The European Union that never was

The European Union that never was

On June the 23rd of this year, the British people voted to leave the European Union (EU), with 52% opting to leave. This decision blindsided most political pundits and went against the advice of both the then-Prime Minister, David Cameron, and the opposition Labour leader, Jeremy Corbyn, with the former resigning soon after the result.

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Source: The Electoral Commission – UK

Many prominent individuals who traditionally assume guard on the same flank of the political and economic battlefield found themselves opposed in this ballot. No longer could individuals count on their side of politics to guide their pen, as many on the left countenanced leave and many on the right countenanced remain, and vice-versa. All rather confusing.

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Leave supporters: Steve Keen (left) and Boris Johnson (right)
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Top: Yanis Varoufakis, Remain; Bottom: Tariq Ali, Leave
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Remain supporters: David Cameron (left) and Jeremy Corbyn (right)

These leaders, from differing backgrounds and professions, took up contrasting positions, each with different justifications and constituents they were seeking to represent.

Firstly, Steve Keen is a Post-Keynesian economist (a school of economics outside the mainstream) and is currently the Head of the School of Economics, History and Politics at Kingston University in London. Keen was prominent in his criticisms of the European Union’s bureaucracy and undemocratic nature, using the Greek debt crisis as an example of the power of the European Central Bank (ECB), the European Commission (EC) and the International Monetary Fund (IMF) – together, the Troika –  to remove power from democratically elected, national governments and return it to Brussels. Not only this, returning power to a bureaucracy attempting to enforce an economic dogma he described as “a suicide pact” – the Maastricht Treaty.

The Maastricht Treaty set strict limits on public debt levels and how national budgets are utilized. The treaty limits government deficits to 3% of national income and public debt levels of 60% of national income. These standards were set in a way that was meant to ensure stability and ensure that convergence of the member nations was achieved to facilitate the single currency. Effectively, they restricted how national governments should operate their national budgets. Signed in 1997, this graph displays the public debt to GDP ratios of several member nations in that year and the year after.

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Source: European Commission, Statistical Appendix to European Economy

As can be seen, many of the member nations were above this public debt limit. To attempt to bend these rules, the European Commission allowed members to enter if their debt levels were falling year on year. Even with this allowance, in this graph Austria is shown to be disqualified. Germany, the largest member, went from 59% public debt to GDP in 1997 to 60% public debt to GDP in 1998, which should have disqualified the economic champion of the union. Simultaneously, the second largest member increased its public debt to GDP from 59.3% to 59.6%. Both have resided above the 60% limit since 2003.

More crucially, the rules specified that the European Central Bank cannot print Euros to assist members who have fallen into debt crises like those experienced during 2010. Economists like Keen and Varoufakis rail against this rule and its implications in particular. This meant that a nation like Greece, facing a serious debt crises, could neither use large deficit spending to kick start the economy nor rely on a central bank to use quantitative easing or other measures to restart credit creation and lending from the financial sector to spur investment, forcing Greece into a deleveraging death spiral.

In 1992, economist Wynne Godley, wrote an eerily prescient article in regards to the Maastricht treaty and the Union, asking the question:

“What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback?”

A question that unfortunately remained unanswered until that crisis was upon the Union. Keen continues to refer to Godley’s article in his critiques.

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Economist Wynne Godley

Keen’s use of the Greek example is a pertinent one. In the Greek election of January, 2015, the outcome was a coalition government made up of the radical-left party Syriza and the populist right party Independent Greeks, united solely by opposition to the bailout being offered by the IMF and the EU. Alexis Tsipras, of Syriza, was sworn in as Prime Minister later that month, representing a major coup for the anti-austerity movement sweeping the continent. Despite this outcome, by August of that year, the left-wing Prime Minister had signed a third bailout deal with the Troika, forcing higher taxes and further spending cuts to satisfy the creditors. Not only did this go against Tsipras’ original mandate, but it flew in the face of the referendum result just days earlier, with 61% of the Greek people voting to extend the government’s mandate to not accept the bailout conditions. A national vote of its citizens had been overcome by a monetary union looking to preserve its credibility by saving Greek creditors – largely German and French banks. This exercise of power over a nation state for supranational interests is exactly what Margaret Thatcher warned of. In 2016, a ‘reclaiming of sovereignty’ was a key argument of Brexiteers in the referendum.

