Social Europe Journal debating progressive politics in Europe and beyond Mon, 22 Sep 2014 12:46:48 +0000 hourly 1 "Revamping Europe’s Tattered Social Contract" by Kemal Dervis Mon, 22 Sep 2014 12:46:48 +0000 Kemal Dervis
Social Contract

Kemal Dervis

For most of the beginning of 2014, the eurozone seemed to be in a state of recovery – weak and unsteady, but nonetheless real. In April, the International Monetary Fund estimated that overall GDP growth would reach 1.2% this year, with slowly declining unemployment, up from its previous forecast of 1% growth. With the threat of unsustainably high interest rates in the countries of the eurozone periphery having disappeared, the path to moderate recovery was supposedly open, to be followed by some acceleration in growth in 2015.

While it is important not to overreact to quarterly figures, recent data, as well as some of the revised data for the first quarter, are deeply disappointing. The pessimism of two years ago has returned – with good reason.

Italy is in an outright recession, and, far from showing hoped-for signs of vitality. French growth is close to zero. Even Germany’s GDP declined in quarterly terms in the first half of the year. Finland, a staunch supporter of firm austerity policies, is in negative territory for the first half of the year.

The eurozone now is facing not only a financial crisis, but a stagnation crisis.

Nominal interest rates for periphery countries’ sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low. The eurozone now is facing not only a financial crisis, but a stagnation crisis. Tensions with Russia may make recovery even more difficult, and it is unlikely that the eurozone can attain 1% growth in 2014 without major policy changes.

The European Central Bank has announced that it will offer new monetary-policy support and has decided to use all instruments short of direct quantitative easing (it is still not buying sovereign bonds). But it is far from clear whether the proverbial horse led to water will actually drink.

If growth and employment expectations remain dismal, it will be difficult to rekindle demand, particularly private business investment, no matter how low interest rates are, or how many resources banks have for potential lending. ECB President Mario Draghi’s message in his speech last month in Jackson Hole, Wyoming, as well as at his September press conference was a clear call for more fiscal support to boost effective demand.

The essential economic problem is clear: there is an almost desperate need for more fiscal space in the eurozone to boost aggregate demand, including more investment in Germany. But there is also a persistent need for deep structural reforms on the supply side, so that fiscal stimulus translates into sustainable long-term growth, not just temporary spurts and further increases in countries’ debt ratios.

Social Contract

The Eurozone economy is slipping back into trouble according to Kemal Dervis.

What the “best” structural reforms actually are remains a matter for debate. But in most countries, they include some combination of tax, labor-market, service-sector, and education reforms, as well as reforms in territorial administration, particularly in France.

These reforms should seek to achieve a thoroughly revamped social contract that reflects the realities of twenty-first-century demographics and global markets, but that also remains sensitive to Europeans’ commitment to distributive fairness and political equality, and insures citizens against shocks. It is easy to call for “reforms” without specifying their content or taking into account the social, historical, and political context.

Reforms should seek to achieve a thoroughly revamped social contract that reflects the realities of twenty-first-century demographics and global markets, but that also remains sensitive to Europeans’ commitment to distributive fairness and political equality, and insures citizens against shocks.

At the same time, it will not be possible to design this new social contract country by country. Europe has become too interwoven in myriad ways – not just in purely financial and economic terms, but also psychologically. It must have come as a surprise to many that it was a German court, not a French one, that banned Uber, the mobile app that is revolutionizing the taxi business.

If the new social contract cannot be forged Europe-wide, it must at least apply to the eurozone to enable the necessary structural reforms. Otherwise, given that the politics and economics of eurozone reform are inseparably linked, fiscal expansion could prove to be as ineffective as efforts by monetary policymakers to foster growth.

Italy’s finance minister, Pier Carlo Padoan, is rightly pushing for a eurozone “reform scorecard,” which would enable direct comparison among national reforms. But, beyond such a scorecard, the will to overcome the stagnation trap must be more than a sum of national wills. Germany must be reassured by what is happening in France and Italy; conversely, Southern Europeans must be able to trust that their efforts will gain additional traction from greater investment throughout the region, particularly in Germany.

A new social contract will not appear out of thin air. Now is the time for the new European Commission to propose – and the new European Council and European Parliament to endorse – a political pact to legitimize and sustain the reforms needed to solve Europe’s economic problems.

© Project Syndicate

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"Towards The Mandatory Approval Of Complex Financial Instruments" by Saule T. Omarova and Peter Simon Mon, 22 Sep 2014 10:18:23 +0000 Saule T. Omarova and Peter Simon
Saule Omarova

Saule Omarova

Complex financial instruments increase systemic risks and jack up leverage in the financial system. The International Monetary Fund (IMF) wants regulators to be prepared to identify systemically important financial instruments (Global Financial Stability Report, p.20). Yet, even transparency is impossible as long as financial instruments are overly complex, argues Suleika Reiners of the World Future Council. Financial regulation and supervision lack always behind because a key driver of new financial instruments is the desire to overcome regulation and avoid taxes, she says.

For these reasons, the World Future Council and the EU Office of the Friedrich-Ebert-Stiftung have organised an international workshop on a mandatory approval of financial instruments (Brussels, 22-23 September). The approach is to build on the concept of regulatory precaution borrowed from the environmental and health law: financial instruments should be put to the precautionary principle no less than other aspects of society such as chemicals and drugs.

The workshop brings together leading academics such as Saule T. Omarova (Professor of Law at the Cornell Law School in New York) with financial policy makers such as Peter Simon (Member of the European Parliament for the Social Democratic Party of Germany, Vice-Chair Committee on Economic and Monetary Affairs). Ahead of the event, both agreed to answer some of our questions.

