Brexit and Democracy

Ambrose Evans-Pritchard writes eloquently and honestly about why he will be voting for the UK to leave the EU. Honestly because he gives chapter and verse on how “anybody who claims that Britain can lightly disengage after 43 years enmeshed in EU affairs is a charlatan or a dreamer.” His argument to nevertheless Leave is straightforward:

“it comes down to an elemental choice: whether to restore the full self-government of this nation, or to continue living under a higher supranational regime, ruled by a European Council that we do not elect in any meaningful sense, and that the British people can never remove, even when it persists in error.”

Although he does attack the Commission “with quasi-executive powers that operates more like the priesthood of the 13th Century papacy than a modern civil service”, and although he talks about the European Court of Justice on which I have no expertise, most words are spent denouncing those that created the Euro, and here I have some knowledge. He writes

“Nobody has ever been held to account for the design faults and hubris of the euro, or for the monetary and fiscal contraction that turned recession into depression, and led to levels of youth unemployment across a large arc of Europe that nobody would have thought possible or tolerable in a modern civilized society. … We do not know who exactly was responsible for anything because power was exercised through a shadowy interplay of elites in Berlin, Frankfurt, Brussels, and Paris, and still is.”

Is this really the case? We know that the push for a monetary union came from France in particular. Germany was less enthusiastic, and therefore demanded as a price some central control of national budgets because they feared that a profligate government could cause systemic problems. When those fears proved correct, they doubled down on that central control and also believed a union wide demonstration of austerity was required. I strongly disagree with all of this, and have thought a lot about why it happened, but a lack of democracy is not high on my list of culprits. After all the Eurozone did not cause austerity to happen in the UK and US.

The fact that democracy was overridden in Greece so cruelly was not the result of actions of unelected bureaucrats, but of elected finance ministers from the other union countries. One reason these finance ministers refused to write off any debt was because of pressure from their own electorates. This exercise in raw political power worked because the Greek people wanted to stay in the Euro. The ‘bad equilibrium’ Evans-Pritchard talks about happens in part because of democracy. The lesson I would draw is that union governments should not lend money directly to other union governments, precisely because governments are democratic and so find it hard to accept write-offs.

Dani Rodrik talks about an impossible trilemma: how you cannot have all three of ‘hyper globalisation’, national sovereignty and democracy. The key question is whether you can find acceptable arrangements that partially limit each of these rather than abandoning one altogether. That is a tricky issue of design, and it is clear that the Eurozone has not succeeded so far. Too many assume that this failure condemns all attempts at monetary union, and that the only way forward is full political union. If that is what is meant by saying there is no chance of a democratic Europe anytime soon I agree, but I think that form of democracy was always a step too far too soon.

There is no shortage of ideas of how the Eurozone could be improved that fall well short of political union. It is simply not the case that you can only have one monetary union design, so you cannot reject the whole concept based on one failed experiment. It is quite possible that in the short term Germany or others may block reform, but it is far from obvious why Germany or others should prevent reform in the longer term. Germany does not want to repeat what happened in Greece.

Above all this, there is a fundamental point. The Eurozone as it currently stands is not immutable, or inevitably dying, or some kind of monster that is bound to ensnare the UK or bring it down. If the Eurozone did become one of these things, we can always exercise our option to leave. In contrast, once we leave, it will be a long time before we can change our minds.

The big story behind Port Talbot

In today’s print edition of the New Statesman I have a brief review of Yanis Varoufakis’s new book. (The review also looks at Piketty’s newly published collection and translation of newspaper articles. I’ll talk more about each when the review appears online, but for now you can read a similar (in parts) double review by Paul Mason.) The organising macroeconomic theme in his book is the need to find systems capable of successfully dealing with current account surpluses. In my review I say I’m not sure whether this framework is really capable of holding up everything that the author wants it to support, but there is no doubt of the importance of the issue. For example, it seems to me this is the framework, albeit at a more industry specific level, with which to see the current crisis over the threatened closure of the UK’s steel plant at Port Talbot.

The surplus in question here is the surplus Chinese capacity to produce steel. Ambrose Evans-Pritchard in the Telegraph, who has a similar perspective, reports an OECD estimate that China's excess capacity is over twice the size of total European Steel production. Because China is able to subsidise production in various ways, this means this steel can beat UK production on price. The US department of commerce is reported as thinking that the subsidy on some types of steel justifies a tariff of 236%!

If this is correct, then this story is not about neoliberalism or the free market, but a story of a rigged market. To put it another way, it is a market where one set of producers have the ability to eliminate their competitors by flooding the market at a loss because they have the ‘deep pockets’ of a state behind them.

The EU have been trying to raise tariffs against Chinese steel producers for three years, but have been blocked by a coalition of countries led by the UK. The UK Business minister Sajid Javid has been quite explicit about this: he prefers cheap steel because it helps other parts of UK industry. It may also have something to do with wanting to curry favour with China because of other matters (which was the point of John McDonnell’s Little Red Book stunt, if only he hadn’t started reading from it!). This is not Javid upholding the principles of a free market, but instead allowing a large state to rig a market. The irony in this case is that the state in question is not the one he works for. 

