By Bob Hancké, Political Economist at the London School of Economics and Political Science
Here’s an interesting question: should the EU be allowed to grant some of its most polluting industries an exemption for carbon trading (and taxes)? The argument is that if the EU did not do this, these industries would still pollute, but in other countries (see Euractiv 22 Sept 2009) – something called ‘carbon leakage’. That puts a slightly different spin on the question, of course: if you assume that global warming is happening and bad, is the EU is better at handling highly polluting industries than countries like China and India? My friend and colleague Willem Buiter wrote a very provocative blog post on a similar issue two months ago (which you can read here), in which he argues that economic development needs are no reason to grant poor countries exemptions. Pollution is pollution, his position, regardless of who is responsible for it – there are plenty of other mechanisms to help poor countries.
My take on the issue sort of turns the question around. Leaving aside soft (or hard) protectionism, which admittedly is never far away when the EU suddenly invents sustainable industrial policy, there is a real question here. Surely you’d want highly-skilled people driving extremely fast cars or well-trained pilots in fighter jets. By the same token, you could argue, you would prefer countries that have a highly-developed engineering system and are able to develop cleaner technologies, especially for such highly-polluting industries as steel, food processing, and plastics manufacturing, to keep them. Germany, France, Sweden, and a host of other European countries have been working under strict environmental regulations for a while now, their science and technology systems know how to innovate, also – perhaps especially – in old industries, and they should therefore be allowed laxer environmental regulations.
The problem I (always) have with such arguments is not the implicit or back-door protectionism. If societies democratically choose to have extra costs associated with a particular way of life, then it is up to them. In fact, I am not even sure that the costs are higher, they are just more visible in terms of taxes or so – a matter of property rights over costs as well as benefits, not a free lunch, in other words. And writing this from France, where farmers have been supported for generations, makes me deeply appreciate the same CAP that is usually the object of my virulent rants in seminars.
My bone of contention is that many countries became the industrial and engineering power houses they are now precisely because they never allowed slack in their system. Think about it: if you are exposed to international competition, and your domestic rules and institutions are such that there is no short-run low-cost way out (wages are ‘rigid’, as economists say, employment protection, investment in training by employers and by workers are high, and currency devaluations are not serious options), then your domestic industry will always suffer in the short and benefit in the long term. Under the conditions I describe above, industry is forced into permanent rationalization: those that can afford the costs associated with the new regulations (say the top-half in the distribution) will benefit from the system, since wages are set at more or less the average (the median of the companies, in fact) that firms can pay; the others have a simple choice move up or move out. And usually firms can rely on well-developed training systems, links with universities, and relatively compliant labour unions.
The remarkable overall effect of such regulations and constraints is that your domestic industry becomes, on average, more competitive every year. That explains why Germany is the biggest global exporter, with France not all that far behind, and why small economies in Europe often export half or more of their GDP. What made these countries strong economies was the discipline imposed by a combination of hard regulations, foreign competition, and domestic institutions that helped firms to innovate and locate themselves in technology-rich (and therefore usually less cost-sensitive) segments of the market.
And that’s the snag with this (I assume) well-meaning idea of allowing ‘carbon leakage’ exemptions to some of the EU’s heaviest industries. Such subsidies and, worse, tariffs that might follow may well end up making these firms less prone and able to sort out their carbon footprint, and possibly even less competitive than they are, in relative terms, now. And that means that, eventually, all that polluting industry is going to go abroad anyway – but at a welfare loss, roughly calculable as the subsidies and the foregone innovation. Much better, it seems to me, under these conditions, to agree on a world-wide and more elaborate Copenhagen/Kyoto protocol, have industry relocate to poorer countries, organize transfer of ecologically sustainable technologies and spend some of our R&D money on that (with tax advantages, if necessary), and sort out domestic dislocation in these polluting industries through social plans. The latter is a small cost for rich economies, and it keeps them on their toes in the right way. Everything else, I fear, will have nasty long-term side effects.
In a remarkable turn of events, there seems to be a consensus that, a year after the Lehman bankruptcy, the recession is over, at least according to the central bankers in the advanced capitalist world. Bernanke, King and Trichet have almost simultaneously taken to the airwaves claiming that the worst is behind us.