Peter SimonWhich classes of financial instruments and practices should be subject to regulatory pre-approval?

Omarova: This is one of the central questions in designing a product approval scheme, and there are potentially different ways to approach it. In general, such a regime should target only those types of financial products that increase the levels of complexity, opacity, leverage, and potential instability in the financial system. Inherently, this regime is broad in its regulatory scope and systemic in its focus. For instance, it is possible to mandate pre-approval for all classes of complex financial instruments and activities and then create specific exceptions for instruments that are less likely to pose significant systemic stability risks. In the alternative, the legislation may enumerate certain classes of financial instruments and transactions that pose potentially high systemic risk and, therefore, are subject to the mandatory pre-approval regime, and then grant the regulators discretionary authority to expand that initial list by adding new classes of potentially risky instruments and transactions.

Both of these approaches would target derivatives, asset-backed instruments and structured products. Traditional, simple financial instruments that facilitate savings, investment and capital-raising – such as, for example, ordinary bank deposits or issuances of shares by companies – should be generally exempted from the mandatory approval regime.

What is the distinction between a new financial instrument and the adaption of an existing one?

Omarova: Developing specific criteria for determining when a previously approved financial product has been altered or adapted to such a degree that it should be treated as a new product subject to separate approval is a challenging exercise. Inevitably, it requires a flexible, individually tailored review and ongoing monitoring of each financial product’s post-approval life. Regulators would have to track changes in the key terms of the approved product, which may include terms related to payments and other material rights and obligations of the parties to the transaction, the nature of reference assets, the intended and actual uses of the product, the nature and systemic footprint of the counterparties and target markets, etc. Accordingly, financial institutions would be obligated to provide and continuously update the relevant information to regulators.

Importantly, private firms would be primarily responsible for determining at which point the overall risk profile and potential systemic effects of their existing product or trading or investment strategy changed enough to warrant a new approval application. The consequences to a financial institution of failing to apply for a separate approval of a financial product, which is being used for a different purpose or by a different class of clients than originally disclosed to the regulators, would be severe: any transactions in such new, unapproved instruments are illegal. Among other things, this should create a strong incentive for financial institutions to monitor their own activities much more closely, and with an eye toward their systemic significance.

Which decisions are to be taken at the global level, and which can be left to national or regional administrations?

Omarova: Ultimately, in today’s globalised financial world, any regulatory regime controlling or limiting financial institutions’ ability to maximise their profits creates competitive pressures and potential for cross-border arbitrage. As a practical matter, instituting an effective domestic scheme of mandatory product approval would require, at the very least, agreement on the principles and cooperation among financial regulators overseeing the most advanced and active capital markets. To reap the greatest systemic risk-prevention benefits of this regime, at least the key financial-market jurisdiction would have to agree on, and commit to implementing, the fundamental principles and goals of product approval regulation. Whether or not a specific decision should be made on a supra-national, rather than a national, level would likely depend on the nature of the financial product at issue, the degree of cross-border inter-connectedness in the market for that product, and the individual financial institution seeking approval.

How can the fear of regulators and supervisors to be liable for their decisions be dealt with?

Omarova: It depends on how the enabling legislation is drafted. Regulators and supervisors should not fear that, by simply doing their jobs, they expose themselves to liability or political backlash. Frequently, that fear is there because of the regulated industry pressuring or threatening regulators. Such threats are often implicit, as in the case of financial institutions’ “prediction” of some calamitous events in response to regulatory action they oppose. Industry resistance to regulation is especially powerful if the law proclaims several potentially conflicting policy objectives such regulation aims to achieve, thus providing at least a superficially legitimate basis for self-interested parties to contest regulators’ judgment.

By contrast, a statute that unequivocally states its primary goal of reducing complexity and systemic risk in the financial marketplace would empower the regulators facing socially harmful resistance from private actors. At the same time, the statute would have to establish clear procedures for contesting individual decisions to deny or revoke approval of a particular product, in order to ensure the necessary levels of transparency and accountability of regulators. Thus, the key task in this respect is to combine a strong regulatory mandate with a robust administrative process.

What would be the benefit for regulators and financial supervisors?

Omarova: From a viewpoint of financial regulators and supervisors, the main benefit of product approval regulation is that it explicitly and unapologetically shifts the fundamental presumptions in favor of pro-actively regulating private market activities that potentially render financial systems less stable and less manageable.

As a burden-shifting device, product approval regulation cures the informational asymmetry between private firms and their regulators. If implemented properly, this regime should ensure that regulators and supervisors continuously have their fingers on the pulse of the financial markets they oversee. More generally, to the extent this scheme leads to controlled reduction in the volume and sheer complexity of financial transactions, it should help to restore the critically important balance between our regulatory needs and our regulatory capacity.

In its European election programme, your party calls for a finance TÜV. Why has this been given a priority?

Simon: The recent financial crisis has unveiled the deep-rooted illness in the global financial system. Moreover, it deprived many citizens of their savings, which they had invested into financial instruments they had not properly understood and whose hidden risks have made a major contribution to the current situation we find ourselves in. For these reasons, improving the quality and unveiling the risks of financial instruments is an integral part of consumer protection, which in turn is one of our many objectives for the current legislative term – a Europe for the people, not for the banks.

What are your next steps to take this policy proposal forward?

Simon: The seal of approval of an independent organisation which states, for example, that an investment product is actually suitable to retail clients, would certainly be more than welcome. At the moment there are still quite a few questions that need answers before we can go ahead. Who could perform those tests? What happens if the evaluation was actually not accurate? Who will be held liable? These are just some of them. A lot of practicalities need to be discussed. I therefore very much welcome this international workshop to discuss a (mandatory) approval of financial instruments.

