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.

Why Brexit should be followed by Irexit

By Anthony Coughlan

The Republic of Ireland joined the then European Economic Community in 1973 primarily because Britain and Northern Ireland did so. Now a group of Irish economists and lawyers of which I was rapporteur have produced a report advocating that Brexit should be accompanied by “Irexit” (Ireland Exit), for a number of decisive reasons.

If the UK leaves the EU customs union while the Republic stays in the EU, the North-South border within Ireland will become an EU land frontier, with customs controls being inevitable and possibly passport controls too. EU-based laws and standards, for example in relation to crime and justice, will prevail in the South and UK-based ones in the North. The only way for the Republic’s politicians to avoid adding new dimensions to the North-South border within Ireland is therefore for them to leave the EU along with the UK.

Since 2014, the Republic has become a net contributor to the EU Budget. This is a big change from the previous 40 years, during which it was a major recipient of EU money, mainly through the EU’s Common Agricultural Policy. In future, money from Brussels will be Irish taxpayers’ money recycled, as is already the case with the UK. This removes what up to now has been the principal basis of Irish Europhilia, official and unofficial – namely, easy EU cash, not any ideological enthusiasm for Eurofederalism or “the EU project”.

If the Republic seeks to remain in the EU when the UK leaves, it will henceforth have to pay more to the EU Budget as its proportionate contribution to help compensate for the loss of Britain’s contribution. On the other hand, a bonus for Ireland of leaving the EU along with the UK is that it would get its sea-fisheries back – the value of annual fish-catches by foreign boats in Irish waters being a several-times multiple of whatever money Ireland has got from the EU over the years.

As regards trade and investment, the Republic sends 61 per cent by value of its goods exports and 66 per cent of its services exports to countries that are outside the continental EU26, mostly English-speaking. It gets two-thirds of its imports from English-speaking countries. The USA is the most important market for the Republic’s foreign-owned firms and the UK for its Irish-owned ones – the latter being particularly important for employment. These two markets together are comparable in importance to that of the EU26 post-Brexit. Taking other English-speaking markets into account makes the English-speaking world much more important for the Republic than the EU minus Britain. This is also so for foreign investors coming to Ireland. Economically and psychologically, Ireland is closer to Boston than Berlin, and to Britain than Germany.

It is not of course a question of the Republic having to choose between one export market and another if it should decide to leave the EU along with the UK. If common sense prevails in the negotiations, there should be continuing free trade between the UK, Ireland and the EU in the context of Brexit and Irexit occurring simultaneously.

Without Britain as an ally beside her in the EU Council of Ministers, the Republic will be in a much weaker position to defend its low rate of company profits tax, which is the principal incentive that it uses to attract foreign capital investment to the country. Germany and the Brussels Commission are already gunning for this. It would also be in a weaker position to defend its fishery interests, its trade interests, its distinctive Anglo-Saxon-based traditions in the area of law and justice, which the EU aims to harmonise, and its military neutrality.

The main argument for the Republic staying in the EU when the UK leaves is the negative one that it is a member of the Eurozone while the UK is not. When the euro was established in 1999, Dublin’s ultra-europhile politicians were so foolish as to adopt the currency of an area with which Ireland does only one-third of its trade. They thought at the time that the UK would be bound to adopt the euro-currency too, and that Dublin would show how “communautaire” it was by going first! The Republic now desperately needs to get its own currency back so that it can devalue it along with sterling and the dollar, and not be stuck with an implicitly overvalued euro that is now crucifying its exports.

That is why Dublin should aim to leave the Eurozone in a planned, concerted manner, negotiating its departure with Germany, the ECB, the UK and the Bank of England in private behind the scenes as part of its move to leave the EU along with the UK, rather than be forced to abandon the euro anyhow in the next Eurozone financial crisis.

The EU plans closer military cooperation when the UK leaves. From Britain’s point of view, can it be be happy with the thought of the Republic participating in EU security and defence policy and implementing ever-closer integation with an EU/Eurozone that is likely to come under greater German hegemony following Brexit?

Germany, like the other 27 EU States, will seek to prevent Brexit if it can but, if it is unable to thwart it, it will accept it, as will the others. This and other considerations may possibly encourage Germany to support Irexit alongside Brexit if that should become Irish Government policy. Germany could more easily aspire to greater hegemony over the continental EU Member States if Ireland as well as Britain cease to be EU members. This should appeal to influential sections of Germany’s current political elite.

It is only since Theresa May’s speech in January that Ireland’s ultra-europhile political Establishment is beginning to realise that Brexit really does mean Brexit, and the case for it being accompanied by Irexit is starting to be heard in Irish business circles. Irish public opinion is in advance of élite opinion on this. An opinion poll last October showed that almost four in ten Irish people would choose open borders and free trade with the UK over the EU. This was before there was any realisation of the hugely adverse effects on the Republic if it is so foolish as to seek to remain in the EU when Britain and Northern Ireland leave it.

