Sunday, January 8, 2017

Seismic Faults in the European Union

On 2-3 December the Sapienza University of Rome organised a Conference on “Present and Future of the EU and EMU”, in honour of Francesco Forte. Speakers at the conference illustrated Forte’s scientific and professional merits. This post discusses Forte’s statement that “I governanti europei sono cretini”, arguing that this is only part of the problem: those who govern Europe have a different agenda, and European institutions and policies can be likened to seismic faults, with an earthquake probability gradually approaching near certainty over time. Forte also is on record stating that “nothing is irreversible in economics”, facts prevail on rules written on paper – an important lesson for those who are reconsidering the terms of EU Treaties.

Introduction. Brexit is widely viewed as a tendency towards EU disintegration, with the risk of contagion spreading to its weaker member states. In truth the crisis is much more serious: the EU has many fault lines, institutions and policies sliding over one another and colliding like tectonic plates. There are also external pressures similar to continental drift. With the passing of time the probability of a catastrophic institutional earthquake approximates near certainty.

Crisis management is not a way to, and does not promote greater integration. At best it is ineffective, causing delays and inertia in multiple crises; at worst it is used as a political tool to justify “mission creep” and to avoid democratic monitoring of EU élites political, non-transparent agendas and behaviour.

Fault Lines. There are a dozen fault lines in the EU:

1 Brexit. Cameron promised a Referendum to defuse UKIP challenge, hoping to replicate the success of the referendum on Scottish independence, in destroying the Scottish Labour Party while denying independence from the UK. He destroyed UK Labour, alright, but in the whole of the UK a 52% majority on a large turnout secured independence, i.e. to LEAVE the EU; he had to resign. His successor Theresa May confirms “Brexit means Brexit”.

Brexit will be punitive: migrations control and EU migrants’ lower access to welfare provisions, no ECJ jurisdiction, and the rest, mean reduced UK access to the single market, in spite of significant mutual losses, in order to discourage other exits or a’ la carte membership.

2 Trade policy. There is a clear democratic deficit: either representatives of 3.5mn Wallonians can block a Treaty affecting 545mn; or after 7 years of secret negotiations with Canada, the Treaty on CETA (Comprehensive Economic and Trade Agreement, like Transatlantic TIP and TransPacificPA, now unlikely to be signed under Trump, who also intends to denounce NAFTA as “the worst trade deal ever”) was unduly favourable to international investors, enjoying an ad hoc ISDS (Investor-State Dispute Settlement) mechanism, protection of profits from regulatory legislation, excessive protection of patents.

There is a pro-multinational corporate bias also in EU “Gold Plated Revolving Doors” recruitment policy of high officials (Monti, Draghi, Issing, Barroso, Bangemann, etc.).

The role of the nation state is that of protecting its citizens from multinational corporations (Judt 2010): self-evidently this role cannot be entrusted to the European Union.

3 Migrations. In 2014-16 there was an acceleration of migrant inflows into the EU from the Middle East, the Balkans, South-East Asia and Africa. Refugees escaping war and persecution are entitled to asylum (art. 13, Universal Declaration of Human Rights) but most migrants are economically motivated and, unlike refugees, their right to migrate is unmatched by a corresponding obligation under international law, to receive them.

Migrations yield a net welfare gain. In a world without borders this would range between 143.3% (Hamilton et al. 1984) and 7% of global GDP (Docquier et al. 2012).

Gross losses are also involved (of workers in host countries, especially if unskilled, and employers in countries of origin) which cannot be overcompensated by gross benefits (accruing to migrants, workers who remained at home, employers in the host country; consumers all round benefiting from greater competition) so as to make everybody better off, because transfers from gainers to losers would have to be international (impractical) and/or from the poor to the rich (undesirable). Trickle-down cannot be taken for granted, trickle-up is just as likely.

Migrations also involve the dilution of social capital (whether viewed as physical infrastructure, or as welfare state benefits, or trust and cohesion) freely appropriated by migrants while private capital is fully protected globally. An unsustainable contradiction.

Moreover, any benefits of cultural enrichment can be matched by losses from cultural impoverishment.  Here the seismic fault is an East-West divide, that caused Schengen area collapse, the building of walls and the spreading of populism.

Populism must include cross-party and inter-class protest against the reintroduction of poverty, mass unemployment, poor services in stable societies, and above all against all losses from globalisation. Such protest is an integral part of democracy and no longer deserves contempt and demonization. A re-definition of populism is required also by the diffusion of Information Technology and the fast inter-connectivity of people in everyday life (e-mail, social media, blogging, mass access to leaked official documents and to expertise, etcetera.)

4 Austerity. Maastricht rules on budget deficit and public debt ceilings, and the tougher GSP and the Fiscal Compact, have condemned member states to pro-cyclical fiscal policies, protracted recession and mass unemployment, creating a North-South divide.

Early claims of a possible “expansionary fiscal consolidation” were disproved by the IMF Research Department and now have been abandoned. The IMF and other international organisations had under-estimated fiscal multipliers in EU and OECD countries throughout 1970-2009, at an average 0.5 now recalculated upwards to be as much as 1.7 (Blanchard & Leigh, 2012).

This revision is due to the ineffectiveness of monetary expansion close to a zero interest rate, lack of opportunities for exchange rate devaluation, a large gap between potential and actual income and simultaneous consolidation across countries. Also, fiscal multiplier for expenditure cuts turns out to be up to ten times higher than for tax rises.