There are two problems with this. One is simply that we are still on very thin ice: stopping the massive decline in GDP growth is one thing; declaring a growth rate of 1-2% as turning the corner is an entirely different thing. And that’s ignoring the possibility that we’re facing another dip next year or in 2011.
The other is that we are in fact very close to a catastrophe, judging by the rising unemployment numbers. The OECD, among others, is suggesting that unemployment in the rich countries in the world may hit levels unseen since the Second World War. Soon, if we are to believe this, we’ll be thinking back to the seventies and early eighties as the easy decades.
I think these fears are correct. Stabilizing a financial system that went belly up may well turn out to have been the easy part of the job. And it is not even all that clear if world finance is doing OK, since many banks are still sitting on their money – well, except for the bonuses, which seem to be re-emerging as if nothing happened a year ago. The irony in all that is that these bonuses are, to a large extent, paid to bankers who have been doing extremely well selling government bonds that have been issued to finance the financial support to the banks that are almost went belly up.
The scenario we are now looking at is scary by any standard, whatever our central banks may suggest. If indeed unemployment is rising sharply and is likely to stay there for a while – which it may, as long as firms are still off-loading the stock of unsold goods that they’re sitting on and business has no reason to invest since growth prospects are, let’s say, weak – then we may face a social disaster the likes of which we haven’t seen since the Thirties.
This is where you realize how important a welfare state, however small, is for the survival of a dynamic capitalist system. By keeping the income of the unemployed at a reasonable level – more reasonable in Europe than in the US, as far as I am concerned – the economy does not nosedive for lack of demand. And this is also where you realize that government intervention to keep people in jobs, through short-term job subsidies as in Germany and to some extent France, may actually be a good thing. It keeps unemployment lower than it otherwise would be and it makes sure consumers still consume, even at a much lower level. It is not a coincidence that those countries that have relatively generous social welfare systems are also the ones where unemployment has not moved up all that much.
But the upshot is, I am concerned, that we will now be hearing voices again that – things being ‘back to normal’ – urge governments to kick some shape into the labour market by getting all the ‘bums’ off unemployment and welfare benefits. If people are unemployed, that logic goes, then that’s because they don’t want to work and rather lie back cashing their welfare checks. Unemployment falls if wages can easily adjust downward.
A simple idea, and attractive in its simplicity, but wrong. Unemployment falls, on the whole, if business hires. And a business will hire if it thinks it can make more of a profit producing things than sitting on its money and not producing. Growth of an economy begets growth in a company which begets employment. Under conditions of low growth, all the rest is tinkering in the margins. Well-meant, at best, but useless if the macro-economy is going the wrong way. Keynes and many others pointed out in the Thirties and those lessons are still valid today. I can only hope our policy-makers remember them when they stare at the sad unemployment figures over the next two years.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
After a month of self-imposed silence – and in a world in which little seemed to be happening, judging from my occasional glances at the International Herald Tribune and Repubblica, which left little to comment on – here we go again. Let me kick off the season with something European that is likely to influence US citizens as well.
Few countries in Europe are deeply concerned about the state of their health care. As far as I am aware, only the UK has regular fits about the costs of health, the efficiency of its health care system, and the sometimes laconic health standards in public hospitals. Despite having been a resident there for almost nine years, I have never truly understood why the country seems both unable to get its act together on health and complain about it all the time. But that is not the point; France, Italy, Germany, and basically all the other continental economies, including those in the former east bloc, have excellent and on the whole relatively inexpensive health care systems. They also have a wide variety of financing and organizational arrangements. The single provider system of the British NHS is, in fact, a rare oddity in Europe. Most of the countries allow patients to choose their doctor, and often their health insurance company as well. In some countries, health insurance comes with citizenship, in others with your (or your parents’) job. Care is universal or at least as good as. And all but the poorest countries have, as far as I can tell, excellent results for the vast majority of the cases they treat.
Affordable, excellent universal health care, the norm in Europe, has for some reason been demonized in the US, and I am not sure I understand why. If the problem is that people don’t like the idea of state provision (assuming that this is a problem), then design a privately organized system (like the German and to some extent French ones). If the problem is that it is mandatory – so are seatbelt, gun and a host of other laws, and no one seems to get too upset over those (OK, admittedly some do about gun laws); there are good reasons, found in standard economic theory, why health insurance should be mandatory. If the problem is fear of some state board deciding who lives and dies – despite the horror stories doing the rounds in the US (who starts such nonsense anyway?), that does not happen in Europe either; some medical conditions may not be recognized as such, but generally medical boards err on the side of caution.
