Macron’s victory may create more problems than it solves

Emmanuel Macron campaigned for – and indeed, won – the French Presidential election on an unashamedly pro-EU platform. His victory was greeted with huge sighs of relief across the Continent. Rather ironically, however, his enthusiasm for the Single Currency and indeed the European project as a whole may have the opposite effect, as John Stepek pointed out in a recent edition of Moneyweek magazine.

At the heart of the problem is that when it comes to further integration within the EU and in particular, the single currency area, it is far easier to talk the talk than walk the walk.

A broad range of economists acknowledge that so many economically divergent nations pushing ahead with a single currency in the 1990s was far from ideal. If a monetary union is to work, fiscal and political union, while not prerequisites, certainly reduce the risk of a catastrophic failure. As it currently stands, the Eurozone is far from being an optimal currency area.

This is exactly the line Macron has been taking. In other words, as Stepek puts it, “He’s one of the rare pro-eurozone politicians who’s actually quite honest about the euro and the eurozone. He is calling openly for a much closer Europe. He reckons that Europe needs a common budget, a common banking system – effectively, a full-blown United States of Europe.”

Any French politician who has made such a proposal in the past has been fobbed off by Berlin with the curt instructions to put their own house in order first. Reforms to France’s generous pension arrangements, bloated public sector and short working week have been often proposed by a number of newly-elected Presidents only to be scuppered by tyre-burning, stone-throwing protesters backed by France’s powerful trade unions.

But just suppose Macron succeeds where his predecessors have come to grief. Even a streamlined French economy will take years to converge with Germany’s and then, what about Italy or Greece? Following Macron’s victory, the headline in the Bild newspaper, which Stepek describes as the rough German equivalent of the Sun, was “How expensive will Macron be for us?”

This is not just the heart of the Eurozone’s problem – it highlights a major stumbling block with the whole European project. Germany has been happy to be a net contributor to the EU’s funds via the EU budget. In some ways, it would be very churlish of the Germans to moan about this. Labour market reforms in the first decade of the 21st Century made German businesses more competitive and the single currency also made German goods relatively cheap in other Eurozone countries. Italy and Spain, habitual devaluers before adopting the Euro, have lost this option. Unable to weaken their currency and thus boost their export markets, businesses in these countries have failed to compete with the Germans.

The unemployment figures bear this out. Only 3.9% of working age Germans are out of work and youth unemployment was a mere 6.7% in March. The corresponding figures for Italy are 11.7% and 34.1%. Spain and Greece are even worse, with overall unemployment at 18.8% and 23.2% respectively and more than two out of every five young people out of work in both countries.

Closer fiscal union means that not only would German taxpayers be paying into the EU budget to rebuild the infrastructure of the former Soviet bloc countries, but they would be liable for the social security and pension benefits of unemployed and retired Greeks, Italians and Spaniards. At the same time, a banking union would increase German liabilities if an Italian bank went bust. In short, it would be all pain for the average German (who is doing very nicely out of the Euro) with very little gain.

But surely the gain would be the big step towards full political integration which has always been the goal of the EU project? We are now getting to the heart of a fundamental flaw in the whole federalist vision. The idea of an United States of Europe may have been appealing in the late 1940s when everyone was keen to find a format which would prevent another world war. The problem is that while certain intellectuals, particularly on the political left, have long had an internationalist outlook, ordinary men and women are far more attached to the concept of nationhood and ethnicity, even though they may not even be aware of how deep that attachment runs.

But the subject of fiscal transfers, along with the related issues of benefits and welfare, can be guaranteed to bring such sentiments out into the open. Even in the United States of America, there is considerable resistance in some states to a European-style welfare state – and significantly, the states in question are the most ethnically diverse. It seems to be hard-wired into our nature that we are more willing to make sacrifices for people who are “one of us” than for people we perceive to be different.

A German, whose public sector employees have to work well into their 60s, is therefore unlikely to take kindly to subsidising the pensions of Greek public sector workers, many of whom used to retire in their 50s. But Greek austerity is biting impossibly hard. At our Annual CIB rally, Ambassador Chrysanthopoulos told us that his own pension had been cut from 3,400 euros per month to 1,200. If the recently announced cut of a further eighteen per cent applies to him, he will be down to under 1,000 euros a month – and he reckons himself lucky! So real hatred for Germany is building up in Greece, as is impatience with Greece in Germany. The German people may yet find the price of European empire too high while poorer Greek households on the most basic social security are currently receiving around 8 euros per household (not per person) per day. So starvation stalks the land – all in the name of building a European superstate.

