I’m sure many of you have done political quizzes online to justify your political allegiances. Every so often, I do one just to check where I stand. I know my beliefs haven’t really changed over the years, but parties do modify and fine-tune their positions. It doesn’t matter how many times I’ve done it, even during the Brexit years, each time the Lib Dems came top.
I’ll let you into a secret – over the years some would consider me a political flip-flopper (I’m using a slightly more polite expression than some may) in the parties I have been active in. I joined the Labour party when I was 16 in the early ’80s. As a member of a tribally Labour family in a coal mining area of South Yorkshire, what else could I do? I was an active member of the party for about 25 years. I joined a regional party six years ago because of my belief in subsidiarity (something I am still passionate about) and under this banner stood for election for the first time and became their first elected councillor. I then ultimately gave in to what the runes were telling me and were a member of the Liberal Democrats until nearly three years ago.
For me, Brexit was the issue which split me from the party. I wrote a piece on LibDem Voice three years ago asking whether there was room for pro-Brexit liberals in the party. I ultimately decided that at that point, despite their many other excellent policies and stances, Brexit had swamped everything else and the Lib Dems had effectively become a single-issue party – an issue I was on the opposite side of the argument to, and I left the party. Funnily enough, I continued to vote Liberal Democrat in every election there was a Lib-Dem candidate (apart from the 2019 Euro’s when I voted for the regional party) despite their Brexit position.
Brexit, I think, is over now. Yes, we still need to negotiate our future relationship with the EU, but now is the time for those issues that have withered under the dark canopy of Brexit for the last few years to come back into focus (once we are through the Corona Virus crisis). Matters which are massively important to the future of our country. Issues I stopped trusting the Labour party to deliver on many years ago. Issues I have never (and still don’t) trust the Conservatives to deliver on. Matters that smaller, regional parties positions on, particularly with our current electoral system, are ignored. I no longer want to be shouting from the side like a demented wallflower. In essence, I want to play an active role in improving the future of my community and my country and to do that I return to the beliefs I have held all my life. Today I have re-joined the Liberal Democrats because, post-Brexit, it is the only party that has the solutions our country needs and I want to play an active part in shaping its future.
* Wayne Chadburn is a member of the Liberal Democrats and Penistone Town Council
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73 Comments
I share some of your views having favoured Brexit since the day we joined the Common Market. I try to remain part of this community as I try to Judge whether the Lib Dem Party is something I could support now on in the future.
Brexit is as ‘over’ as CoVid-19 and both will have damaging repercussions that will hit the poor the hardest. The imperative will be to remain in the Single Market and Customs Union. A Norway type arrangement, it will have to be until Brexit is over turned.
I do not think anyone can expect the Party to give up on its core values (as outlined in its constitution).
Welcome back Wayne.
Peter
Norway is not in the Customs Union.
I (not Peter) wrote’Norway type’, not exactly Norway , because in any case that would not be available. Norway is the principal EFTA state, I doubt it wants to be dominated by an unstable, fractious UK. Norway has no need for anything like the Good Friday Agreement with Sweden or Finland, but not being in the Customs Union, goods crossing the border are subject to checks.
So far as Brexit is concerned we seem to be in a phoney negotiations period. There will be nothing to agree on at the end of the Summer; the later it goes on the more the UK will have to accept a set menu provided by the European Council.
What seems to be unspoken at the moment is that for the foreseeable future we aren’t going to be having free movement and large scale migration on anything like 2010s levels. If you think the politics of free movement were difficult in the past you have not seen anything yet. Even if we have airlines (which is doubtful) quarantines are going to be routine in and out. Germany has indicated that all EU nationals will be subject to the quarantine of 14 days. I’d surprised if others don’t follow – the public health provisions to inhibit free movement are plainly applicable here and will be for years. The EU institutions are about to discover that the four freedoms are very much divisible.
The world is likely about to deglobalize. Greater levels of national self sufficiency is about to be very much in vogue. The EU itself will need to think long and hard about its direction in a world where the open agenda is not king. All the principles underlying the single currency are now gone.
One straightforward option for the UK may be to accept the deal.
Why is it the Lib Dems are so behind the curve? Always seems to be that way now.
Unless they embrace the new paradigm shift they’re going to drop in the polls.
1. Migration. With growing unemployment will be a big issue. The question they have to answer is `why should someone from overseas trump the aspirational economic opportunities of a Brit?`
2. China. Linked to migration there is no doubt about it. There will be harsh demands on current political hopefuls. China HAS TO PAY for its shortcomings. No ifs or buts.
So what are the Lib Dems going to say? Cutting links? Re-onshoring industries? Seizure of CCP assets in the UK? Changing manufacturing base to a democracy? Changing import quotas with a sliding scale of need and security of the exporting country?
3. Unemployment. How will the Lib Dems change the welfare system to get people into jobs, shake up the DWP and the civil service?
4. Environment. `Tackling climate change` will become a toxic idea. People will embrace some of the new `nature` that the crisis has engendered. XR is a dead duck. Who wants more of the same house arrest – of course not for the Greens who will find ways of subverting the system to become the new elites.
Answer in a zoom room – or perhaps looking at the Chinese connections – perhaps not.
“So far as Brexit is concerned we seem to be in a phoney negotiations period. There will be nothing to agree on at the end of the Summer; the later it goes on the more the UK will have to accept a set menu provided by the European Council.”
We wont be accepting anything. We are coming out, with a deal or not. This administration will not take a ‘set menu’ offer. I also strongly suspect we wont be delaying it.
Martin
‘UK will have to accept a set menu’
Not going to happen & the EU leverage (unlike the withdrawal agreement) is much weaker. Easy to have a unified front when money & EU citizens jobs are involved, what’s not to like?
Already a lot of noise this week from head of German auto industry about 50 billion trade at risk. EU used to negotiating with countries for closer arrangements not more distant ones has thrown a spanner in the works.
@ Martin,
“Brexit is as ‘over’ as CoVid-19 and both will have damaging repercussions that will hit the poor the hardest. The imperative will be to remain in the Single Market and Customs Union.”
It could well be that it’s the EU, the euro, the single market and the customs union, which is over!
The Freedom of Movement issue isn’t a big problem on its own. It will naturally sort itself out as restrictions are lifted when infection and death rates fall. The big question, to which there is only one answer, is who is going to pay for the months of shutdown to EU economies. This won’t just sort itself out. The tab, which will be hundreds of billions of euros, will there on the plate long afterwards. There have been suggestions it should be picked up by China! That’s just wishful thinking. It isn’t going to happen.
What is obvious is that it can’t be picked up by Italy, Spain, Greece and France. As these economies slump their government deficits will skyrocket due to a combination of reduced income and the need for higher spending to maintain the incomes of laid off workers and struggling businesses. The usual suggestion is that the ECB issues “Coronabonds” to help everyone out. The USA and the UK face essentially the same problems as the EU but there’s no need for us or the Americans to issue similar bonds because we are both in control of our own currencies. However you look at it, the bill in the both will effectively be picked up by the richer areas. That means California will be paying for Carolina. London will be paying for Londonderry. No one really cares because we do have that sense of unity which is lacking in the EU.
The Germans, the Dutch, the Austrians, the Finns etc do care. They know that the proceeds of the coronabonds will be mainly spent in Italy and Spain but when they have to be redeemed they’ll be responsible for doing the redeeming! It’s just a reflection of what has to happen in any common currency zone. The problem is much too large to be resolved by a typical EU fudge. But unless it is resolved it really is the end of the European project.
https://www.theguardian.com/business/2020/mar/29/the-coronavirus-crisis-has-brought-the-eus-failings-into-sharp-relief
Welcome back Wayne. Despite us having left the EU the majority of comments above are still about Brexit. Last summer I wrote an article for LDV suggesting some of the policies the Party should be developing to deal with a post-Brexit UK, but it wasn’t published. We desperately need to be doing that in order to attract back some of our lost support, and – let’s be honest – to ensure that there is some point to our existence as a Party. (And please don’t start on about electoral reform).
“Pro-Brexit Liberals” should feel welcome in the party, because we are more than a single-issue party and we welcome a diversity of thought (so long as you agree with, and uphold, the constitution). Lots of members disagree with the party on a range of issues, me included.
Don’t expect the party to change it’s tune on Europe any time soon though – most Liberals consider the pro-European position to be the only rational Liberal position (me included) and tactically it would be foolish to abandon the first thing we’ve gotten the public to associate us with (since tuition fees I guess).
Of course Germans etc. fear inflation due to their pre-war history but in other countries in the 30s deflation was the big problem and we are obviously at that point at the moment. I suspect that the Eurozone and EU countries (and of course these are different things) will argue but sort it out with a big Marshall type plan which Germans also remember as rebuilding their country after the ravages of war so after the ravages of coronavirus…. and it will be paid for by big borrowing in the short term
I hope that we will stay a re-join party as we have been for 60 years! While the other two parties have see-sawed this way and that (If not i and I am sure many might be tempted to join a Starmer led Labour party). There is and should always be a place for pro-brexit liberals in the Lib Dems. And I have a long list of issues I disagree with the party over! But ultimately it is the party I am most in tune with and it may not always get it right but free of the more than occasional viciousness of the comrades or the cold-heartedness of the Tories.
