Friday, May 28, 2010

The end of the Euro, pt.26

One point to nuance my largely apocalyptic comments so far on the Euro crisis - I've learnt that huge swathes of Southern European debt are held by French and German banks. This suggests that when push comes to shove, the Germans will bail out whatever needs bailing out, even if this means stoking inflation (as it might, given the huge sums involved).

Sometimes you just can't win. Spain needed to show some readiness to take the pain to impress the markets, and guess what? The ratings people decide the pain will be painful enough to depress the economy and make Spanish debt even less attractive.


Viva Madrid

Just back from Spain, having spent a few days teaching and checking whether the arguments I made in the previous post stand closer scrutiny (maybe I've got my research technique the wrong way round?).

Nearly everyone I know there works in the public sector, and are therefore directly affected by the across-the-board civil servant pay cut (average 5%) in Zapatero's emergency decree passed Thursday. Not surprisingly, they're pretty depressed. Restaurants are emptier than usual, and there are more beggars than usual (although only slightly more). Only Miguel, who works in a bank, seems chirpy.

Returning to London it is quite striking to compare the metro trip to Barajas with my tube journey home from Victoria. In Madrid, gleaming stations with marble floors as the ever-expanding metro transports Madrilenyos effortlessly around the city. In London, the system does move people around well enough but the physical environment is shabby, smelly and depressing, as well as slightly unsafe. Spain and the UK have similar sized deficits, but I get the feeling that their bubble left behind something more tangible, useful and pleasant than ours, which was built mostly on swaps of existing housing stock and accompanying bits of paper.

Tuesday, May 18, 2010


Nice to know that Jose Maria Aznar, who presided over Spain's entry into the Euro and the golden years of its housing boom, has understood everything that Spain did wrong.

And of course the answer to everything is the same as it was before the crisis: 'Spain, like Greece, must meet its financial commitments by implementing sharp cuts in public spending and a complete structural reform package'.

With this kind of leadership, it's no wonder EMU has turned into a nightmare.

Saving Greece

A historical analogy that could make interesting reading for the Greeks: Argentina quickly returned to growth after dropping its dollar peg and defaulting on its debt.

The alternative is a decade of grinding deflation. And Greece is definitely not Japan, so it's hard to see the Greeks resigning themselves to austerity for such a long period.

Trouble is, if Greece goes, the story probably doesn't stop there.

Saturday, May 15, 2010

Spontaneous combustion

Spontaneity is now illegal, it appears. A stranded air traveller tweets that he would like to blow up an airport, and receives a £1000 fine and as a result loses his job, thanks to the provisions of the 2003 Communications Act and a district judge who has no understanding of technology, or indeed the use of language by human beings.

What the unfortunate tweeter said, as well as his threat to 'blow the airport sky high' was that the airport had 'a week to get your shit together'. Presumably the judge imagined that this meant that the airport needed to accumulate... OK, best not to specify what that could mean, if read by a moron who has no understanding of human communication (see David Mitchell for a wonderful deconstruction of this whole business).

So just to be on the safe side, I'd better clarify that I have no intention of using any more metaphors in this blog.

PS This morning I took my daughter to cricket lessons. I was asked to help out when they split the girls into groups. At the end of the session I was given a thick A4 envelope with a form to fill in if I wanted to help in future - so they can check if I have a criminal record for sexual offences. I've got increasingly bored by the debates about social authoritarianism under New Labour, but I have to admit something slightly crazy is going on.

Tuesday, May 11, 2010

Lost my money

Well, the Lib Dems have agreed to go into government with the Tories. Unless the Lib Dems are far more right-wing than I imagined, this is going to be an odd government.

Still, there was not much alternative. And the markets will probably cut us a bit of slack now.

Having said that...

... my money is still on a minority Tory government with non-belligerence from the Lib Dems.

The LDs have too much to lose either way - the Lib-Lab coalition wouldn't look good and probably wouldn't survive (Labour have ruled out governing with the SNP). But, the Tory-LD coalition is stuck on huge policy and ideological difference, plus the fact that the Tories could effectively marginalize the LDs and challenge them to bring the government down, making Clegg look either weak or irresponsible.

You heard it here first.

Monday, May 10, 2010

Subverting the election results

I'm sure it's true, as Conservatives and their leader writers are telling us, that the electorate 'would not understand' a Labour-Lib Dem coalition of people who had 'lost' the election.

But what exactly is wrong with a Lab-LibDem coalition?

It may be true, as Conservative politicians and Conservative supporters in the press are telling us, that the electorate 'would not understand' a Labour-Lib Dem ‘coalition of the losers’. But exactly why would a Labour-Liberal Democrat coalition create a legitimacy problem, and what does this tell us about the British constitution?