An extreme example? Perhaps, but it illustrates graphically the challenges which Macron’s election has brought to the surface. How deeply does the average German, Greek, Frenchman, Swede, Pole, etc  – as opposed to an intellectual or a politician – really love the EU? If the depth of love of the rank and file isn’t strong enough to transcend ethnic and cultural divisions or to be willing to endure financial deprivation and extreme hunger, the only question which Macron, Merkel or their successors will need to consider is how the whole EU project can be put peacefully to sleep without a total political and economic catastrophe.

Photo by Lorie Shaull

EU unemployment could be higher than the official figures

A study by the European Central Bank has suggested that the real level of unemployment in the European Union may be higher than the official figures.  If the numbers of underemployed and unemployed people in the Eurozone are added together, it apparently amounts to between 15% and 18% of the total workforce.

France and Italy in particular have not seen the slow recovery within the Eurozone translate into reduced levels of unemployment. Bert Colijn, a senior economist at the Dutch bank ING, estimates that in Italy, the total of the underemployed and unemployed may be as high as 30%.

In total, five million jobs have allegedly been created across the EU since the 2008 financial crisis, but many are part-time or temporary. This means that wage growth is pretty anaemic in many EU member states.

This report, if true, paints a very bleak picture indeed for some EU member states, as the official data is pretty grim. The youth unemployment rate in Greece stood at 48% in January. In Spain, it hit 56.1% in April 2013, but by March 2017, it had fallen to 40.5% – still two in five young people. The figures for Italy and France were 34.1% and 23.7% respectively. By contrast, in Germany, the figure was 6.7% and the overall unemployment rate a mere 3.9%.

These figures highlight the flawed nature of the single currency. The Germans insisted on a “strong” €uro as the price for surrendering the Deutschmark. They have ended up gaining a very profitable export market for their goods on their very doorstep. Meanwhile, the Mediterranean countries are suffering.

Given that, on the one hand the current state of affairs is going to continue to keep unemployment high in these countries while on the other, Germany would have considerable say in any moves towards further integration within the Eurozone, the prospects for their struggling neighbours to the south are unlikely to  improve any time soon.

That BBC Documentary

As a post script to our piece last week discussing the problems which the EU is currently facing, a number of people have drawn our attention to Katya Adler’s documentary “After Brexit: The battle for Europe“.

The BBC has been in the firing line of groups like the Campaign for an Independent Britain for a long time because of its pro-EU bias –  a bias which dates back to the years when our accession talks were still ongoing, so it was understandably quite a shock to watch the Corporation’s own Europe editor travelling round Europe in a documentary which openly acknowledged the challenges which the EU is facing  in the wake of the Brexit vote. Miss Adler called our departure just “one crisis among many” as far as the EU is concerned and certainly, if one takes the documentary at face value, she is correct.

The progamme features interviews with several euro-critical politicians of varying shades of opinion, including Beppe Grillo in Italy and Marine le Pen in France. Miss Adler also travelled to Hungary to interview  László Toroczkai, the controversial mayor of Ásotthalom, a town near the country’s border with Serbia, who has posted a controversial video warning migrants not to enter his town – totally in disregard of the EU’s fundamental principles, but very much in line with the stance of his Prime Minister, Viktor Orbán.

The prevailing picture painted by the documentary was of an EU caught in the crossfire of several different, albeit interlinked, opposition movements. In Italy, the €uro is the main gripe, whereas in France, an historic bastion of protectionism, globalists are being challenged by what Marine le Pen calls “Patriots”.  Hungary, along with its Visegrád friends, is proclaiming in no uncertain terms its opposition to immigration and multiculturalism.

Of course, Marine le Pen’s Front National is every bit as opposed to immigration – at least Moslem immigration – as Hungary’s leaders while Germany’s Alternative für Deutschland – whose Deputy Leader Beatrix von Storch was among those interviewed by Miss Adler – is as unhappy with the €uro as Beppe Grillo’s party in Italy.  Yet these interwoven strands do seem to have put the EU into something of a stranglehold. Miss Adler finds herself drawing a conclusion which would have been dismissed as poppycock ten years ago:- “Europe’s decision-makers face an unprecedented challenge. Our thorny national debate about Brexit could turn out to be irrelevant. Sooner or later the EU as we know it may no longer be there for us to leave.”

Not everyone agrees, Guy Verhofstadt, the ex-Belgian Prime Minister whom she interviewed in Brussels,  sounded very upbeat. He pointed to a rise in support for EU membership in, among other countries, Denmark following the Brexit vote. “A counter-revolution is under way” he said, while reiterating the classic Europhile mantra for solving Europe’s problems:- “We need to work for closer union.”  Federica Mogherini, the EU’s “High representative” for foreign affairs, also sounded very positive, calling the EU ” a miracle” and claiming that as an institution, it remains “indispensable”.

