And this from the left-of-centre newspaper, The Guardian:

 

I’ve got news for those who say Brexit is a disaster: it isn’t. That’s why rejoining is just a pipe dream

Larry Elliott

Many still hanker for how things were: but looking across the Channel, it’s completely illogical to do that

Tue 5 Dec 2023 07.00 GMT

Brexit is a dead issue at Westminster. There are any number of issues where it is hard to separate Labour and the Conservatives, and the reluctance to reopen the 2016 referendum debate is one of them. As with tax and spending, Keir Starmer is broadly offering continuity Rishi Sunak.

That doesn’t mean the debate about leaving is over. Plenty of people still nurture the hope that the decision will be reversed and are working to that end. But any successful campaign would need to do two things: convince voters that the UK economy had become a basket case since the Brexit vote and that life for those still in the club was so much better.

Neither criterion has been met. Britain’s economic performance in the seven years since 2016 has been mediocre but not the full-on horror show that was prophesied by the remain camp during the weeks leading up to the referendum. The doomsday scenario – crashing house prices (falls of up to 18% could result, warned then chancellor George Osborne) and mass unemployment – never happened.

What’s more, after the inevitable disruption caused by leaving, there have been signs of the economy adjusting. Nissan’s decision to invest more than £1bn in its Sunderland plant with the intention of building three new electric car models is an example of that. Microsoft’s £2.5bn investment in the growing UK AI sector is another.

That’s not to say that the process is complete. Brexit provided opportunities to do things differently but those opportunities have so far not been exploited. It is a lot easier for a giant Japanese car company to make the Brexit transition than it is for a small food and drink exporting company faced with loads more red tape. But while it is convenient for those who have never quite got over being on the losing side in the referendum to brand Brexit a disaster, the reality is that it hasn’t been. Covid-19 scarred the economy deeply and the long-term costs of ill health and children missing out on school will grow over time. Even so, Brexit Britain has recovered more strongly than either France or Germany from the pandemic. Relative performance matters. The rejoin camp tends not to focus on what is happening on the other side of the Channel, and it is not hard to see why.

Rishi Sunak and Jeremy Hunt during a visit to the Nissan car plant in Sunderland, which will build three new electric models. Photograph: Ian Forsyth/PA

Back in the 1960s and 1970s, one of the key arguments for joining what was then called the Common Market was that members of the bloc were doing so much better than we were. While Britain was living on past glories, other western European countries powered ahead. The contrast was starkest with Germany, but unflattering comparisons were also made with France, the Netherlands and even Italy. Indisputably, the six countries that formed the original Common Market grew faster and had fewer structural problems.

That argument cannot be made today. Over a prolonged period, not just since the arrival of Covid-19, the EU’s economic performance has been woeful.

Fifteen years ago, the US and EU economies were of a similar size; today America’s is a third bigger. Fluctuations in exchange rates account for some of the difference, but the US is at the cutting edge of the fourth industrial revolution and the EU is not. All seven of the world’s leading tech companies – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – are American: there is no European tech giant to match the behemoths of Silicon Valley. In 2000, the EU had a 25% share in the semiconductor market: today it is 8%. The US and China are streets ahead of Europe in the development of artificial intelligence.

A number of factors are to blame for the EU’s economic woes. The one-size-fits-all nature of the single currency is one; the lack of a federal budget to match in size that of the US is another; the adherence to neoliberal economic ideas– such as tough controls on the size of budget deficits – a third. The problems go right to the heart of the EU. Its biggest economy – Germany – is expected to contract this year and has been left with a €60bn black hole in the public finances after the country’s constitutional court ruled against the coalition government’s spending plans.

Despite its relative decline, the EU remains prosperous. It is certainly rich enough to act as a magnet for those in poorer parts of the world seeking a better life. So at the same time as its economy has struggled, the number of migrants has increased. One result has been the rise of aggressively rightwing politics. In Germany, Alternative für Deutschland (AfD) is currently second in the opinion polls with voter support running at about 22%. In France, Marine Le Pen could be the next president. Giorgia Meloni leads the most rightwing Italian government since the second world war, while in the Netherlands the anti-immigration Freedom party led by Geert Wilders won the most seats in last month’s election. Something has gone seriously awry when politics in four of the founding members of the European project have turned so ugly.