To answer this question we need to refresh our memories about what ‘winning an election’ means under the traditional British ‘Westminster model’. Traditionally (or at least since the Second World War), British elections have revolved around the choice between the two dominant political parties: Labour and the Conservatives. In the immediate post-war period, these two parties were very dominant, winning well over 90% of the popular vote until the 1960s, and an even larger share of parliamentary seats. In these circumstances, British elections looked rather like a presidential election, in which the leader of the party with most votes would form a majority government and the role of parliament was invisible to all but political anoraks.

This arrangement has been moribund for around four decades, but strangely the two-party logic still infuses the political debate. The reason is that although the share of the vote won by the Labour and the Conservatives has been in steady decline ever since the 1950s, the decline of the two-party system has been largely masked by two factors. First, the British electoral system vastly over-represents the two largest UK-wide parties, consistently awarding Labour and the Conservatives the vast majority of seats in the House of Commons even as their joint vote share declines. Second, because for most of the last 40 years one of the two parties has performed badly enough to hand a parliamentary – if not an electoral – majority to the other. Labour’s travails gave the Conservatives a free run from 1979 until the 1990s, whilst the Conservatives ceased to be competitive from 1997 until quite recently.

So the current situation has been brewing for a long time, and the two-party system has not been an accurate description of how the British actually vote for decades. And now we come to the question raised above: why not a Lab-Lib Dem coalition? The answer is that many observers (largely for entirely partisan reasons, rather than willful ignorance) continue to interpret the election results as if we still had a two-party system, in which one party’s defeat automatically implied the victory of the other. Certainly, Labour lost the election, as indeed did the Lib Dems. But the Conservatives failed to win the election. Which criteria should therefore inform the choice of government?

The Conservatives, as largest party and closest to a parliamentary majority, have been given first shot at making an agreement, and this is consistent with ‘Westminster model’ thinking. It also has crude parliamentary arithmetic on its side. But the main sticking point is that the Conservatives are ideologically and programmatically quite distant from the Lib Dems: on Europe, social issues, the constitution, and - to the extent that we can tell – on the economy. This is not news to anyone who has observed the British party system over time: the chart below shows how the British parties have located themselves on a left-right scale (positive numbers indicate a right-leaning manifesto, negative numbers a left-leaning one) in postwar elections up to 2005. The chart shows that ever since the 1970s, the Liberals and their successor parties have been located closer to Labour than the Conservatives (and indeed, that under Tony Blair Labour were at times closer to the Conservatives than were the Lib Dems!).

Of course, ideological closeness alone cannot justify the formation of a governing majority – the raw parliamentary numbers need to be there too. Here the Lab-LibDem option looks weaker: 258 + 57 = 315, 8 seats short of the effective majority. But minority governments of this kind occur regularly in democracies as diverse as Sweden, Norway and Spain. Moreover, the election results tell us that around 52-3% of the electorate voted for a government including either Labour or the Lib Dems. So, unless we assume that Lib Dem voters are markedly more inclined to support a Conservative government than a Labour one, then actually public opinion should be able to live with this.

This shows up the contradictions of our majoritarian model of democracy, in which we declare 'winners' and 'losers'. This logic only works if the 'winners' can get a parliamentary majority. If they can't, then the parliament, containing 8 different parties (Sinn Fein don't show up), has to 'cobble together' a majority. In most western democracies, this is how governments are formed. We’re probably going to have to get used to it here too.

Meanwhile, in Brussels...

I can't keep up with this...

Gordon Brown resigns, William Hague talks about a referendum on AV, the Ecofin and the ECB decide to print money...

Whatever next? England winning the World Cup?

Closing thought: is David Cameron locked in a darkened room? No sign of him for days.

Brown goes

Good move.

This puts the cat amongst the pigeons, just as the Tory-LibD negotiations hit their critical point. Most Lib Dems, I'm guessing, would far rather deal with Labour than the Tories, and Gordon has just made that option far more plausible.

Not plausible enough for it to happen perhaps, but maybe enough to wreck the Tory-Lib Democrat negotiations.

In Praise of Crony Capitalism?

My take on the Southern European debt crisis:

The euro’s worst nightmare has come to pass. Its Southern European fringe – often referred to by the dubious acronym PIGS – is creaking under the pressure of a brutal adjustment borne entirely by domestic prices. Latest estimates suggest that Greece requires a deflation so severe than it will take until 2017 to return to its 2008 nominal GDP. Spain’s unemployment rate has hit 20 per cent, and Portugal is also facing brutal reductions in living standards. This bleak outlook is spooking investors, threatening debt financing not only in Greece, but countries across the Eurozone periphery.

