop there; you must go all the way. This is where the bloc went wrong. A half-way house of an unfinished monetary union is unsustainable. By unsustainable, I don’t mean bad. Just that either it’ll be made sustainable — or it’ll end.

Some people argue that political integration may yet happen. I fear this is wishful thinking. The politics of the EU has been moving away from political integration for quite some time; the euro crisis was probably the last moment when a fiscal union could have been realistically agreed. Back then, the far-Right was not yet a political force in most countries, while Germany’s economy was strong enough to theoretically accept a closer union. The fact that, even then, Angela Merkel said nein is telling — certainly, in its newly weakened state, none of Germany’s bickering political parties even mention EU integration today.

Superficially, the euro crisis ended when the ECB supported national bond markets through quantitative easing. But the underlying problem of economic divergence between member states was never really resolved, even as the solutions were only designed for small economies. So, if you tell me that France is not Greece, I’d happily agree — except to add that it’s worse.

It was none other than Karl Marx himself who made the sharpest observation of how history repeats itself. In his Eighteenth Brumaire of Louis Napoleon, he writes: “Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce”. Marx was comparing the French emperor who had been dethroned after his defeat at Waterloo with his nephew, Napoleon III, a calamitous figure, who was King of France from 1852 until 1870.

Blair’s attempt at a comeback has a Napoleonic quality. Most commentary on his long essay focused on the man — his record in office and, especially, Iraq — and not on the arguments of the essay. A lot of people, especially on the Left, really hate him. But I think there is a bigger story here that is not about Blair himself, but about radical centrism itself.

He is right to say that “there are two epochal changes happening in the world today — one geopolitical, the other technological — and Britain is not prepared for either.” But he does not reflect on why this happened, and on his own role in that story.

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Blair was the most successful Labour prime minister in history, if you measure success in terms of the number of times he managed to get elected. But his big idea failed. He bequeathed a legacy of economic decline that his successors were not able to address with the classic tools of radical centrist policies — inward investment, trade agreements, privatization, deregulation and financialization.

The election of Emmanuel Macron in 2017 should serve as a more recent cautionary tale of what happens when countries naively try to revive radical centrism. In 2016, Macron suddenly appeared on the French political scene with his own version of radical centrism. He was elected president in 2017, and his new party gained a majority in the French parliament shortly afterwards. His government passed big reforms — the liberalization of labor markets; cuts in capital gains and corporation taxes; reforms in social security contribution systems; apprenticeship and vocational-training reform; railway reform, and so many others. It was one of the busiest legislative agendas that Europe’s ever seen, similar to what happened in the UK during Margaret Thatcher’s first term.

But then it stopped. Macron was re-elected in 2022, yet his party failed to win a majority in the following parliamentary elections. In 2024, he made a bad call to dissolve the parliament, as a result of which his party was almost eliminated.

There is a pattern here. In both France and the UK, radical centrism initially seemed to work and then at some point turned into a car crash. Radical centrism fails not because it’s wrong in theory, but because it’s wrong in practice. It simply cannot be delivered in a small European country, because it requires a diversified economy. That’s why the US could deliver it better than others. Radical centrism means that, if you live in an industrial town and your employer goes out of business, you can move to another part of the country and find another job. Or, if you train as an electrician, you may end up running an electricity company. Or, if Elon Musk fires you from your cosy government job, you can get yourself a food truck and retrain as a chef. Social and regional mobility plays a big part in this. This stuff does not happen in the UK or elsewhere in Europe, at least not on the scale that would be needed for radical centrism to work.

What killed radical centrism in the UK was financial globalization. The UK never recovered from the global financial crisis, because its economy remained dependent on the City of London. Because radical centrism requires a diversified economy, it is not a feasible political ideology for a mid-sized European country.

One could have imagined the EU developing in such a way to make radical centrism feasible. There was a time, in the early Nineties, when people thought of the EU and its single market as the future. I was among them. But reality intruded. My family and I moved around four European countries. So did many families — but most of them stayed where they were.

The barriers were not cultural, as euroskeptics lazily claim, but legal and institutional. Europeans have a long history of migration. The very rich and the very poor have always moved around. But what stopped middle-class employees moving around the EU were practical issues like incompatible pension systems. If you took up a new job abroad, you could lose insurance claims that you’d built up over many years. Another problem, one that affected families with children, was that of incompatible school curriculums. Europe’s private schools are ultra-compatible; if you are rich, Europe is a dream. But if you’re middle-class ,and you try to put your 10-year-old through a French or Belgian state school, you will have second thoughts. Language will be the least of your child’s problems.

The idea of the EU as a framework of radical centrism failed because it would have required a degree of political integration that EU leaders were simply not ready for. One of them was Blair himself. Blair is pro-European in terms of his stated preferences. He was anti-Brexit, even in favor of a second referendum. But his revealed preferences tell a different story. Memories are still fresh in the EU of how Blair divided the bloc over Iraq. He nurtured a narrative about a clash between the old Europe and the new Europe, of which he was the natural leader.

But for me, the decisive moment came much earlier. The most consequential stated preference by Blair was his decision during his premiership not to enter the euro. Initially, he had wanted to join it. I remember the moment when Blair briefly toyed with it but decided to fall into line with the position of Gordon Brown and Ed Balls, who strongly opposed euro membership on macroeconomic grounds. The macroeconomic arguments were indeed weighty. But to reduce the question to macroeconomics alone was to confuse the short-term and the long-term. This was a strategic mistake for Blair. Had he joined the Eurozone, then he might have been able to deliver radical centrism back in the UK.

The reason the euro decision was so important is that it killed the idea of an integrated European capital market. The EU still does not have one today. The lack of a big capital market is the reason why Europe does not have a large tech industry, whereas the US and China do. European banks are not big enough to fund companies the size of Google, Apple, Meta or Nvidia.

Back in the late Nineties, the UK was in a unique position to change that. It had the know-how. It had the financial center. It could have driven the financialization of the EU. But to build a capital market of the scale and importance of the US would have required a single currency and a single government bond market.

History took a different turn — and it won’t turn back. Today the EU has eight currencies, one of which is the euro. On top of this, we have the British pound, the Swiss Franc, and the Norwegian krone. Every country has its own sovereign bond markets, its own banks, and its own capital markets.

All the big European countries today suffer from similar problems to the UK — a fall in productivity growth from which they never recovered. All of them failed to connect with 21st-century technologies. They have bloated welfare states. They have not spent enough money on their security. Their most talented people emigrate. As Marx correctly predicted in his Eighteenth Brumaire, the political leaders in Europe are squarely in the category of what he called “grotesque mediocrity”.

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Blair himself is of a different caliber. What I found refreshing about his essay is that at least somebody in the UK is talking about political ideas. The debate inside the Labour Party is reduced to personalities and popularity. Neither Keir Starmer, nor his presumptive challengers, have the slightest idea of what they want. At least Blair has a plan.

Sadly, it is just not a good plan. I concluded a long time ago that Britain’s problems are not solvable at a national level. I clung on to the hope — the delusion, you might call it — that the EU could develop into a political union capable of addressing this problem. That did not happen and now it will never happen. There are no obvious solutions to the problem.

It is difficult to imagine whether Marx, had he lived today, would still be a Marxist. It is not nearly so hard to imagine what he would have made of Blair and the radical centrists of our generation — tragic figures who turned into farcical ones in their own lifetimes.

Of course, the cause of these misfortunes is Covid-19, not Brexit. And thus the main event of the last few years has become a sideshow in 2020. As a result, the anti-Brexiteers have struggled to promote their narrative. However, with the Brexit negotiations coming to a head, one of their talking points is now bound to be heard — which is that, deal or no deal, we’re leaving the EU at the worst possible time. Who needs an extra set of complications when we’ve got a pandemic to deal with?

It’s a reasonable argument, but one that overlooks the counterfactual. Had the referendum gone the other way our continuing membership of the EU would have caused a different set of complications. Indeed, we’d be in a worse situation than we are now.

If Remain had won in 2016, it’s hard to say who’d be Prime Minister in 2020, but whoever the lucky person, he or she would have had a European nightmare to deal with. Not Brexit, but Britain’s involvement in the EU’s Covid rescue plan.

Consider what actually happened in Europe this year. While every country has suffered, some have suffered more than others. Those trapped by the constraints of the eurozone are in a particular bind — because they can’t devalue their currency or print money. Therefore they need help from their fellow member states.

Just what sort of help (and how much) was the subject of a high-stakes drama back in the spring and summer. Though we barely paid attention to it on this side of the Channel, it was a showdown between the “frugal four” nations (the Netherlands, Austria, Denmark and Sweden) and the Covid-racked countries of Southern Europe, especially Italy.

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Even before the virus, Italy was in dire straits, condemned to stagnation thanks to the eurozone. Covid turned that crisis into an emergency, so something had to be done. The Dutch and their allies, however, were not happy about having to bail out the southerners again — and certainly not in the midst of their own national emergencies. In the end, the French and Germans forced a compromise, but not before Mark Rutte — the Dutch PM — was painted as the cold-hearted villain of the piece.

Now, let’s replay these events — only this time with Britain still in the EU. The frugal four would have been a frugal five — and the chief villain would have been the British PM. Indeed, if we’d been part of these negotiations, an already bitter dispute would have become something much worse — because the Franco-German proposal would have been impossible for Britain to accept.

The actual rescue package consists of €750 billion in grants and loans. The necessary funds are to be borrowed by the European Commission from the money markets, with the liability shared among all EU member states. Thus, assuming a similar package in the no-Brexit scenario, there’d have been two poison pills for the UK.

Firstly, money: we’d be paying tens of billions towards a “recovery fund” whose ultimate purpose is to bail out the eurozone. British eurosceptics have long warned that monetary union is inherently fragile to asymmetric shocks; that’s why everyone from Gordon Brown to Nigel Farage fought so hard to keep us out of the single currency. Yet, without Brexit, there we’d be, paying to prop it up anyway.

The second poison pill is about power: allowing the Commission to borrow hundreds of billions of Euros is a massive step towards fiscal integration, and hence a fully-fledged superstate. Of course, because of Brexit, that’s the EU’s business, not ours. But what if Brexit hadn’t happened and it was our business?

Back in 2016, the Government promised us that the “UK will not be part of a further European political integration” and that no “UK powers can be transferred to the EU in the future without a referendum”. Well, giving Brussels the ability to borrow vast sums of money is about as political as it gets, involving the transfer of national powers to the EU because agreeing to underwrite someone else’s borrowing reduces how much you can borrow in your own name. Thus, had we stayed in, the promise would have been broken — a nation of reluctant Remainers betrayed.