There are problems, of course. France often looks like a country of hypochondriacs: even the very small town where my parents live boasts three pharmacies, all of whom have plenty of business indeed. And in Germany a culture of de-stressing spa holidays (all paid for by their health insurance) has emerged, which is probably not the wisest way to spend money. And in Belgium the health care system had in the 1980s become somewhat bloated: for every bed and brain scanner in a religious hospital one was allocated to a state hospital as well. I vaguely recall a statistic along the lines of Belgium having a ratio of scanners over population that was possibly ten times higher than the second on the list. All clear cases of waste, to be sure, but even with those slightly exorbitant traits, France, Germany and Belgium spend less of their GDP on health care than the US, and have excellent universal coverage.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Everybody seems to be seeing green shoots these days. The latest instalment came in yesterday’s International Herald Tribune (IHT, the world-wide version of the New York Times), publishing a report by Bloomberg that some (soft) economic indicators suggested a ‘hope for recovery’ in the Euro-zone. Some Euro-wide data on business sentiment had risen from a low reading to a slightly higher one, and the leading German business indicator rose to its highest level in nine months.
I could make fun of the overly optimistic reading of the data, who are all still at recession levels – just a slower and milder recession, that’s all – but I won’t: the Germans may make excellent cars, but unless they try their hand at crystal balls, I steer clear of predicting the future. What is interesting, though, is the nature of the alleged or assumed recovery. It appears to be riding on a rise in global demand, which eventually will find its way into the Euro-zone, raising demand there and thus pulling the area out of the crisis. ‘Last in, first out’, the Bloomberg-IHT piece tentatively suggested.
A step back may help understand what’s going on. The Euro-zone is essentially one big exporting machine, hierarchically organized around the German (and to some extent the French and Italian) economy. These three economies, in that order, dominate the Euro-zone: combined they make up about 80% of the single currency’s economy. All three export a lot, mainly to each other, of course, but directly and indirectly also outside the 15 members of Euro-zone (or EMU) to the rest of the world outside the EU.
Since France and Italy have seen their trade balance deteriorate over the last five years, much of the export-led growth falls on German shoulders – who has coped with this remarkably well. The sharp drop in economic activity in 2008 is best understood, as everyone has pointed out, as the result of a contraction in exports. As demand picks up, the German economy reaches cruising speed again, French exports pick up as a result (and with it those of most small economies in northern Europe, for whom Germany and France are the main export markets), Italy’s exports rise, and ‘happy days are here again’. To many a benign scenario, which shows just how well-organized the Euro-zone is when it comes to coping with this crisis – especially true when comparing with the dire reading of the economic indicators in the UK.
But I have a problem with this story. It ignores that the Euro-zone is, in essence, not much different from newly emerging economies who have adopted an export-led growth model. The reliance of the Euro-zone on exports for the recovery ignores the fact that for over a decade now, domestic demand has been too weak in the Euro-zone as a result of overly, and probably unnecessarily restrictive monetary and fiscal policies.
For most small economies that may not matter all that much, since they can compensate by exporting more. But for large economies, that is not necessarily the case: weak domestic demand in a country like Germany, a result of combined restrictive monetary, fiscal and wage policies, is not easily made up through rising exports (the ECB’s interest rates have been too high for a country like Germany, with the lowest inflation rate in EMU, fiscal policy has been quite tight, and wages have risen more slowly in Germany than in other EMU member-states). The German growth engine, and by extension EMU’s as a whole, is therefore almost entirely built on wage moderation in the magnificent German export sector.
