Category Archives: Economics & Finance

The Four Pillars of the EU- freedoms or serfdom?

JR Max Wheel

 

14 March 2017

 

When studying economics, it was a virtual article of faith that freedom of movement of goods and services as well as capital were an unmitigated good. This was not only “sound” Ricardian common sense about comparative advantage. that allocation of resources meant that country X would always have the capability to produce goods more efficiently and cheaply than say country Y, but that it would allow the latter to divert resources to where it had a comparative advantage, thereby promoting mutually beneficial trade. We all thus gain. That of course was the textbook explanation.

 

A similar argument is made for allowing free movement of capital this would then flow naturally to areas where it was both needed and most productive, rather than remain bottled up in nations who would in all probability misallocate it. Again, the theory is that it is a win win.

 

Recall these are textbook explanations of economic theory, sometimes they are true, deregulation can produce beneficial outcomes and help develop valuable natural and human resources which otherwise would not have benefitted.

 

Unfortunately, economic textbooks also believe in “efficient markets” and “rational expectations”, where markets price in all known facts to deliver a market clearing price. Regrettably the one fact we all intuit or may claim to know is that the human being is neither remotely rational for much of the time and that markets can be anything but efficient.

 

Freedom of movement of people can also be beneficial and has resulted in some remarkable success stories, where a persecuted minority can move and develop in a new host country to flourish and contribute to national wealth. History is replete with examples of the outright dim-witted- the expulsion of the “Moors” from Spain for religio-social and identity reasons to the Huguenots from France who settled in the UK and elsewhere and brought their skills and industry with them. The United States with its largely immigrant population is probably the most obvious example of unleashing the multiple talents of its newly “liberated” citizens, even whilst holding down its grotesque system of indentured slave workers.  There have always been moments of profound change resulting in mass migration, whether as result of religious or societal persecution or natural disaster. There is however no absolute right or guarantee that mass migration of people is a good thing, it is circumstance dependent.  The economist might assume that extra labour resources are a good thing and for several reasons, they may contribute to increased national income, they may replace economically inactive citizens with productive ones, but it is a hypothesis. The arrival of uneducated manual labourers in an automated and increasingly technologically driven society may mean that there are a limited number of real job and life chances or that resources need to be diverted to train and equip them to be productive. It may mean they are consigned to the most menial forms of labour. In short there are again no guarantees.

 

Economics as taught in much of the 20thC had elevated itself to the level of a hard science with right and wrong and provable answers to its questions. This is not so, as evidenced by its existential crisis as an academic study. It cannot be because its actors are not particles, but people and as we said people are not necessarily rational or at least for much of the time.

 

Recent history [and there are echoes of this in previous centuries] shows that large corporations can shape-shift rapidly and in doing so transfer jobs and capital to exploit market opportunities, these are not written in stone or fundamental principles, they are opportunistic moves. The rise of truly global corporations transcends the power of nation states and even economic power blocs or multilateral organizations. This has happened and is happening. Technology is equally capable of job creation and job destruction, distribution of the spoils of enterprise are neither necessarily distributed equally or equitably, nor are the costs, the destruction and pollution the so-called “negative externalities” of the economists or the bits that go wrong, despoil, or destroy habitat, damage natural systems.

 

The nation state, in many cases gave rise to democracy, which though never a universally adopted system can now be easily over-ridden, it is no surprise that the management of such corporations can disregard the interest of others. Their interests do not align but diverge, thus decisions are taken with a view to maintaining a world view and a set of values that collides with those of the citizens or electorates. Such people are by definition a nuisance and an obstacle and therefore every trick in the book is used to subvert them.

 

These are the self-same so-called freedoms enshrined in our EU power bloc. They trump national interests and because of their astounding capability of creating wealth are profoundly anti-democratic.  They were never meant to be so, but that was another world in which such aspirational and near utopian ideals were viewed as desirable, rational and the pinnacle of liberal values. They have become so deeply subverted that the victims neither see the results or if they do are powerless to prevent them.

 

 

 

 

A Collaborative Europe?

JR Max Wheel

4 August 2016

Open Europe, the think tank, today floated the EEA route as a potential transitional measure for the UK whilst the country clarifies its post membership aims. This is a position that was proposed by Dr. Richard North (and others) pre-referendum as being a logical route, but it is slow and ponderous and falls far short of the “take back control” leaver stance as:

  • UK contributions will continue
  • Free movement of people will continue
  • EU law making will largely be the same
  • Free trade agreements can be negotiated in principle but EU regulations inhibit necessary flexibility

It has the merits of avoiding a direct clash with the Scots and Northern Irish voters, but as with all transitional arrangements they begin to take hold as a new “status quo” and they most certainly do not reflect the leave vote ambitions.