A more sober assessment was provided by Martin Schulz, the former President of the European Parliament. Although every inch as much a Europhile as Verhofstadt or Mogherini, he bluntly stated that “the risk that we  fall apart is very real.” This is a far more realistic assessment of the situation. Gone are the days when the EU project was regarded with admiration by other countries and continents. To quote Miss Adler again, “Few Europeans are happy with the Union the way it is now. The cry for change is deafening. As is the demand for less bossiness from Brussels. EU power-brokers have a choice: to sink or swim differently, and more in harmony with what the people of Europe want.”

This is the crux of the matter. The EU has been doggedly pursuing its building project of a single European state by means of “ever closer union”. The political problems of its currency union, the blatant violation of the Schengen agreement, a smouldering resentment of the power of the institutions in Brussels and growing hostility to its embrace of big multinationals and political correctness cannot be addressed by just carrying on with the same agenda – Mr Verhofstadt’s solution to the  problem. The question is whether it is possible to change direction quickly and radically enough to avoid being swamped by the rising tide of hostility to everything which Brussels represents.

We have reached the point where the EU’s usual “muddle through” approach to crises is no longer adequate. Furthermore, the recent utterances of people like Verhofstadt, Juncker and Mogherini do not suggest that the EU élite has the ability to “think out of the box” which is needed if the EU is to survive in anything like its present form. No doubt critics will read this piece and say that it is nothing more than wishful thinking by a long-standing anti-EU campaigner, but the harsh reality is that it is nothing more than a précis of a documentary fronted by the BBC’s Europe editor  which happens to agree with her assessment.

Photo by motiqua

2017 – make or break for the EU?

The strong UK economic performance in the second half of 2016 defied the gloomy predictions of many economists. Nevertheless, these same people are determined to tell us that Brexit will result in economic problems in 2017 instead. According to a number of economists surveyed by the Financial Times, growth will slow markedly during the year. Well, we shall see. The fall in sterling will almost certainly cause a rise in inflation, but worst case estimates put the annual Comsumer Price Inflation figure at something between 2-4%, which in recent historical terms is not that high, albeit not terribly good news for consumers.

In spite of Brexit, however, it is events in a number of the other 27 countries of the EU which are likely to cause far more concern during the course of 2017. While the Eurozone economy is recovering, it is still not strong enough to manage without the Quantitative Easing programme which the European Central bank began in early 2015. Italy in particular is looking very wobbly. It is estimated that 18% of all loans made by its banks are “non-performing” – in other words, are highly unlikely ever to be repaid.  These amount to a staggering €360 billion in total.

Furthermore, outweighing the economic concerns is the political scene. This year will see general elections in France, Germany, the Netherlands and the Czech Republic and possibly Italy. The likelihood of parties from outside the “mainstream” making significant gains or even ending up in power has been widely reported (See for instance here and here.)   Indeed, Mark Blyth, an academic based at Brown University in the USA, has predicted has predicted that the EU will cease to exist by the end of this year.

As James Forsyth wrote in the Spectator article mentioned above, however, “The British, it is said, always underestimate the sheer political determination to keep the European project moving forward.” Perhaps he has a point. Many of us who campaigned for Brexit regard the whole EU project as at best misguided and at worst, simply daft. Both during referendum debates and in articles for this website, I have publicly declared “I wouldn’t wish EU membership on my worst enemy”, but is this a sentiment confined to a minority of people in one country which has never been that keen on the EU project anyway?

Certainly Angela Merkel in Germany still exhibits the determination of which Mr Forsyth speaks. She reiterated her belief in the European project only a couple of weeks ago. “We Germans should never be deceived into thinking that a happy future could ever lie in going it alone nationally”, she said in her New Year message.

Meanwhile the Slovak Prime Minister, Robert Fico (whose surname, out of interest, should be pronounced “Feet-so“) has urged member states to stop their “adventures” – in other words, holding referendums on domestic issues  – because they “pose a threat to the EU.”

What will we do if … there is a referendum in Italy on the euro and Italian citizens decide they don’t want the euro?” he asked. What indeed?

On the surface, it appears that Mr Fico is singing from the same songsheet as Frau Merkel, but scratch a bit deeper and it very apparent that the former Soviet bloc countries, while seemingly committed to the EU, have a rather different idea of the way forward. In Poland, for instance, Jaroslaw Kaczynski, the leader of the governing  Law & Justice Party, has called for a new EU treaty in the wake of Brexit which would stop, if not reverse, the flow of power from national parliaments to Brussels. “We need reforms which clearly define that the EU is an association of national states and that national states are the foundation,” he said.