We should at the very least argue for a year’s delay to the current transition. I think every ardent Brexiteer has argued that (complete) leaving will be a shock to the economy in the very short term but worth it in their opinion in the longer term and I would just slightly venture that another shock is not what we need at the moment.
On globalisation, coronavirus cuts both ways, the problem may have been global but so is the solution.
And here was I, currently a member of no party – and I intending to remain so at present (as I’m still not sure whether I have much of a future or not) – actually wishing we COULD go back to arguing about Brexit, given what we’ve experienced in the past few Winter months.
Well, it’s spring, in more senses than one, and, after a month or so stressing about the problems of isolation, herd immunity, authoritarian state control etc, the green shoots of Brexit appear, once again, to be re emerging. Some people are just like a dog with a bone. Come on, folks, what is there new to say about it? Haven’t we covered every base over the past few years? Or is it for some of us really Groundhog Day?
I admire your collective chutzpah; but, at present, my wife and I are concentrating on, as the Bee Gees sang, “Staying Alive”, and that applies to our family and friends as well. I suppose that some may argue that means that my professed ‘liberalism’ is barely skin deep. If so, I must have been in the wrong party/parties for over forty years. Just guess where I might have got if I had stood as a Tory, especially around here in Lincolnshire! I might actually have ended up on the green benches instead of spending thirty years in various local council chambers!
Oh, I forgot. Well done, Mr Chadburn, for having the courage of your convictions.
Now hang on a minute. While we must welcome Wayne in the latest stage of his shuttling between Labour and the Lib Dems he (and some of the posters in this thread) need to remind themselves that we Lib Dems have principles laid down in our constitution. How about this passage – “Our responsibility for justice and liberty cannot be confined by national boundaries; we are committed to fight poverty, oppression, hunger, ignorance, disease and aggression wherever they occur and to promote the free movement of ideas, people, goods and services. Setting aside national sovereignty when necessary, we will work with other countries towards an equitable and peaceful international order and a durable system of common security. Within the European Community we affirm the values of federalism and integration and work for unity based on these principles. We will contribute to the process of peace and disarmament, the elimination of world poverty and the collective safeguarding of democracy by playing a full and constructive role in international organisations which share similar aims and objectives.”
Is it really suggested that with the UK (at least for the foreseeable future) outside the European Union these principles will be torn up? Of course this dreadful world health crisis will lead – is already leading – to a powerful argument for withdrawal from internationalism and hunkering down behind national boundaries. However there must be no doubt as to which side of that argument we are on. Please bear that closely in mind, Wayne, as you come back into our fold.
Denis Loretto 9th 9.09am I agree with you that we are a party of internationalism and free trade. However I think you making the mistake of assuming that can only be done through the EU; which is not the case. As other commentators above have pointed out many of us disagree with some Party policy or other. I also think you and other ardently pro EU members are also making the mistake of trying to elevate being pro EU as a test of orthodoxy which I think is misconceived and will do more harm than good.
If you want to quote from the Peamble to the Federal Constitution how about this:
“We believe that sovereignty rests with the people and that authority in a democracy derives from the people. We therefore acknowledge their right to determine the form of government best suited to their needs and commit ourselves to the promotion of a democratic federal framework within which as much power as feasible is exercised by the nations and regions of the United Kingdom.”
In the 2016 Referendum our Country voted by a clear, if narrow, majority to leave the EU. That is a determination of the form of government best suit to their needs and under our Party’s constitution we should all respect that.
Agree with Peter Martin regarding the EU.
They created the Euro in the hubris of the good times with no structural mechanisms to deal jointly with the bad times. Consequently there are no good options for the finances of the EU, and one way or another the financial trauma will be fatal to the project.
One option which is not a good option, but maybe one of the least worst options might be the creation of a second Euro.
Germans, Dutch, Austrians, the Finns could create and adopt a Nordic Euro, and abandon the present Euro to be used by southern countries as a Mediterranean Euro
I haven’t a clue what the exchange rate would be between the NordEuro and the MedEuro, * save to say that the MedEuro would fall in value to a place where southern debt could potentially be more manageable not just by the south, but also from some element of NordEuro subsidy.
Also our Brexit payoff of £39 billion would of course be made in MedEuros?
For Germany and their Nordic cousins who enjoyed two decades of a suppressed value Euro, the adoption of a NordEuro whoud be a severe shock to their economies, but not as bad as being permanently on the hook for southern debt into eternity. Even if this option were to work out, it spells the end of the EU project, and any suggestion of the UK (or an independent Scotland), rejoining the EU would bring the question ‘Which one. ..The rich one or the poor one?’
* Best guess on the exchange rate between NordEuro and MedEuro would probably be on the same index as between the Spanish peseta and the German mark as was.
@ Denis Loretto “Now hang on a minute”.
A clear statement of the Constitution, Denis. But it begs the question of whether the party when in power applied the principles in practice – or whether the individuals who left the party had a better notion of what it meant in practice.
Did fighting poverty include the Welfare ‘Reform’ Ac, the Bedroom Tax and slashing funding for social care in local government by a third ? Did Ms Swinson’s unhesitating and unreflecting ‘Yes’ to pressing the button ‘contribute to the process of peace and disarmament’ …. or climate change for that matter ?
Principles and practice have to be matched by competence and credibility….. and it remains to be seen whether this can be found elsewhere.
“Is it really suggested that with the UK (at least for the foreseeable future) outside the European Union these principles will be torn up? ”
Stick ‘European Community’ in lower case and everything in that bit of the preamble remains equally valid. Arguably the UK has more flexibility & freedom to pursue those ideals outwith the EU (albeit with less clout as a single country rather than leading the charge within a bloc).
Peter Martin
It could well be over for the EU, three crises in the past 10 years & three complete shambles. Plus the crippling of Greece.
My wife’s relative works on the front line in a hospital in Toulon & phoned us three weeks ago asking if we could send her face masks from UK. The EU tender for ventilators (Brexit or breathe – remember that one) is just about to be signed & they have been told that they should get some additional ventilators in July / August.
France currently has 8,000 ventilators.
The report in L’Express last week of Macron hijacking two face mask orders for Italy & Spain made at the Molnlyke (Swedish) plant in France ,which required the direct intervention by the Swedish government.
@ Michael 1,
“Of course Germans etc. fear inflation due to their pre-war history but in other countries in the 30s deflation was the big problem……”
It was the problem in Germany too. The Weimar hyperinflation occurred mainly between 1921 and 1923. It was over by the mid 20s. In 1928 German elections the Nazi Party received just 2% of the votes cast. Not much different from what the far right used to poll here at one time. This shows that it wasn’t the inflation problem that directly led to their rise. That came about in the 30s as deflation and depression created 30% unemployment levels.
@ Dilettante Eye,
“Germans, Dutch, Austrians, the Finns could create and adopt a Nordic Euro….”
I don’t think this would solve anything. The Finns and Austrians just about manage with the present euro but they’d struggle with a much higher valued euro. That would leave the Dutch and the Germans. They’d probably be OK for a while but sooner or later there would be a dispute that one was subsidising the other by the latter being fiscally more profligate. Sharing a currency is rather like sharing a bank account. It’s rare for there to be no financial disagreements when that happens. The are only two solutions. All EU countries go back to their own floating currencies. The EU forms a single country with a single government, single taxation system etc. The EU PTB just need to look at how the USA works and copy them.
I cannot see anything in my post that said the Lib Dems could only work internationally through the EU. I specifically acknowledged that we had left the EU – albeit adding “for the foreseeable future” because none of us can predict what will happen in the very long term.
Dan M-B has it right in interpreting European Community in lower case in the circumstances that now prevail. The motivation for my cri de coeur was the suggestion in some previous posts that we might embrace the trend towards the national hunkering down that is very much in the air right now.
Where does Wayne Chadburn stand on this?
The debate about the EU is interesting. The current crisis has shown the concept of a multi-member European state to be a fantasy. The currency will fail if members like Italy remain and the project will probably fail if they leave. The central bank cannot save them. It would require a collective bail out by all of the members but many are determined that this is not going to happen.
The uncontrolled influx of migrants and now the virus have demonstrated that freedom of movement is not tolerated by member states when it brings problems. This is not a criticism, it was a contributing factor in Brexit.
When one strips away the thin veneer of foreign policy and defence, the only aspect of EU federal influence which is strong is regulation. The EU excels at this, the regulations cover almost all aspects of life and are defined in great detail.
As one steps back to see the entire project in perspective, the EU success boils down to domination by bureaucracy, but at great cost. (At least to some participants.) I suspect that the project faces a significant re-think by member states once Covid-19 is over.
OK, I didn’t mention trade, but that was alleged to be the whole purpose of the Common Market which we joined in good faith all these years ago.
