Jean-Claude Juncker’s boast about the euro is an insulting fantasy

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History may or may not repeat itself, but hubris certainly does. In April 2008, as the euro approached its tenth birthday, Joaquín Almunia, the EU’s then Commissioner for Economic and Monetary Affairs, recalled how its construction had been accompanied by “dissenting voices”. “One economist” had jeered that it was “at best, an act of uncertain merit”. Another had denounced it as a “great mistake”. Fools! Almunia bragged that “the euro [had] proved an economic success”.  Within 18 months Greece was in crisis.

Earlier this week Jean-Claude Juncker marked the euro’s 20th anniversary of with words seemingly so far removed from reality that not even sciatica could explain them away: “The euro has become a symbol of unity, sovereignty and stability. It has delivered prosperity and protection to our citizens…”

Goebbels once wrote that “the English follow the principle that when one lies, one should lie big, and stick to it. They keep up their lies, even at the risk of looking ridiculous”. However, he would not have expected the English to mock those who they were trying to convince.

Juncker, no Englishman, but known to some as “the master of lies”, has rarely shown much concern about appearing ridiculous. Nevertheless, boasting that that the euro has delivered prosperity insults almost every member state other than Germany, particularly those hit hardest by the bursting of bubbles wholly or partly inflated by the single currency. Most may have crawled out of the A&E (or in Ireland’s case done rather more than that), but memories of what they went through are fresh. And in some instances, they aren’t even memories. Youth unemployment in Greece has only recently fallen below 40 per cent. GDP per capita in Italy (where the euro’s corrosive effect is real, but more difficult to assess) stands roughly where it did in 1999.

On the other hand, Juncker’s claim that a currency which has brought chaos and division in its wake is a symbol of “unity” and “stability” may seem equally absurd, but seen from Brussels, it makes good sense. To appreciate why, note the reference to “sovereignty” as another of the qualities symbolised by the euro. A country that relinquishes its own currency gives up some of its sovereignty, but Juncker was focused on where that sovereignty had been transferred. And that was to “Europe”. Having its own currency represented a major advance in the EU’s step-by-step assumption of sovereignty, and with it, the attributes of a state.

Now adopt that same Brussels perspective to understand what Juncker meant by unity. Despite sharp disagreements, those running the Eurozone stuck together through the crisis, trashing treaty obligations, promises to voters, a referendum result, the integrity of the European Central Bank, economic logic and basic democratic norms to keep the currency union intact. They succeeded in a display of unity that also delivered Juncker’s notion of stability — a Eurozone that weathered the storm — as well as a strong indication that it will continue to overcome the challenges that come its way.

Part of the reason for that, is that once in the euro, there is no easy exit. “Ever closer union” are perhaps the three most important words in the EU’s definition of itself: They imply that there is no reverse gear. Nowhere is this more the case than, as its creators intended, with the single currency, described in 2012 by one top German civil servant as “a machine from hell that we cannot turn off” — words to remember amid current talk of widespread support for the euro.

But back to hubris. Like so much central planning, the euro was born of arrogance, over-confidence, conceit and ideological obsession. Cramming a large number of diverse economies into a necessarily Procrustean currency union made little economic sense—the savings flowing from the removal of foreign exchange risk were somewhere between minimal and illusory. It was also an invitation to disaster, made riskier still by the absence of any degree of fiscal union, something which might have provided a safety net, but would not have been politically acceptable in many of the countries signing up for the new currency.

One example of hubris overlapped with another. Some of those in charge of putting the euro together were aware of its innate flaws but expected that they would eventually lead to—as the phrase in Brussels goes— a “beneficial crisis”. This would be the catalyst for forcing through the fiscal union that had always been the logical counterpoint of monetary union and would also constitute a giant leap forward towards ever closer union. The hubris lay in believing that such a crisis would be manageable in the manner that Brussels hoped.

It wasn’t. Even allowing for its starting point, Juncker’s perception of unity is based on turning a blind eye to some highly inconvenient truths. Made even more destructive by its intertwining with the financial crisis, the storm that tore into the Eurozone essentially divided the currency union’s member states into two antagonistic camps, creditor nations in the north and debtor nations in the south.