Article 50 is however so badly drafted as to be a near unworkable part of the Lisbon Treaty, presumably because it was never envisaged that in reality any member state would wish to leave, so it is there almost for completeness sake. It is also extraordinarily one sided, with any negotiation being subject to the Council and Commission acting as judge and jury. No trade or international agreement would put its interlocutor member in the “dock” or make it jump through so many hoops. This much should be made clear in negotiations. The UK has indicated it would not trigger article 50 until 2017, this is a key year with both French and German elections looming and with considerable possibility for upset. Since both the EU Commission and many member states resent the implicit threat to the “European Project” by the UK vote, there is a rawness to the current debate which inhibits proper dialogue. And dialogue is needed if the process is to be both facilitated to the benefit of all parties and to establish the necessary post membership collaboration whether on matters of security, defence, scientific research or similar cross border issues.

The Project itself is threatened by some serious internal disconnections of which the currency is the most serious and the democratic gulf between citizens and the EU governance entities. As Yannis Varoufakis, the former Greek Finance Minister has argued, talking of an EU democratic deficit is comparable to arguing  of an oxygen deficit on the moon- there IS no oxygen on the moon!

This political deficiency is however only part of the problem, the EU has evolved since the 1950s, when many of its ideals and aspirations were relevant e.g., the 4 pillars or freedoms:  without amendment, movement of people and capital especially, now look to be frankly unworkable and not just for the UK.

At the core of the EU is the Franco-German axis. This was always rather cynically designed as a German cart with a French rider. This quid pro quo, rehabilitating the German people following the horrors of war is a power game, where French diplomacy would triumph as the German economy recovered via the economic miracle. Far from being the end of the nation state  subsumed into a more “equable“ supranational body, there have been a series of brutal trade-offs between both parties, made explicit following the reunification of Germany. 1989 should be seen as a seminal year and not only for the EU.

What were the parties’ objectives? There was a trade-off between an enhanced global role for France in exchange for the curtailment of the monetary discipline of the Bundesbank and an increasingly dominant German economy. The genesis of the single currency was a naive ploy to force political union via economic means and in swapping a stable DM for a inadequately structured new single currency and the establishment of a “non-German” dominated Central Bank, the ECB. Like many other “orthodoxies” this hit the buffers with the crash of 2008, but a short backward glance to the behaviour of the Exchange Rate Mechanism in the late 1980s/1990s would have shown how dangerous this experiment is. This error was compounded by the eastward expansion of the EU to include countries who naturally enough wished to share in Europe’s democracy and economic opportunity, but whose level of development was markedly backward thanks to years of Communist or autocratic misrule.

The EU still has not undertaken the proper political calculus as to why Britain voted out, as it is a confused and multifaceted issue. A major albeit not sufficient reason is the stalled economic prospects of the many and the inequalities engendered by policy failure and rapid change. Equally important is the real sense that decisions are taken remotely and without consideration of societal consequences- immigration being the obvious one. Add to that the malign effects of globalization, the rise and rise of a wealthy and disconnected elite which has created a truly toxic brew roundly rejected by a significant part of the electorate. Over focus on Remain/Leave campaigning positions is both misleading: neither side emerges with any credit, that however is to miss the point.

The EU needs an overhaul and a redesign if it is to ever properly engage its citizens and to prosper, the UK needs and wants a collaborative approach to its European neighbours, whichever route offers the greatest real benefit to both-this is the prize and one is not at the expense of the other.

 

 

 

Brexit – the Fallout

JR Max Wheel

29 June 2016

The bad tempered debate about the referendum result continues to rumble on in the UK and Brussels. It would be charitable to suggest that this is chiefly the shock effect and real fear of cross EU contagion, but it is more.

As is usual faults are evident on both sides, in the UK for failing to prepare for both possible outcomes of the vote and selling the notion that exit would rapidly bring an end to the key issue of uncontrolled migration whilst preserving beneficial trade concessions from the Single Market. The campaign was marked by outrageous and frequently unsubstantiated claims by both Remain and Leave sides and further fuelled by a unpleasant rise in racial tensions, which have lurked beneath the surface in Britain, and well before the advent of a faux multicultural narrative; the same tensions are by no means confined to the UK, but exist across Europe and beyond.

In principle, it should not be beyond the grasp of a mature EU that not all member countries, for historical and cultural reasons regard its federal ambitions as either necessary, desirable or even feasible. That much has been obvious since the Maastricht, Nice and Lisbon treaties, the last being the (failed) attempt at creating a European constitution) rammed through as a treaty. This exercise in overreach really triggered the widespread anti EU feelings of the sceptics, and not just exclusively in the UK. It is no accident that M. Monnet believed in a Commission of elite decision-takers as clearly the serfs could not be expected to run matters themselves, a de haut en bas attitude that prevails even today -an historical core feature that makes for a large part of the EU’s democratic “deficit”.