What political opportunities do you see for a finance TÜV?

Simon: The European agenda for the next few years has not been fully shaped yet. Hence, now is the time to bring forward new ideas. We need to move to a more intense discussion on the topic and find answers to all outstanding questions, both in academic as well as political circles.

The interviews were conducted by Suleika Reiners (World Future Council).

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"Scotland: The Morning After The Night Before" by Henning Meyer Fri, 19 Sep 2014 08:34:21 +0000 Henning Meyer

So, the decision is taken! After a frantic final period of campaigning Scottish voters eventually declined the offer of independence and opted to stay part of the United Kingdom. In the end, the result was not as close as the polls leading up to yesterday’s ballot suggested. The Guardian has now published the final result:


But in terms of politics, this is certainly not the end. It might be the end of the beginning but nothing more. Without a doubt, this result has been a damning verdict on the whole Westminster political class, that is increasingly perceived as detached from the live of people on the ground – not just a problem in the UK by the way. The Conservatives have not had much stake in Scotland in recent decades but for the Labour Party this result should lead to some serious rethinking. The majoritarian electoral system has led to Labour designing policies for the swing voters in Middle England, taking support in the North of England and Scotland for granted. Where else would voters go?

This result has clearly shown that under the surface political support has seriously eroded and disillusionment has set in. People did not believe Ed Miliband when he said that the next Labour government, if elected, would implement the kind of policies the majority of Scottish people favour. Scots felt that they did this already and Labour did not deliver. This is a major problem for Labour!

The ‘no’ campaign, in their panicked last week of campaigning, has made comprehensive promises of power transfers to Scotland that they now have to deliver on. This constitutional reform will not just change the way Scotland is governed but will also lead to major changes for Wales, Northern Ireland and England’s regions and cities. This reform package will have to be ambitious and it is very doubtful – to say the least – that the UK government can deliver such a package in a few weeks as seems to be suggested. Constitutional issues such as the West Lothian question and the English question have not been resolved in more than a decade, so how can they now suddenly be resolved so quickly? You can watch below what David Cameron had to say about the result and constitutional reform this morning.

I personally think that keeping the UK together was the right decision. But the heavy lifting of constitutional reform now has to be managed and I am doubtful that this government – with less than 8 months to go until the general election – can manage this. Stay tuned for more!

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]]> 0 Scotland: The Morning After The Night Before Henning Meyer looks at the result of the Scottish independence referendum and explains why the constitutional reform process has just begun. Scotland,Scotland: The Morning After The Night Before r2
"The Price Of Scottish Independence" by Jeffrey D. Sachs Thu, 18 Sep 2014 08:00:10 +0000 Jeffrey D. Sachs
Jeffrey D. Sachs

Jeffrey D. Sachs

Though the world’s eyes now are on Scotland’s referendum on independence from the United Kingdom, Scotland is not alone in seeking to redraw national boundaries. There are independence movements in many other parts of the world; indeed, 39 new states have joined the United Nations since 1980. Many more aspirants are waiting in the wings, and would likely be encouraged by a Scottish “Yes” vote.

The Scottish pro-independence campaign is based on four claims. The first is cultural: to protect and strengthen the identity of the Scottish people. The second is ideological: to move Scotland toward a Scandinavian-style social democracy. The third is political: to bring democratic governance closer to the people. And the fourth is economic: to lay claim to a larger share of North Sea oil and gas.

UK political leaders and many European governments are strongly urging the Scots to vote against independence. Scottish independence, the “No” campaign argues, would bring few if any of the claimed benefits; on the contrary, it would cause many economic calamities, ranging from financial panics to the flight of jobs and industry from Scotland. Moreover, an independent Scotland might be excluded from the European Union and NATO.

What should the rest of the world think about this debate? Should the Scottish independence campaign be hailed as a breakthrough for claims to cultural identify and self-governance? Or should it be viewed as yet another source of instability and weakness in Europe – one that would increase uncertainty in other countries and parts of the world?

Secession movements can, no doubt, cause great instability. Consider the regional and even global turmoil over Kosovo, South Sudan, Kurdistan, and Crimea. Yet national independence can also be handled peacefully and smoothly. The 1993 division of Czechoslovakia into the Czech Republic and Slovakia – the famed “velvet divorce” – imposed no significant or lasting costs on either successor state. Both accepted the division, and, knowing that their future lay within the EU, focused their attention on accession.

If the RUK, the EU, and NATO respond vindictively to a Yes vote – whether to teach Scotland a lesson or to deter others (such as Catalonia) – matters could become very ugly and very costly.

Here, then, is a plausible and positive scenario for an independent Scotland. The rest of the UK (called the “RUK” in the current debate), including England, Wales, and Northern Ireland, would quickly and efficiently negotiate the terms of independence with Scotland, agreeing how to share the UK’s public debt and public assets, including offshore oil and gas. Both sides would be pragmatic and moderate in their demands.

At the same time, the EU would agree immediately to Scotland’s continued membership, given that Scotland already abides by all of the required laws and democratic standards. Similarly, NATO would agree immediately to keep Scotland in the Alliance (though the Scottish National Party’s pledge to close US and British nuclear-submarine bases would be a complication to be overcome).

Both Scotland and the RUK might agree that Scotland would temporarily keep the British pound but would move to a new Scottish pound or the euro. If such monetary arrangements are transparent and cooperatively drawn, they could occur smoothly and without financial turmoil.

But if the RUK, the EU, and NATO respond vindictively to a Yes vote – whether to teach Scotland a lesson or to deter others (such as Catalonia) – matters could become very ugly and very costly. Suppose that a newly independent Scotland is thrown out of the EU and NATO, and told that it will remain outside for years to come. In this scenario, a financial panic could indeed be provoked, and both Scotland and the RUK would suffer economically.