Fiscal consolidation is much more expensive in terms of output loss than previously believed. Worse, it can be proven that, starting from a hypothetical fiscal balance, a fiscal consolidation (tax increases plus government expenditure cuts) will always necessarily result in an increase instead of a decrease of the Public Debt/GDP ratio, with respect to what that ratio would have been otherwise, as long as the fiscal multiplier is greater than the country’s GDP/Public Debt ratio (See Nuti 2013). 

Thus fiscal consolidation works only in countries with a low Public Debt/GDP ratio, that do not need a consolidation. Renzi promised to make Europe “change direction ” but run perversely large primary surpluses and slowed down debt growth.

5 Tax competitionTaxation across the EU is not sufficiently harmonised. In order to attract foreign investment a beggar-my-neighbour tax competition destroys national and EU collective tax revenue potential, making fiscal discipline more difficult.

As Luxembourg Premier, in 2002-2010 Jean-Claude Juncker made “sweetheart deals” with at least 340 multinational corporations, reducing their tax liabilities by billions of dollars. A poacher turned gamekeeper, he now enforces austerity in countries which he robbed of their tax revenue.

Ireland, levying a 0.005% (sic!) tax on Apple European revenues, is the most spectacular instance. It was fined €13bn but tax recovery is doubtful and is not going to benefit the EU members damaged by its policy. See also Fiat’s move to the Netherlands, etcetera. 

6 The tiny EU budget (about 1% of EU GDP). The USA have a federal budget of over 20% of US GDP, which can support the issue and service of federal debt. Individual member states can issue their own bonds involving a default risk without threatening the dollar or the US financial system.

The tiny EU budget, combined with the rule that it should always be balanced ex-post (by a variable income tax on member states) rules out the possibility of issuing and servicing EU debt. It also rules out financing major Europe-wide investment in infrastructure, or counter-cyclical policies: the Juncker Investment Plan (€2bn EU funds expected to mobilise €315bn private investment through impossible multiplier effects) has remained a dead letter.

7 Divergence of welfare policies. Until the early 2000s the European Social Model, a desirable target though not part of membership obligations, relied on institutions as well as markets, providing employment protection and a generous welfare state.  The Model was diluted and debased by EU enlargement to the East (2004-06), globalisation of labour and austerity.

The Bertelsmann Stiftung computes a Social Justice Index for all 28 EU states, summarising: poverty prevention, equitable education, labour market access, social cohesion and non-discrimination, health, as well as intergenerational justice.

In the vast majority of EU countries the Index, after years of decline, reached the lowest point in 2012-14 but is still noticeably worse than before the crisis. There are significant country differences, impacting on the relative attraction of migrations. (Graph 4, p. 17, plotting the SJI 2016 against the PPP GDP per capita 2015 illustrates well the dispersion of both income per head and the SJI throughout the EU: the rejection of a financial Transfer Union has involved a de facto Labour Transfer Union.)

8 Tolerance of Illiberal Regimes. The original European design was committed to shared values, listed by Angela Merkel in her message to President Trump as “democracy, freedom, …respect for the rule of law and the dignity of the individual, regardless of their origin, skin colour, creed, gender, sexual orientation or political views.”

Such commitment has been neglected by EU acquiescence in member states’ illiberal regimes.  Hungary and Poland have restricted freedom of speech, media pluralism and the protection of minorities. 

In Hungary since 2010 the Fidesz government of Viktor Orbán changed the election system, redesigned electoral districts, eliminated checks and balances within governance built over the past two decades, reshaped the juridical system and gained nearly full control over the media and all state institutions.

Transparency International describes Hungary as a “state captured by private interest groups”. Viktor Orbán in 2014 announced his desire to create an “illiberal state” modelled on China and Russia. Recently he declared the end of the era of “liberal blah blah”, predicting that Europe would come around to his “Christian and national” vision of politics. On 2 October 2016 an overwhelming majority of Hungarian voters rejected the EU's migrant quotas, though turnout was marginally too low to make the poll valid.

In Poland, since October 2015 Kaczyński’s PiS party “attacked the country’s Constitutional Court, politicized the judiciary and the civil service, and launched an assault on media pluralism.” (Müller 2016). The EU treated it as a Rule of Law violation but took no further action for the moment.

Accession state Turkey’s Erdoğan, emphasizing traditional Islamic morality, claims to be a “conservative democrat.” Turkey’s authoritarian involution accelerated after the failed coup of 16 July, when over 100,000 people were purged. In November the European Parliament condemned "disproportionate repressive measures" and called for a freeze on EU accession, but MEPs have no formal role in accession talks. Turkey will still receive €6bn to take back migrants who failed to obtain asylum in Greece.

Robert Fico’s government in Slovakia has pursued a similar brand of what has been dubbed “raw majoritarianism” (Sierakowski 2016). Renzi’s constitutional reform (rejected by the 4 December Referendum) was also a move towards power concentration beyond democratic control. A fault line is dividing liberal and illiberal Europe.

9 The Euro: premature, handicapped, divergent. The common currency was supposed to “crown” European integration, after political, fiscal and banking integration, and a common foreign and defence policy, but was introduced prematurely, an exemplar of the “crises create opportunity for integration” myth. It was also handicapped by the ECB limited powers: unlike the Fed, the BoE and BoJ the ECB cannot finance the EU budget or that of member states purchasing government bonds in primary markets. The Euro also suffered from increasing divergence of member state fundamentals. Nevertheless, the Euro gave us ten years of low inflation, low and converging interest rates, trade and investment integration; its crisis was due to contagion from the US credit crisis, and worsening public debt due to bank rescues, feeding back onto banks’ balance sheets.

