Why rejoining the EU is so problematic

In his latest piece Wolfgang Münchau writes that if Brexit happens then

“the EU you may wish to rejoin will be different from the one you are leaving. From a British perspective, the EU was little more than a customs union and a single market. If the UK ever decides to rejoin, it would have to do so under Article 49 of the Treaty on European Union. That would be the full Monty — with the euro, the Schengen zone, EU involvement in home affairs, no opt-outs, and no budget rebates.”

He is probably right. Probably because no one can be sure how the EU will evolve, but its history suggests it is unlikely to evolve in the direction of reducing its scope.

However he draws the wrong implication from this. He says that those arguing for Remain should give up, accept that the UK will leave the EU, and start thinking about making the case for rejoining. Münchau has gone from misunderstanding the economic arguments to simply discounting them.

If I was asked whether the UK should rejoin the EU on the terms in Article 49, which means joining the Euro, I would not know how to respond. Joining the customs union and Single Market is unquestionable beneficial from an economic point of view, but joining the Euro with its current structure is almost certainly bad for the UK.

Austerity may have ended in the aggregate Eurozone, but the lessons from the Eurozone crisis have hardly been learnt. The fiscal rules that EU countries are meant to follow are a disaster. The ECB was forced to create OMT, and therefore can act as a lender of last resort, but whether it invokes OMT or not remains entirely in the hands of this largely undemocratic and unaccountable institution. No other central bank in the world has this kind of power over whole countries, power that we have seen it deploy against EZ members during the crisis and after the crisis.

None of this means that the Euro has to fail. As we have seen, there is no popular will to leave the EU in Ireland or Greece. In addition most countries have no desire to formalise a two speed EU (which is in my view a shame). As a result, a country like the UK should think very seriously about giving up so much of its freedom by adopting the Euro. This is why the decision not to join in 2003 was correct, and why the opt out from the Euro within the EU was so useful to us. The arrangement that we had, and which we have decided to leave, is so valuable it is worth fighting for every inch centimetre of the way.  

Hitting back

Not a post about a certain byelection, but a reaction to reading this:

“A more serious incident was the forecast by the Office for Budget Responsibility in the UK, which said last week that Brexit would have severe economic consequences. Coming only a few months after the economics profession discredited itself with a doomy forecast about the consequences of Brexit, this is an astonishing reminder of the inadequacy of economic forecasting models.

The truth about the impact of Brexit is that it is uncertain, beyond the ability of any human being to forecast and almost entirely dependent on how the process will be managed. “Don’t know” is the technically correct answer. Before the referendum, Project Fear was merely a monumental tactical miscalculation. Today it is stupidity. One of the debates was whether people should be listening to experts. We have moved beyond that. Because of a tendency to exaggerate, macroeconomists are no longer considered experts on the macroeconomy.”

Shrug your shoulders and move on? If it had appeared in the partisan press that would be a sensible reaction, but this was written by a widely respected journalist in the UK’s internationally renown financial newspaper. Furthermore - lest my motives be misunderstood - written by someone whose knowledge on the Eurozone is beyond dispute and whose views I often agree with. Well on this occasion this particular member of a discredited profession who is no longer apparently considered an expert on macroeconomics is not prepared to take this kind of stuff anymore, whoever it may come from.

It is difficult to know where to start with such apparent and complete ignorance. Nonsense expressed as platitudes. You can only make sense of “beyond the ability of any human to forecast” if you either think we know nothing about the impact of trade restrictions, which is false, or that forecasts are non-probabilistic. No journalist has any excuse nowadays for misunderstanding the probabilistic nature of forecasts (Bank of England fan charts), and any academic economist who knows anything about forecasting will tell you that unconditional macro forecasts are only slightly better than intelligent guesswork. They exist because it is worth being slightly better than guesswork when the stakes are so high.

You can also only make sense of these two paragraph if the writer is unaware or is just choosing to ignore the difference between conditional and unconditional forecasts. These are long words for a very simple concept. You would not dream of asking your doctor to forecast the number of times you would catch a cold over the next year (an unconditional forecast), but if you gave them all your relevant data they could probably make a better guess than your own. Their forecast would be probabilistic, but if you took the mean as ‘the forecast’ then in any particular year your doctor would generally be wrong. It would be absurd for you to then say that, having ‘discredited the profession with this inaccuracy’ you were now going to ignore their advice about how to avoid catching colds (advice based on conditional forecasts). But this is the logic of these two paragraphs.

As for a tendency to exaggerate, the simplest response involves a black kettle. But on this particular occasion I think there is a more honest response. In the Brexit campaign I felt the temptation to exaggerate (I don’t think I ever succumbed), because the media was failing to get the message from economists across. Our collective knowledge about the impact of trade restrictions was treated as just one more opinion, or described as Project Fear. When you are effectively being ignored you tend to shout louder.

But this is all defensive. Trying to explain yet again some basic economic ideas, and to be honest about what you can or cannot do and any failings you have. I’m just tired of doing this stuff over and over again, so it is time not just to defend. There are many good journalists out there, who when they write about macroeconomics do try to check with academics that what they are writing makes sense. (It was one of those journalists who drew my attention to the article I quote above.) It simply lets them down when others think they can write this sort of stuff without any of the kind of basic fact checking that journalists are supposed to do. It brings the profession of journalism into disrepute.