Much of the stuff here is a decade old mish mash of mindless prognostications and fantasy about the EU masquerading as debate.
p.s. the EU/Euro (take your pick) will still be there by Christmas (Which? – Take your pick – any from 2010 onwards)
Martin
‘mish mash of mindless prognostications and fantasy about the EU masquerading as debate.
Does that pass for debate or indeed comment?
@Martin, The response of the EU to the virus may not be of interest to you, but it is certainly of interest to all the members. By that, I mean those demanding financial help, those determined to avoid providing financial help and those in transition who may get landed with providing financial help.
John Marriott,
“wishing we COULD go back to arguing about Brexit, given what we’ve experienced in the past few Winter months.” We didn’t realise that our Brexit bust-up was to be the tranquil times. Even at the end of January this year as the epidemic was raging in Wuhan the Daily Mirror was warning “The government is reportedly examining the possibility of martial law if food and medical shortages spark civil disobedience and rioting following a no-deal Brexit.” https://www.mirror.co.uk/news/uk-news/curfews-property-confiscations-life-martial-13917958
One source, obviously oblivious to what was headed our way, warned: “There is nothing that can replicate the scale of chaos threatened by a no-deal Brexit, which will be about a thousand times worse than the volcanic ash cloud crisis.”
“The only thing that would be comparable would be something like a major Europe-wide war.”
The warnings over Martial Law could yet come to pass if this virus brings about anarchy. Somehing the British Isles has not experienced since the 1916 Easter rising in Ireland, Just to cheer us all up he reporter writes;
“Military checkpoints and road blocks would control our movements.
It would mean civilians would be obliged to carry ID documents to prove who they are as they go about their daily lives.
Martial law would ban the assembly of people “of specified kinds, at specified places or at specified times”.
Emergency laws would ban protests and the assembly of people. Soldiers would be given powers to order people to disperse, or face arrest and imprisonment without trial.
Military-enforced curfews could be declared banning people from moving out of designated areas or even leaving their homes during certain times.
That may mean schools, shops and businesses could be forced to shut and if a curfew is declared during the day.
A night-time curfew could mean streets become deserted after a certain time, apart from soldiers who would arrest on the stop anyone caught defying the order.
Anyone caught encouraging or taking part in civil disobedience, disobeying or obstructing instructions would be immediately detained and hauled before a special court or tribunal.
With human rights suspended during Martial Law, troops would be able to arrest you simply for finding you suspicious or threatening.
Government could prevent the press from reporting something which spread anger or panic among the population.”
@Joseph, This all goes to show what a rubbish comic the Mirror is.
Peter,
the indications are that the EU will rally around to support member states in need. Finance chiefs have agreed a 540 billion Euro rescue package on top of the ECB bond buying program https://www.bloomberg.com/news/articles/2020-04-09/eu-finance-chiefs-agree-on-590-billion-virus-rescue-package The package includes a joint employment insurance fund worth 100 billion euros, a European Investment Bank instrument intended to supply 200 billion euros of liquidity to companies, as well as credit lines of up to 240 billion euros from the European Stability Mechanism — the euro area’s bailout fund — to backstop states economic support programs.
They also agreed to work on a temporary fund that would help kick-start the recovery and support the hardest-hit countries.
@ Joseph,
The problem will be, as it always is with the EU, in the detail of the ” 540 billion Euro rescue package”. There doesn’t seem to be any progress on joint responsibility in the issuing of bonds. The so-called coronabonds. These aren’t the ideal solution but they would at least be step in the right direction. The EU is still trying to maintain the pretence that loans can be given to countries in need of assistance which will later be repaid. They won’t be repaid for the simple reason they can’t be.
On the one hand Germany and the Netherlands insist on running very high trade surpluses which causes them to acquire many more euros than they need, or know what to do with, but when they are asked to lend them back to countries who are in need of them they want to impose austerity conditions which won’t help anyone at all.
The EU as whole, and Germany and the Netherlands in particular, have to understand just how a common currency can and cannot work. They should forget about loans and move towards a direct system of fiscal transfers. Just as happens in all other single currency areas.
Somehow this thread has morphed into a diatribe from the usual suspects about the EU. Is it not ironic that those who most accused the EU of governing our lives are now attacking it for failing to do so? It is no longer enough for those who merely wanted the UK to float free from what they previously saw as the iron grip of Brussels. They now want the EU as a whole to crash and burn. I expect and certainly hope that the EU will rise to the occasion – today there are signs of that starting to happen. I think I speak for most Liberal Democrats in firmly opposing those who are trying to dance prematurely on the grave of what is still a great and admirable institution.
@ Denis Loretto,
“Somehow this thread has morphed into a diatribe from the usual suspects…….”
A “diatribe” is a “bitter, abusive denunciation”. Can you supply an example?
The title of the OP includes the word “Brexit” so a discussion of the EU can hardly be considered off-topic. Even though we are now out of the EU it doesn’t make any sense for anyone ” to want the EU as a whole to crash and burn.” The EU is going to be a major trading partner for as long as it exists. Not that we can make that happen anyway. If it does crash and burn it will be entirely self inflicted.
There’s plenty of free advice from well respected economists around the world about what the EU needs to do to end its dysfunctionality. All we can do is urge it to change its ways.
My post was written in the spirit of me realising that the Lib Dems is the party which, holistically, matches my beliefs. The sad thing for me and what I think the party really does need to address going forward, is that, based on the comments, the party hasn’t moved on from Brexit.
I may have misunderstood Denis Loretto’s points in his comments and if I have I apologise and withdraw what I am about to say but it sounded like the same old tired label attached to those of us who voted for Brexit that we are narrow nationalists. For me and many others that couldn’t be further from the truth. I’m an avowed internationalist and this was one of the reasons I voted for Brexit – but there I go falling into the same old trap that many others in the comment feed have done, Brexit still dominates.
The party went into to the December 2019 election with some excellent policies but only one really came through to those who are not avid politico’s and that was effectively the Lib Dems wanted to cancel Brexit and ignore the 2016 referendum. I thought that was a massive mistake then and the comments here make me wonder whether the party is learning from this. Despite being the only out and out avidly anti-Brexit party it won only 11 seats and 12% of the national vote. The decision ultimately to leave the EU has been made now and nothing will change for a generation until the effects of Brexit are seen. It may work out to be the best thing the UK has done (I hope so) or an unmitigated disaster (I’m not so arrogant to dismiss this as a possible outcome – however distant) but the conclusion to this will not be seen for many years. The Lib Dems need to keep an eye on the ultimate exit path yes, but the party needs to move beyond this and most importantly be seen to do this. It has to highlight and further develop the excellent positions the party has on issues that are going to become massive once we have defeated the Corona Virus – education, social care, NHS, mental health, devolution, transport etc. Until the party takes active steps to move beyond Brexit it will struggle to get beyond 11 or 12 seats and 12% in the polls in parliamentary elections and as I said in my post, I don’t want to be shouting from the sidelines like a demented wallflower any more – that is why I’ve re-joined.
Peter Martin,
the Netherlands is a small country in comparison with its Southern EU neighbours. However, Rotterdam is by far the biggest port in Europe and Amsterdam is one of the biggest airports in Europe. Ireland is even smaller and has reported astronomical growth in GDP and large current account surpluses. Like the Netherlands, however, these figures are distorted by the retained earnings of firms (e.g. domiciled there for tax reasons) that are predominantly owned by foreign portfolio investors and held in-country and not deployed in combination with domestic labour but in combination with overseas workers through contract manufacturing arrangements.
The Rotterdam effect distorts trade figures in the Netherlands https://www.coface.com/News-Publications/News/Netherlands-What-is-the-secret-of-Dutch-trade Many goods transit via the Netherlands. The “re-export” of these goods is an integral part of the Dutch trade balance sheet. Even though the value-added of these exports is very low, their volume has a major impact on trade statistics.
We would not expect the Republic of Ireland to be able to support the UK economy even if it was still tied to sterling. So too, the much larger populations of Italy and Spain cannot reasonably rely on the Netherlands as a backstop. They will need to address their own structural issues to reduce over-reliance on imported consumer products and further develop a comparative advantage to improve their terms of trade.
In the United States, each state is a micro-economy. States are mandated to run balanced budgets and issue their own public binds rather than calling on Federal government finance. California is among the wealthier of states with an economy the size of the UK, and among the highest rates of state taxation in the US, but perennially struggles to meet its state spending commitments. There is no direct system of fiscal transfers between states. Each state manages its own budget and has to lobby for federal investment, so-called ‘pork barrel projects’. This is why poorer states like Mississippi and Arkansas have a fraction of the household income of the much wealthier New England states.
Thank you, Peter Martin, for recognising the importance of the EU as a trading partner. Unlike your namesake Peter who evidently thinks trading with the EU is of no benefit whatsoever. He wins the little challenge you set me of justifying my reference to “diatribe”. How about this – “When one strips away the thin veneer of foreign policy and defence, the only aspect of EU federal influence which is strong is regulation. The EU excels at this, the regulations cover almost all aspects of life and are defined in great detail. As one steps back to see the entire project in perspective, the EU success boils down to domination by bureaucracy, but at great cost. (At least to some participants.)”