On 12 July 2012 ECB President Mario Draghi announced that the ECB was “ready to do whatever it takes” to preserve the Euro. He tried Long Term Refinancing Operations, Outright Monetary Transactions and Quantitative Easing, against German opposition, but on a scale much lower than in the US. Monetary expansion on its own, without fiscal expansion and with debatable “structural reforms”, soon loses effectiveness.  QE comes to a natural end for lack of eligible bonds. Negative interest rates were introduced, to induce commercial banks to expand credit, but failed to re-launch economic growth. “Negative interest rates are stupid. They only shrink a bank’s capital, hinder the sale of credit and weaken the economy” (Stiglitz 2016). Helicopter money might work, but then traditional fiscal expansion seems preferable.

10 The recapitalization of commercial banks. The fragility of European banks is due to the long deep recession worsened by austerity, uncontrolled expansion of derivatives transactions, local credit concentration and bank governance failures.

Large scale bail-out (Germany €241bn) is no longer available since the EU bail-in directive came into force on 1-1-2016. Deposit insurance is still the responsibility of national Treasuries. Bank resolution rules will come into force in 2018. Bank supervision (stress tests, etc.) is feeble.

German commercial banks are still in jeopardy because of the persistent derivatives crisis (Deutsche Bank); liabilities to US fines for selling toxic bonds (Deutsche and Commerz Bank) as well as the precarious state of German Landesbanks. Basel III rules should make banks safer, but their introduction in a recession slows down lending.

11 Foreign Policy. After 1992 the EU was complicit in NATO enlargement to the East, in violation of the 1990 confirmed deal between Gorbachev and George H.W. Bush whereby NATO would expand not “one inch to the east,” (James Baker, see Zuesse 2015). A needlessly aggressive policy became a missed opportunity for détente with Russia (Romani 2014).

In 1991, after the dissolution of the SFRY, Germany’s hasty recognition of Slovenia and Croatia put the EU in front of a fait accompli and was followed by civil war (Bosnia 1992-95) and NATO intervention (1999).

In Ukraine the EU helped initiate and supported the Euromaidan movement that in February 2014 ousted pro-Russian President Viktor Yanoukovich, elected in 2010. This was followed by Russian annexation of Crimea, a “present” from Khrushchev to Ukraine in Soviet times (1954) but ethnically Russian and militarily essential for access to warm-water ports. The EU joined sanctions against Russia which damaged member states asymmetrically (Germany continued to import oil and gas from Russia.)
 
After the US Presidential election Juncker declared that Trump “did not know the world and his first two years would be wasted while he travelled and learned”; his campaign had been “disgusting” – not exactly a sober, diplomatic reaction. Merkel’s Social Democratic coalition partner, Deputy Chancellor Sigmar Gabriel, imitated Juncker and greeted Trump as “the trailblazer of a new authoritarian and chauvinist movement.”

Member states are committed to CFSP – a Common Foreign and Security Policy, aimed at Conflict Prevention and Crisis Management. Acronyms (EUGS, HRVP, EDA, EEAS, EDP, CDA, INTCEN, EUMS INT …) and paperwork abound.

12 Defence. Every EU member state controls its own army but under the Common Security and Defence Policy more than 30 civilian and military operations have been launched since 2003, in Europe as well as Asia and Africa. France, Germany Belgium, Spain and Luxembourg also created Eurocorps, a military body for rapid deployment to hotspots.

The lack of a democratic, political route to decision-taking in military and paramilitary action at EU level is a further source of gross instability. The EU was divided over the Iraq War. Unilateral military initiatives were taken against Gaddafi’s Libya by Cameron and Sarkozy, with Italian acquiescence. The fight against Daesh is handicapped by divisions over the Assad regime, Turkey’s dominant anti-Kurd stance, Saudi Arabia’s involvement and differences in policy towards Iran.

A Franco-German Plan for closer EU defence cooperation was discussed at the Bratislava summit last September; British Defence Minister Michael Fallon declared that the UK would veto the creation of EU military capabilities so long as it remained an EU member. President Trump’s plan to require European states pay up for NATO’s costs contributes to sources of dissension.

Other Potential Fault Lines. There are other potential fault lines: energy policy – energy saving, alternatives to fossil fuels and the nuclear option being still nation-based – or environmental policy - the Paris agreement was ratified by the EU but relies on national implementation policies; and the VW emission scandal uncovered by the US and compensation denied to European customers.

External pressures. Trump’s election to the US presidency might worsen the EU crisis. The likely rise in interest rates, following his plans for $1,000bn infrastructure investment, is bad for the European South and bad for banks which should have sold government bonds much earlier but did not; the Euro will probably fall, generating a greater German export surplus which ceteris paribus will force the South to run larger budget deficits. Trump’s plans are reminiscent of Reagan’s policies which led to defaults in Latin America.

Interconnections. Many of the EU faults are inter-connected: immigration was encouraged by the divergence of welfare policies; its problems were aggravated by austerity; it was precipitated by EU foreign policy and war involvement; has contributed to Brexit.