That realisation is now growing in Ireland. Both public and élite opinion is likely to move in the direction of Irexit over the coming two years, and UK policy-makers should do all they can to encourage it.

This article originally appeared on the Conservative Home website.

Donald Tusk (not Trump!) Reminds us why we voted to leave

We will not be providing you with a blow-by-blow commentary on the progress of the European Union (Notification of withdrawal) Bill as we believe that, in spite of opposition from the Lib Dems, the SNP, some Labour MPs and Ken Clarke, it will complete its passage through Parliament in time for Mrs May’s deadline of 9th March when the government will formally trigger Article 50.  There will be plenty of press coverage and analysis for people wanting to follow the Bill’s progress through both houses of Parliament but this website will confine itself occasional comment on the key moments of the Bill’s progress. We will also be monitoring which MPs support and which oppose the will of the people.

Of more immediate interest is a speech by Donald Tusk, the President of the  European Council, which provided a welcome reminder why we voted to leave. In order to understand where Mr Tusk is coming from, we need to remember that next month marks 60 years since the signing of the Treaty of Rome, which formally inaugurated what has become the European Union. Naturally, the EU wants to celebrate this milestone but we pesky Brits have already spoiled their party with Brexit and, to add insult to injury, the USA has voted for a president who, in the words of Ted Malloch, the new US ambassador to the EU, “doesn’t like an organisation that is supranational, that is unelected where the bureaucrats run amok and that is not frankly a proper democracy.”

So what was Mr Tusk’s response?  The answer is – guess what – More Europe! “We must therefore take assertive and spectacular steps that would change the collective emotions and revive the aspiration to raise European integration to the next level”, he said. Yes, he means further integration. Just to make sure no one could be in any doubt, he also added “If we do not believe in ourselves, in the deeper purpose of integration, why should anyone else? In Rome we should renew this declaration of faith.”

He did not go into much detail about how integration was to proceed, There was no mention of fiscal or monetary union within the Eurozone, although he did talk of “strengthening the foreign policy of the EU as a whole.” Brexit received only a very oblique mention when he claimed that “the disintegration of the European Union will not lead to the restoration of some mythical, full sovereignty of its member states, but to their real and factual dependence on the great superpowers: the United States, Russia and China. Only together can we be fully independent.”

Why could no EU member state be fully sovereign? On which superpower is New Zealand, with a population less than one eighth of Mr Tusk’s native Poland “really and factually” dependent? Or Australia, India, St Helena, South Africa or Morocco, to name a few countries at random.

There is a particular irony in this statement given that many EU member states are also members of NATO and have been accused, with good reason, by President Trump of being too dependent on the USA for their protection.

Tusk complained about “Russia’s aggressive policy towards Ukraine” without the slightest mention that the EU must take the blame for the current state of that country by fermenting opposition to a democratically-elected leader.

He also complained that, faced with “national egoism….becoming an attractive alternative to integration”, the pro-European élites (his own term, may I add) were suffering from “a decline of faith in political integration.”

In other words, it’s the same old message, underpinned with the belief that if it is repeated sufficiently, it will convince the doubters. Tusk’s political rival Jaroslaw Kaczynski, however, is unlikely to be impressed. The leader of Poland’s ruling Law and Justice Party has called not for more integration but for the very opposite- a new treaty which would return power to the member states. “The vision of the EU forced upon us by the Lisbon Treaty has failed”, he said.

Thinking back to this time last year, we will recall that David Cameron went to Brussels asking for something similar – a return of some power back to the UK. He came away with only a few crumbs which ultimately didn’t sway the voters and we wisely voted to leave.

Neither Poland nor fiercely EU-critical Hungary looks likely to follow us out of the door at the moment, but Mr Tusk’s words were those of a man who realises that supporters of the European project are on the back foot at the moment. Unfortunately for him, the determination he expressed to carry on ploughing the same old furrow is unlikely to address the growing disillusion with the project across a number of EU member states.

“If you find yourself in a hole, stop digging” goes the old saying and there is much wisdom in it. Unfortunately, Mr Tusk and his friends in Brussels seem both unable and unwilling to turn their digger off.

Photo by Glueckstadt

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.

There is no safety inside the arrogant, imperial, and dangerously unstable EU

By Allister Heath

We may not always like it, but one of the intractable realities of the human condition is that nothing ever stays the same. Families, companies, nations, the English language, our daily lives: they all change, for better or for worse, quickly or slowly, all of the time.