Younger Britons are more pro-EU but ‘fixing’ Brexit not their priority

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Nor are the traditionally liberal Scandinavian countries immune to this trend. Denmark – which once had one of the world’s most liberal migration regimes – has shifted from a policy of welcome and integration to one of detention and return. Sweden and Finland have both seen the emergence of ultranationalist rightwing parties.

Britain is one of the relatively few European countries to buck this trend. That’s not because economic performance has been stellar here, because it clearly hasn’t. There has been no meaningful recovery from the global financial crisis of 2008. Living standards have been squeezed hard for the past two years by the cost of living crisis, and have only just started to recover.

Nor is it because the government has been more successful in restricting migration since the referendum. Far from it. Net migration hit a record level in 2022, with a decline in the numbers arriving from the EU comfortably offset by an increase from the rest of the world. Yet, if the polls are correct, the next election will be won by a party of the centre-left rather than a party of the extreme right.

This wasn’t supposed to happen. Perhaps because Brexit provided a safety valve – unavailable elsewhere – for those who felt their concerns were being ignored, the UK has not witnessed the rise of the nasty nationalism seen across the Channel. The worrying state of EU politics explains why rejoiners face a long battle. And why the main parties in the UK are right to let sleeping dogs lie.

• Larry Elliott is the Guardian’s economics editor

Get with the (monetary) programme:

 

DAVID SMITH | ECONOMIC OUTLOOK

Higher interest rates are working, but beware the risks of overkill

David Smith

Sunday November 05 2023, 12.01am, The Sunday Times

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It has been hard to ignore the actions of central banks, even after a week in which the Bank of England and the US Federal Reserve merely held interest rates steady. In time, the rate-setters will get less attention than over the past couple of years, when they have been racing to catch up with runaway inflation.

We should soon be entering a period when the main question about the current central bank mantra — “higher for longer” — will be how much longer? When you have reached peak rates, the issue is when they will come down again — and that should be the case at some stage next year, if not for a few months.

In the meantime, not far from where I am writing this, there is a living example of a textbook monetary policy experiment at work. I am not talking here about our own dear Bank, which is still troubled by aspects of inflationary pressure. Three members of its monetary policy committee (MPC) voted to raise Bank rate from 5.25 to 5.5 per cent on Thursday, though they were outvoted by the six who opted to hold. In what was described by analysts as “a hawkish hold”, Andrew Bailey, the governor, reiterated that the Bank “will be watching closely” to see whether further hikes are needed.

No, my attention was grabbed by developments a little farther away, across the Channel. Figures published a few days ago by Eurostat, the EU’s statistical agency, showed two things. One was that eurozone inflation is dropping sharply, and on its preferred measure fell to just 2.9 per cent last month, from 4.3 per cent in September.

The other was that this has been achieved by snuffing out growth. Gross domestic product in the eurozone fell by 0.1 per cent in the third quarter and rose by 0.1 per cent in the EU as a whole. In both cases, GDP was up by a tiny 0.1 per cent on a year earlier, implying an absence of growth. You can debate whether this was achieved by tighter monetary policy — higher interest rates – alone, but this is what central banks would be looking for if they were seeking to drive inflation out of the economy: significant weakness in demand.

As always, there were big variations in the performance of individual countries in the eurozone, and the quarterly figures for the bloc were dragged negative by another big fall in Ireland’s volatile GDP figures. Some countries are showing negative annual inflation rates, including Belgium and the Netherlands.

Europe’s performance contrasts with America, where the Federal Reserve held rates despite an acceleration in GDP growth to an annualised 4.9 per cent in the third quarter, its best for nearly two years, and where analysts cannot be sure that the job is done.

It also contrasts with the UK, where the Bank appears to have done better with the snuffing out growth part, predicting the economy will be “broadly flat” for the next few quarters, than the inflation bit, which it does not expect to drop below 3 per cent until early 2025.

A flat economy, with zero growth predicted next year (election year) and the risk that it could be worse, means the issue of whether the Bank has over-tightened — raised interest rates too much — has become a live one. I used to feature the Institute of Economic Affairs’ (IEA) shadow MPC a lot in these pages, and indeed was instrumental in getting it to announce a “decision” before each actual MPC meeting — but we lost touch.

The latest recommendation from the IEA was very interesting. It called on the Bank to cut rates by a quarter of a point to 5 per cent on Thursday, and to scale back its “quantitative tightening” — the reversal of the earlier quantitative easing. It is worried by the downturn in M4 money-supply growth, broad money, which has turned significantly negative.