The north’s distrust of the south, and the south’s resentment of the north, along with economic distress and the realisation that Brussels and its allies bore much of the blame for this mess (but had no interest in changing direction) also boosted political parties once confined to the fringe or triggered the formation of new parties that would once have found a home there. Those forces were given additional impetus by an unrelated issue— mounting unease over immigration and its longer-term implications. What’s more, many continental eurosceptics have been transformed from naysayers opposed to further integration into a force that actively wants to reverse the direction of ‘ever closer union’. Populist governments (of very different hues) have come to power in Greece and Italy.

Germany and other ‘northern’ states are now even more firmly set against fiscal union, rightly regarded as a device to milk their taxpayers in perpetuity. In the Eurozone’s south, meanwhile, there is increased resistance to Germany’s insistence on enforcing its sometimes counter-productive brand of fiscal discipline on everyone else. It’s significant that, with Emmanuel Macron’s own plans for fiscal union floating face-down in the Spree and gilets jaunes roaming France’s streets, his government will now be breaching (just a one-off, of course) the EU’s budgetary rules.

All that said, betting against the survival of the euro is unwise. The political will to keep this vampire currency going should, as the last ten years have shown, not be underestimated and populist parties are just as conscious as their more orthodox rivals of the general public’s fear of ‘something worse’.

But European growth prospects are deteriorating despite years of the ECB doing “what it takes”. The economies (and balance sheets) of many of the Eurozone’s weaker member-states continue to suffer from the after-effects of the last crisis and remain confined to the straitjacket of a one-size-fits-all currency:  They will not be well placed to cope with a fresh slowdown. It’s hard to avoid the conclusion that another Eurozone drama may well be approaching, with political consequences that are likely to be much trickier than last time around.

One way to head off some of the worse of what might lie ahead would be by splitting the single currency into ‘northern’ and ‘southern’ euros which would better reflect the economic realities of the domestic economies they serve. This would be far from straightforward, but it beats sticking with a status quo that offers much of the Eurozone little more than stagnation at best, and catastrophe at worst.

But such a split runs against the idea of the irreversibility of ever closer union. It’s never going to happen.



Don’t believe the EU – Greece’s crisis is nowhere near over

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With Nemesis dodged, however ruinously, it has not taken too long for Hubris to reemerge from under the rubble.

“The Greek crisis ends here tonight,” declared the EU commissioner for Economic and Financial Affairs within minutes of the conclusion of the June meeting at which it was agreed that Greece would receive the final slice (€15 billion) of its third Eurozone bailout this August.

Even though Greece’s graduation from rehab had been sweetened by its Eurozone creditors extending the repayment date of almost €100 billion of debt (about a third of the total) by ten years, this claim of victory was both tasteless (youth unemployment currently stands at nearly 40 per cent) and premature. Greece will be left with a cash cushion of €24 billion, which should enable it to avoid having to approach the financial markets for around two years — a handy breathing space, to be sure, but one that is more likely to be a respite than the preamble to a cure.

The country’s GDP expanded by 1.35 per cent in 2017, after almost a decade of annual declines interrupted only by the annus mirabilis of 2014, the one year when it eked out a positive return, a miserly 0.74 per cent. The IMF reckons that the pace will pick up to 2 per cent in 2018 and 2.4 per cent in 2019, which is at least something, if less than hoped earlier.

Perhaps that might happen — if the global economy keeps ticking over (and the neighbourhood remains calm: let’s not talk about Turkey and Italy) — but it’s impossible to miss the subtext lurking within the IMF’s recent report on Greece. Has a slump as deep as America’s Great Depression, but more prolonged, left behind enough of a country to make its own way? And will, as the IMF clearly worries, the continued policing of Greece’s finances by its reluctant rescuers be so severe that it shrinks the scale of a desperately needed recovery?

Formal exit from the bailout regime will mean an end to the harshest of the austerity measures that went with it, but Athens will still be required to maintain an annual “primary” (i.e. before debt servicing) budgetary surplus of 3.5 per cent until 2022. The straitjacket will then be loosened — somewhat. The government will be expected to achieve an average annual primary surplus of 2.2 per cent until, well, 2060.