Politics is no different. It is therefore absurd to frame the European referendum as a choice between a terrifying revolution (Leave) and an unthreatening embrace of the status quo (Remain); instead, what we are being asked is to choose between two radical change agendas with complex, unpredictable consequences.

“Brexiters have been confronted with the possible downsides of leaving; now Remainians must address the financial and political risks of staying”

Both come with risks and challenges; both are uncertain and will require adjustments; both will mould our country, our economy and our political institutions into something very different to what they are today. But while the Leave side has relentlessly (and rightly) been grilled about its post-Brexit vision, the Remain camp has been shamefully let off the hook.

It hasn’t had to explain how exactly it sees the EU evolving over the next decade or two, and what we would therefore be signing up to. Brexiteers have been confronted with the possible downsides of leaving; now Remainians must address the financial and political risks of staying.

The starting point for any sensible discussion is to acknowledge that the EU is facing an ongoing economic and social crisis, and is desperate to deepen its integration further. Remain must tell us how this would impact the UK, and why it thinks that we would be better off dealing with the fallout inside, rather than outside, the EU.

What, for example, will happen when the next Eurozone crisis erupts (and no, denying that there will be one isn’t good enough)? A new deal appears to have been cobbled together for Greece, but the real worry must be Italy, a country whose economy has not grown at all since 2000, which is crippled by 11.4 per cent unemployment and a massive national debt, and which could bring down the euro.

Would we have to put our hands in our pockets directly when the next crisis erupts, or would the impact merely be indirect, reducing our exports to the region? It may be that the European Central Bank is forced to resort to helicopter money, but there is a very real danger that Germany would refuse to put up with that, destabilising the Continent.

There are thus political risks wherever we look. Will Spain go populist? Will the current riots spiral out of control in France? Austria’s economy has been growing yet an extremist, authoritarian candidate grabbed 49.9 per cent of the vote at the presidential elections. What next? What is the chance of Marine Le Pen winning a presidential election in France, if not next year then in six years’ time, and waging all-out war on globalisation? What would the impact be on our economy and investments in France? Wouldn’t we be safer out?

Eastern Europe has also started to elect unsavoury politicians: it may well be that the immigration crisis will tear the EU apart, especially when the Dublin convention on refugees is replaced by a quota system. Expanding the EU to include additional countries, which is very much Brussels’s plan, would exacerbate opposition to the free movement of people.

Given all of this, Remain needs to explain why we wouldn’t be better off trying to diversify our economy towards more resilient parts of the world. The share of our exports that goes to the EU has already collapsed from 55 per cent in 1999 to 44 per cent last year – but shouldn’t we be trying to reduce this further and faster?

If the eurozone succeeds in harmonising its fiscal policies and becoming more like a single entity, it may succeed in overriding British interests more effectively, which could be another reason for us to leave.

The EU was always intended by its founders to be a process – a mechanism by which formerly independent European countries gradually bind themselves together into an ever-closer union. Crises were seen as useful flashpoints that would trigger a further push to integration, and its central institutions were deliberately designed to seek and accrue power.

When I was growing up in France, it was made consistently clear that the EU was a political project that used economics as a tool of state-building; the single market was created because all countries have a free internal market, not because the EU’s founding fathers believed in international free trade. We used to be taught all of this openly and explicitly at school: the EU was the obvious, rational future, the only way war could be avoided and the best way to protect our social models from the ravages of “Anglo-Saxon” markets.

There are therefore two possibilities if we vote to stay: eventual abrupt disintegration, or further EU integration. If the latter, how many more powers will we give up when the next treaty comes along, and how much “progress” will be made in critical areas like a European army, tax harmonisation, and the centralisation of justice and home affairs? Why haven’t voters been told ahead of June 23rd?

The biggest, costliest and most immediate change after a Remain vote would be psychological. Forget about all the caveats: an In victory would be hailed as proof that Britain has finally ceased fighting its supposed European destiny. Our bluff would have been called in the most spectacular of fashions: after decades of dragging our feet, of being ungrateful Europeans, of extracting concessions, rebates and opt-outs, of trying to stand up for our interests, we would finally have hoisted the white flag. The idea that we would hold another referendum on the next treaty would simply be laughed out of town.

Voting to Remain would thus be a geopolitical disaster for the UK, a historic failure. Comfortable, middle-class voters who are considering sticking with the devil they believe they know need to think again. Voting to remain is a far greater leap into the unknown than voting to leave. It’s self-evidently normal to be independent and prosperous: just look at America, Australia, Canada or Singapore. But there are no known examples of a previously independent democracy being subsumed into a dysfunctional, economically troubled technocracy and doing well as a result. As mad gambles go, it is hard to think of anything worse.

This article first appeared in the Daily Telegraph on 2nd June