A Conservative Prime Minister would have faced a full-scale party revolt — including Cabinet resignations and backbench defections. Therefore, he or she would have no choice but to block the deal. There’d also be overwhelming pressure from the EU to let the deal through, and as the Greeks can tell you, the masters of the eurozone will do “whatever it takes” to save the single currency. All blackmail options would have been on the table — including an end to Britain’s budgetary rebate.

In other words, an irresistible force would have met an immovable object. And whenever that happens, something breaks — most likely the British Government. In the middle of a pandemic.

Back in the real world, we need to ask whether the rescue package is enough to keep the Italians and others afloat through the brutal recovery period that lies ahead. The answer is probably not — and, in fact, the cracks are beginning to show. In the run-up to this week’s EU summit, Poland and Hungary are threatening to veto the recovery fund and the entire EU budget. Even if that’s just brinksmanship, there’s a deeper problem.

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While the recipient countries are happy to help themselves to the grant component of the fund, they’re not so keen on the loans — because these come with onerous conditions. Instead, the recipients have been borrowing the money they need on the open market, thus circumventing the conditions they object to. They’re able to do this at a low interest rate because of the European Central Bank buying up debt issued by eurozone member states. And so the weaker economies have been filling their boots, which is the sort of thing that got the eurozone into trouble before. The ECB could crack down by cutting off bond purchases. However, this could trigger the sovereign debt crisis the Bank is so desperate to avoid.

It would be easier for Brussels and Frankfurt to keep things under control if any extra money required over-and-above the €750 billion were also to be borrowed and doled out by the European Commission. There’s no immediate proposal for this to happen, but having crossed the fiscal Rubicon once already, the next trip to the money markets will be much easier — and the trip after that. I wouldn’t want to bet my house on this summer’s rescue package being a one-time deal.

Covid has taken all the old imbalances and fragilities in the eurozone and made them worse. Further bail-outs are all but inevitable. Given the new model for raising emergency funds, it’s just as well we’re no longer on the hook.

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The words “post-Brexit Britain” conjure up an unfamiliar environment fraught with danger. By voting to leave, we’ve supposedly condemned ourselves to a future full of uncertainty, while our neighbours remain secure within the European Union. But as we’ve seen, the post-Covid world means risk and uncertainty for all.

The only way that any nation can prevail in such circumstances is to stay adaptable. We must react with speed and agility to the risks that we can manage, while reducing our exposure to those that we can’t. Remaining in the EU would have compromised our freedom of action on both counts.

It is not that the EU is completely paralysed. As the recovery fund demonstrates, it is capable of changes of direction — albeit after a protracted period of wrangling. However, when the breakthrough does come it is always in the direction of further integration, of further compromises to national sovereignty. In voting to leave we did not just leave the EU as it was in 2016, but also the EU as it is now becoming.

As a result, we still have the opportunity to make the wise and timely decisions on which our future depends. Of course, that does not mean that we will — because that requires a competent, visionary government.

But at least we will be responsible for our own failings, instead of being made responsible for those of others.

But appearances can be deceptive. Take a closer look and it becomes clear that 2015 was one of the hinges of history — a pivotal year around which everything changed. Before we get onto world events, just consider what happened at home.

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2015 was an election year in the UK. It seems like another era now — but the shock result laid the ground for everything that was to follow. The election results in 2017 and 2019 were unexpected too, but at least in those years the pollsters correctly predicted the winning party, if not the winning margin. In 2015, however, we were expecting Labour to be the largest party and Ed Miliband to become Prime Minister. Then reality happened.

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Labour limped in second with just 31% of the vote. They also lost their Scottish heartland. The SNP took almost every seat, leaving Labour with just one. A humiliated Ed Miliband resigned immediately and went off to Ibiza. Five years previously, at the start of his leadership, he’d spoken of a “new generation” of Brownite politicians. But in 2015, it proved to be the last generation. David Miliband (remember him?) had already quit Parliament and the country, while Ed Balls and Douglas Alexander (remember them?) both lost their seats. However, this was just the start of their troubles. The fatal blow was yet to fall.

I’ll come back to that in a bit. But first, a brief word about the Liberal Democrats — who were reduced from 57 seats to just eight. They’d expected to be punished for entering into coalition with the Conservatives, but this was beyond all expectations. A cruel twist of fate was that Nick Clegg was one of the few Lib Dems not to lose his seat. Having been deputy PM, he returned to the Commons as the outgoing leader of the fifth party of British politics (only to be unseated by Jared O’Mara two years later).

To make matters worse, the prime beneficiary of the Lib Dem collapse was the Conservative Party. In fact, the blues picked up so many yellow seats that they gained a wholly unexpected majority — the first for the Tories since 1997. And yet this moment of triumph for David Cameron and George Osborne would be their undoing. Having promised a referendum on the UK’s membership of European Union, they were now honour-bound to deliver one. And we all know how that worked out for them.

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But let’s stay in 2015 and move on to the other big event of the British political year: the Labour leadership contest. This was meant to be a two-horse race between Andy Burnham and Yvette Cooper, both of them surviving members of Ed Miliband’s new generation. Liz Kendall was the Blairite no-hoper. Eventually, a candidate of party’s Left was also rustled-up — with a number of moderate Labour MPs lending him their nominations out of a sense of fair play. Big mistake.

By the time they realised Jeremy Corbyn was all-too-popular with the party’s newly expanded membership (another Miliband legacy), it was too late. When the votes were counted, he won on the first round. The new generation hadn’t just lost the election, they’d lost their party. Permanently, it would seem.

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So, yes, 2015 was the year that changed British politics forever. Even something as unrevolutionary as the re-election of a Conservative Prime Minister contained seeds of chaos. Though Tory strategists must have delighted in the result, the Conservative vote share barely improved on 2010. The majority was a fluke produced by the happy coincidence of the Lib Dem collapse and two voter rebellions (SNP north of the border, UKIP south of it) that happened to hurt Labour more than the Tories. The volatility and unhappiness of the electorate should have filled the political establishment with dread. Instead, they looked ahead to the approaching referendum with confidence. Another big mistake.

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Meanwhile in America, there was a parallel failure to read the runes. With Barack Obama’s presidency drawing to a close, the race for the Republican and Democratic nominations was underway. It was pretty much all sewn-up in advance for Hillary Clinton (enough to see off a vigorous challenge from Bernie Sanders), but there was no such consensus among the Republicans. What was conventionally assumed to be a joke bid by Donald Trump gathered momentum. By July 2015, opinion polls showed him in the lead. By the end of 2015, he was established as the clear favourite.

Trump did not hide what he stood for. In the things he said and how he comported himself, his contempt for the political establishment — including that of his own party — was clearly signalled. By 2016 it was probably too late to stop him, but in 2015 mainstream Republicans could have united around a credible candidate. As for the Democrats, some thought could have been given as to how to avoid playing into Trump’s hands. But they obviously decided not to go for that.

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Why were the liberal elites so sure of their own position? Perhaps because 2015 marked the end point of what could be called the Long Financial Emergency. This began in 2007 with the Credit Crunch, it was followed by the banking meltdown of 2008, then the Great Recession and eventually the escalating Eurozone crisis. 

The latter came to a head with a confrontation between Greece and the so-called ‘Troika’ (i.e. the European Commission, the European Central Bank and the IMF). In January 2015, the Greek general election brought the hard Left to power. Alexis Tsipras became Prime Minister and Yanis Varoufakis finance minister. Demands for further austerity were rejected in the ‘Oxi’ referendum in July. The people had spoken. However, the EU wasn’t listening. The Greek government was presented with an offer it couldn’t refuse. Tsipras gave in, Varoufakis resigned. The Eurozone and its reckless bankers were saved — but at the cost of imposing permanent austerity on the Greek people.

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And that, for the foreseeable future, was that. The end not just of the Eurozone crisis (or at least the first Eurozone crisis), but the moment at which the Long Financial Emergency gave way to the Great Economic Amnesia. It’s not that we’ve solved our fundamental economic problems, we just stopped talking about them.

Still, the political threat to the established order was apparently over. Despite everything, Greece was the only western country to elect an avowedly anti-capitalist government — and that was quickly brought to heel.

This could have been the year that Greece was forced out of the Eurozone. This in turn could have brought down the entire single currency, which would have triggered a new global economic crisis. Sometimes a period in history is as significant for what didn’t happen.

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Yet just as one disaster was averted another was escalating. The Mediterranean migration crisis did not begin in 2015, nor did it end there. Thousands have died and continue to die trying to get to Europe on overcrowded, unseaworthy vessels. But in this was the year that a vast and complex tragedy was captured in one heartbreaking image — a photograph of the tiny, lifeless form of Alan Kurdi — a three-year-old Syrian boy found drowned on a Turkish beach.

2015 was also the year when the German government announced an open-door policy for hundreds of thousands of refugees — a decision that provoked a populist backlash within Germany and its European neighbours, especially those traversed by the main migration routes.

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Anti-immigrant and anti-Muslim sentiment drew upon other events in 2015, which began with the murderous attack on the Charlie Hebdo offices in Paris and carried on with further atrocities including the horrific Bataclan massacre, also in Paris. These outrages were, of course, cynically exploited by anti-establishment politicians. But the populists were inadvertently helped along by those in authority who clearly failed to address the concerns of their frightened electorates.

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This should go down in history as the year of establishment complacency. A year when the elites thought that they’d weathered the storms of the banking crisis. A year when they felt they could continue along the path of rapid social and cultural change — while offering no hope of meaningful economic reform. A year in which the Clintons and Camerons of this world assumed they’d be the ones who shaped the rest of the decade.

In a way, they did.

In a recent interview with John Ashmore of CapX, Ferguson makes his reasoning clear. The key point to note is that he’s not a massive optimist about the EU:  “I think the future for the European Union itself is quite bleak. And I still hold the view that in the end, Brexit will be a footnote in a chapter about the breakup of the European Union.”

But rather than take the assumption of a doomed EU as the justification for Brexit, he believes it renders leaving pointless: “…why waste all this time on a divorce from something that is becoming weaker over time, and it’s almost certain not to become a superstate? Remember the starting point for so much euroscepticism was ‘it’s becoming a superstate’.”

In other words, why bother leaving the EU when we can just wait for it to fade away?

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Current events in Europe would appear to support Ferguson’s case. A rift is growing between France and Germany over the future direction of the EU. Emmanuel Macron has big plans — including significant fiscal integration and a European Army. Angela Merkel is standing in his way. Macron has raised the stakes — vetoing the start of membership negotiations with Albania and North Macedonia. The message to Germany is clear: if you don’t give us what we want, we won’t give you what you want. It’s a recipe for gridlock.

If it can’t move forward, then what threat does the EU pose to British sovereignty? Out of the Eurozone, out of the Schengen area, we could have remained without risk, sitting pretty on our literal and metaphorical island. Whether the EU slowly falls to bits or staggers on indefinitely, we could have enjoyed full access to the Single Market, safe from any supranational shenanigans. Instead, we opted for the trauma of Brexit: “Seems like we’ve just wasted so much political capital on this divorce and we’re divorcing a slowly decomposing spouse.”