Adding a culturally appropriate touch of Sisyphus to this already implausible undertaking (the IMF diplomatically talks of “very optimistic assumptions”), any new funding from the markets will be priced on far less generous terms than Greece’s rescuers have been charging.

And there’s no reason to be sanguine about that existing debt. It may be cheap and the timetable for its repayment leisurely, but its sheer size (some 180 per cent of GDP) means trouble ahead. After all, this is not a drachma-denominated liability that Greece once might have printed away. And it wouldn’t be a drachma-denominated liability even if Greece readopted the currency it should never have abandoned. A reborn drachma would plummet so far that the dream of repayment would quickly be replaced with the reality of default.

Brussels’ convenient conceit is that the EU’s new and improved Greece will grow out from under this burden, an unlikely prospect made more unlikely still by overly onerous budgetary constraints and the structural problems that should have made the country ineligible for the euro in the first place.

To start with, there is the matter of ensuring the economy can keep up with the rest of the Eurozone, not easy given the country’s persistently low productivity. Back in the days of the drachma, Greece could at least devalue its way into some approximation of competitiveness. With that option off the table, the conventional alternative, a domestic squeeze — an “internal devaluation”, to use the jargon — has been tried since the early stages of Greece’s long Calvary, and it is still being tried. But whatever its merits as a device to eliminate some of the worst aspects of the Augean state, there is scant evidence that it has done very much to sharpen the country’s competitiveness.

Indeed, in some respects it may have made things worse. Destruction can be creative, but sometimes it is just destructive. GDP stands at 2003 levels and at less than 60 per cent of its 2008 peak. Disposable income has fallen by about a third since 2010 and the private sector has been devastated. The banking sector is under-capitalised (credit is still contracting).

In short, so much has been smashed up that it is difficult to see where the type of turnaround Greece needs can come from. Three hundred thousand Greeks, including many of the nation’s best and the brightest, have emigrated in the last eight years, a move made easier by their right to settle anywhere within the EU. How many will come home?

A similar question can be asked about capital, which also moves freely throughout the EU and, as between the different countries of the Eurozone, with (the danger of eurogeddon apart) no currency risk: A French euro is a Finnish euro is a Greek euro. If a euro invested in Greece cannot offer the returns available from a euro invested elsewhere in the Eurozone, the country will struggle to attract investment, whether domestically or from abroad.

Rather than promote the economic convergence of its constituent parts, a currency union could well have the opposite effect. Capital will tend to flow to its winners and away from its laggards, a process that could doom Greece to ever more peripheral status. This slide will be accelerated by the unwillingness of the Eurozone’s member-states to agree to supplement their monetary union with a fiscal union that would, as in the US, establish the automatic transfer of resources from richer to poorer states that operates as a brake on a currency union’s natural centripetal pull.    

The task of modernising the Greek economy is, to put it mildly, incomplete, and there must be some doubt as to how much further its government is prepared to go down that route. The authors of the IMF report refer politely to “reform fatigue”. “Political pressures,” it warns, “to roll back reforms may intensify ahead of the 2019 elections”. Indeed they may, not only because of the agony associated with these reforms (made even more painful by outcomes with a tendency to disappoint), but also because of the largely accurate perception that they have been imposed from outside.

A good number of the real culprits — most notably those who took Greece into a currency union for which it was not ready and then squandered the opportunity it might have represented— are home-grown, but that’s not how it appears to many voters. Under the circumstances, it will not be surprising if some politicians are tempted to suggest to them that Sisyphus should shrug.

But even if Greeks do vote to stay the course — and the best guess is that they will, if only, in many cases, because they fear the alternatives —  and even if Italy’s new government does not trigger a broader Eurozone fracas, economics will eventually reignite the Greek crisis and, probably, sooner rather than later.

One of the rare, if partial, concessions to reality in the arrangements negotiated in June was that the Eurozone’s leadership will take another look at Greece’s situation in 2032 (2032!) to see if further debt relief is required. Well, it will be — and quite some time before then, because, in the end, nothing has really changed. Greece will continue to pay a terrible price for membership in a currency union for which it was, is and will be completely unsuited, but is understandably terrified to leave.