Which way is Scotland going to vote today? No matter what the result will be, major changes lie ahead.

Which way is Scotland going to vote today? No matter what the result will be, major changes lie ahead.

The key point is that the costs of separation are a matter of choice, not of inevitability. They would depend mainly on how the RUK, the EU, and NATO decided to respond to a Yes vote, and how moderate a newly independent Scotland would be in its negotiating positions. If cool heads prevail, Scottish independence could proceed at a relatively low cost.

The dangers of national secession are much greater in places without overarching entities like the EU and NATO to constrain the situation among the successor states. In such circumstances, unilateral claims of independence opposed by the national government or a sub-national unit often lead to a breakdown of trade and finance – and often to outright war, as we saw in the breakup of the Soviet Union, Yugoslavia, and most recently, Sudan.

The key point is that the costs of separation are a matter of choice, not of inevitability. They would depend mainly on how the RUK, the EU, and NATO decided to respond to a Yes vote.

In those cases, separation was indeed followed by deep economic and political crises, which in some ways persist. Indeed, in the case of ex-Yugoslavia and the former Soviet Union, the EU and NATO absorbed some but not all of the successor states, thereby raising major geopolitical tensions.

International politics in the twenty-first century can no longer be about nation-states alone. Most key issues that are vital for national wellbeing – trade, finance, the rule of law, security, and the physical environment – depend at least as much on the presence of effective regional and global institutions. Even if Scotland declares independence, it will – and should continue to be – bound by a dense web of European and global rules and responsibilities.

I am personally sympathetic to Scotland’s independence as a way to bolster Scottish democracy and cultural identity. Yet I support independence only on the assumption that Scotland and the RUK would remain part of a strong and effective EU and NATO.

Certainly, a Yes vote would put an even higher premium on effective EU governance. But, if the EU and NATO were to “punish” a newly independent Scotland by excluding it, real disaster could ensue, not only for Scotland and the UK, but also for European democracy and security.

© Project Syndicate

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"David Cameron’s Failures And The Great Shrinking" by Steven Hill Wed, 17 Sep 2014 10:12:27 +0000 Steven Hill
Steven Hill, David Cameron

Steven Hill

In Prime Minister David Cameron’s desperate entreaties towards his fellow countrymen in the North, one can hear the resounding bleat of his own policy failures. The theme of Cameron’s tenure has become one of “The Great Shrinking”:  close to losing Scotland and its 5.3 million people, and also retreating influence within the European Union and the world.

It’s a stunning reversal of over six decades of progress toward restoring a bit of Britannia’s former glory. No one shoulders more of the blame for this predicament than the current resident of 10 Downing St.

David Cameron has made many tragic blunders that have placed the UK on the cusp of being not only a greatly diminished power but also a less reliable ally for the United States. The first of these blunders was a failure of leadership, not only of the nation but also within his own Conservative Party.

As party leader, Cameron badly miscalculated and mismanaged his party’s backbenchers and rank-and-file. He thought that he could play with the forces of “Brexit” (Britain exiting from the E.U.) as a lever to push reform within the EU, as well as to pander to certain elements of public opinion in order to win elections. He played with fire, and now he is feeling the heat.

Not only has UKIP (a party that favors independence from the European Union) increased in strength rather than diminished, but Scotland’s desire to remain in the EU is one of the factors driving the “Yes” vote for independence. And while the EU has reformed to some degree, none of it can be attributed to Cameron’s public temper tantrums over his disagreements with many of his erstwhile E.U. partners.

Cameron also badly misunderstood the divide between Scotland and a David Cameron-led UK. Professor Dauvit Broun from the University of Glasgow says that a significant factor behind the surge in support for Scottish independence is the widening gulf between what the Scottish people want and the policies pursued by Cameron’s government since 2010.

Most Scots have been opposed to Cameron’s austerity-led economic policies in the aftermath of the Great Recession. In particular, many Scottish voters have never supported Westminster’s attempts to reform — or in their view dismember — the support system for workers and families, otherwise known as the “welfare state.”

Is David Cameron's politics backfiring? Steven Hill says yes.

Is David Cameron’s politics backfiring? Steven Hill says yes. (CC BY 2.0 Northern Ireland Office)

Moreover, the leaders of the independence movement such as Scottish First Minister Alex Salmond point out that the Cameron-led government was not elected by Scots. All of Scotland is represented by only a single Conservative MP, causing some pundits to point out that even giant pandas are better represented in Scotland (since the Edinburgh Zoo has two pandas). Conservatives in Scotland, in other words, are an endangered species. Scots want out from under the conservative thumb.

While Cameron and other Conservative leaders have badly misread the Scottish tea leaves, it’s not as if Labour Party leader Ed Miliband has been a paragon of leadership either. In fact, it’s been the lack of robust pushback from the left – and from Miliband in particular — when it comes to the bellowings of Brexit supporters as well as austerity acolytes that has created a political vacuum into which the Conservative Party has lurched further right, sucking the Labour Party along with it.

And this will not help Labour politically, quite the contrary. The overwhelming majority of Scottish MPs who would lose their seats post-independence are from the Labour Party. So Miliband’s forces in the House of Commons will be greatly diminished.

Lacking leadership from either the right or the left capable of staring down the nationalists within their own parties and beyond, the UK has been slowly drifting towards these seismic events. The worst-case scenarios are closer to blastoff, in which case the UK is poised to shrink both in size and GDP – losing 5.3 million Scots — as well as withdraw from Europe and become more isolationist. This is an abrupt – and disastrous – departure from the UK’s evolution in the post-World War II period, and will certainly result in the diminution of the UK’s importance in Europe as well as on the world’s stage.