The upshot? Recovery may come to the Euro-zone, and it may appear to vindicate the ECB’s policies over the last decade of keeping everyone in their tight place, and urge structural reforms (thereby conveniently forgetting that it is precisely the regulated German labour market that produces these impressive export results). But such an export-led growth model only works if you are alone and thus can free-ride on others who are raising demand domestically. Now, if there is one thing about which everyone agrees, that is, since the rise of Brazil, Russia, India and China, definitely no longer true. Eventually these countries will compete with German exports in world-wide markets, and global demand may simply not be high enough to absorb all of these products. Sooner or later, even the ECB will have to accept that, and work, with governments, employers and trade unions, on an economic model that relies less on world demand, and more on domestic demand, instead of leaving that all up to the Fed and President Obama.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Several years ago, when Tony Blair, the UK’s then prime minister, was considerably more popular in the US than in the UK, someone dreamed up the brilliant idea of having Blair rather than Cheney complete the 2004 Bush ticket. Blair, Bush’s most trusted ally – some say ‘lackey’ – in Iraq (together with Berlusconi of course; see my previous post for a round-up of his qualities), would then technically be in line for the US presidency, making ‘Blair for president’ a possibility. And, since Blair was the quintessential centrist politician, he would, in an electoral system like the US, where the winner needs to persuade slightly above 50% of the electorate (more or less), even stand a decent chance, exactly as he did in the UK, with a similar system though not presidential, three elections in a row.
The Blair slogan has made a comeback. Everyone in the UK, and possibly most people in Europe, knew that Blair had his eye on a yet to be defined European presidency, a post that does not require elections into high office but an appointment by the heads of 27 states. On July 15, it all became official, when a UK minister said that Blair is a candidate and supported by the government.
I have, to put it mildly, never been a big fan of Tony Blair. Some of the things his government did were OK, primarily on the domestic socio-economic front. But a lot of those initiatives emanated in Gordon Brown’s Treasury, not in Downing Street. Furthermore, many of the initiatives that made me raise an eyebrow and sometimes more, such as the decision to follow George W Bush into Iraq. But his most significant failure is in his current job, as the ‘peace envoy’ to the Middle East. Putting someone like Blair in charge of that, as an executive director, after his less than intelligent stumble into Afghanistan and then Iraq, is not quite like but close to putting Hitler in power of a synagogue rebuilding program, but it’s awfully close. I am sure he meant well (Blair), but that’s not good enough. The road to hell, as they say, is paved with good intentions. Moreover, the results are, by any standards we would use to measure outcomes, weak. I am not sure of the stats, but I’d be sure that the last two years have been among the hardest ones on both sides since the second intifada.
So, this is the guy we’d like to have as a president for the continent? ‘Think not. As far as I can tell, he’s a brilliant salesman, not a politician. Second hand cars, maybe, but peace to the Middle East –definitely a bad career move, for him and for the several hundreds, possibly thousands, that have died under his executive watch. I’d hate to think what he can conjure up for the continent if and when he’s in charge.
Perhaps it’s a good thing he’s a frontrunner for the job now. We know that frontrunners die young.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Many years ago, the American sociologist Robert King Merton coined a term for someone obsessed with procedural detail but oblivious to the substantive goals that these means were supposed to serve: a ‘ritualist’. Psychology has a parallel expression for someone who mistakes the external expression of a thing, or a part of the thing, as the thing itself: a ‘fetishist’. All sounds somewhat abstract? Well, open your paper and look at the news on the G8 summit in Italy.
Berlusconi, who has recently become famous for a lot more than bribing and escaping court judgments, winning local festivals with cheesy songs, owning several TV stations and newspapers, and running Italy into the ground, seems to have decided that getting several heads of state to Italy in one piece is going to be his contribution to world development – full stop. Today and tomorrow, people like Barack Obama, Gordon Brown, Angela Merkel and Nicolas Sarkozy – on the whole people with, probably, rather a busy agenda in these troubled times – are going to be taken on a guided tour of an earthquake-destroyed medieval Italian town, into a room for lunch and for a ride by Silvio.
The Guardian reported yesterday that Obama was so frustrated by the lack of preparatory work in Italy that he sent out his top civil servants to organize something substantial (ideas, not food) for the Italian G8 summit. Conventionally, the organizing country sets the agenda and then cajoles the others into accepting a series of goals and usually some sense of the resources that will get you there, but Berlusconi is too busy with other things. Mind you, G8 summits usually do not lead to much in terms of tangible outcomes. For some reason, participating heads of state forget their vows for world peace and development when they board the plane home. But they can put an issue on the political map. ‘Making poverty history’, triggering an world-wide epidemic of colored wristbands, resulted from the 2005 Gleneagles gathering.