Its creditors, meanwhile, particularly in the Eurozone’s richer north, are terrified about the damage a Grexit could do to a Eurozone built on unstable foundations that they don’t want to complete, demolish or remodel. And so, after a re-run of a drama that will be stale before it has begun, there will be a fourth Greek bailout – and that won’t change much either.

Time has let Corbyn off the hook

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Talk of contacts with Czech Intelligence has generated some entertaining headlines but it hasn’t done Jeremy Corbyn much harm. According to a YouGov poll, only eight per cent of voters think less of him. Nearly two-thirds (some of whom, I suppose, may have already thought that he was a Commie spy) are apparently left unchanged in their opinion and six per cent seemed somewhat impressed. We shouldn’t be surprised. The unelectable, unthinkable Corbyn swept to the leadership of the Labour Party and then led his unelectable party to an almost unthinkable result in the general election. Nearly nine months later, this unelectable party is ahead at the polls: a lead that has grown since Jan Sarkocy started to reminisce.

We do not know what, if any, Cold War skeletons may yet emerge from Corbyn’s cupboard, though it should be stressed that there is, so far, no convincing evidence that he was recruited as an agent or did anything other than have meetings with a representative of a foreign government. But even if there were to be any revelations, it’s difficult to see what difference they would make. After all, there are horrors enough out there as it is: they range from Corbyn’s involvement with (let’s be polite) Irish republicanism to a politically and psychologically disturbing series of fanboy infatuations with thugs, goons and hard men overseas. That some of them are on the hard Left is unsurprising, given Corbyn’s always adventurous interpretation of “democratic” socialism, but it says something – and nothing good – that others appear to be united by little more than their distaste for the liberal West, a liberal West that includes the country that Corbyn would like to lead.

Corbyn, secular and socialist, has praised the revolution that led to Iran’s klepto-theocracy. He once called for “political compromise” with ISIS, and has marched rather too closely in step with a Kremlin that in reality, if not always in imagery, has long since left the red flag behind.

Large numbers of Labour voters are aware of at least some of this, and quite a few are aware too that there is plenty more – hatred of Nato, say, or a degree of sympathy for Serbia’s Slobodan Milosevic – bubbling in the sewer from which Corbyn’s enthusiasms emerge. Yet they still vote for him and his party. They would thus be unlikely to be too concerned by accusations of Cold War skullduggery from over 30 years ago, even, I suspect, if it turned out that “Agent Cob” had handed the Czechs some gossip he felt might speed up the march to Utopia.

Such insouciance is a worry, but not much of a mystery. To no small extent, Corbyn has been let off the hook by nothing more complicated than time. It’s been more than three decades since his alleged Czech encounter, and, for that matter, since he invited two convicted IRA terrorists to a meeting in parliament shortly after the Brighton bombing. The Troubles were ended by the Good Friday agreement and the Cold War by the collapse of the Soviet empire. Memories of both conflicts have faded and so have the passions they once aroused. Time can be too good, and too forgiving, a healer. It is also an accomplished gravedigger. Many of those able to understand the significance of Corbyn’s past behaviour are no longer around to explain.

Later generations have been taught a version of the past that has also been helpful to Corbyn. The Left won the history wars: Corbyn’s Irish entanglements are often excused, with more success than his contemporaries might have expected – or the IRA’s victims deserved – as freelance peacemaking. His embrace of socialism’s rougher variants and with it, a certain fondness for the other side of the Iron Curtain, is regarded as evidence of a heart in the right place. The Soviet experiment was built on a noble ideal, you see. Or so the lie goes.

The broader history of Britain’s 1970s and early-1980s has been rewritten in a way that emphasises the twilight of the pit village rather than the winter of discontent. The focus is on the harshness of Thatcher’s economic medicine, not the deadliness of the disease it was attempting to cure. The remarkable recovery that followed is reduced to a caricature – big hair, big phones, and sharp elbows.

Under the circumstances, Corbyn can be portrayed not as the revolutionary turned relic that he was, but as a former dissident, a prophet, a fighter for fairness, an eccentric, kindly, truth-teller, an image that owes a great deal to his grizzled grandad appearance and almost nothing to the truth.