Difficulties with CETA are bound to hinder any after-Brexit EU-UK Treaty. Tax competition clashes badly with austerity. ECB negative interest rates contribute to the crisis of commercial banks and raise their recapitalisation requirements, and so on.

Local earthquakes feed back onto the Union as a whole: e.g. the failure of Union attempts at stopping the authoritarian involution of Hungary and Poland, and of enforcing national quotas for refugees relocation, has damaged further EU credibility.

Remedies. In principle, the virtual tectonic plates that make up the EU could be controlled by European governance. The remedies to secure the EU entire system are available, in many cases even without amending the Treaties.

Thus Brexit might be softened by revamping UK membership of the EEA (Yarrow 2016) or the creation of a European Continental Partnership (Pisani-Ferry et al. 2016). The migration crisis might be reduced by a common asylum acceptance regime; a stronger common external border; re-location of refugees across countries under penalty of losing structural funds; stopping the Dublin Treaty placing an unfair burden on EU frontier countries; deducting the financial burden of migrants from the permitted fiscal deficit.

Migrants welfare entitlements might be restricted to what their states of origin would offer the recipient country’s nationals, on plausible grounds of reciprocity. Entitlements might be restricted during an initial period (the current UK proposal), or made conditional on residence requirements. Re-patriation of economic migrants often is problematic, but ought to be considered with greater determination. During his campaign Trump has caused a sensation by announcing plans to repatriate 11 million undocumented immigrants, scaled down to 2 million after the election. But during his tenure in 2009-2016 President Obama re-patriated 2.5 million immigrants, often in debatable circumstances – more than the previous 19 Presidents combined. Pakistan re-patriated 800,000 Afghans; last year Sweden announced the re-patriation of 80,000 immigrants.

Austerity might be loosened by excluding from the permitted deficit public investment, which does not involve an inter-generational transfer, or the payment of government arrears towards suppliers, which involve a change of creditors and not an increase in debt. Potential output, relatively to which the permitted deficit is calculated, might be estimated according to a more permissive methodology like that of the OECD. The maximum trade surplus permitted, currently of 6% of GDP, should be reduced to 4% in line with the maximum trade deficit permitted; surplus countries exceeding that ceiling (like Germany at 8.5%, or Holland) could be forced to run a parallel budget deficit in order to facilitate other members’ fiscal discipline. ECB seigniorage could be mobilised to fund the issue of bonds to reduce national public debts in proportion to ECB shares, as proposed by Wyplosz and Pâris 2014 in their PADRE scheme (Politically Acceptable Debt Restructuring in the Eurozone) and by Nuti 2014. This would avoid a Transfer Union.

The adverse distributive effects of globalisation are harder to handle: short of a global Exchequer taxing gainers and over-compensating losers, the transfers involved have to take place within nation states or Unions, compensating domestic losers from additional revenue raised by taxing domestic taxpayers regardless of whether they are gainers from globalisation, or out of savings in domestic expenditure.

Clashes. These effective remedies are in line with the original European design. Unfortunately they clash with the hyper-liberal design that has gradually perverted European policies, as well as with conflicts of interest between states, ideologies, welfare regimes, classes, bureaucracies, memories and expectations.

In Germany the Ordo-liberal tradition of Walter Eucken in the 1930s, based on competition and monetary stability as the pillars of society, is still a heavy inheritance. In German and Dutch the same word Schuld, means both Debt and Guilt.

German memories are long about interwar hyper-inflation, wrongly believed to have caused Hitler’s ascent to power, generated instead by the deflation and austerity of Chancellor Brüning in 1929-32. But Germans have a short memory about their own Wirtschaftswunder, the result of a redistributive currency reform, cancellation of public debt of over 300% of GDP and Marshall Aid – all measures which they denied to Greece. “Thomas Mann dreamed of a European Germany. His wish has turned into its opposite. Today we have a German Europe.” (Lafontaine, 2015).

Lenin (1915) was prophetic: “… a United statesof Europe, under capitalism, is either impossible or reactionary”. Conversely, Hayek (1939) strongly supported interstate federalism as essential to his liberal project: international mobility of goods and factors would constrain national state policy, and heterogeneity of interests would constrain federal policy. Hence Thatcher’s support for UK membership (Parijs 2016).

The New European recently stated that “Brexit is not an earthquake. It is the aftershock of the death of European Social Democracy”. This is only partially correct: Brexit and other forms of the EU crisis, and Trump’s triumph, are not an aftershock but a foreshock, part of a seismic swarm which may or may not be followed by “the big one”.

And it is the agony – not quite the death yet – of a particular, perverted form of Social Democracy: hyper-liberal, globalist, austerian, pro-multinationals, unequal, politically correct, pre-Keynesian after Keynes and pre-Minskyan after Minsky, relying on alleged but unreliable mechanisms of self-regulation and self-balancing of markets, through international mobility of labour (Schengen, Pope Francis, Hillary Clinton) and capital (Maastricht).

Exitaly/ExIT/Italeave. Citizens are reluctant both to move from locations of high seismic risk, and to face the cost of implementing anti-seismic measures to secure their homes and public buildings and infrastructure. EU countries are reluctant to abandon Europe and the Euro, despite the proven impossibility of securing sustainable European institutions.   
Therefore the idea that "there is no salvation outside Europe", and that "we need more European integration rather than less" - instead of a different Europe – is just as senseless and fearful as the refusal of actual and potential earthquake victims to move elsewhere, and the purblind commitment of the Italian government to "rebuild everything as it was, where it was.“

In any case, it is absolutely necessary to imagine, investigate and assess the likely consequences of an exit from the Euro and Europe, on the part of Italy and other countries that have suffered the consequences of European multiple crises.

