Category Archives: Economics

The Single Market includes the free movement of people

As people scurry about trying to figure out just what Brexit might mean in reality, much of the focus has centred on the Single Market and the free movement of people. Most Remainers and probably a majority of Leavers seem to want the UK to stay in the Single Market. This makes a great deal of sense, as the EU will remain our largest trading partner. However the Single Market has never been just a free trade area, contrary to the myths propagated by eurosceptics. From its beginning in the 1950s, the Single Market (formerly known as the Common Market) has had at its heart the commitment to the Four Freedoms – the free movement of goods, services, money and people. This is what every country signed up to when they joined the EU. Even those countries, such as Norway, which are not in the EU, but are in the Single Market have to sign up for all of the four pillars, including the free movement of people.

Yet this did not stop many in the Leave campaign from claiming that with Brexit the UK could stay in the Single Market, yet somehow opt out of the free movement of people. Now, post referendum we have almost a bandwagon of people on the left joining in. The latest to do so includes Stephen Kinnock and Seema Malhotra from the Labour party. In an article for the New Statesmen they argue that somehow the UK can impose controls on immigration for EU states, yet remain in the Single Market.

It is rather disappointing that so many people from the left are so quick and willing to advocate limiting the free movement of people from the rest of the EU. So much for the great internationalist traditions of Labour.  It seems Labour will stoop as low as it can to appease voters in its former heartlands.  Nothing of benefit tends to come from appeasement. The undoubted hardships for many across the UK do not come from immigrants, but from the failures of successive UK governments, including Labour governments.  But this not something most Labour party members are willing to discuss. Much easier to just blame immigrants and the EU.

However at this moment the key question is whether restrictions on the free movement of people is even remotely possible. I would suggest it is not. This for the simple reason that the Single Market is a package and the moment you start to demand exceptions the whole thing will very quickly collapse.

The UK wants to keep three of the four pillars of the Single Market – the free movement of goods, services and money – but to establish restrictions on the other pillar, the free movement of people. Which is fine and dandy for the UK and any other member state that has similar concerns. But what about the other member states?

Let us take the free movement of services. For most commentators this seems to equate to protecting the financial sector and the City of London in particular. As Stephen Kinnock and Seem Malhotra put it: The UK should protect its financial services industry, including passporting rights, vital to our national prosperity. Leave aside for the moment just why the Labour party should have suddenly become the saviours and protectors of financial services. Instead ask, why would all the other 27 member states agree to this? If exceptions are to be made to the four  pillars, why not to the free movement of services? What if Germany and France for example were to demand restrictions on passporting rights? Or what if some member states wanted the right to impose restrictions on the free movement of goods or money?

I other words once you start demanding concessions on one pillar of the Single Market, you are effectively calling for the end of the Single Market. If the UK can demand and get concessions on what it wants, there will no argument for denying this right to all the other member states. If the Single Market is beneficial to the UK, which I believe it is, then you accept all its terms and conditions. You cannot expect to pick and choose and not expect others to do the same. As Angela Merkel has made clear the UK will not get to cherry pick the bits of the Single Market it likes.

The UK once again seems to be reduced to pleading for special treatment. At the same time ignoring the concerns of the other 27 member states. We should be given everything we want and they rest should just sign on the dotted line. This line of thinking seems to ignore that the EU has repeatedly made concessions to the UK. The opt outs on Schengen and the euro for example. David Cameron also managed to get some, admittedly minor, concessions for the recent referendum. All to no avail, a majority in England and Wales still voted to leave. So what incentive do the other 27 member state for offering further concessions? Appeasement does not seem to work. It is time to get real about this. Talk of ending free movement of people yet staying in the Single Market is just that – all talk and no substance.

 

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And Denmark?

Today could have been Independence Day for Scotland if there had been a Yes vote in 2014. Alas there was not and we are still trapped within a sclerotic and ever nastier UK. However this has not stopped Unionists for using this (non)event as an excuse to yet again try to rubbish the whole notion of Scottish independence. Too wee and too poor. It seems that as an independent country there would be a black hole of £15n or £10bn, depending on who you read. Whatever the amount it is clearly something very, very bad. And without the generous largesse of England we up here would be facing disaster.

I am always bemused by these so called analysis and reports as they never seem to include any kind of a) international comparison, nor b) any kind of analysis as to why Scotland is in such economic poor shape. After all to the extent that the Scottish economy is in such a poor state, this must have something to do with the UK. There is no separate Scottish economy at the moment. We remain part of the UK. So any failings, economy wise, must be, at least in part, due to the incompetence of successive UK governments.