Two conclusions follow from this. The first is that Berlusconi is utterly incapable of running international meetings – in the same way that he has been incapable of running his own country. Before Silvio made his reappearance in 2001, Italy had become, for the first time in its somewhat chequered post-war history, a well-adjusted political economy: wages and inflation were stable, companies were moving up-market, and the political system had managed to reinvent itself by kicking out the old, often corrupt, parties. When Silvio took office again, he tried to destroy each of these cornerstones of contemporary Italy. And succeeded, it seems: GDP growth has fallen dramatically over the last ten years, inflation and unemployment are rising, and Italy’s GDP per capita is now below Spain’s. No wonder Silvio is looking for admiration elsewhere.
The second conclusion is that Obama is now, again, after the G20 in April, the leading voice in Europe. As it happens, I think that’s probably better than Europe can do on its own; but it is a surprising solution to the Kissinger problem (‘Who do I call if I want to talk to Europe?’). and it lays bare, again, the massive leadership problem in Europe.
PS. Thanks to Sarah Pilkington for coming out last week: I had no idea whose banner Bruce and Stevie carried on-stage in Hyde Park. Now I do. Great idea too, by the way; that’s why I borrowed it.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Last night (Sunday 28 June) I was pleasantly reminded of one of the things that Europe and the US, despite all the differences they may have, actually share: I had the good fortune to see Bruce Springsteen’s concert in London. A hot, humid summer night, possibly the best rock band in the world, and 70,000 people in an open air venue in London’s largest park who had come for a good night out.
I won’t go over the gig -- the London papers will and they can almost certainly do a concert review better than I can. Suffice to say that it was what you’d expect from the hardest-working rocker in the world, and that it had a surprisingly democratic tone to it: at some point, Bruce collected signs with song titles from the audience, changed the set on stage, and thus gave us half-forgotten classics which may not have found their way into the evening otherwise.
I have been a Springsteen fan since very early on. One of the things that I have admired from the first day was his ability to mix beautiful if somewhat naïve love songs with songs about the primarily economic problems of real people in a world that is not always fair to them. Many of his songs, both the older and the more recent ones, talk about shattered dreams; think about the outcasts and misfits in the 1982 Nebraska album, the decline in America’s former industrial heartland in the 1996 song ‘Youngstown’, or even the B-movie characters in his very early work who are operating in the margins of society (the Magic Rat in ‘Jungleland‘). And on such albums as The Rising or Magic, his comments on real-world events made us, or at least should have made us, think again -- not because the media don’t do a good job at that (‘Discuss.’), but because the people who have lost their partners and children on September 11 were given a voice in his sometimes very personal and heartfelt implicit storylines that might otherwise have disappeared in the geopolitical post-9/11 maelstrom.
If the concert as a whole was a healthy reminder of the fact that many Europeans are as impressed with Springsteen as much of middle America, one section in the three-hour set one-upped that. For about 20 minutes we were given songs about the economic crisis, the causes (‘the bank manager had taken my house away’), the effects (‘Youngstown‘), and the hopes that hard times won’t ever come back again. Most of these colorful vignettes on economic life ring as true in a country like the UK, with a social safety net that is, by US standards, very generous, as they would do in the hard-stricken regions in the US. And the family tragedies that Springsteen evokes in his songs have their counterpart in many European countries today.
This was not an angry concert, though, very much unlike one I saw a few years ago, when Springsteen had a hard time containing his frustration with the Bush administration. Here is a guy with, as far as I am concerned, both his heart and his guitar in the right place, enjoying himself tremendously, pulling all 70,000 fans (surely, by now) along -- and allowing us to rediscover common ground while it happened. For three hours on Sunday the world looked OK again.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Le Monde for this weekend of the 21st June, which I was reading over breakfast this morning had, probably inadvertently, printed two articles on France side by side which captured a dilemma that most of Europe faces in some form or other. One page discussed the changing nature of lives and careers in our post-industrial age and its implications for the welfare state, especially retirement. There are too few French (read: Europeans) of working age to cover social security payments, whilst mid-career breaks and late-career part-time work and retirement are now becoming more standard than they ever were. Population matters: the rule of thumb for sustainable growth rates is that they are, in the long run, constituted of population growth (demand) plus productivity growth (supply). If one falls too much, the other has to compensate.