First, Italy might be required to leave. Imagine a balance of payments crisis, a burst of capital flight, restrictions on capital movements and bank withdrawals, a panic run on the banks. European assistance might be provided, subject to draconian conditions. This is where Greece got to before it capitulated. But Italy is much larger, it might be offered assistance in insufficient quantity, or the government might be unwilling or simply unable to meet the required conditions before the imposed deadline.

Then the ECB would no longer be able to provide emergency liquidity assistance, and the only choice left would be between a barter economy or the introduction of a national currency. The trouble is that this would require long and secret preparations, which are difficult to imagine in Italy.

Second, the cost of Exitaly would be enormous, but perhaps not as large as it is often suggested. It should not be taken for granted that the large cost of leaving Europe would be necessarily greater over time, in terms of present value, than the large cost of remaining in Europe without the necessary, possible but unlikely improvements.

Finally, reflections and discussions about the mutual costs of Eurozone disintegration would strengthen the negotiating position of those seeking to reduce the risks from catastrophic shifts and collapse.

References:

Bertelsmann Stiftung (2016), “Social Justice Index 2016”, Gütersloh.

Blanchard Olivier J. and Daniel Leigh (2012), “Box 1.1. Are We
Underestimating Short-Term Fiscal Multipliers?” in International Monetary Fund (2012), World Economic Outlook – Coping with High Debt and Sluggish Growth, Chapter, “Global prospects and policies”, pp. 41-43, October, Washington.

Docquier F., J. Machado and K. Sekkat (2012), “Efficiency gains from liberalizing labor mobility”, Discussion Paper 23, IRES Louvain and UCL. 

Fayola Anthony (2016), “Angela Merkel congratulates Donald Trump – kind of”, The Washington Post, 9 November.

Hamilton B. and J. Whalley (1984), “Efficiency and distributional implications of global restrictions on labour mobility”, Journal of Development Economics, Vol. 14, No. 1, pp. 61–75.

Judt Tony (2010), Ill fares the land, Allen Lane, London.

Lafontaine, Oskar (2015), “Let’s develop a Plan B for Europe”, LINKS-International Journal of Socialist Renewal, 23 September.

Lenin Vladimir Ilich (1915), “On the Slogan for a United States of Europe”, Sotsial-Demokrat No. 44, August 23, 1915. Lenin Collected Works, Progress Publishers, [1974], Moscow, Volume 21, pages 339-343.

Müller Jan-Werner (2016), “The problem with Poland”, New York Review of Books, 11 February.

Nuti D. Mario (2013), "Austerity versus Development", "International Conference on Management and Economic Policy for Development", Kozminski University, Warsaw, 10-11 October.

Nuti D. Mario (2014), “PADRE”, Blog “Transition”, 4 April.

Pâris Pierre and Charles Wyplosz (2014). PADRE – Politically Acceptable Debt Reduction in the Eurozone, Geneva Reports on the World Economy, Special Report 3, ICMBS and CEPR, January.

Pisani-Ferry Jean, Norbert Rottgen, Andre’ Sapir, Paul Tucker and Guntram B. Wolfe (2016) “Europe After Brexit: A Proposal for A Continental Partnership”, Bruegel Institute, 29 August.
 
Romani Sergio (2015), In Lode della Guerra Fredda – Una Controstoria, Longanesi, Milano.

Sierakowski Sławomir (2016), “The Polish Threat to Europe”, Project Syndicate, 19 January.

Stiglitz Joseph (2016), “Globalisation and its new discontents”, 5 August, Project Syndicate.

van Parijs Philippe (2016), “Thatcher’s Plot — And How To Defeat It”, Social Europe, 29 November.

von Hayek Friederich A. (1939), The Economic conditions of interstate federalism, in Individualism and Economic Order, Chicago University, 1948.

Yarrow George (2016), Brexit and the Single Market, Essays in Regulation, Regulatory Policy Institute, Oxford, July.

Zuesse Eric (2015), “How America double-crossed Russia and Shamed West”, The Washington Culture Foundation.