The realization of either or both scenarios also makes the UK a less significant partner for the United States, not only in the transatlantic alliance but also within NATO and other international bodies. President Barack Obama naturally has stepped delicately around these issues, saying that it’s a decision for the people of Scotland to make. But his only statement hints at the UK’s expected loss of standing, saying:

We obviously have a deep interest in making sure that one of the closest allies we will ever have remains a strong, robust, united and effective partner.

So Cameron’s sudden desperation is understandable. He opened the Pandora’s box only to discover – surprise! – that he can’t control what he has unleashed. Finally even he appears to understand that the UK is standing at an abyss: of shrinking size, shrinking GDP and shrinking influence on the world’s stage.

Indeed, Cameron is showing himself to be the worst Prime Minister in the UK’s post-war history. If he loses in Scotland, he may still have a chance for a course correction when it comes to the UK’s relationship with Europe – if he isn’t thrown overboard by his own party. But the prime minister’s time is running out.

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"Vanguard Scotland?" by Robert Skidelsky Wed, 17 Sep 2014 09:42:47 +0000 Robert Skidelsky
Robert Skidelsky, Scotland

Robert Skidelsky

Since I believe that the Scots are sensible, I think that they will vote “no” this week to independence. But, whichever way the vote goes, the spectacular rise of nationalism, in Scotland and elsewhere in Europe, is a symptom of a diseased political mainstream.

Many are now convinced that the current way of organizing our affairs does not deserve such unquestioning allegiance; that the political system has closed down serious debate on economic and social alternatives; that banks and oligarchs rule; and that democracy is a sham. Nationalism promises an escape from the discipline of “sensible” alternatives that turn out to offer no alternative.

Nationalists can be divided into two main groups: those who genuinely believe that independence provides an exit from a blocked political system, and those who use the threat of it to force concessions from the political establishment. Either way, nationalist politicians enjoy the huge advantage of not requiring a practical program: all good things will flow from sovereignty.

Nationalism promises an escape from the discipline of “sensible” alternatives that turn out to offer no alternative.

Though nationalist politics was long suppressed after World War II by economic prosperity and memories of pre-war horrors, Europe offers fertile ground for its revival. This is not just because of Europe’s prolonged economic malaise. It is because practically all of Europe’s existing nation-states contain geographically concentrated ethnic, religious, or linguistic minorities. Moreover, these states’ incorporation into the European Union – a kind of voluntary empire – challenges their citizens’ allegiance. Thus, nationalists can look either to Europe to protect them against their own states or to their states to protect them against the European empire.

That is why Britain has spawned two nationalisms simultaneously. The United Kingdom Independence Party (UKIP), led by populist Nigel Farage, looks to London to protect British independence against the EU bureaucracy. The Scottish National Party (SNP), led by the astute Alex Salmond, looks to Brussels to protect Scotland against the “imperial” parliament in Westminster. Given the right conditions, nationalism will always discover an “other” against which to define itself.

Scottish nationalism was not created by the recent economic crisis, but the Scottish referendum was. Scotland convened its first devolved parliament in 1999, giving the SNP a political platform in Edinburgh from which to campaign for independence. The removal of the Labour government in London in 2010 was the voters’ way of punishing the Labour Party for the economic collapse of 2008-2009. But, while Labour’s punishment delivered a Conservative government in London, it produced a majority victory for the SNP in Edinburgh in 2011. To maintain governability in Scotland, British Prime Minister David Cameron was forced to permit a referendum on independence.

An independent Scottish government would face huge economic costs. It would inherit its share of UK public-sector debt and future liabilities without the benefit of the substantial subsidy that it currently receives from the British Treasury. The SNP claims that additional revenues from North Sea oil would offset the subsidy. But these revenues are naturally time-limited, and the SNP has failed to mention the large decommissioning costs that will be incurred when the oil runs out. So, almost certainly, Scottish taxes would have to be higher than UK taxes. In addition, leading Scottish-based banks and many large businesses have said they would relocate some of their operations to London. Scotland would also be threatened with the loss of British defense contracts.


Alex Salmond makes the case for Scottish independence on a BBC programme.

According to the SNP, an independent Scotland would not cause fragmentation of the UK internal market, because it would maintain a currency union with Britain. But the three main British political parties, and the Bank of England, have rejected this. If the Scots want sovereignty, they will need their own currency – and their own central bank: no British lender of last resort would be available to Scotland’s banks.

Scotland might try to keep its currency at par with sterling, but this would require larger reserves than a Scottish central bank could command, at least at the outset. And a Scottish currency that floats against the British pound would mean large transaction costs and reduced trade between the two countries. Nor is there any easy escape, at least in the short run, by joining the EU, which may well require an independent Scotland to apply for membership.

The SNP’s dream of social democracy in one country would fall afoul of the larger interdependencies that bind together the components of the UK, and that tie the UK to the EU.

In short, the SNP’s dream of social democracy in one country would fall afoul of the larger interdependencies that bind together the components of the UK, and that tie the UK to the EU and the EU to the rest of the globalized world. None of this fazes the Scottish nationalists.

In nationalism’s forward march in post-crash Europe, its standard-bearers often use immigration to exploit pre-crash resentment against globalization, notably the erosion of cultures and identities, declining sense of community, wage stagnation, rising inequality, uncontrolled banks, and high unemployment. They question whether people can enjoy the benefits of globalization while being sheltered from its costs – and what alternatives there are to the “market fundamentalism” that has defined capitalism since the late twentieth century.

In this mood, people are more willing to discount nationalism’s costs, because they have come to doubt the benefits of its liberal capitalist rival. Ordinary Russians, for example, refuse to face the costs of their government’s Ukraine policy, not just because they underestimate them, but because they somehow seem unimportant relative to the huge psychological boost the policy brings.