There are those who are excited by dark tales from Corbyn’s time in the wilderness, seeing it as a promise of what the future might bring. They are not wrong. But those who tell themselves that the old boy has mellowed are fooling themselves. And those who tell themselves that what Corbyn might have muttered to a man from Czechoslovakia (the original “faraway country” filled with people of whom the British were said to “know nothing”) is an irrelevance, of no more importance today than some of the other unsavoury company he has more provably kept in the past, reveal only what they don’t know or, maybe, don’t care to know. They are either ignorant of, or have decided to ignore, Corbyn’s extensive track record of support for causes and regimes hard to reconcile with parliamentary democracy, a record that – as demonstrated by his cynically delicate waltz around the anti-Semitism running through a segment of the Labour party, or his threats against the press after the Czech story broke – is by no means played out.

Perhaps this blindness, willing or otherwise, is just the complacency of those who live in a country where, whatever they may claim to the contrary, most believe that things cannot go that wrong – “Venezuela, here? Impossible”. Comforted by that illusion, an illusion made credible by not having no clear memory of the 1970s, many on the centre-Left, and even the centre, will be prepared to take a risk on a Corbyn-led Labour.

Buying a place to live is beyond the reach of many of the young, wages have stagnated, and the government is busy blundering its way to a Brexit which will be loathed by far more than the 48 per cent. What’s to lose? Quite a bit, as it happens, as Britain may one day discover.

It's Time For The Norwegian Option

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Extricating the UK from the EU after over four decades of membership was never going to be straightforward. And yet, more than a year after the referendum, David Davis’s talk of moon landings aside, the Government’s approach has been dismayingly vague and delusionally blithe. It has no one to blame other than itself.

Once the voters had (correctly, in my view) “advised” Parliament that the UK should depart the EU, it was up to the Government to decide on the type of Brexit it would put to Brussels. Representative democracy was back. The various Leave groups were self-selected and even Vote Leave’s “official” status was derived from bureaucratic fiat — designation by the Electoral Commission — rather than any popular mandate. This group’s “promises” were what they were, but they were binding on no one. There is also the little matter of the 48.1 per cent who voted to Remain. If such a closely-fought referendum were to be truly advisory, the opinions of the losers ought to count for something in shaping Britain’s Brexit proposals.

Some confusion was to be expected after the referendum’s unexpected result, but, even allowing for the Tory brawl that ensued, not on the scale of the chaos that Britain has witnessed. The months that passed between June’s referendum and the Article 50 notification in March were squandered by a team that didn’t have a clue when it took charge, doesn’t seem to have much of one now and has now blundered further by throwing away its parliamentary majority.

Article 50 gives the two sides two years to work things out. If that deadline is missed (and no extension is agreed), what follows is the hardest of hard Brexits. The clock, as the serpentine Michel Barnier, the EU’s chief Brexit negotiator, warned last week, is ticking.

Theresa May has repeatedly argued that “no deal is better than a bad deal”, a mantra that could — in indicating a willingness to walk away from the table — be defended as a negotiating tactic, but only if the EU is convinced that May is actually ill-informed enough to believe what she is saying. Unfortunately that could well be the case, but awkward reality cannot be wished away. No deal would be bad for the EU, but disastrous for Britain, triggering major economic (and probably not just economic) difficulties at home and, Tory ultra-Brexiteers please note, opening Number 10’s door to Jeremy Corbyn—or some equally sinister successor.

Even if it can be cobbled together in time, a more flexible Brexit featuring some sort of free trade agreement (hopefully including services, but quite possibly not) will still be rough going for Britain’s exporters, used to the “frictionless trade” with the EU that would be torn away from them. Tariffs won’t be a problem, but more insidious regulatory barriers will be. The notion that the UK can bypass the latter by simply importing the relevant rules into its post-Brexit legislation is naïve. Regulations change constantly, and Britain will struggle to keep up, even — fingers crossed — if an increasingly mercantilist EU cooperates, and, if or when it comes to services, particularly financial services, “regulatory equivalence” will only be able to do so much in the face of a bloc that regards the City with a dangerous mix of envy and distaste.