So were the opponents of extending the eurozone to the shores of the Mediterranean right? In one respect, yes. Critics argued that the reluctance of political leaders in the Southern countries to embrace structural reforms would hinder adjustment if they ran into competitiveness problems within the monetary straitjacket of EMU. Although euro membership brought inflation, interest rates and fiscal deficits down dramatically, wages still rose ahead of productivity in the Southern eurozone. Old problems such as inefficient public administration, demographically skewed social policies and lack of investment in human capital were addressed only half-heartedly. So when recession struck, the cohesion of the euro area came under immediate threat.

But this narrative tells only half the story. In fact, the countries in direst trouble at present enjoyed buoyant economic growth rates for most of the noughties. Spain in particular won praise for its embrace of economic openness, financial liberalization and fiscal rigour. Its post-euro boom raised living standards and transformed Madrid into a major corporate and banking centre, whilst Spanish companies went on buying sprees in Latin America. In contrast, Italy’s stagnant growth rates were attributed to its refusal to countenance changing its inward-looking, sclerotic form of crony capitalism and addressing its burden of national debt. Aznar and Zapatero were lauded abroad for presiding over Spain’s economic miracle; Prodi and Berlusconi condemned by the Anglo-Saxon financial press as unfit to govern the European Commission and Italy respectively.

In 2010, a very different picture is emerging. Spain’s new economic model is now looking decidedly peaky. It is now apparent that, as in the UK and Ireland, Spain’s impressive growth performance was a function of the Greenspan bubble. Spanish property prices doubled between 1995-2007, even though residential construction was expanding at such a rapid rate that only mass immigration could meet the sudden demand for low skilled labour. A good part of the boom was driven by speculative investments by Northern Europeans generating a trade deficit of around 10 per cent of GDP. The building boom spilled over into the rest of the economy, bringing unemployment down to unprecedented levels. Yet as in any other case of irrational exuberance, investors over-reached themselves, leaving deserted building sites and a million unsold homes, and sawing 4 per cent off Spain’s output in 2009. Despite running fiscal surpluses throughout the boom years, Spain very quickly found itself running deficits of around 10 per cent.

In contrast Italy, which has not run a budget surplus for over quarter of a century, finds itself in a rather less dramatic situation. The current government deficit is, at just over 5 per cent of GDP, within touching distance of the limits imposed by the Stability Pact, and bond prices as yet show little sign of contagious panic. Output has certainly shrunk sharply in this recession and unemployment is rising, yet the Italian press is relaxed enough about the crisis to focus instead on the endless saga of Berlusconi’s encounters with judges and showgirls, and the inevitable government reshuffle as leaders jostle for position after each round of local elections. In short, while Spain faces economic collapse, for Italy it is business as usual. Why?

The answer lies in the perils of financialization. Although the big Spanish banks adopted a conservative approach to capital requirements and remain apparently solvent, Spain’s openness to foreign capital flows imported the Greenspan bubble and stoked a housing boom to match those in America and the British Isles. The sound budgetary position of the Spanish government masked the accumulation of household debt whilst the euro hid the symptoms of an unsustainable trade deficit. The severe imbalances of the Spanish economy were ignored because Spain ticked the correct boxes according to the orthodoxy of the boom years: fiscal probity, openness to financial flows, and an acquisitive and outward looking corporate sector.

Meanwhile Italy was doing everything wrong. Outside capital – whether industrial or financial - was shunned. When Dutch bank ABN-Amro sought to expand into Northern Italy by buying the Venetian Banca Antonveneta, Bank of Italy governor Antonio Fazio pulled out the stops to block the deal. He first used regulatory powers inappropriately, and then mobilized contacts in the Italian financial world to generate an unsuccessful counter-bid, which allegedly used insider-trading to raise the capital for an alternative deal. At the time, the affair seemed symptomatic of everything that was dragging the Italian economy down: regulatory inefficiency, corruption and cronyism. Yet, when the financial crisis hit, ABN-Amro, now owned by the Royal Bank of Scotland in a deal involving the Spanish Banco Santander, found itself forced into the arms of the British taxpayer by insolvency. In an ironic twist, Antonveneta was sold off by Santander back to another Italian bank, Monte dei Paschi di Siena.