Nationalism today is not nearly as virulent as it was in the 1930s, because economic distress is much less pronounced. But its revival is a portent of what happens when a form of politics claims to satisfy every human need except the coziness of communal belonging – and then lets the people down.

© Project Syndicate

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]]> 2 Robert Skidelsky Robert Skidelsky Alex Salmond Alex Salmond makes the case for Scottish independence.
"Stop Structural Reforms And Start Public Investment In Europe" by Paul De Grauwe Wed, 17 Sep 2014 09:01:41 +0000 Paul De Grauwe
Paul De Grauwe, Public Investment

Paul De Grauwe

Slow growth in the Eurozone has become endemic since the start of the sovereign debt crisis in 2010. This is made very clear in Figure 1, which contrasts the growth experience of the Eurozone with the non-Eurozone EU-member countries since the start of the financial crisis in 2007.  What is striking is that up to the Eurozone sovereign debt crisis of 2010 the growth experiences of the Eurozone and non-Eurozone countries in the EU were very similar. Both groups of countries saw their boom collapse and turn into a deep recession in 2008-09. Both recovered relatively quickly in 2010. Since 2011, however, the two groups of countries depart. The Eurozone experienced a new recession and since then has experienced a growth rate that on average has been 2% below the growth rate of the EU-countries that are not part of the Eurozone.

1, Public InvestmentSource: Eurostat

What happened since the start of the sovereign debt crisis that has led to a systematic decline of economic growth in the Eurozone as compared to the non-Euro EU-members?

In Brussels, Frankfurt and Berlin it is popular to say that this low growth performance of the Eurozone is due to structural rigidities. In other words, the low growth of the Eurozone is a supply side problem. Make the supply more flexible (e.g. lower minimum wages, less unemployment benefits, easier firing of workers) and growth will accelerate.

This diagnosis of the Eurozone growth problem does not make sense. As is made clear from Figure 1 the Eurozone countries recovered as quickly from the recession of 2008-09 as the non-euro countries. If the problem was a structural one, it also existed in 2008-09. Yet these structural rigidities did not prevent the Eurozone countries from recovering quickly in 2010. Why then did structural rigidities from 2011 on suddenly pop-up to produce lower growth in the Eurozone than in non-euro EU-countries, while they did not play a role in 2010?  Although this supply-side story does not hold water, it continues to provide the intellectual underpinnings of the Eurozone policymakers who continue to insist on structural reforms.

There is a better explanation for the Eurozone growth puzzle. This is that demand management in the Eurozone has been dramatically wrong since the start of the sovereign debt crisis. The latter led the Eurozone policymakers to impose severe austerity on the peripheral Eurozone countries and budgetary restrictions on all the others. This approach was based on a failure to recognize that the Eurozone was still in the grips of a deleveraging dynamic. After the debt explosions in the private sector during the boom years, private agents were still deleveraging. As a result of austerity, both the private and the public sector tried to deleverage at the same time. This introduced a deflationary bias in the Eurozone that led to a new recession during 2012-13, the second one since the start of the financial crisis in 2007-8.

One of the most spectacular manifestations of the ill-advised austerity programs was the strong decline in public investment in the Eurozone. This is shown in Figure 2. It shows that after the sovereign debt crisis the Eurozone governments, in the name of austerity, decided to dramatically reduce public investment. How they could hope that this would promote economic growth will remain a mystery. In fact, such a decline in public investment is sure to lead to lower production possibilities in the future, i.e. to less supply in the future.

All this leads to the question of what to do today? Governments of the Eurozone, in particular in the Northern member countries now face historically low long-term interest rates. The German government, for example, can borrow at less than 1% at a maturity of 10 years. These historically low interest rates create a window of opportunities for these governments to start a major investment program. Money can be borrowed almost for free while in all these countries there are great needs to invest in the energy sector, the public transportation systems and the environment.

This is therefore the time to reverse the ill-advised decisions made since 2010 to reduce public investments. This can be done at very little cost. The country that should lead this public investment program is Germany. Public investments as a percent of GDP in Germany are among the lowest of all Eurozone countries. In 2013 public investment in German amounted to a bare 1.6% of GDP versus 2.3%  in the rest of the Eurozone.

2, Public Investment

Source: Eurostat

Such a public investment program would do two things. It would stimulate aggregate demand in the short run and help to pull the Eurozone out of its lethargic state. In the long run it would help to lift the long-term growth potential in the Eurozone.

The prevailing view in many countries is that governments should not increase their debt levels lest they put a burden on future generations. The truth is that future generations inherit not only the liabilities but also the assets that have been created by the government. Future generations will not understand why these governments did not invest in productive assets that improve their welfare, while these governments could do so at historically low financing costs.

This blog was first published on Paul DeGrauwe’s Ivory Tower Blog

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"The European School-to-work Transition And The Crisis" by Luca Giuliani and Francesco Pastore Tue, 16 Sep 2014 09:12:55 +0000 Luca Giuliani and Francesco Pastore
Luca Giuliani

Luca Giuliani

The school-to-work transition is a long, dark tunnel for many young people around the world. However, the problem is not the same everywhere; in Germany, for example, young people have almost the same probability of working as adults, while in the Eastern and Mediterranean EU countries the employment chances of young people are likely to be more than three times lower: this disadvantage depends largely on the work experience gap of young people with respect to adults. These discrepancies are, in large part, due to the educational and training system and, moreover, to active labor policies in the various countries.

The Scandinavian countries (Finland, Sweden, Norway), for example, have a sequential system of education, whose mission is only to provide general education, while work experience should be made after school. Thanks to pro-active schemes on a large scale, given within four months from the beginning of the unemployment spell, the state helps young people to build their skills at the end of their school career.