These words are hardly in the spirit of the “Ever closer union” from which David Cameron sought to exempt the UK last year – and it needs to be remembered that this phrase goes right back to 1957. It features in the preamble to the Treaty of Rome which was the treaty which launched what has become the European Union. It is a foundational concept to the whole European project.

Kaczynski is often labelled “Eurosceptic” as is his Hungarian counterpart Viktor Orban. Whether or not this is an accurate label, there is no doubt that their vision of the EU is vastly different from that of the Western European leaders 20 or so years ago. Indeed, according to Martin Schulz, the outgoing president to the European Parliament, the attitude of these men has hamstrung the entire EU project:- “The generation of [Helmut] Kohl and [François] Mitterrand travelled to Brussels with the attitude that a strong Europe is in the interest of our country… The [Viktor] Orbán generation says ‘we have to defend the interests of our country against Europe’ – as if they were being attacked by Brussels.”

Schulz went on to defend both the €uro and the eastward enlargement of 2004, even though both have created enormous problems for the EU. The former has brought Greece to its knees and has given Italy a “lost decade” economically, the latter has brought in a group of nations whose outlook on life is very different from the mindset of Herr Schulz or his Chancellor and are none too keen to change.

It could be that Mr Forsyth is right and that, in spite of both the misery the Single Currency has caused to several Mediterranean nations and the opposition to multiculturalism, social liberalism and various other -isms in Eastern Europe, the EU will muddle through. On the other hand, throw into the mix the forthcoming General Elections and the fact that 2016 did not turn out as the “experts” predicted and  it would be a brave man who would bet his money on it.

Symbolism in politics – Italian style

Wise politicians know how to use symbolism. Winston Churchill posed with a tommy gun in 1940, Ronald Reagan wore a cowboy hat and Neville Chamberlain – less successfully – had a piece of paper.

So what was Italian Prime Minister Matteo Renzi doing with symbolism when he made his somewhat rambling resignation speech yesterday evening? Behind him were three very obvious things:

1 – The flag of Italy

2 – The flag of the European Union

3 – A mural by the great Renaissance painter Raphael.

The two flags are straightforward enough. Renzi was Prime Minister of Italy, a member state of the European Union. Both flags were of the same size, both on upright staffs and both of the same height. That means that neither was given precedence over the other. Of course, the flag of the EU should take precedence as it is a supranational organisation of which Italy is a mere part. But in the world of smoke-and-mirrors that is the EU it would never do to admit that. The pretence is made that member states are still democratic and independent. EU trickery and obfuscation, nothing new there.

No, it was the painting by Raphael that caught my eye. The picture in question is “The Meeting between Leo the Great and Attila”. This masterpiece of Renaissance art depicts a key historic event that took place in 452. Atilla, ruler of the barbaric Huns, had spent the previous 12 years butchering his way around Europe, and now he was marching on Rome. Pope Leo I led a trembling delegation north to meet Attila. Against all odds, Leo persuaded Attila withdraw back over the Alps. Rome was saved from the barbarians.

So what can we read into this?

Was Renzi seeking to portray himself as a latter day Pope Leo, seeking to save Italy from the northern barbarians? If so, he might have been casting the big German banks in the role of Attila – not the first time that Germans have been likened to Huns. After all, it is largely the need to stick to German inspired fiscal measures that has got the Italian economy – and its banks – into the mess that they are in. Or was the EU itself being likened to the Huns?

Unlikely, I think. Renzi is a creature of the EU. He was raised up to implement its policies and now has been cast down as a result.

Perhaps Renzi was seeking to liken his constitutional reforms to that previous great turning point in Italian history. If so, it was an unfortunate analogy. Rome was saved from the Huns, but it fell to the Germanic barbarians soon after.

Actually, I think any symbolism to be found here lies in the fact that the historic allusions were ignored.

That is typical of Renzi and of the EU. They were seeking to change radically the Italian constitution so that they could ram through highly controversial measures that would have brought the Italian banking system and finances even more into line with EU diktat than they already are.

They ignored the historic reasons why Italy has the rather unwieldy constitution that it does. Those who drew it up in 1947 wanted to achieve two things. They wanted to make it impossible for any single person again to wield the sort of power that Benito Mussolini had achieved under the old constitution. They also sought to reflect the identities and powers of regions which, within living memory, had been separate countries while at the same time binding them together into the nation-state of Italy.

This delicate balancing act within the Italian Constitution was to be swept away for the temporary convenience of the EU masters in Brussels and German bankers in Frankfurt.