If diatribe is deemed a hurtful epithet how about balderdash?
Wayne, I find much to agree with in your latest post but am slightly concerned that your list of topics the Lib Dems should now concentrate on do not include internationalism of some sort. I am puzzled as to why I am being tagged as some sort of remoaner. I could not have been clearer in acknowledging that the UK has left the EU and you may well be right in saying nothing will change in that respect for a generation. I was motivated by the tone of some of the posters on this thread to say “Is it really suggested that with the UK (at least for the foreseeable future) outside the European Union these [internationalist] principles will be torn up? Of course this dreadful world health crisis will lead – is already leading – to a powerful argument for withdrawal from internationalism and hunkering down behind national boundaries. However there must be no doubt as to which side of that argument we are on.”
Can you reassure me as to your position on that, Wayne?
@ Joe B,
“Italy and Spain ……. will need to address their own structural issues to reduce over-reliance on imported consumer products”
How do you suggest they do this?
They can’t devalue their currency because they are stuck with the euro. They can’t, by treaty obligations, impose tariff barriers. So, to balance their trade, all they can do is impose austerity on their own citizens, depressing the economy, having higher than acceptable levels of unemployment, and generally creating the conditions that imports cannot be afforded. This doesn’t do any good to the people living in Italy and Spain and doesn’t do any good to those, including us and the Germans, who would prefer them to have a more buoyant economy so that we could trade more with them.
“The Rotterdam effect distorts trade figures in the Netherlands”
It probably does. The last time I checked, the Netherlands was running an 11% of GDP surplus. 11% is way too high. How big is the Rotterdam effect? 3% of GDP? If so 8% is still way too high.
“In the United States, each state is a micro-economy.”
No. They are not.
Nearly all income tax goes to the Federal Government. The Federal Government directly funds much of social spending and medical spending on the elderly. Plus lots of military and other types of spending too. The Federal Government rarely, if ever, runs a balanced budget. There is a clear system of fiscal transfers, not loans, from the wealthy states to the poorer states. You can, of course, argue that there should be a higher level of fiscal transfers than there are, but it doesn’t change the fact that the USA is a genuine fiscal transfer union. Something that the Dutch and German governments have always resisted for the EU.
Peter Martin,
no country is stuck with the Euro. It is a choice each country makes, often following a referendum. Italy has had a poor experience with currency devaluation in the past. It is a prosperous developed economy with large regional differences between the north and south. Their problems are longstanding and predate the Euro. They arise from a very large informal sector that operates outside of the tax net and unionized pay rigidity in the South. These are issues that both Germany and the Netherlands have had to contend with in the past in collaboration with employers and unions and are consequently gig to be loath to continually underwrite states that will not themselves address their tax gaps and level of International competitiveness.
In the USA, public sector spending is split fairly evenly between the federal government and states being about 20% and 17% respectively. States collect property, sales/excise taxes and state income taxes on individuals and companies. States are responsible for education, teachers and other state employee pension provision as well as most local services including police and fire services. Many States also collect unemployment insurance in addition to the federal FiCA and manage their own supplementary schemes. Health care for most families is provided vis private insurance companies and health management organisations HMOs. Fiscal transfers are not a significant element of funding for most state economies unless they have large military bases like Pearl Harbour in Hawaii. Even there, Tourism dwarfs local miliary spending. Almost half of federal spending in the US is on Social security including pensions, Medicare and Medicaid) accounting for approx 10% of GDP. The other 10% of GDP goes on defence, interest costs and a myriad of other programs that include subsidised public housing projects jointly funded at federal and state level.
@ Denis,
We can all have our different criticisms of the EU. For Peter (not me!) it is on the issue of bureaucracy. I wouldn’t entirely agree with him. The old EEC which was reasonably successful wasn’t much different to the EU in this respect. So it would be a criticism of both rather than “balderdash”. It’s also a bit harsh to accuse him of writing a “diatribe”.
I’d be happy enough to have stayed in an EEC type arrangement. It’s the change to the EU and particularly the common currency, and yes I know we didn’t use it, which has been a step too far and will very likely lead to its undoing.
@ Joe B,
“Almost half of federal spending in the US is on Social security including pensions, Medicare and Medicaid) accounting for approx 10% of GDP. The other 10% of GDP goes on defence, interest costs …..”
I’ve read that a fiscal transfer union needs at least a central government which is capable of spending at least 15% of GDP into the economy. So by your figures, which I haven’t checked, we have 20% for the USA. So that’s enough.
The IMF itself doesn’t consider that a common currency to be the same thing as a fiscal (transfer) union! It says, rightly, that the EU needs one! This will, no doubt, be over the dead bodies of the ultra fiscally conservative Germans and this is why the EU has real problems.
https://blogs.imf.org/2018/02/21/the-euro-area-needs-a-fiscal-union/
“no country is stuck with the Euro. It is a choice each country makes……”
It sounds like a nice idea but hardly anyone who voted for the euro had the faintest idea of what they were letting themselves in for. Italy might have had its problems prior to the euro but when did it ever have two full decades of lost growth previously?
As Yanis Varoufakis says, the euro is like the Hotel California. You can check out but you can never leave. I’m not sure this is completely correct but it’s certainly ultra difficult.
Peter Martin,
the Northern EU states have made their concerns over moral hazard clear enough. In an economic crisis such as this, however, it has not prevented the development of a joint employment insurance fund worth 100 billion euros, a European Investment Bank instrument intended to supply 200 billion euros of liquidity to companies, as well as credit lines of up to 240 billion euros from the European Stability Mechanism — the euro area’s bailout fund — to backstop states economic support programs.
This article argues that Italy’s problems are not caused by the euro, but by the country’s chaotic political system https://www.bin-italia.org/italys-economic-problems-are-not-caused-by-the-euro-but-by-the-countrys-chaotic-political-system/ He argues that most of the problems identified with Italy’s use of the single currency would likely be exacerbated with an independent currency and that the real issues facing Italy are a consequence of the decisions made by Italian politicians. The author concludes:
“European institutions have to help Italy to implement reforms – not with absurd economic parameters, but through anti-corruption laws, social protection, a reduction in inequality and strict control of European funds to reduce the gap between the South and the North. The Eurozone may have real problems, but the current exit strategies being put forward for leaving the single currency are little more than a smokescreen used by Italian politicians to obscure their own responsibility for the crisis.”
Maybe, it’s just possible, this virus pandemic will see some real reform and EU states coming together to tackle these longstanding problems in their southern periphery.
It is certainly a difficult decision to leave a currency union. It did not end well for the Confederate states in the American civil war and the Confederate States Dollar was virtually worthless as legal tender long before General Robert E Lee’s surrender at Appomatox.
@ Joe B,
All this “moral Hazard” stuff is just neoliberal codswallop! It’s treating a national economy as a household. If you or I go off to borrow too much money, which we don’t use wisely then we’re in trouble. That’s because we are “households” in microeconomic terms. We are not currency issuing governments.
If we were, yes, we could create too much inflation. Comparisons with the Confederate govt are quite misplaced. Their dollar became worthless because they lost and, as you say probably even before that when it was apparent to all they were going to lose. If the Union had lost it would have been their dollar that became worthless.
You’re making the same mistake as many, including most Germans, in thinking that if everyone else in the EU was like Germany then there’d be no problem. Everyone could run a surplus in their trade. Wrong. If someone is running the surpluses then someone else is going to have to run deficits. Period. To think otherwise is a fallacy of composition. It’s like someone standing up at a football match and saying they can see better. Therefore if everyone stood up……
Peter Martin,
you write above “The EU is still trying to maintain the pretense that loans can be given to countries in need of assistance which will later be repaid. They won’t be repaid for the simple reason they can’t be.” Then you go on to say All this “moral Hazard” stuff is just neoliberal codswallop!
Italy has the third largest surplus in the EU behind Germany and the Netherlands https://www.ft.com/content/513579e8-763e-11e8-b326-75a27d27ea5f As the FT notes;
“Italy suffers from a large competitiveness handicap — a legacy of the 40 per cent increase in unit labour costs relative to those in Germany over the first decade of economic and monetary union. Since 2007, that divergence has diminished somewhat in manufacturing and more steadily in services; nevertheless, the competitiveness handicap remains.”
“But over the past several years it has achieved some success, through a policy of modest “internal devaluation”, in transforming a substantial and recurring current deficit into a substantial and recurring current surplus. Nevertheless… the International Monetary Fund has concluded that Italy needs a further “internal devaluation” in the range of 10 per cent in order to realign its current account with the fundamentals of the economy.”
Germany and the Netherlands may well provide the initial funding for much of the EU economic support programs, but over the longer-term, it will be incumbent on individual states to manage their intra-EU indebtedness in a manner acceptable to the stronger economies.