Thursday, October 20, 2016

4 December: NO to RENZI’S P2 Constitutional Reform

On 4 December 2016 Italian electors will be called to vote on a Referendum on Constitutional reform and a new electoral law. The question posed to electors is: “Do you approve the text of the constitutional law concerning ‘norms for overcoming perfect bicameralism, the reduction in the number of parliamentarians, the containment of the costs of institutions, the abolition of CNEL [the advisory National Council for Economy and Labour] and the revision of Title V of Part II of the Constitution’ approved by the Italian Parliament and published in the Official Gazette n. 88 of 15 April 2016?" YES/NO. Being a confirmation and not an abrogation Referendum no quorum is required for its validity.
Such a question is tendentious. The constitutional law in question does not abolish the Senate, it simply transforms perfect bicameralism into asymmetric (and less directly democratic) bicameralism, turning the Senate into a Chamber elected by a selectorate of mayors and regional councillors among themselves, instead of being elected directly by “the people” as art. 1 of the 1948 Constitution provides. What the new law abolishes is the Senate’s power to bring down the government in a confidence vote, while retaining for the proposed Senate dual legislative powers on a broad range of questions, from local issues to European directives. The number of senators is reduced from 395 to 100 (21 mayors, 74 regional councillors and 5 nominated by the President) but there is almost no reduction in cost; far from the €500mn boasted of by Renzi, it is officially estimated at €50mn a year – equivalent to one day of Italian military expenditure, or a fraction of the tax that FIAT avoids by moving its headquarters to the Netherlands. And even that tiny cost reduction in keeping the Senate at all is matched by the only part time involvement (two days per month) of the new senators most of whose time naturally is taken up by their local administrative duties. The 630 members of the lower Chamber with their generous salaries, golden pensions and handshakes, bonuses, allowances and expenses entitlements, remain untouched.  
Il Fatto Quotidiano (11 October) proposes spelling out and unbundling the long mixed question drafted by the government asking specifically whether electors approve:
·  the abolition of elections for the Senate, which will be made up of mayors and regional councillors nominated by regional Councils i.e. by parties, not elected by the electorate, and empowered to legislate in the face of popular sovereignty;
·  the concession of parliamentary immunity (from surveillance, arrest and prosecution) to mayors and regional councillors nominated as senators without ever having been elected as legislators and therefore not entitled to that privilege;
·  the complication of methods for law approval, passing from 2 to 10, or to 7, 9 or 13 according to the interpretation given to the incomprehensible text of the reform;
·  the trebling, from 50,000 to 150,000, of the number of signatures needed to introduce a law by popular initiative;
·  the survival of a Senate that will be able to or be compelled to – according to the subject matter – re-vote and modify all the laws approved by the Chamber of Deputies, replicating and complicating the bicameralism (even in its reformed asymmetry rather than current parity) that is alleged to be abrogated;
·  the expropriation of the powers of Regions to protect their populations, territories, security and environment from useless large-scale, costly and polluting public works (such as the Turin-Lyon TAV, the Third Crossing [Valico], the bridge on the Messina Strait, oil drilling on land and at sea, regasification plants, etc.) which will be decided by the Prime Minister in Rome alone and in command.
In order to raise YES support falling behind in the South and on the Right Matteo Renzi has just resurrected the multibillion euro project of the longest suspension bridge in the world connecting Sicily with the mainland, associated with Silvio Berlusconi’s premiership, and which Renzi had fiercely opposed in 2012. The project was abandoned in 2013 because of its high costs and dubious benefits, it being a long-term mafia objective, and the strait’s vulnerability to earthquakes. There are more pressing needs and better growth-promoting projects in anti-seismic investment, rail and road transport improvements, and environmental protection and reclamation. Tony Barber in the Financial Times spoke of Renzi’s reforms as the “constitutional bridge to nowhere” – nicely put were it not for the fact that opening to the mafia does not lead to nowhere but to the further criminalisation of the Italian state.

On 16 October Andrea Camilleri, Gustavo Zagrebelsky, Nadia Urbinati, Paolo Flores d’Arcais and Tomaso Montanari, Why we vote NO, posed the question that is really being asked in the referendum:

“Do you want to count less, to have less democracy, to give a free hand?”.

“We will answer NO,” they write, “… We do not want to give a free hand to this or to any other government. An inept and often corrupt political class tries to convince us that the Constitution is at fault, but this is not true. To those who tell us that to make Italy work it is necessary to change the rules we answer: we, instead, want to change the players”.


The present Parliament was elected on the strength of electoral law 270 of 21 December 2005, named after its Lega proponent, Roberto Calderoli, and better known as the Porcellum from the name (una porcata, a pig’s breakfast) attached to it by the proponent himself, which in January 2014 was declared unconstitutional by the Constitutional Court (Sentence 1/2014). Continuity of state power required that Parliament should continue to be legitimate in its functioning, but it is highly questionable whether the current Parliament should have done anything other than at most pass a new electoral law before being dissolved by the President, who was himself elected by the current unconstitutional Parliament, moreover for a second mandate not envisaged (although not specifically forbidden) by the Constitution. Instead of which the unconstitutional Parliament with Napolitano’s prodding launched itself at a major constitutional reform changing one third of our Constitution.

Moreover, since its unconstitutional election in February 2013 the Italian Parliament has achieved the unenviable record of containing 246 turncoats (voltagabbana in Italian) Members of Parliament changing sides, many of them more than once reaching a total of 325 crossings of the floor, equivalent to about one third of the combined membership of the Lower Chamber and the Senate (and rising weekly). Berlusconi, a pioneer in establishing a market for parliamentarians, purchased support that was decisive in toppling the Prodi government. With this kind of tradition there is no way even the majority premium envisaged by the new Constitution can guarantee a stable majority.

So the new Constitution dice are loaded in favour of an authoritarian regime, where the leader of the party enjoying a guaranteed 55% majority in the Lower Chamber, who will be mostly his own nominees under the party list electoral system, in addition to his and his party’s new-Constitution Senate nominees, can play an exceptionally powerful role in appointing: the Head of State, the members of the Constitutional Court, the members of the Higher Council of Magistrates (CSM), the leading Authorities responsible for sectoral functions, the RAI Board of Directors etc.; as well as legislating and exercising executive power without having to face any real opposition. And, as the UK has found, the collapse of the Labour Party and its subsequent failure to realise a real opposition has adverse consequences for the country, and for Europe.