Francesco Pastore

Francesco Pastore

In contrast, in continental European countries (Germany, Austria, Switzerland, Denmark, Holland, France), the education system is dual. It takes as its mission not only to generate general education, but also on-the-job professional training, to be carried out during the course of study and not after, as is the case in sequential educational systems. This implies that, just after graduation, young people are ready to enter the labor market. Unsurprisingly, these countries have always had a low unemployment rate and a very low relative disadvantage.

Anglo-Saxon countries (Canada, New Zealand, UK, USA, Australia, Ireland) have a (sequential) system of education of high quality. The flexible labor market provides labor contracts with a low firing cost for firms; this allows companies to hire workers more easily, without worrying about the long-run prospect, and therefore allows young people to develop work-related skills. In these countries, the youth unemployment rate is relatively low while the relative disadvantage of young people is high, but weighs less since it corresponds to low average unemployment rates, except during the crisis.

Mediterranean countries (Portugal, Spain, Greece, Italy) have an inflexible and sequential education system. The reforms at the margin have made the labor market more flexible, reinforcing the strong segmentation between insiders and outsiders. Often, the most effective way to find work is recurring to the individuals’ informal network of family and friends, since the labor market infrastructure is underdeveloped (public and private employment agencies, schools and universities) or declining (public competition). As always, the youth unemployment rate is very high and also the relative disadvantage.

Finally, the new European Union member states (Poland, Slovakia, Hungary, Estonia, Czech Republic) have increasingly flexible labor markets and growing levels of spending on active and passive labor market policies. The youth unemployment rate is still high.

Which of these groups of countries managed the crisis best? To answer this question, we compare the absolute (unemployment rate), and “relative” (ratio of unemployment among young people and adults) disadvantage of young people in the different regimes before and after the crisis.

Figure 1. Youth unemployment by school-to-work transition regime


Source: our elaboration on OECD data.

The Central European, Anglo-Saxon and Scandinavian countries have seen relatively low youth unemployment rates in 2000. With the crisis, though, unemployment has increased while in the Mediterranean countries and the new member states, youth unemployment seems to be, at least initially (2008) slightly decreased. The reason is that the reforms recently carried out had increased temporary employment. 2012 is a critical year for everyone, but with important differences. The most flexible countries did worse than others. This is the case for both the countries belonging to the liberal tradition, such as the Anglo-Saxon countries, and the Southern and Eastern European countries, which had adopted the so-called reforms at the margin, reducing the costs of hiring and firing only for the new hires.

In terms of “relative disadvantage”, young people in Central European and Anglo-Saxon countries seem to be doing better than their peers in the other groups of countries. It should also be noted that in 2012 there is an improvement in the ratio compared to 2008, caused by the relatively higher unemployment rate of the adults. Still the ratio remains above the starting level of 2000.

Figure 2. Relative disadvantage by school-to-work transition regime


Source: our elaboration on OECD data.

The reduction in the relative youth disadvantage is surprising to those accustomed to consider the cyclical nature of youth unemployment. Typically, in fact, companies adopt the last-in-first-out principle, firing the last to arrive, namely the youngest workers. However, when the crisis is deep and prolonged, like the current one is, firms are forced to fire also adults, which reduces the relative disadvantage.

In the long term, in order to reduce youth unemployment in the Mediterranean countries, far-reaching reforms of education systems should be carried out to introduce the dual principle. In recent times, things have been moving in this direction. For instance, France has adopted a dual system of education. In Italy, a reform of apprenticeship was implemented in 2011.

In the short term, however, the program called Youth Guarantee should allow countries that have youth unemployment rates higher than 25% to obtain funds for active employment policies: apprenticeship, training, and paid internships in the company for the under-25. If well implemented, this program could help to reduce the disadvantage of young people, but there are many conditions to be met. One of them is a relaxation of the Maastricht public deficit criteria which would help fostering economic growth. Another one is a dramatic reform of the public and private employment services in Southern and Eastern European countries.

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"David Cameron (From Wikipedia 2100)" by Simon Wren-Lewis Mon, 15 Sep 2014 10:10:17 +0000 Simon Wren-Lewis
Simon Wren-Lewis, david cameron

Simon Wren-Lewis

Prime Minister of UK (including Scotland until 2014) from 2010 to 2017. Widely seen as the catalyst behind the renewed decline of the UK, after a brief respite in the 30 years previously (see entries for Margaret Thatcher and Gordon Brown). On becoming Prime Minister in 2010, embarked on a fiscal austerity programme which delayed a recovery from the Great Recession until 2013, accelerated the privatisation of public services and encouraged social hostility to immigration and the poor.

This proved to be a decisive factor in Scotland narrowly voting Yes to independence in 2014. (The other was his decision not to allow a third option for greater devolution.) His administration was then bogged down in negotiations with Scotland for the next two years, which caused increasing bitterness between the two countries. In the UK election of 2015 the SNP captured many Scottish Labour seats, but refused to form a coalition government with Labour, allowing Cameron to continue to lead a minority government with tacit support from the LibDems and (initially) UKIP.

Most analysts naturally point to his promise of a referendum on EU membership as his biggest mistake. In the short term this meant that UKIP’s success in the 2015 election was as much at the expense of Labour as his own party. But his decision to recommend voting Yes to continued membership in the EU referendum in 2017 led to an attempt to unseat him as leader which narrowly failed (see entry on Boris Johnson), and then large scale defections of MPs from his party to UKIP.