And they can only get away with it because academic economists only get a media voice by the grace and favour of journalists. If anyone should be doing some serious introspection after the Brexit result it should be journalists and the media. Warning of the dangers of trade restrictions was not a ‘tactical mistake’. What was a mistake was for journalists to allow those warnings, that knowledge, to be characterised as Project Fear, all in the name of ‘balance’ or cheap copy. But this was not a temporary lapse in an otherwise good record, but just another example of a growing tendency for the media to allow politicians to define economic facts and truths, a record I described in my lecture.

To have the nerve to blame economists for the Brexit result, to suggest that using their knowledge was a ‘tactical mistake’, to imply that the OBR should pretend they know nothing about Brexit, all that is itself amazing malevolent chutzpah. But it goes beyond audacity to criticise a profession and subject matter you appear not to understand when it is this lack of understanding that has contributed so much to the damage over the last few years.

Its ideology, stupid

Wolfgang Münchau takes to task in today’s FT the latest example of German opposition, and in particular opposition from finance minister Schäuble, to ECB policies. However I think he ends up missing the obvious target. He discusses the particular problems negative rates pose for Germany’s financial sector, and in his last paragraph writes

“This episode is a reminder that the collective spirit that was so strongly present in the first years of the eurozone has gone. That — not the presence of imbalances or other technical problems — constitutes the single biggest danger to the long-term viability of Europe’s monetary union.”

I would suggest this has the causality wrong. Any collective spirit has gone because of these ‘technical problems’. The biggest technical problem is an obsession with inappropriate collective fiscal consolidation (austerity). In the Eurozone the ECB is being forced to try negative interest rates because it is having to undo the impact of fiscal consolidation. And the man most responsible for this obsession is Schäuble.  

Gavyn Davies nicely sums up my own view about negative interest rates. Without radical institutional and social changes (which may not be desirable), bank profitability puts a limit on how far central banks can go, and for that reason exploring these frontiers could be counterproductive. But the alternative of more QE, possibly directed at other assets besides government debt, is way down the list of effective and reliable instruments for managing aggregate demand right now. Helicopter money is a much better way of giving central banks more ammunition. But the focus right now should not be on any of this, if we are genuinely concerned about social welfare. As John Kay says, “we need less financial ingenuity and more common sense”.

What we should be talking about is why governments are not doing much more public investment. Yet in the US, Germany and the UK any dramatic increase in public investment seems out of the question. Barry Eichengreen, in an article entitled “Confronting the Fiscal Bogeyman”, writes of Germany:

“The ordoliberal emphasis on personal responsibility fostered an unreasoning hostility to the idea that actions that are individually responsible do not automatically produce desirable aggregate outcomes. In other words, it rendered Germans allergic to macroeconomics.”

In the US, antagonism to the Federal government rooted in the past has meant Republican leaders are  

“antagonistic to all exercise of federal power except for the enforcement of contracts and competition – a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz.”

He ends

“Ideological and political prejudices deeply rooted in history will have to be overcome to end the current stagnation. If an extended period of depressed growth following a crisis isn’t the right moment to challenge them, then when is?”

He does not mention the UK, where the antagonism to public investment seems to lack any deep historical explanation, and may just reflect stupidity or an ideology imported from the US.

When I talk about public investment people normally think about big projects, like HS2 in the UK. I like to point out that simpler and perhaps more boring things, like repairing roads, are at least as important, and can be done immediately. But if there is one area above all else where much more needs to be done right now it is investment in renewable energy.

The recent news on climate change is not good. It is foolish to read too much into one or two months figures, but this chart is nevertheless quite scary. It is scary because we know of various possible ‘tipping points’ (like the melting of all Arctic ice or the mass release of methane from permafros) which could accelerate global warming. Most climate models assume we will control carbon emissions in time to stop that happening, but we cannot be sure of that, because we are in uncharted territory.

We know we need a massive expansion of renewable energy, but one problem that has so far stopped that being a complete solution to climate change has been that sometimes the wind neither blows nor the sun shines. We need to be able to cheaply store electricity, but our current battery technology is not good enough. Battery technology is also crucial in making electric cars as attractive as petrol based cars. But technology could come to the rescue. Existing batteries could be made much more efficient, or completely new battery technologies could be made viable. Much more efficient transmission could also help. And if you look at all three links, you may notice one common factor. These potential breakthroughs have all come from research undertaken in the public sector. As Mariana Mazucato has argued, the state is “better able to attract top talent and pursue radical innovation”.   

China put over $80 billion into the renewable energy sector in 2014. That is nearly 1% of its GDP. It has committed to spend 25 times that amount over the next 15 years on clean energy. Both the US and Europe spent much smaller amounts ($38 and $58 billion respectively), even though their economies are much larger (the US figure is around 0.07% of its GDP). In dollar terms, the Chinese government also spent more on Green R&D than Europe or the US. [1] The scope for US and European governments to spend more on researching and help with developing green technology is huge. Yet in the UK the government has recently cut back its support for renewable energy, even though the UK’s need for renewable energy is urgent.

Climate change may be the most important example, but it is not alone. It is absurd that when the potential for technological change leads people to write about robots taking over, actual productivity growth is slowing everywhere. As an IMF report says, "innovation [is] highly dependent on government policies." I think Brad DeLong, in commenting on Eichengreen’s article, has it exactly right when he writes “it is long past time for a frontal intellectual assault on the[se] dangerous and destructive ideologies”.   

 

[1] If we include corporate R&D, Europe moves ahead of China in $ spend, but China is still ahead of the US.