EU finance chiefs will not want to see a repeat of the European debt crisis. That crisis was caused by a balance-of-payments crisis (a sudden stop of foreign capital into countries that had substantial deficits and were dependent on foreign lending) .
Eurozone member states could have alleviated the imbalances in capital flows and debt accumulation in the South by coordinating national fiscal policies. Germany could have adopted more expansionary fiscal policies (to boost domestic demand and reduce the outflow of capital) and Southern eurozone member states could have adopted more restrictive fiscal policies (to curtail domestic demand and reduce borrowing from the North). After the immediate pandemic crisis has passed, I expect it will be this kind of intra-community coordination of fiscal policy that will prevail in EU deliberations.
@ JoeB,
I’m surprised at you for even suggesting the idea of internal devaluations. And what about revaluations? If Italy, and maybe Greece, Spain, Portugal too, need a 10% internal devaluation then surely Germany and the Netherlands need a 10% revaluation? And this is just going to be agreed in an amicable meeting of finance ministers? I don’t think so.
It’s not just a question of wages and prices. But even this is going to be hard enough. If you start cutting wages, including pensions, across the board there’s quite likely to be a general strike. I think we found that out the hard way in 1926. It’s going to look even worse if Italians are having their incomes cut at the same time as Germans are all having a pay rise. Then prices, including all rents will have to decrease by a set amount. Loans and bank deposits will also have to be adjusted.Downwards in Italy. Upwards in Germany. It might all work perfectly fine in a computer simulation, but you can’t seriously think this is going to be remotely possible in the real world?
It’s not just Italy that runs a trade surplus. Greece does too. It’s not necessarily a sign of a successful economy. If the home market isn’t healthy because many workers are on very low pay or have lost their jobs, then industry and commerce will naturally look to export more. What Germany needs to understand is that someone has to run trade deficits to enable them and others to run trade surpluses.
The comment about “moral Hazard” stuff being just neoliberal codswallop was also followed by a comment about you and I not being currency issuing governments. And neither are the countries of the EU – except in a very diluted form. Therein lies the problem. They have voluntarily placed themselves in a fiscal and monetary straitjacket from which it is very difficult to escape.
A lot of discussion around the EU and the Euro, tend to get a bit highbrow and academic, but people on the ground don’t think that way. At ground level a Spaniard or a German both think at the level of their wallet.
Italy and Spain are certainly too big to get the bully treatment that Greece had to endure, nevertheless risky lessons at ground level will have been learned from the Greek debacle. If you are a Spaniard, why would you not save your money in a German online bank? If there is some suggestion of some Spanish ‘haircut’ at the local bank level, it would be better to move your Euros from your Spanish bank to a German based bank now, before any government ‘theft’.
There are many other Euro anomalies at the wallet level, but all of the anomalies are a ‘gift’ of the fact that the North and the South of Europe operate with very different economies and at different speeds?
As I suggested earlier, the least worst answer to a two speed Europe, might be to have two Euros, a NordEuro and a MedEuro.
By using the present Euro as a MedEuro, it would set the South free. Also as Peter Martin concludes, the MedEuro would not fall to zero value, because the Mediteranean are not losers in a war, indeed they are very productive, but need a currency (MedEuro), which matches them and their economy.
Also a NordEuro should be designed from the start with the kind of fiscal structures that were woefully absent than the original Euro, so none of the Nordic countries would feel overwhelmed by high valuations without Germany helping them out. I think Germany would favour some element of NordEuro transfers between its rich cousins, rather that be on the hook for the whole of the Eurozone?
Also there is nothing to suggest that Germany could not continue to use MedEuros if it suited their purpose, and, Spain and Italy could use NordEuros as they see fit? Already if a British traveller use their debit card in a Spanish department store they are asked ‘do you want to pay in Pounds or Euros?’
Two currencies for two speeds of Europe seem a reasonable answer to this dilemma, and its still possible to be asked at any till across the whole of Europe. ‘Do you want to pay in MedEuros or NordEuros?’
Peter Martin,
internal devaluation is not a suggestion it is what happens in any currency zone or in a pegged currency system where consumption is greater than the productive capacity of the working population. In a floating currency system, the same result comes about through currency depreciation and higher import costs as we have seen ad Infinitum in the UK.
The governments of EU states, like the UK, have to prioritise the needs of their own citizens. If they do not they are not likely to be the government for very long (and that’s about 6 months on average in Italy). If the UK was in the Euro, would British citizens be clamouring to increase Italian and Greek pensions and wages at the cost of their own standard of living? Of course not.
The stronger EU states can borrow cheaply and lend funds to financially weaker states when those states cannot easily access capital markets as now. But longer-term each country cooperates on the four freedoms for mutual benefit, not for altruism.
Moral hazard is a real issue. In Italy’s south the Mafia is reported to handing out food parcels to entrench its influence in these regions https://www.theguardian.com/world/2020/apr/10/mafia-distributes-food-to-italys-struggling-residents. A professor writes: “Mafias are not just criminal organisations. They are organisations that aspire to govern territories and markets. Commentators often focus on the financial aspect of mafias but they tend to forget that their strength comes from having a local base from which to operate.”
“These handouts by the mafias are not gifts. The mafia does not do anything out of its kind heart. They are favours that everyone will have to pay back in some form or another, by aiding and abetting a fugitive, holding a gun, dealing drugs and the like.”
“The mafias might be able to benefit in other ways from the current lockdown and especially from the future, when Italians will all be able to return to work, spend more money, and get the economy on its feet again. But surely the story exemplified by the handouts of food parcels in Palermo and Naples shows their true nature, and it tells why they are so dangerous.”
Peter Martin,
you write above “If you start cutting wages, including pensions, across the board there’s quite likely to be a general strike.”
Consider the UK experience of the 1930s, not unlike Italy now with its prosperous North and “special areas” in the South. This report by George Trefergane discussess what happened then https://www.cps.org.uk/files/reports/original/120312164231-Metroboom.pdf
“The consensus view of the 1930s as a universally destitute place is a myth. While the mood was depressing in 1931, by the middle of the decade, recovery had come and a British boom was underway. There are important lessons for our own time as to how and why this was achieved – as Vince Cable recognised when he wrote in his leaked letter to the Prime Minister last week: “Finally, the economy will continue to struggle while the construction industry remains so depressed. By contrast the big recovery in the 1930s was driven by a combination of new industries (cars and chemicals) and construction: estates of semis and lots of council housing.”
There were of course deep pockets of severe poverty in the “Special Areas”, so powerfully described by among others George Orwell in The Road to Wigan Pier. But after the financial crisis of 1931, healthy economic growth averaged 4% a year in real terms between 1934 and 1939,stimulated primarily not by rearmament but by the successful tax and economic policies of the National Government.
The mid-1930s was a time of vibrant innovation and industrial growth. Housebuilding, car manufacturing, aircraft production and textiles all boomed while unemployment fell by almost a half between 1932 and 1937.
This healthy recovery in the 1930s is in sharp contrast to the UK in 2012. Today, four years after our financial crisis, the economy remains frail, growth sporadic while unemployment is still rising.
Five lessons can be drawn from the economic policies pursued first by Labour’s Philip Snowden and later by Neville Chamberlain:
Spending cuts work. Tough spending cuts – including an immediate 10% cut in benefits and civil service salaries – quickly led to balanced budgets and maintained the confidence of citizens, businesses and international investors. Today’s cuts are much shallower in comparison.
Austerity in the public finances must be matched by a cheap money policy to encourage the private sector to expand. While this was achieved in the 1930s, the appropriateness of today’s Quantitative Easing policy is far less certain.
Confidence in the legal and political foundations of the financial system must be restored. The early 1930s saw a number of high profile trials of those who had misbehaved in the previous decade. Today, nothing similar has happened and public confidence in the banks remains low.
Tax cuts work. From 1934 on, Neville Chamberlain’s tax cuts for families and the low paid gave a further boost to business confidence. The top rate of tax was only 37.5%. A similar approach is needed today.
Press on with welfare reform. The National Government failed to do enough for the long-term unemployed and for those areas which had been hit particularly hard by the recession. Today’s Coalition must not make the same mistake.
Finally, while everyone has to make sacrifices, we should do so confident in the knowledge that, in Chamberlain’s phrase, the quicker we can put down Bleak House, the sooner we can embark on Great Expectations”
That ‘Great Expectations; is how economies and the over-consumption society can be rebuilt to be more resilient and equitable. To build housing that is affordable to the great majority and to cope with what we know is coming down the track fast – Climate Change.
If as I believe, Brexit is a scheme of Vulture Capitalism ( & Tax evasion), including the rich buying assets cheap after the collapse of companies & property values, or short selling the collapsing pound from money held in more stable currencies, then the virus will allow bigger gains. Individual traders and hedge funds including many top Tories will make millions out of this. Unless enough political pressure can be applied by December, they will go ahead.
Britain’s food ( up to 45% ) will be held up at ports by the new brexit/WTO paperwork and the UK’s creaking infrastructure, while UK farmers struggle and fail to get their crops in from a shortage of up to 70,000 seasonal workers from EU countries. This is partly why certain veg are in short supply now, including Cauliflower, Brussels and Lettuce.