The idea that a buccaneering Global Britain, sailing out into the blue on a smile and a shoeshine, will be able to make up the shortfall anytime soon is fantasy. To be sure, there will be free trade deals to be had, but they will take time and, with the UK not in the strongest of negotiating positions, they will come at a price. And the Britain that signs them won’t be so very buccaneering. There’s a great deal to be said for a post-Brexit UK that goes fully “offshore”, deregulating, cutting taxes, flushing the green crap, but the political party that says so will lose the next election: the buccaneers will be sunk before they can set sail.

If Brexit is to be a way out of Brussels’ ever closer, ever less democratic union, while protecting Britain’s access to the more positive aspects of European integration, the best route (as a growing number of observers are pointing out) runs, so to speak, through Oslo. The much-maligned, much misunderstood “Norway option” — continued membership of the European Economic Area (EEA), and thus participation in the EU’s Single Market, on a basis similar to that enjoyed by Norway and two other European Free Trade Association (EFTA) countries — could represent either a transitional arrangement or, arguably less desirably, a final destination in its own right.

Norway, whatever some critics of the Norwegian option may maintain, is not a member of the EU either legally or in practice. Norwegians have twice rejected the delights of EU membership and, judging by opinion polls, they won’t be changing their minds any time soon. Yes, it’s true that Norway does make payments (on a net per capita basis, a bit lower than that now paid by the UK into the EU) connected to its membership of the EEA, but they mainly consist of direct assistance by Norway to poorer parts of the EU, and Britain should expect to pay as well, perhaps — naughty thought — drawing on some of its swollen foreign aid budget to help do so.

It’s also true that remaining in the EEA will imply accepting (much) more of a brewed-in-Brussels regulatory burden than enthusiasts for laissez faire (me, for one), would like. That would be a bigger problem if Brexit promised a bonfire of controls, but, as noted above, with Corbyn at the door and the Tories as they are, it can’t. And Norway has more of a say in those areas of EU regulation that concern it than is often claimed, including, as a last resort (it would risk retaliation), a “right of reservation” enabling it to reject EU legislation.

Then there’s immigration. While Norway has to play by the Single Market’s free movement rules, it also has the right (subject again to the risk of retaliatory measures) to unilaterally apply a temporary emergency brake to immigration from the EU in the event of “serious economic, societal or environmental difficulties”, a right likely to be the subject of fierce debate ahead of any agreement to let Britain take the Norwegian option or anything like it. That said, occasional murmurings, admittedly not always from entirely reliable figures (Tony Blair comes to mind), hint that there might be slightly more room for manoeuvre on this topic than hitherto imagined.

It’s also worth adding that Britain’s membership of the EU has little to do with immigration from outside the EU, a net 189,000 people in 2015 alone, compared with a net 184,000 from the EU the same year. If the government wants to reassure voters that it is determined to cut immigration, more effective restrictions on non-EU immigration would be a useful step forward, a step that Theresa May has notoriously failed to take: in 2010, the year she became Home Secretary, net non-EU immigration stood at 217,000, a total not so very different from where it stands today.

And, for the avoidance of remarkably persistent doubt, membership of the EEA is not the same as membership of the EU’s Customs Union. Britain would essentially (there are some technical issues) be free to cut the trade deals it wanted with that excitingly wide world beyond the EU.

With administrative chaos quite likely to add to the pain that a hard Brexit could inflict, a Norwegian-style prix fixe solution also has the advantage of drastically reducing Brexit’s complexity. Given that, and the broader continuity it preserves, the Norway option ought to be welcomed by business, and (polling indicates) not just business, whether as a temporary fix or — a separate debate — a final destination. And for the EU, it safeguards more of the benefits that the status quo gives its members, while (in what would be a tremendous development for Brussels, if not for many of those living within the EU’s borders) removing that perennial British obstacle to ever closer union.

Sadly, there is no guarantee that the Norwegian option (or something like it) is available for Britain to take up. Far from it. The moment may have passed — or been frittered away — if it ever existed, but for the UK even to propose it would suggest a seriousness about what Brexit involves and what Britain wants from it that has, up to now, been lacking. And that, at least, would be a start.