“There is mounting evidence that the UK’s monetary policy is too tight and could lead to price deflation in a few years and potential recession in the interim,” said Trevor Williams, who chairs the IEA committee. “The Bank of England should lower interest rates.”

There was never any real possibility of that happening on Thursday, not least because the money supply does not feature prominently, if at all, in the actual MPC’s decisions. It was also too soon for a majority on the MPC to contemplate a cut in rates after running them up so aggressively.

This will, however, become very relevant in the coming months. We will know more about what is happening to the UK economy, despite uncertainty over the data, this week. Friday will bring monthly GDP figures for September and the first release of GDP data for the third quarter as a whole.

The context is that monthly GDP rose 0.2 per cent in August after a 0.6 per cent fall in July. If previously published figures are not revised, this means September must show a rise of 0.4 per cent or more for GDP not to have fallen in the third quarter. The Bank thinks third-quarter GDP will have been flat.

If it were to show a small fall, this would not be a huge moment — quarterly GDP dropped slightly in July-September last year, though the Queen’s death and funeral was a factor. A weak third quarter would confirm the view that UK monetary policy is hurting, with many sectors in retreat.

It would also add to the belief that it is working, and not before time. But the Bank, and its central bank counterparts, must be sure that it is not working too well. A flatlining economy is one thing, a proper recession another.

A former MPC member I was talking to the other day described the problem the Bank would face if over-tightening led to recession. It would be caught on the other side of the problem it has faced up till now, which is that the lags between its actions and their impact have got longer.

That is true when raising rates, as so many people are now on fixed-rate borrowing, but it would also be true for rate reductions. Rate cuts used to offer a speedy economic stimulus, heading off recession or lifting the economy out of it. That is harder now. Despite its hawkish tone, the Bank has a vested interest in avoiding too much pain.

You'll have to look for the nuggets in here for Paper 2

 

The world’s financial system is entering dangerous waters again, warns guru of the Lehman crisis

Columbia professor Adam Tooze: ‘We don't know what is going to break until it does, but there are a lot of reasons to worry’

ByAmbrose Evans-Pritchard IN DAVOS23 May 2022 • 6:00am

The 51st annual meeting of the World Economic Forum in Davos on 22 May 2022 CREDIT: LAURENT GILLIERON/EPA-EFE/Shutterstock

If anybody knows where the points of maximum stress lie as monetary tightening collides with epic levels of global debt, it is the man who wrote the definitive opus on the last traumatic blow-up in 2008.

Columbia professor Adam Tooze is the rising star of the Davos circuit. His book Crashed: How a Decade of Financial Crises Changed the World is a superb forensic analysis of the political and economic brew that led to the meltdown of the western banking system, and led to the Lost Decade that followed, with invidious consequences for Western liberal democracies.

There is a frighteningly-long list of shoes to drop as inflation finally forces central banks to do what they desperately wish not to do, which is to yank away the debt shield that lulled both investors and the political class into a false sense of security.

"We don't know what is going to break until it does, but there are a lot of reasons to worry, and there is going to be severe stress," he said on the eve of the World Economic Forum, the conclave of the great and the good in Davos.

The global economy has never been so sensitive to the slightest change in borrowing costs. The Institute of International Finance says global debt has reached 348pc of GDP since the pandemic. It was 269pc at the peak of the last debt bubble in 2007.

The perennial locus of trouble is Europe's half-built monetary union, where the bond-buying spree of the European Central Bank has mopped up Club Med (and French) debt issuance as if there was no tomorrow, and tomorrow has now arrived. 

"Could Italy get bad quickly? Yes, it certainly could," he said.

Italy's 10-year bond yields have tripled this year to 3pc. Risk spreads have ballooned to 200 basis points, higher than they were when Mario Draghi was drafted by the political elites to save the country.

Prof Tooze said the ECB has no credible mechanism to defend the southern European states as QE winds down.

"They're talking about a 'spread-management' instrument and telling us they've got a magic bullet, but the markets don't believe it," he said.

Such an instrument, if it ever emerges, moves beyond anything plausibly billed as monetary policy. It looks like a naked rescue of insolvent sovereign states in breach of EU treaty law, and invites a challenge at the German Constitutional Court. It is anathema for northern hawks alarmed by the ECB's slide into fiscal dominance.