The crash of 2008 and its consequences and the economic damage wrought by the single currency, essentially incapable of adjustment, should itself have required a major rethink by administrators in Brussels, at Council, Commission and Parliament level. They signally failed to do so and fatally pressed on, triggering serial economic crises in Southern Europe which continue to this day. The mantra of “more Europe” was again trotted out as the only solution, despite the fact that France and the Netherlands notably, submitted Lisbon to referendums and decisively rejected its implications.

The migrant crisis is for many the final straw; it shows the EU as incapable of coordinated rational response on either sensible humanitarian or socio-economic grounds. This is not to pretend that it is or will be easy to resolve; but clinging to artificial constructs in the face of an unprecedented movement of people was irrational and irresponsible. The root causes are well known, however the limp and disoragnized response revealed EU power structures to be incapable of rapid or rational action. The freedom of movement of peoples is a wholly aspirational and Utopian idea, born in the 1950s and its current extreme form, utterly inappropriate in the highly mobile globalised 21stC.

By now the problems piling up at the EU have reached breaking point – Euro mismanagement and ongoing suffering from economic woes, borders exposed as dangerously porous, rapid accession of low income new states, a mishandled accession approach from Ukraine resulting in a barely contained war and the annexation of Crimea and a bureaucracy, for whom no issue seems too small or insignificant but to require the dead hand of a meddlesome Brussels.

This is both dangerous stasis at one ahand coupled with over focus on trivia:  further integration is stymied, even to support the currency, let alone protect common borders or to consult on matters of foreign policy. Worse, policy making is driven by appointed staff, whose remoteness from member states’ own electorates leads to the perception and frequently the reality, that national laws and customs become increasingly irrelevant.

The continuing increase in wealth inequality despite the excesses leading up to 2008, but in reality a much longer time horizon back to the mid 1970s (since when wages as a share of GDP have been static or falling) and the increasingly powerless lower or eroded middle classes add up to a toxic brew. The EU project is now suffering an existential threat and the UK referendum is merely the lightning rod, but the blame game persists with no one focused on how a modern Europe can be made both democratic and dynamic. Tying essential trade issues to mass migration on  the immovable notion of an “essential” pillar or “freedom” verges on lunacy.

The Visegrád group of Central/Eastern European countries have already begun to demand reform of EU institutions, even as extremist parties have picked up momentum and arguing for national referendums in France, Italy, Greece, Finland and the Netherlands. Those who have benefitted from the opportunities arising from globalised trade in goods and services are being challenged by those who have not and whose communities have changed radically and who sense that nationals are being pushed to the bottom of the queue for hard-pressed public services. Rationality does not enter into that argument, even if it is part perception and part reality. Anger fuels political upheavals.

If the EU is to mean anything and to survive, let alone thrive, it must change fundamentally, that means either real economic and political integration, which is what more Europe means, and seems wildly unlikely or it means a move to a more flexible set of political arrangements, a Europe of associated nation states trading freely and with their agreeing which issues require pan European cooperation, rather than diktats handled down from a supranational Commission to a rubber stamp Parliament. Since the currency problem cannot be fixed and acts like a latter day gold standard, it must be made flexible to allow for external adjustments, which don’t repeat the errors of the 1920s/30s, where the only way to achieve it was via falling employment, wages and GDP.  A measure of how vital this is the prevalent fear that Germany, the de facto EU paymaster may itself lose out in the wake of Brexit, outvoted by austerity ridden Southern Europe. The clock is therefore ticking for both sides and contrary to mainstream media,  it is not solely due to the threat or reality of Brexit.

Muddy Waters – Central Banks, interest rates and the need for fiscal policy

9 September 2015

JR Max Wheel

 

Central Banks appear to be in a total quandry about interest rates with the result that we have had a ludicrous situation of near zero interest rates for seven years in the US and UK. Whilst ZIRP rates and QE were supposed to trigger a return to economic normality, they have not done so. The growth and employment statistics have improved in both countries, but something has broken in the present model. It is not just zero hours contracts and a drift to self-employment, growth in production is weak and uncertain in most advanced countries and much of this antedates the now evident problems in China and emerging markets. The fear factor is that the underlying economies are too weak to sustain a change in policy. That way we remain in thrall like an addict and that normalization is somehow not possible!