One can, of course, object to Ferguson’s pessimism about the EU’s vitality (not to mention the ickiness of that final metaphor). But assuming he’s right in that respect, does the rest of his argument stand up? I have my doubts.

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By John Lichfield

Let’s start with with a basic fact, which is that the EU already is a superstate. It has its own currency, its own central bank, its own customs union, its own directly elected parliament, its own budget of over €150 billion, its own civil service, its own diplomatic corps and its own seat on international bodies like the G20. It has a common trade policy, a common agricultural policy and a common fisheries policy. There’s an EU flag, an EU anthem and EU citizenship.

Other features of a sovereign state are absent, but even if these are never acquired, what already exists is not static, but possessed of an in-built forward momentum: the accumulation of EU law; the expansion of the EU budget; the ongoing and highly uneven impact of internal EU migration. As David Cameron found out to his cost, these fundamentals are non-negotiable, while opt-outs and concessions to member states cannot be guaranteed — as the erosion of the UK’s rebate demonstrates.

Ferguson’s talk of slow disintegration is therefore misleading. The EU continues to integrate in small, but numerous, steps. Moreover, the possibility of faster movement cannot be discounted. Angela Merkel’s time in office is running out; Emmanuel Macron’s is not. The cautious CDU will not rule Germany forever — a Green-led Left-wing coalition could be in charge by October 2021.

Economic events could also force the pace of change. We’ve already had one Eurozone crisis; if the single currency comes under threat again, then significant movement towards fiscal union may be judged a price worth paying to save the European project (the crushing of Greece was judged worth it last time).

But what if it isn’t saved? If the EU is doomed, we shouldn’t assume that its demise will be gradual and therefore manageable. In the modern world, multi-national political entities have a habit of going out with a bang not a whimper — Yugoslavia, the Soviet Union, various European colonial empires, the Austro-Hungarian Empire, the Ottoman Empire. Of course, the EU is neither an empire nor riven by war; but arguably it’s more easily collapsable, because national governments are already in place to (re)absorb the EU’s functions.

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The dissolution of the single currency, however, would be a deeply disruptive event. The UK has its own currency, but, in the event of a Eurozone collapse, being in the Single Market would expose us to destabilising flows of capital looking for a safe haven, followed by large numbers of EU citizens looking for a job.

Admittedly, Britain outside of the EU would not be immune to serious troubles within the EU. Indeed, anything as big as the collapse of the Eurozone would be an economic shock of global proportions. Nevertheless, a UK in full control of its borders and trade policy would be in a better position to manage the consequences.

Finally, one has to question the ethics of sticking with a political project that you don’t believe in. Remember that the Ferguson case isn’t just that the superstate won’t happen, but that the EU is ultimately doomed. Indeed, there’s something vulture-like about waiting for a community you’ve chosen to be part of to topple over. We should either give the project our all or find a new national purpose.

Britain should always be the best of friends to our neighbours, but the European Union is not a friendship group, it is a family — and family requires love, loyalty and sacrifice. If that is not something we feel we can give, then our place is elsewhere.

No, I don’t mean Brexit — after all there’s nothing especially odd about a major economy having its own trade policy and controlling its own borders. What I’m talking about has no precedent: helicopter money.

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By Peter Franklin

What used to be a wild ‘thought experiment’ among economists is now closer to actually happening than ever before. If it does, we, as citizens, need to be prepared — because there are profound implications for the conduct of economic policy and, I’d argue, our entire system of government.

So, here’s what you need to know now before it happens. Let’s start with the most basic question:

What the heck is helicopter money?

Helicopter money is money that a country’s central bank (which in Britain is the Bank of England) creates out of thin air and then gives to the government or directly to citizens in return for… nothing. Though the process of money creation (and distribution) would be done electronically, it’s basically the same thing as printing off bank notes and handing them out.

It’s called helicopter money because the economist Milton Friedman once compared the process to a helicopter dropping banknotes over a crowd of people waiting below. In practice, the distribution would be more orderly. For instance,  a sum of money could be transferred into the bank account of every qualifying recipient; or it could happen indirectly, the money going to the government to fund tax cuts or extra spending. Either way, the purpose is to increase the money supply and stimulate demand in a slowing economy.

Doesn’t this sort of thing cause inflation?

It could, and at various points in history it has — sometimes triggering hyperinflation.

However, central banks, especially in the Eurozone and Japan, are more worried about deflation — a sustained, growth-killing fall in prices. That’s why governments instruct central banks to do what’s necessary to maintain a low, but positive, inflation rate — typically 2%.

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By Peter Franklin

To stop inflation from over-shooting the target, central banks put up interest rates to discourage borrowing and thereby shrink the money supply. This decreases demand for goods and services — and thus lowers prices. However, since the financial crash of the last decade, the big challenge has been to stop inflation from under-shooting the target. There’s been too little demand in the economy, which is why central banks have cut interest rates to encourage borrowing. More money floating around the economy ought to push up prices just enough to hit the inflation target.

But here’s the thing: despite cutting interest rates to record lows, the anticipated inflationary pressures have failed to materialise — in fact, central banks have struggled to produce even the small amount of inflation they need to hit their targets.

With interest rates on the floor, what else can central banks do?

Weirdly, zero isn’t as low as interest rates can go: some countries have experimented with negative interest rates — meaning that it is the lender not the borrower who pays interest on the loan.

You might ask why anyone would lend money on these terms. But for large organisations who manage massive piles of cash, it might be the least worst option if other stores of value are riskier. Think about it as paying someone to look after something valuable for you.

However, there are limits to how far interest rates can go into negative territory. Too far and the economy starts seizing up — as people do what’s necessary to protect their money from evaporating before their very eyes. For instance, they could send it abroad or convert it to illiquid assets like gold. This would defeat the main objective of reducing interest rates, i.e. to increase the money supply.

Therefore, when interest rates really can’t go any lower central banks need a completely different way of expanding the money supply. Which brings us to quantitative easing…

What is quantitative easing?

Quantitative easing, or QE, was first used in the wake of the 2008 financial crisis. Here’s how it works:

The central bank creates money out of nothing. It then uses it to buy up financial assets, mostly government bonds, from financial institutions like banks, pension funds and insurance companies.

This has several effects. Firstly, it provides a big injection of cash into the financial sector. Secondly, all that extra demand means that bond prices go up and the return they need to provide to keep investors interested goes down. Anyone looking for a higher rate of return therefore needs to move their money into other, somewhat riskier ventures. In theory, there ought to be a cascade of lending and investment throughout the economy, thereby stimulating consumption and enterprise.

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When central banks, at the direction of governments, started QE, there were warnings that this would unleash inflation. But, as was the case with slashing interest rates (see above), it didn’t. Even with close to full employment in America, Britain and the privileged parts of the Eurozone, there’s been little sign of the economy overheating — despite all those QE money injections.

In any case, QE can be reversed — or ‘unwound’, to use the jargon. A central bank can sell the assets that they’d previously purchased from the finance sector. The money generated by the asset sales would then be destroyed — remember it was created out of nothing in the first place and the central bank would return it to nothing. This would obviously shrink the money supply back down again and cool any overheating in the economy.

Indeed, this was always the plan: QE was never supposed to be permanent — just a temporary shot in the arm during the trauma of the Great Recession and its aftermath. Once things were back to normal, QE would be unwound and interest rates put back up again.

But there was no return to normal. Ten years after the end of the recession, QE has not been unwound. Interest rates remain on the floor — and deflation, not inflation, remains the main threat. Indeed, with worrying signs of a new economic downturn in Europe, the European Central Bank has recently restarted QE.

If QE doesn’t cause inflation, what’s wrong with doing more of it?

Well, the clue is in the question — QE was meant to cause enough inflation to end the danger of deflation and return the economy to ‘normal’, but in this respect it’s proved to be weak medicine. What’s more, QE has damaging side effects. By pushing up asset values, it widens wealth inequalities between people who own lots of assets (like bonds, shares and property) and those who don’t.

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Hence the argument that the central banks need an alternative to both interest rate cuts and QE, which is where helicopter money comes in.

How does helicopter money differ from QE?

With QE, the central bank creates money and transfers it (via asset purchases) to the financial sector. To have the desired impact, the institutions that make up the financial sector need to lend that money to the rest of the economy, i.e. to individuals, private companies and public sector bodies, who’d use the supply of credit to buy things and make investments.

There’s a number of reasons why this hasn’t worked. Firstly, rather than lend the money out, financial institutions have stockpiled cash and assets. Secondly, individuals, enterprises and governments have been reluctant to borrow and spend — especially those with too much debt already. Thirdly, a lot of the money that has been borrowed has been used to finance the wrong things — like property speculation and keeping failing ‘zombie companies’ alive (thus tying up capital and talent that might be more productively used elsewhere).

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Helicopter money, on the other hand, would by-pass the financial sector and go straight to the ‘real economy’. Furthermore, the recipients would get it without having to go deeper into debt, making it more likely that they’d spend it. Thus, in theory, it would not suffer from the impediments that stopped QE from working.

If it worked too well and sent inflation soaring above the target, central banks would have plenty of tools to calm things back down again. Stopping the helicopter money, unwinding QE and putting up interest rates would all be options.

OK, but nobody serious is serious about this, are they?

Adair Turner, former chief of the Financial Services Authority and the CBI, is an advocate of helicopter money. The economist Frances Coppola wrote a book this year making the case. There’s an argument for it in a recent report from Deutsche Bank. It’s now regularly discussed as a possibility by financial journalists and investors (if not always supportively).

So far, we haven’t had any senior politicians or serving central bankers stick their heads over the parapet, but if (or when) there’s another recession and nothing else is working, the pressure on the decision makers will become intense.

Remember that before QE happened it was seen as a purely theoretical idea — and far too unconventional for monetary policy in the real world. But with the financial crisis at the end of the last decade, the tried-and-tested options were exhausted one-by-one, leaving QE as the next untried option. 

Now, it’s helicopter money that is the next untried option.

What are we waiting for, then?

Helicopter money could be a powerful policy instrument, but it reeks of desperation. Unlike the obscure technicalities of QE, we’d all notice if the state started giving us cash-stuffed envelopes. Suspicions of this free lunch could shake rather than bolster consumer confidence — a counterproductive outcome.

Central banks could make their move less obvious to the public by giving the money to governments to spend on our behalf. Except that would be illegal under Article 123 of the Treaty of the Functioning of the European Union. Britain might be free of this restriction after it leaves the EU, but that probably wouldn’t be the best time to turn on the printing presses. Besides, it is the Eurozone that’s at the greatest risk of deflation, so it’s the European Central Bank that should take the initiative.