The article on the other side of the spread covered an initiative by insistently secular members of the French parliament to prohibit the full and semi-full dress for Islamic women, the burqa and the niqa, in official jobs, and even in public places. The Republic, so the initiators, is a secular place, and overly public expressions of religion have no place there. Coming from center-Right and center-Left, the idea of the senators and members of the Assemblée is to set up a commission to examine under which conditions these women wear these clothes.
Leaving aside the utter silliness of trying to regulate clothing, which is, unfortunately, not limited to France, when read together these two articles expose a critical problem for Europe. Europeans no longer make children as they used to. In both Western and Central Europe, the number of children per woman has now fallen way below two, the level at which an entire generation reproduces itself. France is, in fact, not even the most dramatic instance of this. After the collapse of communism in Central Europe, women seem to have gone on a ‘fertility strike’, with less than one child per woman in many of these new European democracies. Demographers have pointed to many possible factors for explaining this: longer schooling, more women at work, motherhood later in life, men who are not very willing to commit to fatherhood before their mid-thirties, etc. One easily identifiable group, though, still has many children: immigrants, especially those from poorer countries. Among some immigrant groups, especially those with Muslim social and religious backgrounds, families with four and five children are still very common.
Hence the dilemma: Europe needs more children. Native Europeans may no longer produce them at a high enough rate, but other inhabitants of the continent do. Those, however, are often treated with an intolerance, usually based on a deeply misleading reading of where they came from and what they are or were doing in Europe, that turns them from new quasi-citizens into less than semi-citizens. They primarily seem to have become fodder for far-Right politicians who have discovered this new social cleavage and are maximizing their votes by concentrating their actions there. The ideas (well, ideas…) proposed by some of these people warrant, as far as I’m concerned, a publicly-paid trip to some of the well-preserved extermination camps in Central Europe to remind them of where ethnically-informed stupidity has ended in the past. But there is, in all fairness, also a genuine concern among some of them that the tolerant, liberal lifestyle they grew up with might be a thing of the past soon if conservative Muslims have their way. That explains the relative success of far-Right parties in such places as Denmark and the Netherlands. And, this was the relevance of Le Monde this morning – now also in France.
Politically rewarding as they may be, culture wars are a bad idea. They threaten to open up loads of complicated normative questions about who ‘really’ belongs where in Europe, which issues are ‘normal’ in Europe, and what being European is all about. But they do not resolve the European demographic problem. Perhaps that was the biggest contribution of Le Monde: not many people may have made the connection above (the social security piece was remarkably silent on fertility rates, and very ‘white’ in its understanding of the problem), but it was there for those willing to see it. If Europe wants to resolve its demographics, it may well have to start thinking a little more carefully about how it treats its migrants, and how to give them a space in society from where they can become citizens.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Something strange is happening in the European economy. Those countries that, on the whole, did the right thing over the last ten to fifteen years by sorting out their domestic economies, and produce competitive exports goods, are staring into a dark tunnel, while the country that built its growth on debt and speculation – the UK – may be coming out of the recession. Germany’s 2009 drop in GDP is going to be the highest on the continent (leaving aside the Baltics and a few other semi-suicidal Central European economies); the UK government, meanwhile, is increasingly looking right in its forecasts of positive growth in 2010.
It’s too early to tell if this is actually going to happen. I am not very impressed by the pervasive talk of ‘green shoots’ in the economy, and it is not entirely clear what exactly medium-term growth in the UK would be based on. The recovery has been primarily based on government-financed macro-economic policy and a massive devaluation in sterling, not on a resurgent vibrant economy. My fear is that while the UK is doing the right thing in the short run, its problems lie in the long-run adjustment of the economy. I don’t quite see how the industries where the UK was strongest internationally – first and foremost the financial sector, of course – are offering a viable long-term economic strategy, and I am equally sceptical about the ability of the UK to rediscover its old industrial roots and start churning out sophisticated complex engineering goods. And the high levels of public and private debt will curtail any ambitions about public or private investment for many years to come.
If I am right about this, the UK is in for a protracted period of low growth, punctuated by mild recessions – exactly what made Japan lose almost two decades. Think of the curve over time as a slow decline, followed by a long period of stagnation at a relatively low level, with small annual blips above and below this trend line, playing out over at least ten years – or longer, if that’s what it takes to restore financial balances and build competitive export sectors.