Gustavo Zagrebelsky, the former President of the Constitutional Court, states that the combination of the new electoral law (the so called Italicum, whereby 2/3 of deputies will be nominated by party leaders), and the reforms linked to it by a YES in the Referendum would remove the checks and balances so judiciously introduced in the post-Fascist 1948 Constitution to prevent any return of authoritarianism of any kind, and create the conditions for “a shift from democracy to oligarchy”. Indeed, under Italicum a party commanding only 20%-25% of the votes in the first ballot might access a second ballot and beat the only other remaining competitor, thus gaining the winner’s premium to end up with a statutory 55% majority.

The concept of oligarchy must not be confused with that of minority. Government is always necessarily exercised by a minority, but whether or not this is an oligarchy depends on whether power is exercised for the benefit of that ruling minority and its goals, or for the collective benefit of society, in which case it is not an oligarchy but a representative democracy – as the historian Emilio Gentile observed in his rebuttal of Eugenio Scalfari, the Repubblica editorialist’s crass claim that oligarchy is the only possible form of democracy. Moreover – as Gentile pointed out – any democracy is intensely vulnerable to the oligarchic globalisation of economic and financial powers interfering with national policy-making, a major constituent of the “post-democracy” theorised by Colin Crouch. The risk is of a democracy in which the people are only comparse (extras) acting an insignificant part on the political stage at the time of the election leaving the exercise of power to party and government oligarchies, demagogic leaders, a corrupt political class, a degraded political culture and the method of populist slogans and announcements.

Renzi is simply the current mouthpiece and tool for the implementation of the Piano di Rinascita Democratica (Plan for Democracy Reborn), an authoritarian project initiated in Italy by Licio Gelli of the P2 secret Masonic Lodge (drafted around 1976, published in 1982), and pursued by Craxi, Cossiga, Berlusconi, Napolitano, with the blessing of international financial circles such as JP Morgan (2013), not to mention the support obtained through undue interference by the US Ambassador and Barack Obama in his role as the President of the US.

JP Morgan claimed that in Europe “Constitutions tend to show a strong socialist influence, reflecting the political strength that left wing parties gained after the defeat of fascism. Political systems around the periphery typically display several of the following features: weak executives; weak central states relative to regions; constitutional protection of labor rights; consensus building systems which foster political clientalism [sic]; and the right to protest if unwelcome changes are made to the political status quo. The shortcomings of this political legacy have been revealed by the crisis.”  The Renzi regime’s attempted scrapping of the Italian 1948 Constitution is custom-tailored to JP Morgan’s specifications. 

For my part, I will vote a convinced NO, and encourage all my readers who have a vote to do the same on 4 December next.

Saturday, October 1, 2016

Unpacking CETA



This Guest Post on CETA - the Canada-EU Trade Agreement scheduled to be signed at the end of October - was contributed by Peter Rossman, Director of Campaigns and Communication for IUF (the International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations). After thorough reading he wrote this contribution, which originally appeared in the Global Labour Column edited by CSID (Corporate Strategy and Industrial Development, University of the Witwatersrand, Johannesburg). We are grateful for his permission to reproduce it here. An earlier extended paper on “Trade Deals That Threaten Democracy” is also available. (DMN)




‘The Parties hereby establish a free trade area…’ CETA Article 1.4.

‘Trade, like Religion, is what every Body talks of, but few understand: the very Term is dubious, and in its ordinary Acceptation, not sufficiently explain’d.’ Daniel Defoe, A Plan of the English Commerce (1728).

The Canada-EU Comprehensive Economic and Trade Agreement (CETA), like other looming mega-treaties, is a comprehensive vehicle for expanding the scope of transnational investment by rolling back the capacity of governments to regulate in the public interest. The attack on democratic governance is not restricted to the notorious Investor-State Dispute Settlement (ISDS) mechanism, which privileges transnational capital by creating a parallel legal system exclusive to transnational investors. The invasive claims of transnational investors permeate the entire treaty. 

'Free Trade' and the expanding investor universe. Canada and the EU are already among the world’s most open economies. Tariffs are at a historic all-time low. CETA’s primary mission is to eliminate ‘non-tariff barriers’ – namely the laws and regulations constructed over decades of struggle to limit corporate power and support the services and policies needed to defend workers, citizens and the environment. CETA is an investment treaty embedded in a comprehensive deregulatory project.

The treaty leaves existing regulations and policies in Canada and the EU vulnerable to investor challenges – directly through ISDS, or indirectly through corporate-driven state-to-state dispute mechanisms. It also forecloses the use of essential policy tools which progressive governments will need to reverse the social destruction which is feeding an authoritarian, nationalist and xenophobic right.

The treaty builds on an expansive definition of investment which broadens its scope beyond existing treaties between Canada and the EU. It is virtually identical to the leaked draft investment chapter in the Transatlantic Trade and Investment Partnership (TTIP).

The ‘legally scrubbed’ official CETA text states, tautologically: ‘Investment means every kind of asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment.’ (CETA, 2014: 39). Characteristics of an investment include ‘the expectation of gain or profit.’ In addition to direct investment in an enterprise, ‘investment’ includes stocks, shares, bonds and other debt instruments; concessions, ‘including to search for, cultivate, extract or exploit natural resources’; intellectual property rights and ‘other moveable property, tangible or intangible, or immovable property and related rights’, and ‘claims to money or claims to performance under a contract’ (CETA 2014: 39ff) A corporation need only demonstrate a ‘legitimate expectation’ of profit to challenge regulatory obstacles to realising that expectation.