Yanis Varoufakis had a front row seat to Greece’s political theatre of knives. Made Finance Minister in Syriza’s election victory of January 2015, Varoufakis was the elected official tasked with representing the will of the people. A professor of economics himself, and writer of several books on game theory, it would seem the Greeks chose well. First and foremost, this task involved negotiating with the Troika for terms of an agreement that would include substantial debt relief to the Greek people. Recently, Varoufakis has stated in his blog:

“…I had ranked the potential outcomes in the following order: (1) a viable agreement with the Troika; (2) being expelled from the Eurozone; (3) signing the 3rd ‘Bailout’ agreement.”

After hitting a brick wall in negotiations with creditors compelled to hold-fast by the wish to impose similar austerity measures on other countries further down the line (Portugal, Spain and, Varoufakis argues, eventually France), using Greece as an example, Varoufakis began planning a parallel payment system so that the Greeks could unilaterally exit the Euro in the face of unacceptable bailout terms. Despite the bailout referendum outcome, which should have reinvigorated and emboldened Syriza’s leadership to carry on in its push against the creditors, Tsipras caved to the Troika demands soon after the result and signed documents establishing fiscal targets that meant further tax increases and spending cuts, leaving Varoufakis no choice but to resign from his posting as Finance Minister.

The Greek example would seemingly be enough for any man to be put off European unity. However, Varoufakis still argued that Britain should remain in the European Union. He argued for a strategy of ‘remain and reform’, suggesting that a break from the European Union would not be a successful break from the neoliberal agenda underpinning the Union’s key institutions, as deflationary forces would lead to a rise of the right, leading to further recourse to austerity, not less. The Greek experience, as explained by Varoufakis, paints a picture of a dictatorial, supranational power suppressing the calls of national citizens – an image that Brexiteers portrayed as a betrayal of the nation. However, with extremely different reasoning, Yanis Varoufakis found himself an odd bedfellow of David Cameron, as he too shouted to Remain.

Comparatively, David Cameron argued that economic catastrophe would unfold if Leave succeeded. In his final speech before the vote, Cameron focused on the ability of European nations to coordinate to ensure national security when part of the Union, the impending recession that would occur if an exit occurred and the access to the Single Market of Europe. Cameron argued that Britain had “the best of both worlds”, by not having the euro currency but having the regulatory standards and market access. Thus far, the economic impact has been mixed.

Cameron does mention a crucial difference between the Greek and British experience with the European Union – the Greek’s have adopted the Euro and thus given control of their monetary policy to the European Central Bank, whereas Britain negotiated early on to be part of the Single Market but not adopt the currency. Leaders of Britain were openly apprehensive about the Union from its outset, with Margaret Thatcher particularly critical of its potential, and implicit need, to reduce the power of the House of Commons.

As a result, the United Kingdom maintained an arms length relationship with the European Union in terms of monetary control. However, Full Fact (a UK based independent non-profit fact checking agency) found that 15-50% of the laws passed by the House of Commons are adaptations or adoptions of European Parliament law, highlighting the difficulty of measuring influence in legislative impact.

Under current Prime Minister Theresa May, it is becoming increasingly likely that a so-called ‘hard Brexit’ will take place – British exit from the Single Market. Article 50, from the EU agreement the Treaty of Lisbon, outlines the method in which a member state can exit the Union. Theresa May recently made comments indicating that she wants a ‘clean break’, which have been interpreted to mean that the Conservatives do not wish to negotiate a deal that requires continued contributions to the EU budget and continued observance of certain EU regulation, in exchange for continued access to the Single Market; Norway uses these policy settings. However, conservatives and those on the right who pushed Brexit as a way to curb immigration are apprehensive about this suggestion, as access to the Single Market demands free flow of labour across borders. This specific feature of EU membership was used by Nigel Farage and other Brexit campaigners to argue the Union did not benefit average, working-class Britons.

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Current Prime Minister Theresa May

Many believe May will adopt a position that appeases hard-line Brexiteers, like Farage and those inside her party like Boris Johnson – a position that will result in loss of access to the Single Market in exchange for full control over the national budget, immigration and regulation. Most experts predict a far greater impact if this is the outcome of the maximum two-year negotiations.

Simultaneously, Labour has completed its leadership elections, with Jeremy Corbyn reaffirmed as Labour leader. Corbyn, like Varoufakis (who campaigned for his election to the leadership in 2015) and Keen, has criticized what he terms the “free market dogma” of the EU. He has indicated since his re-election that a ‘hard Brexit’ must be avoided and that negotiations must ensure that Britain holds on to access to the Single Market whilst recovering its sovereignty and respecting the meaning of the referendum result. Corbyn has challenged May and the Conservative Party on its handling of Brexit, stating that some in her party wish to turn Britain in to a “tax haven, offshore island off Europe.” Corbyn’s primary concern remains ensuring that wages are not undercut by foreign labour, a problem he says can be addressed without restricting the movement of labour.