David Cameron

David Cameron has called for a renegotiation of (and referendum on) the UK’s relationship to the European Union. (photo: CC BY 2.0 DFID)

Campaigning under the slogan ‘If Scotland can do it, so can we’, and with the support of large sections of the press, UKIP leader Nigel Farage achieved a very narrow majority to leave the EU, forcing Cameron to resign. Some argue that the Scottish independence decision was critical here, as he would have won the referendum vote if Scotland had stayed part of the UK. A few argue that the decision to break up the BBC and allow partisan broadcasting, and in particular the rebranding of ITV into FOX-UK, was a more important factor in losing the EU vote.

There is some dispute as to how much Cameron himself is to blame for these events, or how much was the work of his Chancellor (and his successor as Prime Minister) George Osborne. There also remains some controversy over whether the inability of the economy to make up the ground it lost during the recession was due to the initial austerity plan, renewed austerity after 2015, controls on immigration or the uncertainty created by the referendum itself and subsequent EU exit.

It is a great irony that the only leader of this period whose current reputation is lower than Cameron’s is his opponent in the Scottish independence debate Alex Salmond, now widely known in Scotland as the Great Deceiver. Scotland’s own economic decline following independence was far greater, following a collapse in oil prices and the loss in UK markets when Scotland joined the EU.

This blogpost was first published on Mainly Macro

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"How The Rich Rule US Democracy" by Dani Rodrik Mon, 15 Sep 2014 09:56:53 +0000 Dani Rodrik
Dani Rodrik, US democracy

Dani Rodrik

It is hardly news that the rich have more political power than the poor, even in democratic countries where everyone gets a single vote in elections. But two political scientists, Martin Gilens of Princeton University and Benjamin Page of Northwestern University, have recently produced some stark findings for the United States that have dramatic implications for the functioning of democracy – in the US and elsewhere.

The authors’ research builds on prior work by Gilens, who painstakingly collected public-opinion polls on nearly 2,000 policy questions from 1981 to 2002. The pair then examined whether America’s federal government adopted the policy in question within four years of the survey, and tracked how closely the outcome matched the preferences of voters at different points of the income distribution.

When viewed in isolation, the preferences of the “average” voter – that is, a voter in the middle of the income distribution – seem to have a strongly positive influence on the government’s ultimate response. A policy that the average voter would like is significantly more likely to be enacted.

But, as Gilens and Page note, this gives a misleadingly upbeat impression of the representativeness of government decisions. The preferences of the average voter and of economic elites are not very different on most policy matters. For example, both groups of voters would like to see a strong national defense and a healthy economy. A better test would be to examine what the government does when the two groups have divergent views.

To carry out that test, Gilens and Page ran a horse race between the preferences of average voters and those of economic elites – defined as individuals at the top tenth percentile of the income distribution – to see which voters exert greater influence. They found that the effect of the average voter drops to insignificant levels, while that of economic elites remains substantial.

The implication is clear: when the elites’ interests differ from those of the rest of society, it is their views that count – almost exclusively.

The implication is clear: when the elites’ interests differ from those of the rest of society, it is their views that count – almost exclusively. (As Gilens and Page explain, we should think of the preferences of the top 10% as a proxy for the views of the truly wealthy, say, the top 1% – the genuine elite.)

Gilens and Page report similar results for organized interest groups, which wield a powerful influence on policy formation. As they point out, “it makes very little difference what the general public thinks” once interest-group alignments and the preferences of affluent Americans are taken into account.

These disheartening results raise an important question: How do politicians who are unresponsive to the interests of the vast majority of their constituents get elected and, more important, re-elected, while doing the bidding mostly of the wealthiest individuals?

US democracy

New research shows how the wealthiest people dominate policy-making in the US.

Part of the explanation may be that most voters have a poor understanding of how the political system works and how it is tilted in favor of the economic elite. As Gilens and Page emphasize, their evidence does not imply that government policy makes the average citizen worse off. Ordinary citizens often do get what they want, by virtue of the fact that their preferences frequently are similar to those of the elite. This correlation of the two groups’ preferences may make it difficult for voters to discern politicians’ bias.

But another, more pernicious, part of the answer may lie in the strategies to which political leaders resort in order to get elected. A politician who represents the interests primarily of economic elites has to find other means of appealing to the masses. Such an alternative is provided by the politics of nationalism, sectarianism, and identity – a politics based on cultural values and symbolism rather than bread-and-butter interests. When politics is waged on these grounds, elections are won by those who are most successful at “priming” our latent cultural and psychological markers, not those who best represent our interests.

A politician who represents the interests primarily of economic elites has to find other means of appealing to the masses.

Karl Marx famously said that religion is “the opium of the people.” What he meant is that religious sentiment could obscure the material deprivations that workers and other exploited people experience in their daily lives.

In much of the same way, the rise of the religious right and, with it, culture wars over “family values” and other highly polarizing issues (for example, immigration) have served to insulate American politics from the sharp rise in economic inequality since the late 1970s. As a result, conservatives have been able to retain power despite their pursuit of economic and social policies that are inimical to the interests of the middle and lower classes.

Identity politics is malignant because it tends to draw boundaries around a privileged in-group and requires the exclusion of outsiders – those of other countries, values, religions, or ethnicities. This can be seen most clearly in illiberal democracies such as Russia, Turkey, and Hungary. In order to solidify their electoral base, leaders in these countries appeal heavily to national, cultural, and religious symbols.

In doing so, they typically inflame passions against religious and ethnic minorities. For regimes that represent economic elites (and are often corrupt to the core), it is a ploy that pays off handsomely at the polls.

Widening inequality in the world’s advanced and developing countries thus inflicts two blows against democratic politics. Not only does it lead to greater disenfranchisement of the middle and lower classes; it also fosters among the elite a poisonous politics of sectarianism.

© Project Syndicate

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