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If the ECB found a way around Article 123, helicopter money would still be a political minefield. For instance, if the cash went directly to individuals would all Eurozone citizens get the same amount per head or would it be pegged to average income in each member state?

Once a central bank starts handing out cash to citizens or to governments, the distinction between monetary policy (interest rates, QE, etc.) and fiscal policy (tax, benefits, etc.) becomes blurred. Indeed, the central bank starts to look like a government — which is awkward in a democracy because it isn’t elected. Within the context of the EU and the Eurozone it’s especially awkward, because monetary policy would be seen as a means of integrating fiscal policy by the monetary backdoor.

Any other problems?

According to a post on the Bank of England’s staff blog, issuing helicopter money would make the central bank technically insolvent. That’s because creating money means that those who get it have correspondingly bigger deposits with their banks and the banks, in turn, have correspondingly bigger deposits with the central bank. From the central bank’s point of view these are extra liabilities. In the case of QE, that’s doesn’t matter because in buying up bonds it acquires assets that balance the liabilities. But with helicopter money the central bank acquires new liabilities (an inevitable consequence of money creation) but no new assets — because it doesn’t get anything in return for the money it gives away.

That doesn’t matter if the general bank doesn’t have to pay interest on the deposits it holds. But that implies that interest rates would have to stay at zero forever — meaning the economy would never get back to normal.

Another hazard is that government gets a taste for helicopter money — after all, it’s free! It’s meant to be a one-off emergency measure, and no doubt that’s how it would be sold to a sceptical public. But that’s what they said about QE and yet, rather than being temporary, it’s become a fixture of economic policy. Helicopter money could prove to be equally addictive, if not more so — which would leave the solvency of the entire system dependent on permanently supine interest rates.

What’s wrong with zero interest rates forever?

Ultra-low interest rates are the result of a low growth economy; but, with vicious circularity, they’re also the cause of it. As I’ve argued before, cheap credit destroys enterprise by making banks risk averse and by increasing ‘market concentration’ (i.e. reducing competition) in the real economy.

Ultra-low interest rates are the economic equivalent of empty calories. They feed a bloated, sluggish form of capitalism — to the detriment of risk-taking, innovation, productivity and wage growth.

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By Peter Franklin

Enterprising, inventive, fast-growing economies have no trouble avoiding deflation because with so many opportunities to invest in a brighter, more prosperous future, there’s a constant demand for money. A hunger to commit today’s resources to building tomorrow’s bigger, better economy is a good thing, but of course it pushes up interest rates.

Loaded up with debt, governments have a perverse incentive to suppress investment in genuinely productive economic activity. If, through the use of helicopter money, we load up the central banks with liabilities we’ll only make the problem worse.

“…Spain, with its vast, sunbaked and largely uninhabited interior (and geographical proximity to Western European markets) would be well-placed to benefit from a solar-driven manufacturing revolution.”

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Is Spain's day in the sun dawning?

By Peter Franklin

I’m not the only one who sees a bright future for the nation. Bryan Caplan, who is Professor of Economics at George Mason University, has just returned from a five week stay in the country:

“The quickest way to explain Spain to an American: Spain is the California of Europe.  I grew up in Los Angeles, and often found myself looking around and thinking, “This could easily be California.”  The parallel is most obvious for geography – the deserts, the mountains, the coasts…”

It’s an intriguing comparison. In both land area and population, Spain is about a fifth bigger than California. The Golden State is much richer though. If it were an independent country, California would easily be one of the top ten global economies. Indeed, the latest estimates would put it in the top five. Spain, meanwhile, comes in 13th or 14th – with a GDP per head of $31,000 as opposed to California’s whopping $76,000. I dare say the likes of Mark Zuckerberg skew the Californian average somewhat, but that’s still quite a gap.

What could Spain do to start catching up? Caplan has nothing to say about energy resources, but he does think that Spain holds another trump card:

“Spain has more to gain from immigration than virtually any other country on Earth. There are almost 500 million native Spanish speakers on Earth – and only 47 million people in Spain… due to the low linguistic and cultural barriers, the migrants are ready to hit the ground running. You can already see migration-fueled growth all over Spain, but that’s only a small fraction of Spain’s potential.”

There’s certainly plenty of room for an expanded population – “you can see vast unused lands even ten miles from Madrid.” In fact, if you divide up the country into square kilometers, 87% of Spain is unpopulated.

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Caplan argues that Spain could unlock massive potential for growth by liberalising its immigration controls (though, of course, its borders are already open to migrants from other EU countries) – as well as by loosening up its labour market and its planning system:

“The trinity of ‘deregulate immigration, employment, and housing’ is vital in almost every country, but this formula would do more for Spain than nearly any other country.  Wise policy would make Spain the biggest economy in Europe in twenty years flat.”

Caplan does express some doubt as to whether the Spanish would ever take such a libertarian path. The renewed popularity of the Socialist Party would suggest not. However, the country’s membership of the European single currency may leave it with no choice.

When an economy is hit by a crisis, the conventional response is to cut interest rates and devalue the currency. But, for Spain, which swapped its Peseta for the Euro twenty years ago, those things are decided in Frankfurt not Madrid. So what could the country do, should it find itself in economic trouble? Assuming that a bailout from German taxpayers is not forthcoming, the one remaining option is internal devaluation. This refers to a combination of austerity, wage restraint and deregulation, all designed to restore confidence and competitiveness by cutting costs.

That’s what happened earlier this decade when the Eurozone crisis hit the countries of southern Europe. Spain made an impressive recovery – in many ways outshining the economies of northern Europe. However, as I’ve argued previously, a lot of this was achieved by squeezing workers, and there are limits to how much more they can take.

Over the last few years, we’ve seen surges of support for protest parties of the Left (Podemos), Right (Vox) and centre (Ciudadanos). At the moment, the volatile electorate has swung back to the Socialists – who look set to do well in the impending general election (the fourth in the space of five years). Should the next Government find itself strapped for cash, a deregulating dash-for-growth may be more palatable to voters than everlasting austerity and wage restraint.

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Indeed, if a renewed Eurozone crisis breaks out elsewhere and spreads its contagion across southern Europe, then such a strategy could be Spain’s only way out. It carries it own risks of populist backlash, but no other member state has a better chance of pulling it off. If anywhere in the Eurozone has the potential to become a high growth frontier economy, it is Europe’s California.

The most obvious objection to this theory is that while the Golden State is home to several of the world’s biggest tech companies, Spain isn’t. However, neither is the rest of Europe, which in this vital economic sector is hopelessly outclassed by America, China, Japan and South Korea.

So within the context of the Eurozone, this doesn’t leave Spain at a special disadvantage. Meanwhile, the country’s special advantages are there waiting to be fully unleashed – with the potential to disrupt the EU’s economic pecking order. The German masters of the Eurozone should think carefully before backing Spain into a corner again.

For its part China has escalated its own tariffs, and is threatening to impose an export ban on rare earths used in many hi-tech goods as well as some military equipment. Such a rupture was not one either side appeared to have contemplated over the past five months of high-level trade negotiations. Trump apparently had expected a deal he could portray as resetting the US-China trade relationship to American advantage while the Chinese leader, Xi Jinping, simply cannot want the US to declare economic war when the Chinese economy is as vulnerable as it presently is to financial shocks.

The US-China relationship is in crisis because the United States has under Donald Trump reversed strategic course, and most of the American political class across both the Republican and Democratic parties back him. Although Bill Clinton came to office attacking his predecessor as too accommodative of China, he ended up pursuing a strategy of integrating China into the international trading and financial order through China’s accession to the World Trade Organisation.

Many large American companies responded to this strategic environment by investing in China, selling into Chinese markets, and setting up manufacturing and supply chains that run through China. Apple, for example, has today more suppliers in China and Hong Kong than it does in the United States. Meanwhile China was able to make the United States the centre of its drive for export-led growth and accumulated a massive portfolio of dollar assets that allowed it to manage its currency. This apparent co-dependency was named ‘Chimerica’ by Niall Ferguson, and it drove much of the growth in the world economy between the late 1990s and the 2008 crash.

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By Isabel Hilton

Some of its problems have been long apparent. By the middle of the last decade, China’s rising trade surplus produced plenty of discontent in the US Congress. The Bush administration eventually responded by pushing China into a moderate revaluation of its currency. When China lost confidence in its holdings of Fannie Mae and Freddie Mac’s debt, it forced the US authorities to make the two mortgage corporations’ massive liabilities the responsibility of the federal government. Under the guise of a ‘‘Pivot to Asia” in 2011 the Obama administration sought to encircle China from the Pacific. It pushed the Trans-Pacific Partnership as a Pacific trade bloc that excluded China. It also declared that freedom of navigation in the South China Sea to be an American national interest, and developed an operational doctrine for a possible military confrontation with China.

But crucially the Obama administration sought to contain China without disrupting the international trade order, including the supply chains that run through China. It grumbled about China’s behaviour on intellectual property rights, forced technology transfer, and cyber spying, but eschewed any fractious face-off. In pursuing the Trans-Pacific Partnership as another trade agreement it also ignored the escalating domestic protectionist pressures. While some in the Democratic party, such as New York Senator Chuck Schumer, had long railed against the outsourcing of US manufacturing jobs to China, the Obama administration appeared sanguine and presented the dislocation as the inevitable consequence of economic success.

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By Mike Martin

The cultivation of Chimerica is now seen in much of Washington as a mistake and Obama’s attempt to shift to containment without disrupting it as a failure. Trump made these issues, and the relationship between Chimerica and the donor class around the Washington establishment, central to his campaign in 2016. But in this regard he has been a catalyst for change with causes that extend far beyond him. Under Xi Jinping’s leadership China responded to Obama’s Pacific containment strategy first with the One Belt, One Road initiative – which seeks to make Eurasia the primary external environment for the next stage of China’s economic development – and then a “Made in China 2025” strategic plan under which China will become a hi-tech manufacturing power with core materials made in China. If China wants direct economic competition with the United States then, most American politicians have concluded, the terms of Chimerica must be changed.

Europe is exposed by the American turn to confrontation. There would appear a strong geopolitical logic for the United States to use the European Union as a balancing force in Eurasia, especially when China itself is picking off EU states, such as Italy, to join One Belt, One Road. The EU also shares certain economic interests with the United States in regard to China. In principle the United States could have worked with the EU. For example, in June 2018 EU filed a legal case at the WTO against China on intellectual property issues and forced technology transfer.