"We all know that if there was a legal way to control yields they would already have used it. So it is just sleight of hand," he said. The ECB can "skew" the reinvestment of its existing portfolio to vulnerable countries but that is a token gesture.

A fresh spasm of Club Med debt angst is coming as market vigilantes test the ECB's ability to act. The exchange rate will take the strain: Europe's €2 trillion investment giant Amundi says it expects the euro to hit parity against the dollar this year.

Prof Tooze does not think euroland will disintegrate. Europe's leaders cannot let that happen, but neither will they resolve the incoherence of an orphan currency union without fiscal union. "The whole eurozone has been in suspended disbelief for years. It ought to blow up but it never does because somehow they find ways to improvise," he said.

That does not exclude a crisis along the way, and Italy is the stand-out candidate because it has incendiary politics as well as zero trend growth and a debt ratio of 151pc of GDP. The unelected Mr Draghi will soon be gone and the eurosceptic hard-Right leads the polls. Markets will test that too.

The silver lining is that inflation works wonders for debt-dynamics. It erodes the real burden of legacy borrowing through the denominator effect. People across the West should stop fretting about the CPI horror story and remember that bond holders — with broad-shoulders — are paying the main tab for the pandemic.

"Two or three years of inflation above 5pc is beneficial: it burns off the debt. But you have to protect vulnerable people from real income losses. That is a poverty problem, and there are policies to address it," he said.

The UK is assuredly not addressing it. The Government is pushing through the fastest fiscal retrenchment in the developed world seemingly in the belief that public debt is nearing a critical threshold, or judging that mid-sized open economies with big trade deficits cannot take risks.

"It is a rerun of the 2010 panic, but without the rhetoric. I don't see how they are going to build a working class coalition like this," he said.

The arguments over austerity have never been settled. There is a persuasive case that a fiscal squeeze at the wrong moment and at the wrong therapeutic dose is counter-productive on its own terms. It does not lower the debt ratio more than would otherwise occur, leaving aside the lost economic growth and social misery caused along the way.

America is doing its own variant of austerity-lite, swinging abruptly from eye-watering deficits to a negative fiscal impulse, but not because the White House has chosen to do so. Joe Biden cannot get his spending packages through Congress.

Prof Tooze said the Rooseveltian $6 trillion New Deal proclaimed during those hubristic halcyon days of early Bidenism have sputtered out.

"It’s completely collapsed. The Democrats are going to face a massive defeat in the midterms this autumn, and they'll have trouble holding the White House," he said.  

"All they have really done is the Recovery Act, which is really just sending out cheques, and a bit of infrastructure. In the end, Biden is going to achieve less than Obama," he said.

He does not buy the line that America is roaring back at the head of a resurgent West, even if the autocracies have suffered a crushing reverse over recent months. “I see America as the huge weak link," he said.

He broadly subscribes to the Fukuyama thesis that the American body politic is by now so rotten within, so riddled with the cancer of identity politics that it is developing a paranoid loser's view of the world. The storming of Congress was not so much an aberration under this schema, but rather the character of modern America.

His opinion is pertinent since one of his early classics, The Deluge: The Great War and the Making of the Global Order, 1916-1931, was about the rise of America as the global hegemon.

Another of his books, The Wages of Destruction: The Making and Breaking of the Nazi Economy, is about the failed attempt by the authoritarians to hurl themselves against this Anglo-Saxon domination.

Prof Tooze blames the disintegration of Sino-US ties largely on American petulance, describing China's sins of copyright theft and piracy as the methods of catch-up economies through the ages. 

"The escalation was driven by an American backlash. What the US has done on microchips and technology is basically a declaration of war on China. Taking down Huawei was a spectacular act of aggression.”

Nor does he accept that China is falling into the middle income trap. It will recover from the housing bubble, the tech crash, and zero-Covid, because the fundamentals remain intact. 

Beijing has invested massively in STEM education — science, technology, engineering, and maths — the foundation disciplines of ascendant nations.  

China has escaped the curse of identity politics, albeit by totalitarian means. It has the incalculable resource of what Hegel called "disposition" or what we might call patriotism. "China can call on all its citizens and mobilise the flows of labour in ways that almost no other country can," he said.

This is not, on balance, my view. I think the US will again heal itself and that China’s sorpasso will fall short as the country succumbs to Japanification and slowly fades into old age. But there is a high risk that Prof Tooze’s deep pessimism on America may be all too close to the mark.