“Britain’s food ( up to 45% ) will be held up at ports by the new brexit/WTO paperwork “
Sorry, that just makes no sense.
Italian producers, desperate to sell their fruit and veg, send several truck loads towards British supermarkets. Trucks get stopped at French dockside, ‘sorry Monsieur, wrong paperwork’ . So, Italian produce stays in truck on French dockside until it rots/rejected and doesn’t get delivered. Italian produce not delivered to British supermarkets, means Italian producers don’t get paid.
Who do you think Italian farmers will be angry at?
Moreover, British supermarkets won’t repeat that mistake again and will start to drop Italian producers, and develop contracts with more stable producers of fruit and veg elsewhere, where supplies are not politically hampered by a belligerent EU.
Unfortunately, those kind of crazy scare stories are concocted by fear mongering politicians, when the real world functions on commerce delivered on time and paid for.
@ JoeB,
If a currency falls by on the forex markets everything falls with it. Wages, prices, the value of capital, and the extent of debts when measured against another currency. What you are referring to as “internal devaluation” isn’t that at all. What you really mean is wages fall but everything else remains the same.You are advocating wage cutting. So if that is what you mean then please say what you mean and I can happily suggest you join the Tory Party!
You mention “The Road to Wigan Pier”. I was brought up just a few miles from Wigan so I do know from direct the experience of my parents experience that life in the 30s was nothing like you suggest but very much like George Orwell describes. Unemployment was high. Wages were low. If children were sick there was usually not enough money to pay for a doctor and so they died. That continued until the outbreak of WW2. See the graph of unemployment below.
https://upload.wikimedia.org/wikipedia/commons/c/c4/United_Kingdom_unemployment_1881-2017.png
We need to get back to the kinds of economic policies we had between 1945 and the 1970s. The was nothing wrong with Keynesian economics per se but the monetarists who morphed into the neoliberals latched on to the difficulties of high inflation in the 70s to throw out the baby with the bath water. Well their time is up. You can s**ff your “internal devaluation” you know where!
@Joe Bourke great post. I suspect the usual suspects will be along shortly to tell you that you need to be expelled from the party for heresy.
@Peter Martin “So if that is what you mean then please say what you mean and I can happily suggest you join the Tory Party!”
That didn’t take long.
Peter Martin,
the economic policies we had in the UK between 1945 and the 1970s were based on nationalised industry, restrictive practices and capital controls. It was these policies (not Keynesian monetary or economic stimulus which became increasingly ineffective in the face of declining International competitiveness) that led to the loss of the UK’s industrial base as industry after industry was picked off by European and Asian competitors. This is why the Callaghan/Healey government began to change course in the mid 1970s.
Most European countries left such policies behind in the last century. Italy’s high debt is a legacy of the 1980s. The Lira was devalued by 40% against the dollar at that time. In 1980 the Italian public debt was at 57,7% and by 1994 it grew by 124,3%. Interest rates on the Italian government bonds went from 8% of its GDP in 1984 to 11,4% a decade later, while in the rest of the Eurozone the average interest rate on national bonds increased from 3,5% to just 4,4%, less than half of the amount paid by Italy.
Many countries can overcome their debt with a little inflation and signs of economic growth, but Italy has consistently lagged its neighbours in the ability to grow its economy at the same rate as other European countries. Bad administration of public finances keeps playing a role in creating an unstable economic environment, where the debt prevents the country’s economy exiting a decade of stagnation.
Italy’s government currently spends about 49% of GDP (close to Scandinavian levels) has high rates of tax on labour and a 22% Vat rate coupled with a large tax evasion problem. Having your own currency doesn’t guarantee low rates if investors believe that the only way you’ll be able to handle your debt is via inflation, as the US learned in the 1970s and early 1980s. Turkey paid rates of over 50% per year during the 1990s.
There are no easy routes for Italy. The government will need to decide whether to stick with the Euro and undertake the structural labour reforms needed to regain a greater level of International competitiveness or exit the Euro and go it alone with a devalued Lira and default on its Euro debts. Not an easy choice.
” Not an easy choice.” ???
It’s really a no brainer. History shows that the euro isn’t working for Italy and it needs to try something different.
https://www.ceicdata.com/en/indicator/italy/gdp-per-capita
In any case if Italy did what you suggest they’d only be “succeeding” on a beggar-thy-neighbour basis. The rules of the eurozone are designed to suit Germany which has an obsession with large external surpluses. There will always be a division between the winners who run the large surpluses and the losers who can’t. It simply is not possible for everyone to be in large external surplus.
Peter Martin,
it is never as simple as “a division between the winners who run the large surpluses and the losers who can’t” nor is it necessary or desirable for “everyone to be in large external surplus.”
A main reason to export is to be able to import. As this IMF article points out https://www.imf.org/external/pubs/ft/fandd/basics/current.htm judging whether deficits are a problem depends on the factors giving rise to a deficit.
“If the deficit reflects an excess of imports over exports, it may be indicative of competitiveness problems, but because the current account deficit also implies an excess of investment over savings, it could equally be pointing to a highly productive, growing economy. If the deficit reflects low savings rather than high investment, it could be caused by reckless fiscal policy or a consumption binge. Or it could reflect perfectly sensible intertemporal trade, perhaps because of a temporary shock or shifting demographics. Without knowing which of these is at play, it makes little sense to talk of a deficit being “good” or “bad.” Deficits reflect underlying economic trends, which may be desirable or undesirable for a country at a particular point in time.”
@ JoeB,
“A main reason to export is to be able to import”
Yes. Agreed. And it may make sense to run a surplus in exports one year so that this can be balanced by an import surplus in the following year. It may also make sense for a developing country to run a series of export surpluses to build up their foreign exchange reserves. But it doesn’t make any sense for developed countries like Germany, Denmark and Switzerland to run huge surpluses year in year out and yet they do. Why? Germany’s trading surpluses are, eurocent for eurocent, someone else’s trading deficit.
There are no Eurozone rules against running trading deficits per se but we know that an external deficit has to be financed by someone in the country doing some borrowing. That can be by both Government and the Private Sector. So we have:
Current Account (Trade) Deficit = Deficit of PS + Govt Deficit.
There are rules that the Govt Deficit should not exceed 3% of GDP. So if the Private Sector is borrowing, like they were prior to 2008, say 3% of GDP too we can have an allowable C.A.D. of 6% without anyone breaking any rules. Everything works fine. We have lots of growth everywhere including in Greece, Italy and Spain. But what happened when we have a sudden shock as we did in 2008? The PS then saves rather than borrows. The same happens everywhere. So the pattern of trade doesn’t change much in a short period of time. The currency can’t be devalued. Tariffs can’t be applied.
Instead of having 6 = 3 + 3
we now have 6 =-3 +9
In descriptive terms, the neoliberals/ordoliberals are horrified when the automatic stabilisers start to do some stabilising and insist that a 9% Govt deficit needs to be urgently reduced by extreme austerity. That’s what happened and that’s why there hasn’t been any recovery in Italian GDP. That’s why it should have left the eurozone in 2008. Had it done so it would be in a far better position today.
Peter Martin,
Greece had the opportunity to leave the EZ but stepped back when it came to the crunch. There is greater security as a member than going it alone.
The Italian premier has just been on the BBC calling for a united approach from Europe, the G7 and G20 to economic support for global trade. He was also at pains to point out that Italy’s problems are everybody’s problem.
Italy has no fiscal or financial fallback once it slides from its current economic and political torpor into a deep economic contraction. The government’s debt-to-GDP ratio will rise rapidly, pushing up interest rates on Italian debt and making repayments even more onerous. The chaotic banking system will face losses that it cannot bear and the government cannot shoulder. The public and private Italian defaults will cause their creditors to default, triggering an ever-widening global cascade of defaults.
In an Italian economic and financial crisis, the EU’s financial-rescue systems will be tested mercilessly. Any rescue effort will require, as a first step, an Italian bailout programme that puts the government on a tight fiscal leash.
If the ECB does bankroll Italy, and the Italians don’t pay the ECB back, the taxpayers in the northern member states could bear a recurring burden so large that even their apparently strong governments will face fiscal stress and credit-rating downgrades.
Long-term growth prospects in the advanced and much of the developing world have sharply declined. The Italian epicenter is in a much more fragile economic and financial condition than at any time in the postwar period.
Governments would do well to coordinate a global fiscal stimulus through increased spending and tax cuts to buoy the international economy.
However, well before monetary or fiscal stimulus kicks in, there will be a moment of reckoning. This will be the choice. Northern EU member states could agree to pay for Italy, with the knowledge that they will have to keep their cheque books open for a long time, inflicting significant, even long-lasting, damage to their own fiscal situations. Or they could stand back, hoping the problem will go away. In which case, the Italian financial system could go into a free fall, causing cascading debt defaults to race through the world’s financial pipelines. The crisis will almost certainly be larger than eurozone members can handle alone.