The story of Antonveneta is evocative of broader trends in the Italian economy. This protectionist instinct of Italy’s political and economic elites was not limited to finance: Berlusconi’s trashing of a deal, carefully brokered by Prodi’s government, to sell off national carrier Alitalia to Air France-KLM reflects the same logic applied to the industrial sector. Alitalia may not be viable as a global airline, but regulatory manipulation and backdoor subsidies allow it to continue to dominate Italian airspace. This mercantilist style has clear fiscal and efficiency costs. But rejection of open markets, long criticized by outsiders as a drag on growth, proved an asset when the global financial system imploded. Hostility towards foreign investment protected Italy from the direct effects of the crisis, as there were no flows of hot money to dry up. Italian output suffered as a result of the collapse of its export markets, rather than a fall in domestic demand.

The Italian elites’ determination to retain control of their economy by curbing markets was theorized by Giulio Tremonti, Berlusconi’s Treasury Minister, in a book, La Paura e la Speranza, published in early 2008. For Tremonti and his allies on the Italian right, globalization was always seen as a threat rather than an opportunity. The Italian left, ironically, has increasingly embraced a ‘third way’ style of politics which accepts many features of market liberalism, such as flexible labour markets, privatization and the deregulation of professional services. The electoral consequences of this unlikely political division of labour have been clear: Berlusconi consistently trounces the left at election time. Tremonti’s modern-day mercantilism is not an option for the left, since it generates rent-seeking opportunities which have regressive implications for income distribution. But if there is a lesson progressive forces in Europe should learn from the Southern European experience, it is that voters do not like the downside of free markets and crave protection from the volatility of globalized finance.

Saturday, May 8, 2010

Town and Country

Just eyeballing the constituency results, it appears that the Conservatives have failed to win any presence in any major city outside London (and, with a couple of gold-plated exceptions, most of the heart of the capital too).

Once upon a time, seats like Birmingham Edgbaston (Tory until 1997, Labour since, with Gisela Stuart hanging on yesterday) were natural Conservative country: leafy middle-class enclaves in the industrial cities. Conservatives no longer win in these places, and this is one of the reasons why they can't reach the levels of support won by the party before 1997.

This indicates one thing: David Cameron's bike-riding and wind turbines haven't convinced affluent but liberal-minded voters in large cities that the Conservatives have anything to offer. The Tories have become, and remain, a party of rural and suburban England and Wales (with the exception of the richest parts of London). Their consistent Euroskepticism and discomfort about immigration and contemporary forms of family life stem in part from this. Will they ever be able to connect with people in urban Britain?

If not, PR will be the only way to get stable government in this country. It probably will in any case.


...returned just one Conservative MP.

Should be interesting to see how cuts to public spending in Scotland go down, when they are decided by a Conservative-led government which is the fourth party there. Good news for the SNP in their push for independence.

Brown's squatter's rights

That well respected constitutional authority The Sun newspaper has decided that Gordon Brown is doing something terribly dastardly by not immediately clearing out of No.10.

Quite apart from the fact that constitutionally, in the absence of an immediate Lib-Con pact it would be unjustifiable - and politically irresponsible - for him to resign, there are also democratic grounds for him staying; even for another five years. Not that I'm advocating that, but - here is the reasoning.

The Conservatives have 306 seats, Labour 258, and the Lib Dems 57. The Conservatives got 37% of the vote, Labour 30%, the Lib Dems 23%. So, no party has a majority of seats or votes, but a LibDem coalition with the Cons would have both (only the former matters constitutionally, but the latter would be happy for democratic legitimacy) and a Lab-Lib coalition would have the latter, and could reach the former without too much trouble. A Lab-Con pact is pretty implausible.

So the question is, why should a Lib-Con deal be preferable to a Lib-Lab one? The first would be that it is over-sized, which would be good from the representative democracy perspective, since more voters would have some voice in government. But power spread more broadly is power spread more thinly, so that is not necessarily an advantage. Moreover, over-sized coalitions are more likely to contain destabilizing internal tensions. The second reason is that the Conservatives are the biggest party. On a majoritarian understanding of democracy, this gives some legitimacy to govern, and indeed our democracy usually confirms this by giving the biggest party an artificial parliamentary majority to govern with.

But there is also a case for a Lab-LibD coalition. First, it is close enough to a majority to have a plausible chance of governing, especially if it reaches agreements with left-leaning nationalist parties. Second, Labour and Lib Dems are close enough programmatically to reach agreement on a number of issues quite easily. It would be, in my view, a more cohesive coalition than a Lib-Con one. On Europe, immigration, public spending, bank regulation, sexual and ethnic diversity, territorial issues and, crucially, constitutional and electoral reform, the two parties are barely distinguishable. On these same issues, the Lib Dems and the Conservatives are clearly quite distant.

So, a Lab-LibD coalition would probably be more stable than a Lab-Con one. A Con-Lib coalition can only work if the Lib positions are largely ignored by the government on most issues. At which point, rather than a coalition in which a broad range of opinion is represented, it simply becomes a Lib Dem favour to the Conservative party.