Britain now faces the issue of trying to negotiate a deal with an increasingly cornered European Union administration attempting to maintain its perceived attractiveness whilst addressing the exit of a major European nation. Germany, as the dominant player of the EU and whom Varoufakis refers to as ‘the European hegemon’, will rail against any cherry-picking of the regulations and Single Market pillars. The challenge remains for British leadership to deliver on a multitude of somewhat incompatible promises whilst negotiating with a former partner that it never truly embraced. The way that EU leadership responds will be crucial to the outcome of negotiations. If it chooses to use Britain as an example, as it did Greece during the debt crisis, May and the Conservative leadership will have to accept compromises. It seems unlikely EU leadership will suddenly be overcome with compassion for the British, giving them a sweetheart deal. As a result it seems unavoidable that by respecting the referendum result, Britain will suffer either some economic cost through reduced investment and reduced trade, or accept the free flow of labour across its borders, a tough sell to the rising Right of the nation.

In explaining the EU, Varoufakis said to the BBC in 2015:

“The problem is that once you’re in, it goes just like the Eagle’s song ‘Hotel California’ – you can check out any time you like, but you can never leave.”

Indeed, for Britain, they are trying to leave a club which does not permit exit – a cult like group complete with religious doctrines. During the escape from these zealots, Britain will bear some cost – it remains to be seen which priorities its leaders deem more important, or more politically palatable.

 

 

 

 

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Political extremes and the new power play

Political extremes and the new power play

In 2016, we are facing reevaluations of the status quo. This realignment of the conventional wisdom began in 2007, with the mother of all credit crunches – the Global Financial Crisis. The global order governing our political, economic and societal structures are being called in to question as disenfranchisement and dissatisfaction reign supreme, pushing people to look elsewhere for answers. This trend is all-encompassing, permeating across cultural, religious and national bounds.

Here on the giant island, of usual centrist dominion, we have not been unaffected. Often viewed as an Australian aberration, Pauline Hanson is merely a symptom of the broader affliction. Donald Trump, Marine Le Pen and Robert Duterte continue to dominate our news cycles as they drive their authoritarian agendas. The far-right’s list of successes in recent years is impressive:

  • Norbert Hofer, the presidential candidate of the Freedom Party in Austria, narrowly lost to the Greens candidate in the race, by less than 1%. Since then, that decision has been successfully challenged, and a re-vote will be held in October. He leads in the polls.
  • Donald Trump, proving the pundits wrong, continues to challenge a seemingly vulnerable Hillary Rodham Clinton in the United States. Astonishingly, Clinton only holds an average 2.7% lead over Trump in the polls. The most recent CNN/ORC poll actually showed Trump ahead by 1%.
  • Current French presidential polling shows Marine Le Pen, the leader of The Front National party, polling well ahead of incumbent Francois Hollande. According to the polling, Le Pen would be in a tight race with the former President Nicolas Sarkozy or Alain Juppe, both likely-runners for the Republican Party nomination – both are being pulled to the right themselves. First-round elections will be held in mid-2017.
  • In May, Robert Duterte secured the presidency of the Philippines, sweeping away the candidates before him by capturing more than 40% of the vote. Since then, Duterte has implemented his hard-line policies on crime to devastating effect. Most recently, Duterte made headlines for referring to Barack Obama as “the son of a whore”.
  • Under the leadership of Nigel Farage, head of the United Kingdom Independence Party (UKIP), and the Conservative Party’s Boris Johnson, Britain voted to leave the European Union, with 51.9% of the vote. This was despite the best efforts of its then Conservative Prime-Minister David Cameron and Labour leader Jeremy Corbyn (arguably).

This is by no means an exhaustive list. Concurrently, Latin American leadership of normally left-leaning states comes under strain from right-wing populists, with the Workers Party’s Brazilian President impeached recently. Norway, so often held up as one of the most progressive nations on earth, has begun constructing a 4 metre high wall along its Arctic border with Russia.

It’s not inconceivable that by mid-2017, the United States, France, Austria and many other nations could have far-right heads of state. This turn of events was precipitated by an immigrant crisis and economic stagnation, as we struggle to recover from the Global Financial Crisis.