The lack of international comparisons has always seemed to me to be an ongoing weakness of the debate about independence. For this post I will concentrate on Denmark. Another relatively small north west European country. Slightly smaller in size than Scotland, with a slightly larger population. Hardly anyone disputes that Denmark continues to be an economic success story. It does not need to rely on anyone in order to pay its way in the world. Its GDP per capita remains higher than the UK’s. Its budget deficit is less than 3%, while its national debt represents just 47% of its GDP. All this without the blessing or curse of significant North Sea oil revenues!

So why is Denmark so consistently successful, while Scotland is apparently so consistently a basket case, unable to survive well on its own?  I can think of only two reasons that might account for Denmark’s success and Scotland’s relative failure. One is that Danes are simply genetically more intelligent, more enterprising and generally just better than Scots. A bit of a stretch this one, and not obviously true. Not sure that Unionists would want to push this line anyway. Not only are we too wee, too poor, but also too stupid!

The other possible explanation for Danish success it that Denmark, the land and its waters, is inherently more productive than Scottish land and seas. Now, not being either an economist, nor an expert on Denmark and its economy, this also seems a bit of a stretch. Not aware of any natural resources in Denmark that could even begin to explain its economic success.

The only other difference I can think of is that Denmark is an independent country and can thus tailor its policies, economic, financial, social etc to suit the needs of Denmark. While poor Scotland remains tied to the Westminster straightjacket, both in terms of overall taxation policy and spending decisions.

It would be helpful if some of our Unionist friends could explain to me just why Denmark is so successful and clearly manages very well as an independent country. What is it that Denmark has that Scotland has not? After all the whole thrust of the better together argument should mean that Scotland is economically more successful than Denmark. Why is it not?

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Labour’s 1p tax is not anti austerity

Labour’s latest wheeze, to increase income tax for Scots by 1p, has attracted a fair bit of attention. It has not been universally welcomed and I am as yet unpersuaded. Others have gone into some detail about the proposal and how it might work, or not work as the case may be. I want to raise some fundamental objections to the proposal.

Contrary to what many from Labour have said, this is not an anti austerity measure. Cuts to public services are not the only way to impose austerity. Austerity is essentially taking money out of the economy.  Cutting the income of workers has the same effect. And raising income tax does precisely this – reduce the income of working people. It does not raise the amount of disposable money in the economy. If this money is then given to local authorities, there has been no effective change in the economy at all. It is simply a variation of robbing Peter to pay Paul. Now you may think this is a just way to preserve public services, but it has nothing to do with challenging, let alone reversing austerity.

Missing from Labour’s announcement is any mention of who is responsible for the austerity and the cuts to public services – the Tory government at Westminster. As a Unionist party, Labour clearly does not want to blame the Westminster government too much, as it would raise some awkward questions as to why Labour supported the Union. Much easier to blame it all on the SNP, ably supported by the media.

Effectively what Labour are proposing is that Scottish workers pay extra tax in order to ameliorate the cuts imposed by Westminster. Remember this extra tax is only to try and reverse the Tory cuts from Westminster. It is not to raise additional money for public services. As working people in Scotland, as in the rest of the UK, have already suffered years of frozen or stagnating wages, it is far from clear why we should be further burdened.

My final objection is that this proposal, if enacted, will set a very, very dangerous precedent. The one person rubbing his hands with glee about this will be George Osborne. If this goes through and Scots are willing to pay more just to offset Tory cuts, then why would he not make further cuts to the block grant? He will have had confirmation that his Unionist pals in Labour are only too willing to pass on the bill to working people in Scotland.

These cuts come from Westminster and any opposition to them must include opposition to Westminster.  Only independence ensures that we will have austerity imposed on us from elsewhere. Weren’t we supposed to be Better Together? Seems very much like Worse Together.

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Puerto Rico and Greece

While just about everyone is fixated on developments in Greece and the outcome of Sunday’s referendum, another little crisis is brewing away nicely on the other side of the Atlantic. Puerto Rico may be a few thousand miles away from Greece, but it is not a million miles away in terms of its economic woes. Even Paul Krugman took time to pen a brief article on Puerto Rico. So what is up on the sun drenched island?

Unsustainable debt is the short answer. According to the New York Times the state’s debt has ballooned because of a failing economy and an inefficient government that has taken in more that it has spent. Sounds a lot like Greece. Puerto Rico’s governor, Mr Garcia Padilla has declared that the state’s
$72bn debt is unpayable. Like Greece, Puerto Rico is now faced with further austerity. And in an further eerie parallel with Greece, the IMF has waded in with a call for debt relief. In the case of Puerto Rico this has come in the shape of a report issued by three former IMF and World Bank officials. They state quite categorically that even big spending cuts and tax increases will not fix the fundamental problem.