Having said all that, Labour could do with a new leader and a spell in opposition, and the media pressure for the Conservatives to govern is irresistible. It would probably destroy the Labour and Lib Dem parties if they deny the Tories their right at another turn exercising absolute power. But that doesn't mean that it's overwhelmingly the only democratically legitimate outcome.

LibDem dilemma

Poor Nick Clegg. One minute everyone is agreeing with him, next thing he's losing seats (people like me briefly feeling like voting for him, and then reverting to type in the polling station). Even worse, he's being invited to form a government with David Cameron but it doesn't look like there is anything in it for him. If he accepts, the LDs will share the political costs of the inevitable cuts and they will not get what they really want, which is PR. If he refuses, the Tories will claim that the Lib Dems don't want to do their bit to sort out the country's problems.

One neat thing about this election result is it shows up how our political system really works: artificial majorities are created by the electoral rules, and then the biggest party does whatever it wants. However, the moment the biggest party isn't big enough, the whole thing falls to pieces. And the interesting point is that if First Past the Post doesn't deliver a parliamentary majority and you have to have a coalition, then there really is no point in not  having PR. After all, if you need to have negotiations between parties ('backroom deals' and 'horse trading' if you're a pro-FPTP type) then you may as well have those parties winning a share of parliament in proportion with their votes. At least that way a Tory-Lib Dem coalition would not be a shotgun wedding.

Final consideration. Maybe I'm biased (well, obviously), but I really do think the Lib-Dems are way closer to Labour than to the Conservatives. I don't see how the two can govern together substantively without splitting their parties.

Really final consideration. I think the LDs would be mad to cut the deal Cameron is offering, or even anything close to it. They should agree not to overturn a minority Conservative government and maybe even give their consent to an emergency budget. But they should then sit in the opposition and wait for the next election, which will probably come sooner rather than later. Then they might get PR if Labour do well enough.

BNP defeat

And.... the BNP not only failed miserably to take Barking and Dagenham from Labour, they also lost all of their local council seats there too. A good sign indeed.

Friday, May 7, 2010

Green MP

Just one thing worth signalling, largely ignored in the middle of all the fuss about the hung parliament - the Greens have elected an MP for the first time ever: quite a result in a First Past the Post System.

History being made

This is by far the most interesting election in Britain since I was in shortpants.

What can we make of it so far?

First, the Conservatives have clearly won the most votes and seats, but are clearly short of a majority, and probably won't be able to govern effectively without a good deal of messing around.
Second, Cleggmania was a mirage (23%, seats lost).
Third, Labour did actually pretty well considering (29% ish, over 250 seats).

What will happen now?
God knows. The Tories will have to try and govern alone, it will be difficult, and a number of scenarios are possible. New elections pretty soon - which would be a very unpopular outcome among voters, and therefore unlikely; some kind of coalition with the nationalists, or maybe even the Lib Dems (although I'm not sure what's in it for them); or even, a Lib-Lab pact to overturn the Tories if things go wrong (the arithmetic just about allows it, especially if you throw in nationalist forces).

And all this with the most brutal fiscal squeeze for decades due shortly, and the markets collapsing around us. Glad I can sit and snipe from the sidelines rather than having to sort out this mess.

Thursday, May 6, 2010

Cameron's victory speech

Obama it ain't.
Difficult speech to make, doesn't look comfortable with it.

Uniform swing

Well, it's nearly 3 o'clock, and what's becoming clear is that the assumption of anything like a uniform swing no longer holds. Sure, there is a tendency towards a swing in favour of the Conservatives, but in some constituencies, including Tory targets, the swing is very small, or even negative.

David Cameron is on camera and not smiling very much. There is a recount in Birmingham Edgbaston, which is clearly a seat the Tories need to win to get a majority.

It's going to be a long night.

Wednesday, May 5, 2010

Vote Conservative!

Yes, I thought I should help my blog readership make up their mind tomorrow. To my mind, voters should think about the most important issues for them, and choose the party which offers the policies they like most on those issues.

In my view, the most important issue is family breakdown, and the Conservative idea of handing married couples, no matter how many times they've been married nor how hopeless they are at bringing up their children, a tax handout at the expense of everyone else, seems to me an excellent idea.

Oh, I also like their plan to abolish inheritance tax on estates of up to a £1 million. There are a lot of impoverished old widows with million pound houses in London, you know.

So, a vote for David Cameron it is. If unlike me you're more worried about reining in the banks, promoting tolerance or protecting public services and help for the poor, maybe you should vote for someone else. This site will explain how.