Germany faces a very different predicament. It has been overly reliant on exports for growth, and with global demand slumping, that creates its own problems. In addition, its fiscal policy is too little (and often too late), so relief from that corner is going to be minor. And because Germany is directly or indirectly the main trading partner of all other places in Europe, a slump in Germany rapidly reproduces itself over the entire continent. The upshot: German companies adjust by becoming more competitive, while the macro-economy keeps on sagging. But that, too, looks like Japan in the 1990s: a morose economy with a highly competitive export sector, but which discovers that you cannot compete your way out of a serious recession.
It might all not be as bad as this: the UK may well be turning the corner, slowly, and north-west Europe, including Germany, may go through a short, sharp V-like recession, and start picking up again, on the UK’s and the US’ coattails by late 2010. But if it is, the textbooks on economic policy-making will have to be rewritten: what we thought we learned from the Japanese experience over the last twenty years should take a far more central place than it has up until now.
by Bob Hancké, Political Economist at the London School of Economics and Political Science
Yesterday and last week, several hundred million voters across Europe voted for the European Parliament – the EP, the institution which, on paper, monitors the European executive. What with the recession, and the many countries where center-Right parties are in office, these should have been a moment for the center-Left to shine. My colleague Simon Hix modelled the elections and concluded that center-Right and center-Left would more or less hold each other in balance in the new parliament.
What happened instead was the total déconfiture of the center-Left: the German Social-Democratic Party, the Austrian Social-Democratic Party and the Labour party in the UK marked their worst results since the Second World War, Spain’s Zapatero was severely kicked by the electorate, and the overall number of center-Left MEPs is now about 100 below the center-Right. (The BBC report can be found here.)
Such dramatic shifts are generally unheard of in Europe, where electoral systems (including the one used in these elections) almost seem organized to minimize massive vote transfers. The lowest turnout ever in EP elections may explain the rise of far-Right (and in France and Germany far-Left) parties across Europe, but not why the voter disenchantment is concentrated at the center-Left. In the UK, for example, the Conservatives and the anti-EU UK Independence Party did much better than but generally not at the expense of Labour: nationally neither of these parties polled much above their 2004 level.
These are early days to assess what’s going on, of course, but what we might be witnessing here is the electoral bankruptcy of old social-democratic thinking in Europe. For too long, the center-Left has tried to be a center-Right ‘light’, organizing capitalism with a human face (I wrote about this here a few weeks ago); and when it did not do that, the Left’s knee-jerk reaction was to go back to old Marxist-inspired schemes. It is surprising to observe just how little the European Left has to say about the economy in tatters (largely as a result of a deep misunderstanding by the center-Right of how economies actually operate), and it has managed to produce a massive political deficit vis-à-vis its voters because of uninspired responses to non-EU immigration and the subsequent culture wars. The center-Left’s traditional social basis, being more exposed to the vagaries of the economy and the competition and uncertainties associated with immigration, turned away to the populist far-Right.
Indeed, far-Right parties with a racist, anti-Muslim and anti-Roma (in Central Europe) platform are the biggest winners in these elections. Places as far apart as the UK, Hungary, the Netherlands and Austria, saw far-Right parties polling at their best level ever, often hitting the 10 or 15% mark. And in some places the far-Left also did rather well: in France and Germany they took six and eight MEPs. Since the far-Left won them in countries with many seats, it is actually even larger in the new EP than the far-Right.
The center-Right is the only group that hung in during these elections, regardless of them holding office or not. But it did so at a price, since it is now split between the centrist parties that support a politically more integrated Europe, and those who see it primarily as a free-trade zone.
European elections are traditionally not good predictors of general elections: turnout is lower, they are run according to an electoral system that is often different from the national one, and the issues are frequently not entirely clear (what is ‘Europe’ to an average citizen?). But these results suggest that something is afoot that many of us have misunderstood for a long time. The collapse of the center-Left, the rise of revolutionary socialist Left and racist parties on the Right, and the European schism within the center-Right suggest that European politics may be moving in a strange direction, simultaneously associated with an abandoned working class during a crisis, increasing social insecurity, and fierce nationalism – not a new combination in European history…
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