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But Trump has opted to act alone. For the Trump administration the WTO is a sideshow. Although the US did start action against China at the WTO in April last year, Trump has since said that the WTO is soft on China and has blocked the appointment of judges in WTO cases, making the WTO’s overall operations more difficult. Moreover, when it comes to the US trade deficit the EU is for Trump more like China than not. Indeed, when President Macron visited the White House last year and suggested that the US and EU should work together on China, Trump insisted that the EU was worse on trade than China. The Trump administration is also taking a tough line with Europe on Huawei, with the Secretary of State, Mike Pompeo, recently chastised Theresa May by pronouncing that Mrs Thatcher would never have tolerated appeasing China on security matters.

Germany faces particular difficulties from the threat to Chimerica since the United States is its biggest single export market and it imports more from China than any other national economy. German firms and politicians have had their own illusions about China and Chimerica shattered. German manufacturing firms have supply chains involving China that are central to German export strength. German car makers are also dependent on China’s large consumer base, not least from their US production sites where exports are now subject to China’s tariffs. Made in China 2025 was as much a blow to Germany as to the United States.

Last autumn the Federation of German Industries described China as a ‘strategic competitor’ looking for technological dominance, and warned firms to reduce their dependency on China from supply chains to markets. The problem for Germany is that what happens in China will hurt its export-based economy more than it does the consumption-oriented US economy, as the Germany’s economy woes in the second half of last year demonstrated. Germany has also made the Eurozone much more dependent on external trade than it was. Prior to the Eurozone crisis the Eurozone for most of its existence had a current account deficit with the rest of the world. Now it has a significant surplus, making it more vulnerable to a downturn in international trade.

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Germany may in part want EU solutions. For example, the Federation of German Industries last year recommended creating European industrial champions. But any conflict about external trade also exposes disagreements within the EU, not least between Germany and France. While Germany pushed last July to offer EU-US trade talks as a way of holding off Trump moving to tariffs on European car imports, France was never keen on them and last month voted against the Commission’s negotiating mandate for the talks, with Macron declaring that the EU should not negotiate with states that aren’t party to the Paris climate agreement. Germany also has simultaneously to fight another battle with the United States over Nord Stream 2 – the second gas pipeline under construction from Russia to Germany – with Trump edging towards sanctions.

What has changed since the boom years of Chimerica is not just the strategic judgement in Washington about China but the United States’ geopolitical power. The United States is quite simply in a significantly stronger position in relation to Europe than it was before the 2008 crash when that same year the Bush administration had to accept Germany and France’s veto of Georgia and Ukraine joining Nato. Shale energy production, the dependency of still struggling European banks on dollar funding, the ascendancy of the US digital and high-technology sector, and the Eurozone’s ongoing structural weaknesses have given the US the leverage to demand more from Europe and to ignore it as a strategic constraint.

Whether the United States has, however, sufficiently recast its geopolitical position to prevail over China is another matter. Trump appeared to believe that the battle could be won without too much risk to inflation, share markets and oil prices and by offering some financial compensation to American farmers who have seen their Chinese soybean market collapse under Chinese tariffs. But share markets reacted badly to the breakdown of the trade talks, Saudi Arabia and its allies may well not be able to supply more oil at the prices Iran has been doing, and farmers in the mid-West, already stung by flooding this year, are becoming very vocal about the sacrifices expected of them. There may well be an incentive for Trump to try to patch the talks back together. The risk is, though, that there is now no way back, and that under a temporary pretence that there is, Trump will sharpen his fire on Europe.

Another pair of terms that can get confused is ‘fiscal’ and ‘monetary’. Fiscal policy is all about how a government raises and spends money; monetary policy is about the management of the currency – and especially how much of it there is in circulation, which is primarily controlled through interest rates and which has a big influence on inflation.

Being about spending and taxation – i.e. what the government giveth and what it taketh away – fiscal policy tends to be more political than monetary policy. The latter typically goes unnoticed, unless something goes badly wrong. In fact, the whole subject is so esoteric that situations that we ought to be concerned about – such as the impact of persistently low interest rates – fail to excite much debate. Indeed, it suits the politicians to depoliticise the whole issue, handing over key decisions to an ‘independent’ central bank as if some of the most fundamental features of the economic system had nothing to do with them or, by extension, us – the voters.

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By Peter Franklin

However, monetary policy is becoming re-politicised. In fact, it’s become the subject (and sometimes the cause) of some of the most radical developments in politics of our time. The most obvious example is the ongoing consequences of the European single currency, which was supposed to be the ultimate in turning over political decisions to the technocrats, but which has unleashed forces that are slowly tearing the EU apart while at the same time driving efforts towards further integration.

Then there’s the debate stirred up by the use of monetary instruments like quantitative easing (QE) – when central banks create money and use it to buy back government bonds and other assets from the market, thus boosting the money supply and reducing the cost of borrowing. As well as being controversial in itself, QE is drawing attention to things that governments would prefer the public not to notice – such as the fact that private banks are allowed to literally create money out of thin air before lending it to us.

Once people start focusing on the weirdness of monetary policy, they start having weird ideas of their own. For instance, there’s the proposed alternative/supplement to QE known as ‘helicopter money‘ i.e. money that is created by the central bank and then dropped directly into consumers’ bank accounts. Then there’s Modern Monetary Theory, which turns conventional economic policy on its head and is gaining influential converts.

Another radical departure in monetary policy is proposed by Dirk Schoenmaker in an article for VoxEU. He argues that Eurozone monetary policy should be “tilted” in favour of investment in low carbon technology – by lowering the cost of capital for such investments relative to investments in polluting technologies.

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It's time to overhaul economic policy

By Peter Franklin

But are central banks supposed to get involved in such things? Surely if the state wishes to channel investment towards certain sectors it should do so by non-monetary means, like tax breaks and subsidies. And if a central bank were to pick favourites, how would that even work? Doesn’t a change in base rates apply to the economy without differentiation?

To answer the last question first, Shoenmaker explains that as well as setting interest rates, the institutions of the Eurosystem (i.e. the European Central Bank and the central banks of the Eurozone member states) have other means of influence:

“The Eurosystem manages about €2.6 trillion of assets in its Asset Purchase Programme, which includes corporate and bank bonds in addition to government bonds. In its monetary policy operations, the Eurosystem provides funds to banks in exchange for collateral, which currently amounts to €1.6 trillion. A haircut is applied to the value of collateral, reflecting the credit risk.”

In finance, a ‘haircut’ is the discount that creditors apply to the value of an asset as a item of collateral compared to its value on the market as an investment item. The more extreme the haircut, the greater the reduction in general demand for the asset:

“Applying a higher haircut to high-carbon assets also makes them less attractive, reducing their liquidity. Early estimates indicate that this haircut could result in a higher cost of capital for high-carbon companies relative to low-carbon companies of four basis points.”

A basis point is a hundredth of one per cent, so four basis points amounts to a 0.04% difference in interest rates. That might not seem like very much, but when it’s applied to the vast sums of investment that will be needed just to stop Europe’s energy infrastructure from crumbling, it adds up. Furthermore, it sends yet another signal to the money markets that investing in fossil fuels is risky – and that the climate change commitments that governments enter into come with teeth.

It would also demonstrate that central banks, though not directly responsible for climate policy, realise that anything that destabilises the global climate ultimately destabilises everything – including the financial system for which they are responsible.

Schoenmaker makes a persuasive case, then. And yet I wonder if EU member states might not see any extension of monetary policy as economic integration by the backdoor. While monetary policy has been federalised by the single currency, fiscal policy remains, for the most part, in national hands (though subject to the Stability and Growth Pact). If, however, we start using monetary policy to do things previously the exclusive province of fiscal policy, then within the EU that would represent a further erosion of national sovereignty – and that could be subject to a further populist backlash.

Ironically, it may be non-members of the Eurozone (and indeed the EU) that find it easier to use monetary policy in new ways.

Further reading

Ten precedents for a compromise Brexit

By Peter Franklin

Its membership, though, is controversial. To make room for countries from different parts of the world, countries in well-represented regions have been excluded. The most glaring example is Spain. By any reasonable measure, the Spanish economy easily makes the global top twenty. But because western Europe is rich in medium-sized powers – with four in the G20 – it was thought that adding a fifth to the list (at the expense of, say, Argentina or South Africa) would result in a regional imbalance. And so Spain is fobbed off with “permanent guest invitee” status.

That’s the Spanish story more generally: it’s a country that doesn’t get the global attention it deserves. Never mind the size of its economy, just look at the influence its culture and language has in shaping the modern world. But even when the media’s attention is on Europe alone, it’s as if the continent stops at the Pyrenees.

Of course, if the news is about the fraught relationship between the richer northern and poorer southern members of the Eurozone, Spain (and Portugal) may get a mention, but the focus tends to be on the latest Italian drama or Greek tragedy.

Suggested reading

The permanent punishment of the Greek people

By Peter Franklin

But perhaps that goes to show that ‘no news is good news’ – because as Clara Wright reminds us in an AFP report (via the The Local), there is some good news about the Spanish economy:

“Spain’s economy shrank during the financial crisis from 2009 to 2013 but rebounded in 2014. Its rate of expansion has since outstripped much of the EU with growth of more than 3 percent.”

Furthermore, “Spain’s jobless rate is down from a peak of nearly 27 percent in 2013 to 14.5 percent in September”.

The Spanish recovery is an under-reported story; and perhaps that’s because it doesn’t fit the standard narratives. It contradicts the idea of southern Europe as an economic disaster zone in need of firm guidance from Frankfurt.

It also appears to contradict the Eurosceptic narrative. If membership of a single currency is such a straitjacket (one tied to the primary benefit of the Germans) then how have the Spanish pulled off such a notable turnaround? Indeed, how have they managed to show those self-righteous northern Europeans a thing or too about growth?

Unfortunately, this is where good news gives way to bad:

“The country has the European Union’s highest proportion of workers at risk of poverty, 13.1 percent, after Greece and Romania, according to 2016 Eurostat figures…

“…salaries did not recover when the economy returned to growth because unemployment has remained high…

“Real wages actually declined in the last two years, the OECD said in a report published in July.”

Poverty pay isn’t the only way in which Spanish workers are disadvantaged:

“Spain is more reliant on temporary contracts than any other EU nation. More than one in four workers, 26.9 percent, was employed on a temporary contract in the second quarter, according to Eurostat.”

There’s a name for this kind of thing: internal devaluation.

When a country suffers a severe economic shock as Spain did during the Eurozone crisis – and it can’t devalue its currency in response because it no longer controls that currency – then it has to find other ways of staying afloat. One of the easiest, but unfairest, approaches is to squeeze workers. At a time of high unemployment and cuts to social security, people can’t afford to turn down work – no matter how poor the wages or insecure the contract.

Of course, it’s not as if the external devaluation resulting from exchange rate adjustment is cost free. When the value of a country’s currency sinks, its exports get cheaper and imports more expensive,  driving up prices at home. However, while everyone experiences the pain of inflation, an attack on wages and work security falls heaviest on the least protected workers – such as the young and low-skilled.