Postscript (11/4/16) For more detail, see this from Ben Chu        

Why Sen is right about what is being done to Greece

At first sight the negotiations between Greece and the Troika seem to be simply a battle about resources: how much of the pie that is Greek national income their creditors should receive. There have been many similar types of battle over the years - what makes this one unusual is that the creditors have a unique weapon on their side. With primary surplus approximately achieved, Greece’s bargaining position would normally be extremely strong. The Eurozone creditors would be desperate to salvage what they could from their foolish decision to effectively buy some privately owned Greek government debt. The only reason the Troika is able to call the shots is that it can threaten to eject Greece from the Eurozone. [1]

Part of the deliberate mystification that goes on here is to present Eurozone exit as if it somehow automatically follows if there is a Greek default. But of course Greece has already defaulted, and it remains in the Eurozone. Greece wants to remain in the Eurozone. What will stop them if they do default will be a run on their banks, and a refusal of the lender of last resort for their banks - the ECB - to act in that capacity. Again this will be presented by the ECB as inevitable given the ECB’s own rules. But as Karl Whelan points out, the ECB in reality has considerable discretion, and it has been using that discretion in its role as part of the Troika.

Still, even if the sides are a little unequal in their power, is it still just a battle over resources? One side advocates left wing/populist/humanitarian policies and the other side policies that are more of the consensus/neoliberal/tough variety. [2] One side has suffered a massive fall in GDP partly as a result of previously agreements, while the other is negotiating over what is to them peanuts. So there is plenty of opportunity to pick sides based on preferences. Both sides would almost certainly be better off with an agreement, so it also makes sense for people to appeal for flexibility, which is why I signed this letter.

But to pick sides, or to call for flexibility from both, misses the main point. Yes, this is a battle over resources, but it is a battle where one side is using its power to pursue a policy that is very short-sighted, involving incredible hubris, and which is ultimately self defeating. The Troika are not acting in the long term interests of those they represent. This is I believe what Amartya Sen was saying when he compared these negotiations to the Versailles agreement. 

The most obvious example of this are the Troika’s continuing demands for positive primary surpluses and the austerity measures required to achieve them. This is just stupid. It continues to waste large amounts of valuable resources, as well as inflicting real suffering. It certainly is not in the interests of Greece, but it is almost certainly not in the interests of the creditors either. If you shrink the pie, you are less likely to get the amount of pie you have a claim to. (Martin Sandbu goes through the maths here.) It is disgraceful that key parts of the IMF plays along (or worse) with this. In the past I have described how heterogeneous the IMF is, but taking absolutely no notice of what your own research department says about austerity is crazy. Ambrose Evans-Pritchard talks about the Fund's own credibility and long-term survival being at stake. Keynes, who helped found the organisation, would be turning in his grave.

What about all the reforms that the Troika is insisting on? It is tempting to look at each in turn, and apply our economics expertise to come to an evaluation. If a reform demanded by the Troika might tend to increase the long run pie, then perhaps they are right to insist on it. This neglects one small issue: democracy. The Greek people have elected a government with a mandate. The Troika appear to be acting as if this is neither here nor there, and that is deeply worrying, at least to those of us who are very weary of yet further economic and political integration. (For those who have that integration as their ultimate goal, Greece can be seen as an annoying obstacle that should be thrown aside. [3])  

The hubris of the Troika is incredible. They have convinced themselves that they must override the democratic wishes of the Greek people because the Troika have the wisdom about what is good for the Greek economy. This is the same body that with its superior wisdom prevented full default, and imposed ridiculously strong austerity on Greece and crashed the economy as a direct result. To cover up these errors they play to stories in the media about the lazy and privileged Greek people, stories that largely disintegrate when confronted with evidence. Now they shrug their shoulders and say I have to keep on the same disastrous path because my electorate gives me no choice!

Amartya Sen is right. This is our Versailles treaty moment. It could be so very different. No doubt some of Syriza’s mandate may be unwise, but their own economists may recognise that and welcome the excuse to shelve them. The Troika and Syriza’s negotiating team could be cooperating in that endeavour, but I’m pretty sure that is not what is happening. On austerity the priority of the Troika should be to eliminate the Greek output gap, which means in the short term less rather than more austerity. This would not just be in the interest of the Greek people but also the interests of the rest of the Eurozone.

[1] This is why I think these negotiations are less like bargaining over a mutually beneficial exchange (rolling over lending in exchange for reforms), and more like a discussion with a mugger over which of your personal possessions you hand over.

[2] Or add any other description you prefer - my point is that they differ and people have strong views about them both in principle and practice, and therefore pick sides accordingly.

[3, postscript] Karl Whelan shows here that Giavazzi’s piece is as grounded in facts as some other FT op-eds.