Joseph, very interesting. It does look likely that the outfall from the virus could achieve what the populists couldn’t in starting to break up the Euro, unfortunately. Let’s hope not.
@ JoeB,
“If the ECB does bankroll Italy, and the Italians don’t pay the ECB back…..”
The Germans (and one or two others) have the credits at the ECB and the Italians (and more others) have the debits. The ECB is just an intermediary. So you should really be saying “….and the Italians don’t pay back the Germans”.
But how can they? They can only get the euros to repay if they run a trading surplus with the world’s most mecantilistic country. We both know that is just not going to happen. The wider world economy does work reasonably well because the USA, for all its faults, has a relatively relaxed attitude to trade. Those faults don’t include a tendency to mercantalism. It’s only since Trump has become President that there’s been some suggestion that might change. But, so far, its been more verbal rhetoric than any real action from Trump.
“Northern EU member states could agree to pay for Italy, with the knowledge that they will have to keep their cheque books open for a long time……”
I’d say that should be for ever. In a common currency union its the responsibility of the wealthier areas to effectively subsidise the less wealthy. It’s called having a fiscal transfer union. Emmanuel Macron is one EU leader who does seem to grasp the importance of this. But the Germans don’t. They are the ones sabotaging the European project.
https://www.politico.eu/article/an-offer-emmanuel-macron-cant-refuse-eurozone-budget-angela-merkel/
Peter Martin,
Italy pays back its Intra-governmental debts in the same way as any country by refinancing in the capital markets and drawing on the wealth of Italian households,
The net wealth of Italian households is estimated to amount to about €10 trillion, of which over one half, or over €5 trillion is in financial assets, which is about twice total public debt of around €2.4 trillion. Most of this debt is held by Italian financial intermediaries (banks, insurance companies,etc.) whose ultimate beneficiaries are Italian households.
The central Bank of Italy holds about €400 billion of government debt which it finances under the Target II payments system. These are monies it owes to other EU countries and a further €450 billion of public debt is held by foreign investors. In total around 43% of Italian debt is owed to foreigners but mostly inside the Eurozone.
As to the program of reforms that Italy might follow in the future to ensure economic recovery, this has been detailed by the OECD https://www.oecd.org/economy/wide-ranging-reforms-needed-to-ensure-italy-s-economic-recovery.htm
“The Italian economy has many strengths. Exports, private consumption, investment flows and a dynamic manufacturing sector have driven growth in recent years while labour market reforms have helped raise the employment rate by 3 percentage points since 2015. But the country continues to face important economic and social challenges. Tackling them requires a multi-year reform package to achieve stronger, more inclusive and sustainable growth, and revive confidence in the capacity to reform.”
“Without sustainable public spending and taxation policies, the room to improve infrastructure, help the poor and deliver the services people expect will inevitably narrow. Designing budgets within the EU Growth and Stability Pact, which should be implemented in a pragmatic way, would help strengthen the credibility of Italian fiscal policy and reduce its risk premium. Lower government bond yields would also help safeguard the stability of banks”
“Public spending needs to become more efficient and better targeted through designing and implementing spending reviews in the budget making process. The tax system needs to be made fairer through improved voluntary compliance, avoiding repeated amnesties and fighting evasion forcefully.”
@ JoeB,
“Italy pays back its Intra-governmental debts in the same way as any country…..”
Not quite. Italy isn’t “any country”. Italy uses someone else’s currency. Most countries have their own. That makes a big difference. At present Italy is very much dependent on the ECB to buy its bonds. When the ECB is seen to be in the market buying them others will buy them too. There’s a bit of a taboo about the central bank buying bonds directly from governments which enable the private banks and bond dealers to unnecessarily insert themselves into the chain. This is no doubt a nice little earner for them.
The OECD and others have been saying the same kind of things for the last 10 years. Italy has had different governments to try to get things moving. No-one has managed it so far and the chances of anyone succeeding now after the problems with the coronavirus don’t look at all promising. To say the least.
All you, and others, can suggest is “internal devaluation”. That’s just code for requiring workers to cut their wages and accept poorer conditions. You should be ashamed of yourself.
“The net wealth of Italian households is estimated to amount to about €10 trillion….”
There is really no possibility of squeezing anything like this amount out of the Italian private sector. The EU would have an armed uprising on it hands if it tried. In any case most of it will be based on valuations. The money isn’t there in reality. If the EU wants money out of Italy it has to persuade Germany to end its mercantilism and run trade deficits. That way Italy will be able to run a trade surplus and have a net inflow of euros which it can use to repay its debts.
After WW2 not all German debts were written off. The USA and other countries opened their borders to German exporters so that the Germans could earn the dollars to repay debts in just the same way. It wouldn’t have done the USA much good, for exactly the same reasons, to demand that German households hand over their supposed wealth.
Peter Martin,
the Euro is not someone else’s currency. Italy is a big economy comparable to the UK and a big player in the Eurozone. It is a major exporter running significant trading surpluses (larger than the Netherlands after accounting for the Rotterdam effect) and not so far short of Germany’s. It is not the EU who needs to squeeze funding out of Italian households to cover their own governments public spending it is the Italian Treasury as this FT article notes https://www.ft.com/content/319b334a-e28e-11e8-8e70-5e22a430c1ad
“Italian households’ sovereign bond holdings have fallen more than a third since the start of 2015, to €133bn, according to ECB data. The coalition is hoping that Italy’s rising bond yields will help to lure them back into the market. While some Italian retail investors will snap up the bond as they have in the past, daily headlines about Rome’s fight with the EU and the rising level of “lo spread” may not be helping convince older savers to buy.
Alberta Angelo, a 62-year-old pensioner from the wealthy northern Italian town of Asti, known for wine and truffles, says she “does not intend to buy even one Italian government bond”, despite the government’s call on citizens to help buy the public debt.
“I don’t know much about investments and national finances, but the fact that the government is asking citizens to chip in with their own savings is a good enough reason to be worried,” she said.”
@ Joe Bourke,
“the Euro is not someone else’s currency.”
It’s the EU’s currency. It’s not Italian. Rightly or wrongly, I’d say wrongly, the lira is history.
” It is a major exporter running significant trading surpluses (larger than the Netherlands after accounting for the Rotterdam effect) and not so far short of Germany’s.”
According to the link below the Italians have surplus of between 2% and 3%. The Netherlands has a surplus of nearly 10%. Germany between 8% and 9%. It seems nearly everyone runs a surplus in the EU! So who (besides us) ran the deficits to make everything balance up? We’d need to look at more than a single year’s figures to get a true picture.
The Italian pensioner you quote is right in a way. Except he should be suspicious of the EU/ECB rather than his own government. They are the ones in charge of Italian bond prices.
https://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance_as_a_percentage_of_GDP
The advice for Italy to leave the eurozone is nothing new.
http://bilbo.economicoutlook.net/blog/?p=28349
Peter Martin,
according to the link and the criteria you apply, Macao is the biggest offender at 30.45%.
Italy has a current account surplus of $52 billion in 2018 according to estimates https://knoema.com/atlas/Italy/Current-account-balance
The Dutch trade is largely made up of reexports as this paper explains https://www.cpb.nl/sites/default/files/omnidownload/cpb-achtergronddocument-lopende-rekening-definitief.pdf:
“The bulk of the trade balance in goods comes from a few neighbouring countries. The Netherlands has large bilateral trade surpluses with Germany, France and the United Kingdom. These trade balances were already large in 2000, although back then the NL-UK surplus was smaller than the surplus with Italy and Belgium. That trade flows are large with these countries is not surprising, given their economic size and proximity to the Netherlands. The Netherlands has had deficits with the US and China since 2000, and
especially the increase in the deficit with China is impressive. This is related to the gateway function of the Netherlands; large amounts of goods that are shipped from China (and the US) first cross the Dutch border, before they go to their final destination elsewhere in Europe. The next paragraph shows that these re-export flows contribute significantly to the Dutch trade balance.”
The Dutch premier has offered direct aid to Italy and Spain to assist with the Coranavirus pandemic https://www.cnbc.com/2020/04/02/coronavirus-eu-latest-dutch-offer-as-death-toll-rises-in-spain-italy.html
“The Netherlands, with a current account surplus and a debt-to-GDP ratio below 60%, is one of the few EU countries that has respected the bloc’s fiscal rules in recent times. With its fiscally-conservative approach, the country took the leadership of the “Hanseatic League” a few years ago. The informal group of northern EU nations has pushed back against significant steps for eurozone integration”
Italy has not made good use of its access to low-cost borrowing over the years as a member of the EZ in the way that the Netherlands or even Ireland since the Financial Crisis of 2008 has.
Many of these European countries, particularly Germany, have rapidly aging populations and pension systems that rely almost entirely on state management of the funds with only a tiny proportion in the way of private pension provision for most citizens. They undermine that at their peril.