So, for both Greece and Puerto Rico a key element in any sustainable plan will include some debt relief and an extension of the pay back time for the rest of the debt. There is an added hurdle for Puerto Rico to overcome to get this part right. As a Commonwealth and not a fully paid up state of the US, Puerto Rico is not covered by the Federal bankruptcy law for municipalities and states. Basically this means that Puerto Rico cannot legally default! Action on this will need to be taken in Washington by Congress.

However there is no such thing as a free lunch. In exchange for debt relief, US commentators all seem to be in agreement that investors and Congress should press Puerto Rico to make significant regulatory reforms. Or, as the Economist likes to put it, many of the reforms needed to revive growth must be ordered from Washington.

With luck, both Puerto Rico and Greece can reach an agreement that is satisfactory to both sides, but in both cases it will involve some degree of continued austerity and almost certainly some economic changes that many will find difficult to accept. The alternative of a forced default is likely to prove even more unpalatable.

A couple of key differences in respect of the two crisis. Both Puerto Rico and Greece are part of a single currency zone. While many are using the Greek crisis as an opportunity to question the whole of the eurozone and its survival, nobody is doing this in relation to Puerto Rico. Whatever happens there, no-one is going to raise questions about the sustainability of the dollar zone. It also does not look like that anyone is calling for Puerto Rico to be expelled from the dollar zone either.

Another key difference is that Puerto Rico only has to deal with two political intermediaries – the President and Congress. Contrast that with Greece, which has to negotiate with the IMF, European Commission and all 18 other member states in the eurozone. While most commentators focus on Germany, all of the other 17 governments have their own concerns and electorates to worry about. Not to mention their own veto on any new deal with Greece. It should raise the question as to how Syriza has managed to alienate all of these partners?

Greece and Puerto Rico desperately need an agreed deal. I am not at all sure what outcome in Greece tomorrow is more likely to promote an agreement. One situation where I am glad I do not have a vote.

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Greece – what is Syriza’s plan?

The rather sudden and unexpected decision by the Greek government to hold a snap referendum on the latest proposals from the Troika has caught everyone by surprise. Something does need to be done to bring this long running and seemingly never-ending merry-go-round to an end, one way or another. Whether this particular referendum will help resolve the crisis is open to question.

The basics are pretty well known. Greece is effectively insolvent. Its debt burden is too great for it to have any prospect of ever repaying this debt. The unprecedented additional austerity measures proposed by the Troika, in the view of most people, will only make things worse. Most of the additional loans go immediately back to the lenders in the form of repayments on previous loans. Hence the merry-go-round analogy. Very little of the loans go to helping the Greek population. While the greater the austerity the greater the long term damage to the Greek economy.

Yet the Troika seem even more determined than ever to force further austerity on Greece. As Paul Krugman puts it, it has been an act of monstrous folly on the part of the creditor governments and institutions to push it to this point.

How should Greece respond? The Syriza led government has responded by proposing to hold a referendum for next Sunday. The Greek parliament has voted in favour of holding this referendum. But will the referendum provide a clear cut result for a way forward?

Various international observers seem to think so. Paul Krugman for example supports the referendum for the following reason: “… until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way.”

This is in line with the view of those who believe that leaving the Euro offers the best option for Greece, at least in the long run. Unfortunately the actual question being put to the Greek people does not support this interpretation. According to Reuters, Greeks will be asked the following question: “Greek people are hereby asked to decide whether they accept a draft agreement document submitted by the European Commission, the European Central Bank and the International Monetary Fund, at the Eurogroup meeting held on June 25.”

Alexis Tsipras, the Greek Prime Minister has stated that an emphatic “no” vote would strengthen Greece’s negotiation position. The obvious question here is negotiating what? An improved bailout agreement or an exit from the euro? The referendum question says nothing about the euro and only refers to the bailout agreement. There is a further doubt about the validity of the referendum and that is that the draft document referred to, in effect no longer exists. So the Greek people are being asked to accept or reject a proposal that is no longer available. What’s the point of this?

A further problem with the referendum is that in order to secure any kind of strengthening of Greece’s negotiating position, Greece needs to still be in euro by the time the referendum is held. Will it? The Greek government has asked the EU to extend the current agreement for another two or more weeks to allow the referendum to take place, but this has been rejected. Unless something is agreed today, Sunday, then on Wednesday, 1st July Greece will have defaulted on its repayment to the IMF. Before then, absent an agreement with the EU/ECB, there will most likely be a run on Greek banks. To prevent this the Greek government will have to declare an extended bank holiday and probably institute capital controls to prevent euros draining out of Greece.

This is where it all gets very messy indeed. Greece almost certainly needs to default on most, if not all of its debts. The real issue is whether this is done in an orderly and agreed manner, or is done abruptly without agreement. This could happen if Greece is either forced out of the euro, or voluntarily decides to leave the euro.