Robert Reich, Professor of Public Policy at the University of California, Berkeley, argues that income inequality is the major driver of dissatisfaction and the rise of right-wing populism in the United States. Reich, a Sanders backer turned Clinton supporter, derides what he terms excessive monopolization and the stagnation of wage growth in the United States since 1970.

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Source: Pew Research Center, 2014

As Sanders did during his campaign, Reich consistently refers back to the apparent fact presented in the above graph: hourly wages for the average American worker have risen by a mere 7.77% in real terms (2014 dollars) since 1964. According to the Organisation of Economic Cooperation and Development (OECD), in 2012 the US also had the highest rate of incidence of ‘low pay’ – those earning less than 2/3 of the median wage – out of any OECD member, with 25% of the workforce. The vast number of working poor in the developing world are so numerous that a new term has been coined in their ‘honour’ – the precariat, referring to their precarious economic circumstances. This is all while the well-documented gap between CEO and average worker compensation widens, with a Glassdoor report from 2015 finding the average ratio was 204 to 1 in the United States (Walmart’s CEO earns 1,133 times its average worker’s compensation).

Coupled with this severe inequality, is the deep sense of dissatisfaction with the political powers at be in the United States. Pew Research found that in January 2016, 70% of respondents declared they were dissatisfied with “the way things are going in the country today”. Similarly, in September of 2015 they found that 69% of people were dissatisfied with the performance of Congress. Observed simultaneously, these facts may have helped pundits better predict that two outsiders in Sanders and Trump would perform so strongly against more established and well-known candidates.

The platform of candidates like Trump have similar threads of nationalism, anti-Islamic sentiment and a rejection of free-trade. Trump has targeted Muslim immigration, the building of a Mexican border wall, free-trade agreements and second amendment rights as the key pillars of his program. Trump continues to reiterate the need to “put America first”. Similarly, Marine Le Pen emphasizes the need to support “French exceptionalism” and pushes restrictions on immigration not dissimilar to Trump’s. Furthermore, Le Pen wishes to follow in Britain’s footsteps and exit the Euro. Nigel Farage’s UKIP (which he has now resigned as leader of), claims that the British Labour party “…betrayed working people…” by creating an “open door immigration policy”. UKIP’s primary promise to its voters is to curb this “mass immigration”.

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Nigel Farage: “I think we’ve reached a point where we have to admit to ourselves, in Britain and France and much of the rest of Europe, that mass immigration and multicultural division has for now been a failure.” (November, 2015)
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Marine Le Pen after the Paris attacks: “France and the French are no longer safe.” (November, 2015)
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Donald Trump on Muslims: “They’re not coming to this country if I’m president. And if Obama has brought some to this country, they’re going, they’re gone.” (December, 2015)

These three leaders have successfully tapped in to anti-establishment sentiment, as large swathes of the electorate blame the respective centre-left or centre-right political parties for their woes. Alternatively, and simultaneously, they have attempted to pander to fear generated through terrorism, promising safer societies through immigration restrictions, with particular focus on Muslim immigration (to differing degrees). The politics of fear has played a significant role in all of their successes.

However, it would be constructive to analyse how our current systems are failing to create inclusive economies and societies. Without these failures, these leaders would lack the fertile ground from which to garner support. In another blog post perhaps.

Source: Economist.com. (2016)

The charts above demonstrate the trend effectively. Europe has been the epicentre of the immigration crisis, with Germany alone accepting a million immigrants in a single year. In response to this, and the huge economic upheaval since 2007 and the proceeding Greek, Spanish and Portuguese debt crises, nationalist parties have been reinvigorated. A strong anti-EU sense has flooded the region, even outside Britain which has always had an arms-length association with the Union, with prominent individuals like Yanis Varoufakis, Noam Chomsky and Steve Keen outwardly critical of its undemocratic bureaucracy. Recently, proponents of EU reform have started the DiEM25 group, aimed at restoring democracy to the European Union.

Clearly, these subjects cannot be unfurled in a 1000 word blog post. Complex issues of income inequality, social upheaval due to immigration, Islamophobia and economic disenfranchisement in our current systems are fields of study in their own right. However, it is obvious that common threads of nationalism, fear created by terrorism, economic stagnation and dissatisfaction with government responses to crises are driving their successes. Sanctuaries of the left are losing their strangleholds in Latin America, Scandinavia and even the bastion of progressive society, France. Critical elections are around the corner, with the most important being the US election. An endorsement of Clinton is the strongest endorsement of the establishment in recent memory. This may colour and impact later contests in strong and unexpected ways. Watch this space.

 

 

 

 

 

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