The constitutional vandalism, disrespect for the past and contempt for the views of the people are typical of the EU – and summed up by Renzi’s disdain for the symbolism of the painting behind him.

Euro ‘house of cards’ to collapse

By Ambrose Evans-Pritchard. This article originally appeared in the Daily Telegraph.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

“One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency.

Prof Issing said the euro has been betrayed by politics, lamenting that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that once again masks the festering pathologies.

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,” he told the journal Central Banking in a remarkable deconstruction of the project.

The comments are a reminder that the eurozone has not overcome its structural incoherence. A beguiling combination of cheap oil, a cheap euro, quantitative easing and less fiscal austerity have disguised this, but the short-term effects are already fading.

The regime is almost certain to be tested again in the next global downturn, this time starting with higher levels of debt and unemployment, and greater political fatigue.

Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said.

The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties.

“The Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions. So there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union.

“The no bailout clause is violated every day,” he said, dismissing the European Court’s approval for bailout measures as simple-minded and ideological.

The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.

The central bank already holds over €1 trillion of bonds bought at “artificially low” or negative yields, implying huge paper losses once interest rates rise again. “An exit from the QE policy is more and more difficult, as the consequences potentially could be disastrous,” he said.

“The decline in the quality of eligible collateral is a grave problem. The ECB is now buying corporate bonds that are close to junk, and the haircuts can barely deal with a one-notch credit downgrade. The reputational risk of such actions by a central bank would have been unthinkable in the past,” he said.

Cloaking it all is obfuscation, political mendacity and endemic denial.  Leaders of the heavily indebted states have misled their voters with soothing bromides, falsely suggesting that some form of fiscal union or debt mutualisation is just around the corner.

Yet there is no chance of political union or the creation of an EU treasury in the forseeable future, which would in any case require a sweeping change to the German constitution – an impossible proposition in the current political climate. The European project must therefore function as a union of sovereign states, or fail.

Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all. The Greeks should have been offered generous support, but only after it had restored exchange rate viability by returning to the drachma.

His critique will exasperate those at the ECB and the International Monetary Fund who inherited the crisis, and had to deal with a fast-moving and terrifying situation.

The fear was a chain-reaction reaching Spain and Italy, detonating an uncontrollable financial collapse. This nearly happened on two occasions, and remained a risk until Berlin switched tack and agreed to let the ECB shore up the Spanish and Italian debt markets in 2012.

Many would say the crisis mushroomed precisely because the ECB was unable to act as a lender-of-last resort. Prof Issing and others from the Bundesbank were chiefly responsible for this design flaw.

Jacques Delors, the euro’s “political” founding father, issued his own candid post-mortem last month on the failings of EMU but disagrees starkly with Prof Issing about the nature of the problem.

His foundation calls for a supranational economic government with debt pooling and an EU treasury, as well as expansionary policies to break out of the “vicious circle” and prevent a second Lost Decade.

“It is essential and urgent: at some point in the future, Europe will be hit by a new economic crisis. We do not know whether this will be in six weeks, six months or six years. But in its current set-up the euro is unlikely to survive that coming crisis,” said the Delors report.

Prof Issing is not a German nationalist. He is open to the idea of a genuine United States of Europe built on proper foundations, but has warned repeatedly against trying to force the pace of integration, or to achieve federalism “by the back door“.

He decries the latest EU plan for a “fiscal entity” in the Five Presidents’ Report, fearing that such move would lead to a rogue plenipotentiary with unbridled powers over sensitive issues of national life, beyond democratic accountability.

Such a system would erode the budgetary sovereignty of the member states and violate the principle of no taxation without representation, forgetting the lessons of the English Civil War and the American Revolution.

Prof Issing said the venture began to go off the rails immediately, though the structural damage was disguised by the financial boom. “There was no speed-up of convergence after 1999 – rather, the opposite. From day one, quite a number of countries started working in the wrong direction.”

A string of states let rip with wage rises, brushing aside warnings that this would prove fatal in an irrevocable currency union. “During the first eight years, unit labour costs in Portugal rose by 30pc versus Germany. In the past, the escudo would have devalued by 30pc, and things more or less would be back to where they were.”

“Quite a few countries – including Ireland, Italy and Greece – behaved as though they could still devalue their currencies,” he said.

The elemental problem is that once a high-debt state has lost 30pc in competitiveness within a fixed exchange system, it is almost impossible to claw back the ground in the sort of deflationary world we face today.

It has become a trap. The whole eurozone structure has acquired a contractionary bias. The deflation is now self-fulling. Prof Issing’s purist German ideology has no compelling answer to this.