The big problem for Syriza is that all the indications are that a large majority of Greeks want both an end to austerity and to stay in the euro. Which is why the referendum question does not mention the euro. However if by the time the referendum is held, next Sunday, it is clear to all that a rejection of the bailout agreement means leaving the euro, how will the Greek people vote then?

For underlying all this is the uncomfortable reality that there is no good option for Greece in the short to medium term. And the long term may be a very long time coming. Leaving the euro will not bring about an end to austerity. It may change who suffers most from continuing austerity, but things are likely to get even worse for many Greeks with a euro exit. There is no short term, painless fix for the Greek economy.

A further complication is that many legal and economic commentators have opined that even with a default there is no need for Greece to leave the euro. In fact it seems there is no legal, treaty based way for any eurozone country to be expelled from the euro. So, at least in theory, Greece could default on some of its debt, and try and remain in the euro. What this might mean in practice is unknown and at the moment unknowable. Much would depend on how willing the ECB and Greece’s partner countries would react. The prospects do not look good.

A final point on the portrayal of the referendum as a battle between democracy and the nasty world of finance. This is just nonsense and not at all helpful. Democracy is not just for Greeks. A commentator on another site puts it nicely and succinctly. “It is normal that a vote in Greece is not binding for Germany, France, Ireland, and the poorer than Greece countries of Eastern Europe. The Greek vote is valid only for Greece’s government. The democratically elected governments of the remaining Euro Group are negotiating according to their own voters opinions. The outcome may please some and not others.”

I agree with Paul Krugman that the governments of the eurozone countries have been acting with monstrous folly in relation to Greece. Alas democracy has never guaranteed the election of sane and reasonable governments. In the eurozone all governments have the same democratic validity. It does no good to anyone to pretend that the wishes of the Greek people are more worthy than the wishes of others.

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Opposing Austerity

Last weekend saw various marches and demonstrations across the UK against the Tory government’s further austerity plans. Pretty substantial ones in London and Glasgow by all accounts. All very good in a way, but what does it achieve? Richard Seymour has a very good, short piece on his Lenin’s Tomb blog on this, which you can read here. I am very much in agreement with Richard on this. Opposing austerity is relatively speaking easy. Write a few letters or articles, blog away about how nasty and self-defeating austerity is, and of course go on any number of marches and demonstrations. However stopping austerity is an altogether harder nut to crack.

The big problem is that the battle against austerity was lost decades ago. Ironically, as Simon Wren-Lewis points out, the one place were the austerity bandwagon has failed is in the economics profession. See this article for details of how the academic world views austerity. Alas, the same cannot be said for the world of politics and public opinion. The austerians have successfully won the battle of public opinion. The majority of people agree that the two Ds – debt and the deficit – pose a real and existential threat to the survival of our country. The image of the UK as a big family which has overspent and misspent on its credit card has struck a chord with most people. The fact that this is economic illiteracy is irrelevant. This view, backed up by just about all of our media has almost obliterated alternative views.

In this task, the right has been immeasurably helped by the complete failure of the both Labour and the LibDems to mount any kind of sustained opposition to the “austerity is needed to save our country” message from the Tories and their allies. Even worse, these two parties have either explicitly or implicitly acknowledged the key message that some degree of austerity is necessary. If all you have to offer is austerity lite, you might as well vote for the real thing and get it over with.

This is the real challenge which faces the left across the UK, and in the rest of Europe it must be said. We urgently need to find ways to challenge and replace the dominant neo-liberal consensus in the media, the mainstream political parties and most of all with the public. While the odd march and demonstration will continue to play their part in this, the real work needs to be done elsewhere. The various strands on the left, including the Greens and the SNP, Plaid etc, need to develop an alternative story as to how we got into this mess and how to get out of it. The ingredients are there – financial deregulation and the over mighty power of banks and other financial institutions for one. However as yet no simple to convey and simple to understand alternative story has made it regularly into the media and into popular perception.

It would be good if the Labour party were to become part of this counter attack on austerity. But the omens are not good. Previous Labour governments did little or nothing to anticipate or prevent the crash. Government spending did not cause the crash. However the lax attitude of Labour governments, bordering on the irresponsible, did create the regulatory framework which allowed the crash to happen. All this means that Labour are unlikely to be part of any solution. The party still seems to be in thrall to big finance and the precious role of London as a world financial centre. God bless them, they seem all to willing to admit to overspending, which they didn’t do, but unwilling to admit to favouring the rich and big business.

This is where we need the more creative and economically aware people on the left to get involved in developing an alternative and popular story. A lot is already being done and available via our exciting alternative media – Bella, Newsnet, Wings, Common Space etc. However in large measure these outlets are preaching to the converted. How do we get our message and our alternative story out into the parts of the population that the Sun et al manage to reach? And onto out TV and radio programmes?

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