@ JoeB,
I’ve Googled “The Rotterdam Effect” and I can’t see any convincing evidence that it really exists. If something goes into Rotterdam it is counted as an import and when it goes out it is counted as an export. So the two cancel. If you count total trade then the trade per capita would appear to be unusually high but that’s not going to affect the Netherlands’ trade balance.
Earlier you claimed that:
” healthy economic growth averaged 4% a year in real terms between 1934 and 1939, stimulated primarily not by rearmament but by the successful tax and economic policies of the National Government.”
This is another one of your unsubstantiated assertions.
The move towards UK pre-war rearmament started in 1934 too! But this in your opinion was entirely coincidental?
https://en.wikipedia.org/wiki/British_re-armament
The problem with the euro, which you seem very reluctant to accept, is that it’s a political rather than an economic project. The architects of the euro either didn’t understand what they were doing or they just took a leap into the dark and hoped for the best! This is not just a left wing argument. Here we have a reference to Otto Issing
“Now He Tells Us, Architect Of The Euro Says It Will Never Work – So Milton Friedman Was Right”
https://www.forbes.com/sites/timworstall/2016/10/23/now-he-tells-us-architect-of-the-euro-says-it-will-never-work-so-milton-friedman-was-right/#64e7341c3750
And this is the MF article in question.
https://www.project-syndicate.org/commentary/the-euro–monetary-unity-to-political-disunity?barrier=accesspaylog
@ Joe Bourke ” healthy economic growth averaged 4% a year in real terms between 1934 and 1939, stimulated primarily not by rearmament but by the successful tax and economic policies of the National Government.”
But what was the geographical spread of it outside the Home Counties ?
It never got to Jarrow…. where Palmers shipyard (set up by a Liberal M.P.) closed down for lack of rearmament orders despite the rise of Hitler. The (sometime Liberal) President of the Board of Trade , Walter Runciman (who should have cared more given his South Shields origins) simply wanted to sell off the site. Not much sign of successful tax and economic policies of the National Government in Jarrow.
Peter Martin,
in this new world of ‘alternative facts’ I suppose comments such as “This is another one of your unsubstantiated assertions.” are to be expected from the least reliable of characters.
I have given you the source of the data for the growth in the UK economy in the mid- 1930s which was concentrated in the Midlands and the south-east. It is the linked essay from George Trefergane which notes the principal sources utilised:
“This brief essay is built on the shoulders of more substantial work by others. I am especially indebted to Professor Nicholas Crafts of Warwick University for sharing some data with me. Those familiar with the period will recognize I have also relied inter alia on RS Sayer’s Bank of England 1891-1944; HW Richardson’s Economic Recovery in the 1930s; Robert Skidelsky’s Politicians and the Slump; Juliet Gardiner’s excellent 1930s, An Intimate History; Barry Eichengreen’s Gold Fetters; Liaquat Ahamad’s Lords of Finance; and Robert Self’s new Neville Chamberlain, A Biography.”
This is perhaps a key difference between Liberalism and Socialism. As a Liberal, I rely on evidence to analyse a situation. You, on the other hand, simply dismiss any evidence that does not support your worldview and unfailingly revert to rhetoric when you are presented with evidence that contradicts your view. You do it again when presented with a substantial report on the Dutch trade balance.
You don’t need research to understand there were a greater number of houses built in the UK in the 1930s (peaking at 350,000 per year) than at any other time before or since https://www.theguardian.com/business/2014/may/24/history-british-housing-decade Those houses are still standing.
Nor do you need academic research to understand what distorts Dutch balance of payments figures. Starbucks and Fiat are two examples of companies that base their Intellectual property holdings in the Netherlands and transfer a large portion of their profits there for tax purposes https://www.theguardian.com/business/2015/oct/21/starbucks-and-fiat-tax-deals-with-eu-nations-ruled-unlawful. Coffee is not grown in Holland and Fiat’s factories are in Northern Italy nor Amsterdam yet very large transfer payments from multi-nationals around the world go into Holland every year.
David Raw,
you are absolutely correct it never got to the North or South Wales where unemployment and destitution were at there worst and rearmament did not start in earnest until the well after economic recovery in the Southeast and the Midlands was embedded.
Trefargane makes these points in his essay., writing:
“The 1930s were an imperfect decade and the attempt here to set the record straight about the strength of the overall economic recovery in Britain and the relative buoyancy of the culture should not also be interpreted as belittling the unacceptably high poverty and unemployment in the Special Areas. But one should remember this was in complete contrast to the relative prosperity in the Midlands and the South.”
“Whatever Chamberlain’s merits as a Chancellor, one has to concede that the National Government’s approach to curing long-term unemployment in the Special Areas was lacking in imagination. It is impossible not to be moved by the Jarrow march or by contemporary descriptions of urban poverty in the North, such as in the first half of George Orwell’s The Road to Wigan Pier. The National Government did not make enough effort to invest in retraining, for instance, or to encourage start-up businesses or reconstruction or relocation. There was a famous moment when Edward VIII toured South Wales and announced: “Something must be done.” Yet not enough was. It was a failure which tainted Chamberlain’s record and that of his party for years to come.”
For this reason, the Coalition must not now be dissuaded ts attempts to get the longterm unemployed off benefits and into work. Furthermore, the current rise in youth unemployment, especially the so-called NEETs, who are not in employment, education or training, is clearly unacceptable.”
Italy should not make the same mistake in confronting deep unemployment in its rural south, as it endeavours to reconstruct its economy on more sustainable grounds in the aftermath of this crisis.
@David Raw perhaps you’ll explain how how the 4% growth that @Joe Bourke took place between 1934-39 could have supported a shipyard that closed in 1933?
Peter Martin 10th Apr ’20 – 7:32pm:
I’ve read that a fiscal transfer union needs at least a central government which is capable of spending at least 15% of GDP into the economy. So by your figures, which I haven’t checked, we have 20% for the USA. So that’s enough.
‘United States Government Spending To GDP’:
https://www.libdemvoice.org/rejoining-the-party-postbrexit-64022.html
@ Jeff,
I think Joe said it was 20% Federal and 17% State which adds up to be pretty close to your 37.8%
@ JoeB,
OK if you’re so into evidence based thinking maybe you can start by quantifying, with suitable references, the extent of the “Rotterdam Effect”? If the official stats say a a 10% GDP surplus, does the Rotterdam effect mean that shou;d really be 1% or 9% or anything inbetween?
I don’t think George Orwell would come across many 30’s semis being constructed in Wigan! But I do know they exist. My first house was one! That doesn’t mean everything was hunky dory though. The 30s was a turbulent time politically and the turbulence was fuelled by social unrest.
What do you make of Milton Friedman’s article about how the euro was never going work? You’ve ignored the two links I sent you. This is quite usual when you’re presented with something that doesn’t fit into your world view.
Peter Martin,
The European project is based around the free movement of goods, capital, services, and labour within a single European market. The market is intended to be conducive to increased competition, increased specialisation, larger economies of scale, allowing goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources. It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU-wide economy sharing a common currency and European central bank.
Economic convergence is aided by the EU Structural Funds and the Cohesion Fund(Financial tools set up to implement the regional policy of the European Union). These funds aim to reduce regional disparities in income, wealth and opportunities. Europe’s poorer regions receive most of the support. The funds make up the great bulk of EU funding, and the majority of total EU spending. The EU has agreed on a budget of €166 billion for the year 2019, representing around 1% of the EU-28’s gross national income (GNI). The long-term budget is of €1,082 billion for the period 2014–2020, representing 1.02% of the EU-28’s GNI. The long-term budget (or Multiannual Financial Framework) is a long-term spending plan, allowing the EU to plan and invest in long-term projects.
The European Stability Mechanism was established in 2012 as a permanent firewall for the eurozone, to safeguard and provide instant access to financial assistance programmes for member states of the eurozone in financial difficulty, with a lending capacity of €500 billion.
German economic policy is an issue for many of its EZ partners. But is does not need larger fiscal transfers to address the issues. Wages need to rise in Germany in proportion to their higher productivity levels. Unit labour costs were suppressed for a long-time following the reunification with East Germany and this continues to be the case. It is a relatively weak domestic demand in Germany arising from correspondingly low wages that forces an over-reliance on export-driven demand there. Allowing wages to rise in Germany will quickly draw-in imports from other EU countries and do much to smooth out the imbalances and tensions that have arisen since the creation of the Euro.
@ JoeB,
I agree that higher wages in Germany would go some way to solving the problem of the euro black hole that is the German economy. So why wouldn’t they just do that anyway? Why do they need to be prodded and cajoled? I’m not sure what it is about the ‘Germanic’ mentality but the Danish are just as bad. According to the link I included previously they run a 7-8% GDP trade surplus. They don’t use the dollar so why don’t they stop pegging their currency, the Danish krone at an artificially low level?
They would find lower prices in the their shops. Petrol would be cheaper. They’d be able to go on foreign holidays more often and stay in better hotels. We’d never do anything to artificially depress our currency. We want those cheap imports and the cheaper the better. Are they totally mad? Or is it us?
I mean “they don’t use the euro…”