It should also be said that upward pressure on prices tends to help people in debt by inflating away the real value of the sums they owe. Putting pressure on wages, on the other hand, only reduces people’s ability to repay their debts.

For all these reasons, Spain’s economic success story is not quite what it seems.

The shine has also come off the political success story. For many years Spain was unique among the big EU countries in having no significant party of the radical Right.

Suggested reading

What snapped in Spain?

By James Bloodworth

Though politics-as-usual was disrupted, but by new parties on the Left (Podemos) and in the centre (Ciudadanos), not to mention the separatist movement in Catalonia.

However, in the last year or so, the national populist party Vox has emerged from nowhere to become a major force in Spanish politics. It’s set to win dozens of seats in the forthcoming general election. Last year, it also pulled off a major upset by helping dislodge the ruling socialists in their Andalusian heartland.

The rise of Vox has been explained as a nationalist reaction against Catalan separatism. However, political discontent and volatility are also the result of economic factors.

It is one thing to have ordinary working people suffer through a recession, but if they’re still suffering through a supposed recovery, that’s when the establishment should really watch out.

Will Spain’s working poor take revenge?

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Not Brexit, that’s for sure. British remainers may regard the UK’s impending departure as the end of the world, but the world will carry on. Roughly 85% of the EU will carry on (measured by GDP). And, in answer to the above question, all of the Eurozone will carry on too.

This last one is the biggie because as complicated as Brexit undoubtedly is, it is fundamentally simpler than sorting out the Eurozone. Brexit is about finding the best way of loosening relationships, of different countries having less to do with one another’s affairs. The implied direction of Eurozone reform is precisely the opposite – which is what makes it so difficult.

Suggested reading

The West divided: Populism versus liberalism in the 21st century

By Peter Franklin

Nations will have to sacrifice even more of their sovereignty and bind themselves even more tightly to the Euro and everything that the single currency implies. It will truly be a point of no return.

However, there can be no crossing this threshold without the consent of the people. In continually fudging the issue of democratic legitimacy, the European elites have already provoked a populist revolt – to which most of central Europe and now Italy has fallen. To go to the next stage – an unambiguous and irreversible commitment to a European superstate – in the same manner, would risk a populist takeover of the EU as a whole. This, by the way, is now the stated aim of the populist politicians already in power.

*

The current euro-establishment has a limited number of options:

1. Carry on stalling

Well, it’s worked so far… and, who knows, the next Eurozone crisis could be a long time coming. Fingers crossed. However, not everyone in the Euro-estabishment is content with this approach – for instance here’s Guy Verhofstadt giving Donald Tusk a proper dressing down.

2. The Greek option

This involves making the necessary adjustments, but loading most of the pain on the weakest and most dependent member states. A populist revolt would be all but guaranteed, but confined to the target nations. And as with Greece, in the first Eurozone crisis, the rebels could be then be crushed – and, even worse, compelled to do their masters’ bidding.

Suggested reading

The permanent punishment of the Greek people

By Peter Franklin

Greece, however, was in a uniquely vulnerable position. It’s by no means certain that the Euro-establishment could strong-arm a larger, less traumatised nation. The outcome of the current stand-off between Brussels and Rome over the Italian budget is as yet undecided; but on the EU’s other big integration issue, i.e. immigration, Brussels has not prevailed against Warsaw and Budapest.

3. Legitimise change through national referendums.

After Brexit? They won’t be making that mistake again!

4. Leave it up to national governments to sort it out between themselves

If the Eurozone status quo is unsustainable, and the dissolution of the single currency unthinkable, then it follows that reform – meaning monetary and fiscal integration – must, at some point, happen. As for the details, those can be thrashed out by the various heads of government (who, after all, each have their own democratic mandates).

The trouble with that logic, however, is that the democratic legitimacy confered upon presidents, prime ministers and chancellors applies within the context of Europe’s various parliamentary systems and all the associated checks and balances. Eurozone reform, however necessary it might be, will require concessions whose importance goes far, far beyond the usual horse-trading.

A behind-closed-doors negotiation between heads of state might facilitate the grandest of grand bargains, but it cannot legitimate it. To press ahead in these circumstances would be political suicide for all the national governments involved – which is why they continue with option 1 (see above).

Suggested reading

Germany's identity crisis

By Henry Olsen

5. The Delatte option

In view of the problem with all the existing options, Anne-Laure Delatte[1. Among other things, Delatte is the deputy director of CEPII – “a research centre in the network of the French prime minister.”] proposes an entirely new one in an article for VoxEU. This is her modest proposal:

“We need coordinated, representative decision-making to make Europe functional again.

But national governments are very reluctant to transfer sovereignty to non-national parliamentarians.  In order to go beyond this either-or logic of integration or sovereignty, we need to co-opt the members of elected national parliaments within a new, second, parliamentary chamber at the European level…”

In other words by bringing national parliaments together to settle important European matters, a European Assembly would have the legitimacy and/or relevance currently lacking in the existing decision-making structures of the European Union – i.e. the European Council (national governments sans parliamentary oversight); the European Commission (appointed, unaccountable viceroys); and the European Parliament (will never be trusted with the big decisions):

“A European Assembly would fix the inefficient asymmetry between the EU-wide interaction of heads of government and the domestic parliamentary check when they are back home. It would also create a direct interaction between national MPs who would have the double responsibility of representing their constituents in national arenas and in the Europe-wide body…

“The chamber’s regular meetings and public debate on European and domestic issues would be brought at the same level of attention. It would arguably increase transparency compared to emergency summitry prone to deal making behind closed doors.”

It’s a fascinating idea. The EU throughout its history, has only ever moved forward by means of institutional innovation. Faced with a problem of existential significance – the absence of a EU-wide democratic mandate for Eurozone reform – the solution has to be embodied within a new and democratic decision-making body.

*

At this point it behooves me to say that true democracy requires a demos. Representation, transparency, relevance and all those other things are necessary, but without a demos they are insufficient.

Suggested reading

To save democracy, we must disrupt it

By Carl Miller

If from, say, a British perspective, you don’t believe that the voters of Normandy, Silesia or Jutland to be as integral to your conception of the common good as those from Devon, Yorkshire or Shetland, then you shouldn’t be sharing a democracy with them. The fatal weakness of the Eurozone isn’t ultimately a matter of monetary or fiscal policy, but the cold, hard fact that a Bavarian voter doesn’t feel the same way about a Sicilian voter as he or she does about a fellow German.

But, for the sake of argument, let’s assume that a pan-European demos can exist in parallel to each national demos. How, then, might a European Assembly actually work?

It could be composed of appointed delegates from each national parliament – this is how the European Parliament worked before the first direct elections in 1973. It is also how the Parliamentary Assembly of the Council of Europe (PACE) currently works. But I don’t think it would work for Delatte’s European Assembly.

The whole point of her idea is to confer the legitimacy of national representative democracy upon EU-level decision making. This wouldn’t happen if only a small sub-set of a nation’s MPs, with nothing more pressing to do back home, were delegated abroad. Most of the electorate in each country would not have a a directly elected representative in the new assembly. And, in any case, national governments that aren’t prepared to entrust more powers to the existing European Parliament, aren’t going to grant them to a glorified committee. Constituting a European Assembly on this basis would fail the test of legitimacy and relevance.

The only way that Delatte’s big idea could work is if entire national parliaments (or at least the lower chambers thereof) joined together to form the European Assembly. Of course, this would mean that the Assembly would have thousands of members – about 4,500 members if we use the German Bundestag as a yardstick for the number of citizens per elected member.[2. The ratio would have to be harmonised across member states to ensure equal representation of national electorates]

Without Britain, this would fall to a bit less than 4,000 – but still bigger than world’s biggest legislative body, China’s National People’s Congress, which has 2,980 members. The European Assembly, containing all the parliaments of Europe, would be a legislature like no other. But, then, a functionally integrated European Union would be a state like no other.

*

What sort of building would be required to accommodate so many representatives? Well, it wouldn’t have to be a mega-structure like the Nazi Volkshalle or the Palace of the Soviets (neither of which were ever built). A chamber for 4,000 or so parliamentarians could be accommodated in a space similar to that of the Albert Hall – grand, certainly, but not totalitarian.

Suggested reading

Fascism, architecture and Donald Trump

By Peter Franklin

Obviously there’d have to be a lot of associated office space, but the construction of such a complex would give the EU’s key institutions a chance to make a fresh start in a new home. Brussels could be left behind for a new European capital.

It would need to be somewhere more reflective the EU’s current geography, not that of the 1970s. The Franco-German compromise of the Low Countries will not do. So, somewhere in the middle of Europe, but still within one of the smaller member states (i.e. not any of the ‘big 5’).[3. Germany, France, Italy, Spain and UK (with Poland set to replace the UK, post-Brexit)]

That leaves just one candidate – a great imperial city that’s been missing an empire for the last one hundred years: Oh, Vienna!

It really does fit the bill: German-speaking, as befits the EU’s teutonic engine-room, but not in Germany. It’s west of the old Iron curtain, but also close to the east and the south.

The utter nonsense of scattering the EU’s key institutions in different cities and countries (including the migratory European Parliament) could come to an end. With one eye on the glories of the old Europe, they could build a 21st-century Europolis on the banks of the Danube.

Suggested reading

Lessons from the first attempt at a European union

By Peter Franklin

There’d be something to please almost everyone about the new location – even the Belgians, who could pull down the hideous Berlaymont and the rest of Brussels’ ‘European Quarter‘. The grey, glassy void at the heart of their capital city could be reclaimed; an extention to the Parc du Cinquantenaire would be nice.

*

Of course, the French wouldn’t be happy – and they’d never let it happen. It is they who insist that the European Parliament continues to meet in Strasbourg as well as in Brussels (with the Parliament’s secretariat in a third location, Luxembourg). This shuffling back and forth, like some demented animal in a rundown zoo, symbolises everything that’s stuck about the European Union.

To avert disaster it needs to become unstuck. The words “ever closer union” imply forward momentum; the single currency has made it absolutely necessary.

That means understanding that what the European Union is struggling to become has no precedent. It is not an empire like the Hapsburg Empire. Nor a crypto-empire like the Soviet Union. And despite the language of federalism, it is not a European counterpart to the USA – which was built by those who’d left their old countries behind. In a United States of Europe, the old countries come as part of the package. In short, the super-state required by the single currency is something never seen before in human history; and if it is to remain a democracy it requires democratic institutions of a kind never seen before either.

Any half-hearted effort at reform will produce a half-democracy. The members of this project must be fully committed to it… or get out altogether and remain themselves.

Suggested reading

Five reasons why populism isn't up to the job

By Peter Franklin

The crash was the ultimate demonstration of market failure – and, many would argue, the failure of free market ideology.

