Unity and disunity: Cameron’s cheapshot is classic populism
Unity is tested in austerity. And disunity becomes popular.
At times of austerity, it is convenient to blame others for economic pain. And naturally after blame comes a desire to get away from this supposed external source of hurt. Both themes – blame and extrication – have been seen in the political rhetoric in the UK and Ireland this week.
British Prime Minister David Cameron promised in an FT opinion piece to crack down on EU immigration. He is partly blaming the outsiders – the EU and the immigrants – for the UK’s problems. The First Minister of Scotland, Alex Salmond, published his manifesto for independence on Tuesday. In his opinion his country would be wealthier going alone, extricating itself from the UK. And finally the Irish court ruled that the guarantee made in 2008, backstopping the banking system, was legal. That bailout eventually bankrupted the state. Not surprisingly there are loud calls for Ireland to leave the Eurozone if the Troika doesn’t approve reductions to the debts created from this bank guarantee.
The fear at the beginning of the Eurozone crisis has always been that Europe would descend into nationalism, extremism, racism and ultimately even war thanks to the deep depression. The view was that voters would elect politicians that promised a resurgent nationalistic country with blame deliberately placed externally, namely Germany and the EU. Clearly this has happened to a certain extent in Greece with the rise of the Golden Dawn party. And to a lesser extent it has also happened here in the UK, with the rise of the anti EU UKIP. Blame and extrication are popular policies with impoverished voters. However not one EU government has been replaced by a deeply nationalistic, anti EU party in the years since the crisis began.
Let’s start with Cameron’s hit back against immigration. As soon as his comments were making the headlines, the EC shot back and pointed out that Free Movement of People is one of the building blocks of the EU and enshrined in its law. A fact, I am sure, Cameron is aware of. But this was a political move by Cameron to stand up to what many voters view as the external source of the country’s problems. It also needs to be seen in the bigger picture. Cameron said this whilst Britain is negotiating a new deal with the EU. He wants Britain to be able to duck out of the European parts that voters don’t like – interference in legal process, migration, some employment law and business red tape – whilst remain in the free market. I have always been sceptical of the ability for this country to negotiate such a deal but recently I met one of those involved in the negotiations and he was surprisingly optimistic about the outcome. First and most importantly he said that it’s not just the UK that thinks integration has gone too far – there are other EU states that are not happy and want more opt outs to remain globally competitive. He also said that the chances of a new EU deal have improved markedly thanks to Merkel’s re-election. Cameron has promised a referendum on remaining in the EU if he wins the Election in 2015. That gives the bother three parties 18 months to be pressurised into following suit.
Why a deal with Scotland wouldn’t work
As I have mentioned before, it always shocks me the lack of financial and economic knowledge of most of the politicians that I meet. And Alex Salmond did not disappoint this week. His 670 pages of prose left many of the key economic questions unanswered (but that’s politics for you). Most importantly is that he is suggesting a monetary union with England but with fiscal separation. Now that is often argued to be the ultimate problem at the heart of the Eurozone crisis. Is Mr Salmond unaware of what is going on in the continent? He wants to keep the pound (or Sterling,which is after all a place name in Scotland). He also wants the Bank of England to set monetary policy for Scotland, as well as taking England, Wales and Northern Ireland into account. I cannot see Westminster agreeing to that, even if it was a good idea.
And what if Mr Salmond, like many politicians, gets his sums wrong, is overly generous to the electorate and gets his country into a fiscal mess. In this crisis, the central banks have been alleviating the fiscal disaster through extremely loose monetary policy. How will that work if Scotland requires massive monetary stimulus and yet the rest of the UK does not. And the other enormous question that really does determine the future economic prosperity of Scotland – its level of debt – will be exceedingly difficult to negotiate. In fact much of his vision of success relies on Westminster’s co-operation. But where is Westminster’s incentive to give Scotland a good deal?
This week I also participated in a debate on Irish state radio, RTE, about the country’s economic plight.
Did Ireland get a fair deal?
It became very clear that the one big argument in the country that has been ongoing since Greece got its debt relief, was whether Ireland should also get similar help. Many voters feel very strongly that they should not be paying for the cost of bailing out the country’s banks . That cost is estimated to be around €64bn, for a country of only 4.5 million people. Before its bank guarantee, the Irish state has exceedingly low debt levels.
Clearly the main problem for Ireland was that it went into the crisis too soon, before the support programmes had been created. Although bank insolvency was the ultimate problem as property prices fell, in Autumn 2008 the problem was liquidity. Irish banks had been overly reliant on wholesale markets but as the credit crunch hit, they could no longer find anyone willing to lend to them. At that time the ECB was still under Trichet. Draghi’s great LTRO which provided €1.1trillion of cheap funding to prop up Europe’s ailing banks, was not created until December 2011. If the LTRO had been created before and the Irish banks had been able to access such cheap loans, then they may have staggered on until help was given to recapitalise. Like the Spanish banking system. The LTRO bought time to sort out insolvencies. The second help programme to help with bank recapitalisations again came later in the crisis. In particular the ESM – the permanent route for helping troubled EZ countries and their banks – was only ratified in Autumn 2012.
The other major problem for Ireland is that it is not big enough to do serious damage to either Europe’s banking system or the Euro project. That fact reminds me of the great quote by John Maynard Keynes “if you owe the bank £100, you have a problem. If you owe the bank one million pounds, it has”. One of the reasons why Greece got a debt write down is that at the time it threatened the Euro project and the stability of Germany’s banks. Sadly Ireland was the £100 debtor and Greece the one million pound debtors. Ireland is not a large enough country to cause EZ meltdown.
Ireland has been treated unfairly compared to other bailed out countries. Thus it is no wonder that the electorate feel so passionately that the bank guarantee given in 2008 should not impoverish future generations. Of course the ultimate sanction against the troika is for Ireland to withdraw from the Euro. One of the contributors to the Late Debate on RTE, Diarmuid O Flynn of the Ballyhea Protest Group, passionately argued precisely that. If the Troika would not allow Ireland some debt relief, then Ireland should threaten to exit. (Note Ireland’s debt to GDP is still over 120%). Mr O Flynn likened the political class’ addiction to the Euro to Irish fear of independence (from the UK) back at the beginning of the 1900s. Emotional rhetoric given the Irish Home Rule Movement was a bitter and bloody war spanning over a century.
On the death of Queen Elizabeth I, the virgin Queen and daughter or King Henry VIII and Anne Boleyn, the Kingdoms of England and Scotland were joined under King James I. Just over a century later, Parliamentary unity followed Regal unity. But in less than one year’s time Scotland may begin to break its 300 year old link to England to become an independent nation. The British election, just eighteen months away, may well be followed by some kind of referendum on British membership of the EU. And as Greece comes back next year for more EU help on its debt pile, the calls in Ireland for similar help will only get louder.
University College London held a Unity/Disunity conference earlier this year, however it was based at the UCL school of European Languages with presentations from disciplines ranging from “theology to architecture, fine art to social philosophy”. However the ending panel sounded highly relevant for those in financial markets: “Crisis, Chaos and Conflict: European Identities in Disarray”. I should have gone.