 

If you are an Austrian school economist you might take comfort from the fact that this all results from a massive misallocation of resources and hence no real surprise at all. Interest rates are and meant to be fundamental signals; that they are not thanks is in no small measure thanks to Central Bank policy manoeuvres and QE which goes a long way to explain the disconnect. Whilst few would argue that in the immediate aftermath of 2008 massive intervention and stimulus was needed, it has now become embedded; this is unhealthy. Any attempt to unwind QE or to raise rates has resulted in behaviour like the 2013 US “taper tantrum”, throwing markets into reverse gear. Persistent low-interest rates discourages savings and blows asset bubbles – the most obvious ones being the property and until very recently stock markets: meantime asset managers are seeking yield even via the re-generation of securitized assets based on inflated property prices. Have we learned nothing? It seems not.

 

The banks have also retreated substantially from traditional intermediation, itself a result of weakening incentives to lend and potentially damaging to balance sheets, this often leaves SME companies in difficulties, whilst institutional investors like pension funds face increasing mismatches between liabilities and weak returns on assets. None of this looks in the least bit helpful to a sustained return to a normalized economy.

 

The commentariat continues to assert that QE has not/will not bring forth inflation, but this is because central banks do not count asset price inflation, (typically equities and property) gains in their calculations: this is an error that needs addressing. It is not the dog that didn’t bark, rather the one that was ignored. The big news though has been oil prices and the price decline of any major factor input would logically contain inflation, but for how long? Monetary policies pursued by central banks are often accompanied by long lags, so maybe we should be looking out say 2 years before sensing signs. Clearly the oil price will have asymmetric effects on economies depending  on whether they are importers or exporters of energy.

 

The BIS latest annual report makes for required reading, for anyone mystified by the current malaise. It can be found here: www.bis.org/publ/arpdf/ar2015_ec.pdf It calculates that between Dec 2015 and May 2015 some US$ 2 trillion of LT sovereign debt is trading at negative yields. This is clearly unsustainable, yet at the same time sovereign debt levels continue to rise. A further problem is the erratic movements in currencies, the dollar and euro have moved quite violently in opposite directions, and the Chinese have engineered a decline in the value of the RMB. The global nature of the US $ in trade is a rapid transmission mechanism to other and especially emerging markets, not helped by the collapse of the commodities “super-cycle” .

What the BIS gets absolutely right is that monetary policy alone cannot succeed in bringing about a normalized economy, that much is blindingly obvious, there needs to be a proper role for fiscal policies and to avoid building up additional and unwelcome problems, we had better address the imbalances – a good starting point would be a move to begin the process of raising interest rates and reining in QE. The latter has only worked fitfully at best and production and investment will only recover when it is able to judge from an appropriate benchmark. Managing this will have to be communicated to markets a whole lot better than the shall we, shan’t we approach of the Fed or specious “forward guidance”  approach of the Bank of England.

 

Greece-Torpedoing the “deal”.

15 July 2015

JR Max Wheel & Graham Reid

 

It seems barely credible that after the heavy-handed treatment of Greece by the Eurozone and the Commission over the weekend to drive a deal to which its co-members could agree, support or at least defend, that no one thought to reference the IMF figures, which were both known and available to Brussels. This makes a terrible situation, a whole lot worse for obvious reasons. It is not feasible for either the Greek Parliament or indeed the other EZ states to recommend this deal, which of course was far from a real deal at all, more talks about how to reach some kind of binding agreement short of removing Greece from EZ and possibly the EU itself.

http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf?hootPostID=2cd94f17236d717acd9949448d794045

 

That the IMF has gone public with it in its uncompromising wording has left all the delegates looking as inept as they have appeared vindictive. That serious long-term debt relief was required is blindingly obvious. This has been our view since at least 2009. We have argued for zero coupon bonds on the basis of the Brady bonds used successfully in the Latin American debt crisis of the 1980s, this was laughed out of court by the cognoscenti. We have called for real FX flexibility, not solely for Greece but the whole zone, since no economy can assume that it will not at some point be radically blown off course. We suggested that the IMF might consider expanding and using the SDR as a means of preventing the blow out of national budgets as countries came to grip with the banking crisis, only to run into the US Dollar as near sole reserve asset and seinorage arguments.

 

One suspects that future scholars will pull their hair out at the seeming near total lack of grasp by leaders of the European Union in determining that a cart should or even must pull a horse by designing a system that in nearly every way mimics that of a failed gold standard, a system that derailed economies for nearly a decade and was at worst a partial progenitor of WWII.

 

“Earth’s proud empires pass away” as the old hymn has it, and that is what the EU has become a quasi –empire, run in the interests of a few and as such always vulnerable to overreach.       In the Greek case there are many parties that have contributed to the present shambles; their reasoning has as much to do with outright self-interest as with the greater whole. Founding father Jean Monnet observed that the Union would be beset with crises on its way to achieving its goal, this one might be terminal, and not just for the hapless and badly ruled Greeks, unless it is quickly addressed.