A particular bugbear is the ‘efficient-market hypothesis‘, which is the theory that asset prices fully reflect all available information. The fact that ten years ago the value of entire companies and asset classes collapsed overnight is surely proof that the hypothesis is wrong.

Except that depends on what you mean by ‘value’. More than two millennia before the hypothesis was formulated, Publilius Syrus said “Anything is worth what its purchaser will pay for it.”

In that respect, markets are never wrong. Indeed, modern markets have never been more right – because they gather information about more purchasers (and what they’re willing to pay) than ever before.

Further reading

How (some) economists finally caught up with financial reality

By Peter Franklin

One can object that this is missing the point – and that what purchasers are willing to pay for something can become totally detached from any rational assessment of its ‘deeper’ value (however one might want to define that).

Fair enough. But were the people responsible for the stability of the global financial system oblivious to this reality?

No, says Sebastian Mallaby in the Washington Post. The idea that “blind faith in markets” stopped the likes of Al Greenspan (chairman of the Fed before the crash) from seeing the warning signs is itself deeply flawed:

“Contrary to myth, Greenspan himself never believed that markets were efficient. In his youth, he wrote lucidly about bubbles and crashes and regarded market inefficiencies as so obvious that he sought to exploit them by day trading… As Fed chairman years later, Greenspan frequently reminded his colleagues that periods of prosperity could be punctured by ‘irrational exuberance’ in financial markets.”

Mallaby puts the blame not on market failure, but state failure.

The fact than an extensive system of financial regulation existed before the crash indicated that policy-makers were well aware of the potential of markets to go haywire. The real problem was that the regulatory framework was not fit for purpose:

“…the reality [was] that political constraints, not intellectual failures, prevented policymakers from curbing the housing mania. Nobody remembers that in 2001 the Greenspan Fed banned the most abusive subprime mortgages, for the good reason that the ban was circumvented. But why was it circumvented? The answer is that the capture of Congress by financial lobbies ensured the balkanization of regulation into an alphabet soup of agencies, many of them underfunded and ineffective.”

Though the financial lobbyists were representing private sector interests, they were pushing at an open door: both literally in having the run of legislatures and government departments; but also metaphorically given the state’s addiction to debt as facilitated by the money markets.

And it wasn’t just in America, of course. In the UK, Gordon Brown’s ‘tripartite’ system of financial regulation also produced an “alphabet soup of agencies”. As for continental Europe, one only has to look at how Greece ‘qualified’ for Eurozone membership to recognise the extent of state complicity in the causes of the ensuing financial calamities.

Further reading

The permanent punishment of the Greek people

By Peter Franklin

Mallaby makes a number of excellent points, but that doesn’t mean we should absolve the theoreticians of all responsibility.

The politicians were never blind to the potential for market failure. Where governments and financial institutions did go wrong, however, was their unfounded degree of confidence in their ability to manage the consequent risks. As Nassim Nicholas Taleb warned at the time, the risk models the regulators and bankers relied upon were deeply flawed – and for that we can certainly blame the theoreticians.

Ten years on from the crash what should worry us isn’t the risk of market failure. That, like death and taxes, we can assume. What should keep us up at night is that the debt that magnifies those risks hasn’t gone way – and nor has the false confidence of the risk managers.

I’d glanced briefly at my Twitter timeline and registered the words ‘Donald’ and ‘President’.

‘What’s he said now?’, I wondered to myself.

It turned out to be an insensitive comment about another country, so no surprise there. Except that it was about Greece and the end of its bail-out programme – not an obviously Trumpian topic of interest.

But, of course, I’d got the wrong Donald. On closer inspection it turned out to be D. Tusk, President of the European Council, not D. Trump, President of the United States of America.

If you missed it, here’s the tweet in all it’s sick-making glory:

“You did it! Congratulations to Greece and its people on ending the programme of financial assistance. With huge efforts and European solidarity you seized the day.”

It’s amazing how much misjudgment you can pack into 26 words. But the tweet is just as remarkable for what it doesn’t say.

Further reading

How the radical left has it both ways on Brexit

By Peter Franklin

For instance, it doesn’t say that over a fifth of Greeks are living in severe material deprivation (and over a quarter of Greek children). Nor does it acknowledge the unemployment rate of around 20% or the youth unemployment rate of almost twice that. There’s no mention that nearly half-a-million Greeks have left their homeland; no mention that the crisis has wiped out a fifth of the Greek economy; or that productivity and investment have cratered; or that the country remains weighed down by extraordinarily high levels of sovereign debt and nonperforming loans. (A horrifying OECD report has the grim details).

All that and more is the context for Tusk’s cheery “You did it!” – as if it were 2004 again and the Greek football team had just won the Euros.

The fact that Greece has returned to growth, that the government is running a primary surplus and that the bail-out programme has stopped is, of course, to be welcomed – but not as a distraction from the fact that the damage done to the Greek economy is extreme and permanent and, above all, ongoing.

It’s a point powerfully made by Frances Coppola in an article for Forbes:

“The magnitude of Greece’s collapse over the last decade is extraordinary… The Greek people have just lived through a Depression as deep as the Great Depression and considerably longer. It is now the greatest recorded peacetime Depression.”

“…Many of Greece’s young people will be middle-aged by the time there is any work for them. Some may never work at all. An entire generation thrown on the scrap heap.”

The bail-out programme may be at an end, but Eurozone control of Greek economic policy certainly isn’t:

“Greece’s government is critically hampered by ridiculously tight fiscal targets not of its own making. The Eurozone creditors have agreed a package of debt relief that depends on the Greek government maintaining high primary fiscal surpluses virtually indefinitely.”

Coppola quotes the Euro group itself as saying that the terms forced upon Greece imply that it must run a “primary surplus of 2.2% of GDP on average in the period from 2023 to 2060.”

Further reading

Is Europe on the brink of a new Thirty Years' War?

By Peter Franklin

You don’t have to be a hardline Keynesian to realise this amounts to a policy of permanent austerity in all circumstances.

Coppola wonders what will happen the next time that the Eurozone heads for recession. And that’s not the only trouble brewing:

“Greece is currently paying very low interest rates on its debt. But when the bonds held by its Eurozone creditors mature, it will have to refinance them on the financial markets – if it can. It’s as yet unclear how much market access Greece will have by, say, 2030.”

There are many things wrong with the Tusk tweet: The celebratory tone, the shameless reference to “European solidarity”, the absence of the merest hint of an apology to the Greek people. But the cruellest thing is the impression it gives that the pain is over. 

Now, thanks to electronic forms of payment, it’s increasingly easy for the rest of us to go cash free.

According to a 2014 article on the UK Fundraising website, one third of all Britons say they never carry cash (a problem for charity fundraisers). Since then we’ve seen an expansion of electronic payment technologies – in particular contactless card payments, making cashlessness easier than ever.

Could we end up abolishing cash altogether? It’s a very real possibility, according an intriguing article by George Eaton for the New Statesman. He reveals that when David Cameron was Prime minister, the UK government was considering just such a plan:

“In the summer of 2015, as David Cameron cast around for ideas for his Conservative conference speech, an ambitious proposal caught his eye: a cashless economy. Former No 10 aide Daniel Korski, who developed the policy, suggested setting a target of eliminating hard currency in Britain by 2020.

“The prime minister eventually said, ‘I like this but I don’t think it’s for conference,’” Korski, now the chief executive of Public, a venture capital firm, recalled when we spoke. “But the real resistance was the Treasury and the then chancellor [George Osborne]. There was real concern about where this would go politically.”

Of course, having lost the Brexit referendum, Messrs Cameron and Osborne are not in a position to abolish anything. And, given this context, it would be odd if their successors scrapped the Pound (if only in physical form).

Eaton suggests that it might be Sweden that becomes the first country to go cashless. In the UK “cash accounts for only 3.9 percent of payments by value”, which is pretty cashless by international standards – until, that is, you consider the Swedes:

“Cash transactions account for only 1.4 per cent of the value of all payments and the country is forecast to become cashless by 2030. Market traders, churches and homeless magazine vendors all accept card and phone payments. More than 900 of Sweden’s 1,600 bank branches no longer take cash deposits.”

Of course, Sweden only has this option because it wisely kept out of the single currency. Eaton tells us that within the Eurozone cash accounts for 10.4 per cent of payments – and so, as things stand, it’s difficult to see all the member states agreeing to abolish the physical currency. A particular obstacle would be the Germans, who are famously fond of the folding stuff. It was they who insisted on the €500 note – which facilitates large cash purchases, but also, it is alleged, organised crime.

Then again, cash in general facilitates crime:

“In his 2016 book, The Curse of Cash, the Harvard economist Kenneth Rogoff disparages paper currency for aiding tax evasion, theft, corruption, terrorism, the drugs trade, human trafficking and the rest of a burgeoning black economy. Though a digital system creates new forms of crime, illegal activity becomes easier to trace.”

This is one of the best arguments for abolishing cash; but what else might government try to control if it had a digital grip on the use of money? Writing on the same subject for CapX, Tim Worstall has nightmares:

“…what do we think would happen with just the one government-approved payment system? Those not approved of by government would not be able to access it. Perhaps paying for sex and illegal drugs isn’t one of the things we’d go to the barricades for, but… much effort would be applied to having ever more disapproved-of transactions added to the verboeten list. Public Health England might want to add sweeties, soda pops and lunches over 600 calories, and someone would certainly try to ban cigarettes from the payment system, and so on. It would be a giant kick-me target pinned to the back of the payment system for every crank with a ban to promote.”

The fear that control of the means of exchange could be used to control all human activity goes back a long way. For instance, the Book of Revelation prophecies an apocalyptic scenario in which no one can “buy or sell unless they [have] the mark, which is the name of the beast.”

If that isn’t a warning against the total centralisation of economic power, I don’t know what is.

UnHerd Interview

Test article

By Charlotte Pickles

It’s true that fewer people in Britain identify as European than in any other EU country; however, even fewer Britons identify as American, and that doesn’t stop the British media from following US politics in extravagant detail. America may be the most important country in the world (for the moment), but what happens across the English Channel is every bit as relevant to Britain as what happens across the Atlantic.

In part, the problem is one of complexity. In America, only two parties matter (and just the one in Russia and China); but with European politics there are multiple parties in multiple countries to keep track of.

Recommended reading

Test article

By Michael Burleigh, Nigel Cameron and Peter Franklin

Was that why the broadcasters did such a poor job explaining last week’s Italian general election to the British public? Or, was the result – a disruptive surge in support for Eurosceptic populism – simply too painful for the Europhile media establishment to dwell upon? There is, however, one Europhile bastion – the Economist – that does understand the gravity of the situation:

“Both chambers of parliament are hung… More alarming is that half of the voters—fed up with high unemployment, stagnant wages, uncontrolled immigration and a self-serving political class—voted for the two main populist parties, the Five Star Movement (M5S) and the Northern League. Both are hostile to the EU and especially the euro, and both campaigned on lavish tax and spending promises that Italy cannot afford. Mathematically, no government can be formed without one of them.”

It’s difficult to see the PD (the main party in the outgoing, EU-compliant government) from doing a deal with either Five Star or the League.

Other options also lack feasibility:

“For the PD, the choice is between hemlock and cyanide. But refusing to give even limited support to either risks an even more gruesome possibility: an alliance between the League and M5S. Right now that seems unlikely. The League’s traditional hostility to the poorer south, where M5S is strongest, makes such a pact hard… Faced with deadlock, President Sergio Mattarella could seek to appoint a short-lived technocratic government. Or Italians may be asked to vote again. Neither option will solve much. Scheming to keep the populists out will only strengthen them…”

At some point, a government of some description will emerge – but not one with the inclination or the mandate to implement the painful measures being urged upon Italy by its partners in the Eurozone:

“The euro zone’s third-largest economy has low growth and public-sector debt of about 130% of GDP. It is also too big to bail out. Italy poses a systemic risk to the euro unless it can reform itself. And on the evidence of last weekend, it can’t.”

In its current form, the EU can’t move forward without major reforms to the Eurozone, but those can’t happen without major reforms to Italy – which the Italians have just rejected. This is why the Economist calls the election result “a vote for irresponsibility”.

But who’s really being irresponsible here? The Single Currency – that crushing burden on Italian growth – is an invention of French politicians, engineered by German bankers. The nature of Italy’s economy and government was never a secret, and yet the country was welcomed into the Eurozone.

Even less of a secret is Italy’s geography. When Germany opened its borders to mass immigration, Angela Merkel knew that the invitees would have to come via southern and eastern Europe. In the face of a domestic backlash, she then reimposed controls – as did Emmanuel Macron – trapping migrants on Italian soil.

What happened on 4 March was an inevitable consequence. The Italians may have done the voting, but the result was of France and Germany’s making.

Recommended reading

Test article

By Henry Olsen

The 19-nation currency bloc expanded 2.5% year-on-year during the third quarter of 2017 – compared to 1.8% in the UK. Moreover, survey data from December shows the eurozone’s Purchasing Managers’ Index registering 58.1 (where 50 and above indicates growth) compared to Britain’s more modest 54.9.

These growth numbers have been gleefully circulated by those determined to block Brexit – as ‘evidence’ the UK is doomed to under-perform over the coming years. They’ve also led some to conclude the eurozone no longer faces systemic dangers. Neither proposition is true and, as such, it is important to put these eurozone growth numbers in their medium-term context.

I’m delighted the eurozone is growing. The EU accounts for around 40% of UK exports – and will remain a major market for us after Brexit. A healthy, fast-expanding eurozone is good for Britain, too. Yet this latest growth, after years of eurozone stagnation, in no way amounts to an economic renaissance. Nor does it solve the major structural issues at the heart of the single currency and the broader EU.

One reason the eurozone is growing faster than the UK is that it’s recovering from a decade of significant under-performance. Since the 2008 financial crisis, while GDP in the UK and US has expanded on average by 1.5% and 1.2% respectively per year, the eurozone has managed just 0.4% annual average growth. As such, it took the eurozone eight years to recover from the 2008 financial crisis, something the UK achieved in half the time.

Growth across the eurozone is also very uneven:

• While Germany managed annual average growth of 1.1% during the ten years since the financial crisis…
• Spain has expanded by just 0.1% each year…
• Italy has actually contracted, by an average of 0.5% per annum, since 2008.

Some eurozone nations, then, find life in the single currency straitjacket so tough that their GDP has still not reached pre-crisis levels. Italy, in fact, has barely grown since the euro was launched in 1999.

Along with large growth disparities, eurozone unemployment remains at almost 9% – twice as high as Britain’s 4.2% rate. Monetary union has worked well for Germany, Netherlands and other wealthy northern members, their exporters benefiting from a currency far lower than their economies would warrant alone. Yet it has throttled other Mediterranean nations, as they’ve laboured under a single currency which, for them, has long been significantly over-valued. That helps explain youth unemployment of no less than 40% in Spain and Italy and 50% in Greece – figures that amount to nothing less than a generational tragedy.

Flawed at birth

The single currency was “flawed at birth,” according to Nobel Laureate economist Joseph Stiglitz, despite being an avowed and long-standing supporter of the EU. “The structure of the euro is to blame for the poor performance of Europe, its successive crises and increased inequality,” he says[1.  Stiglitz, Joseph, “The Euro”, Allen Lane, 2016]

Far from promoting European prosperity and peace, the euro has “tied together” countries with vastly different economic and social backgrounds, Stiglitz concludes, “denying them the vital ability to manipulate their exchange and interest rates”. Former Greek Finance Minister Yanis Varoufakis, who battled with Brussels during the early stages of his country’s on-going bailout negotiations, is even more direct. The single currency has “sown division across Europe,” he says, “turning Europeans against Europeans”[2.  “After Brexit: The battle for Europe”, BBC4 television documentary, 14.02.17. At the time of writing, this documentary has unfortunately been removed from BBC iPlayer.].

Extremely uneven, and partly driven by “catch-up”, the eurozone growth we’ve seen in 2017 has also been heavily dependent on quantitative easing. The European Central Bank continues to expand its balance sheet by tens of billions of euros a month. The Frankfurt-based bank has now done more QE since 2008 than America’s Federal Reserve. Once the ECB’s money-printing stops, though, eurozone bond markets, having almost imploded in both 2011 and 2012, may well face renewed crisis.

What is certain is that if the single currency is to survive in the long-run, member states must secure both a fiscal union and a banking union – pooling government revenues to a far greater extent and putting their respective sovereign balance sheets behind each others’ banking sectors.

Some say that the election of Emmanuel Macron in France means such big advances in “Project Europe” are now likely. The German electorate seems to think otherwise. It may be that the eurozone’s paymaster – which will be the only major, consistent net contributor to the EU budget once Britain has left – can be convinced to bankroll the rest of the eurozone and the broader EU. But I somehow doubt it.

Berlin rhetorically backs “Europe” and has spent tens of billions of euros on bailouts. Yet Der Spiegel dubs Macron “Teurer Freund” – our ‘expensive friend’. [3.  Der Spiegel, 15.05.17, ‘Frenemy in the Making? Merkel Views Macron with Skepticism and Hope’.]

Chancellor Angela Merkel has long been entirely against a unified Eurozone finance ministry, with explicit fiscal pooling and mutually guaranteed banking sectors. And the German electorate remains extremely unlikely to accept the kind of deep fiscal integration that is ultimately required to guarantee the euro’s survival.

That has been the case for many years –and looks even more certain since elections last September, which saw the recently-formed hard-right eurosceptic party Alternative Fur Deutschland come third, with no less than 13% of the vote.

For all the displays of unity, France and Germany are irrevocably split on the future of Europe. Traditionally obedient Europhile nations like Finland and the Netherlands are meanwhile complaining loudly about bailouts and QE, their electorates also increasingly backing Eurosceptic candidates. Populations across the Mediterranean are also far less enamored with the EU than they once were. And new members in Eastern Europe, particularly Hungary and Poland, are now also openly chiding Brussels – cheered on by their increasingly Eurosceptic electorates.

More than three months on from an election, Merkel is still trying to form a government. A combination of ECB money-printing and endless bailouts, as well as the disproportionate burden Germany shouldered during the EU’s migrant crisis, has angered voters. For the first time since World War Two, Merkel’s CDU and the centre-left SPD failed, between them, to command a majority of votes cast – an electoral watershed. Yet German voters are now about to be presented with yet another ‘Grand Coalition’ of these two mainstream parties – a development that could fuel further support for AfD and other radical parties.

I will be accused of unfairness, but I genuinely believe the eurozone, and perhaps even the EU, could be just one bad election, one geopolitical event, one eurozone bond crisis away from a great unraveling. I’m far from alone in that view. “I know about the state of the EU,” said Sigmar Gabriel in January 2017, who has since become Germany’s Foreign Minister. “It is no longer unthinkable that it breaks apart”[4.  Reuters, 07.01.17, “Germany’s Gabriel says EU break-up no longer unthinkable” ].

And it strikes me that the main danger the EU faces this year is Italy.

Mamma Mia!

Having been hit by the extended, decade-long slump, the eurozone’s banking sector remains weighed down by bad debts. Non-performing loans amounted to €866 billion as of December 2016 – representing 6.4% of gross loans outstanding across the eurozone, well above the UK (1%) and the US (1.5%) where banks have raised more capital since the global financial crisis and acknowledged more write-offs. High NPLs have kept fresh eurozone bank lending subdued, stymying job creation and growth.

While Germany has an NPL ratio of 3.2%, the figure in Italy is a massive 17pc, with bad bank loans amounting to €360 billion – up 80% since 2010. This is a major reason why eurozone fiscal pooling and banking union won’t happen. Economic stagnation and high unemployment has seen Italy’s national debt spiral to over 130% of GDP – much of it held by the nation’s banks. This loan-pile represents “a major source of vulnerability” for the single currency, observed the European Commission in February 2017. In response, Rome says the Commission and other EU member states should cut Italy “more slack”, not least as the country has also been heavily affected by the migrant crisis.

Italians refer to NPLs as le sofferenze – the suffering. The stock of bad loans is now so large that on-going slow growth means the chances of a natural banking recovery look remote. The Italian economy is ten times bigger than Greece – a systemic Italian bond crisis would shake the global financial system to its foundations. Consider also that the 2007 sub-prime debacle was originally triggered by the accumulation of bad housing loans that generated a 5% NPL ratio among US banks. The bad loan share across Italian banks is more than three times larger.

Ahead of elections this coming March, Italy’s three main opposition parties – including the Five Star Movement, headed by comedian turned political leader Beppe Grillo – have all supported leaving the euro, which they believe is preventing economic growth. At the time of writing, Five Star is polling at around 30%, well ahead of any other party.

Victory for Grillo’s party, even if Five Star were unlikely to take office, could spark another systemic crisis across the eurozone. This election in March represents the biggest flashpoint for the EU economy since the eurozone bond crisis of 2012, with Italy potentially emerging as the epicentre of global instability.

Last year, right-wing firebrands in both Holland and France, campaigning on an anti-Brussels platform, significantly increased their vote shares. Austria and Germany also lurched rightward. Now, with Italian elections fast-approaching, the populist, anti-EU Five Star Movement, looks set to come first.

The UK economy, while bearing up well, faces considerable uncertainties in 2018 – relating to housing, productivity, inflation and, of course, our on-going Brexit negotiations. It may be, though, that the uncertainties facing the eurozone are greater still.