The market access and national treatment provisions set out in the investment chapter apply to governments at every level, erasing all restrictions in the name of ‘non-discrimination’. The treaty prohibits governments from managing foreign investment for distinct objectives, and prohibits any restrictions on profit repatriation.

‘Indirect expropriation’. The investment chapter ‘reaffirms’ governments’ rights to regulate in the public interest, but investors are guaranteed expanded ‘fair and equitable treatment’ and protection against ‘indirect expropriation’ of anticipated profits through the adoption of new laws and regulations. The dispute settlement body will determine whether indirect expropriation has occurred through a ‘fact-based inquiry that takes into consideration, among other factors: the extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations’ (CETA, 2014: 331; emphasis added). Indirect or ‘regulatory expropriation’ has enabled a growing number of successful investor challenges to public interest laws, regulations and court decisions through investor-to-state lawsuits.

Public services are exempted from market access, national treatment and performance requirements and the most-favoured-nation provisions of the investment chapter only to the extent that they are ‘carried out neither on a commercial basis nor in competition with one or more economic operators’. This is the phantom public sector carve-out established in the World Trade Organisation’s (WTO) General Agreement on Trade in Services (GATS) agreement. As there are pockets of private business in most public services, few meet these criteria. Parties must explicitly reserve the services they wish to exclude – the negative list approach – based on the United Nations’ 1991 Central Product Classification, whose thousands of entries blur the distinction between public and private and manufacturing and services. Standstill and ratchet clauses freeze current levels of privatisation, making it difficult, and costly, for governments to take privatised services back into public hands.

CETA’s Domestic Regulation chapter is not restricted to services. Governments must ensure that any regulatory restrictions they maintain or adopt ‘do not unduly complicate or delay the supply of a service, or the pursuit of any other economic activity’ (CETA, 2014: 91; emphasis added). Article 2 of the chapter on Technical Barriers to Trade reinforces limits on regulation by stipulating that technical regulations must ‘not be more trade-restrictive than necessary to fulfill a legitimate objective’[1].

The chapter on Government Procurement widens corporate penetration into governments at every level by generalising ‘national treatment’ and prohibiting ‘offsets’, defined as ‘any condition or undertaking that encourages local development’.

The Financial Services chapter allows for loosely-defined ‘prudential measures’ but weakens the potential to restrict the size or market share of financial institutions even where such measures are ‘non-discriminatory’ with respect to foreign and national investors. Governments seeking to restrict the introduction of new financial ‘products’, or limit the size of financial corporations, will find that financial corporations have, through CETA, insured themselves against regulatory risk.

The chapter on Regulatory Cooperation commits signatories to ‘remove unnecessary barriers to trade and investment’ and ‘enhance competitiveness’ through an unaccountable Regulatory Cooperation Forum, which institutionalises corporate lobbying. The Forum is tasked with reducing compliance costs, exploring ‘alternatives’ to regulation, and promoting the ‘recognition of equivalence and convergence’ – a blunt instrument for levelling protection. Governments will share ‘non-public information’ with their Forum counterparts before the information is shared with lawmakers or the public – all ‘without limiting the ability of each Party to carry out its regulatory, legislative and policy activities’!

Regulatory approaches are to be ‘technology-neutral’ – a requirement at odds with the vague promise in the chapter on Trade and the Environment in which the parties ‘commit to cooperate in means to promote energy efficiency and the development and deployment of low-carbon and other climate-friendly technologies’.

How important is investment (and its proxy ‘trade in services’) compared with trade in goods in CETA? The treaty provisions cease to apply 180 days after notice of intention to terminate. However Chapter 8 (Investment) remains in force for a full twenty years (CETA 2014: Article 30.9).

Labour’s agenda? After the Brexit vote, the European Commission announced that CETA – scheduled to be signed at the EU-Canada summit in late October – would be treated as a ‘mixed agreement’, requiring approval by the national parliaments of EU member states as well as by the main EU institutions. But the Commission proposes that the treaty enter immediately into ‘provisional’ force following approval by the European Council and European Parliament, meaning that its investment provisions would apply for some years before full ratification, and even if one or more member state voted to sink the deal.

Unions and our civil society allies are unanimous in calling for the removal of ISDS from the treaty. The European Commission’s rebranding of ISDS as an investment court fails to eliminate its fundamental toxicity (See for example Eberhart, 2016) and should be rejected on similar grounds.

But ISDS is only one element, albeit a major one, in CETA’s comprehensive corporate power grab. Transnational investors can press their claims through state-to-state dispute mechanisms, as the WTO’s Dispute Settlement Body demonstrates. The expansive claims of transnational investors are systematically built into the treaty; corporate confiscation of democratic governance links the chapters. ISDS cannot be surgically excised, leaving a text which then somehow serves as a vehicle for a progressive trade agenda. Nor can a sweeping charter of investor claims be ‘balanced’ by inserting stronger provisions to defend labour rights or protect the environment. CETA is fundamentally hostile to democracy and the labour movement; it has to be scrapped, not ‘improved’.

Behind CETA, or course, lurks the Transatlantic Trade and Investment Partnership (TTIP). Should TTIP fail, many of its ambitions can be realised through CETA. The majority of US transnationals have Canadian subsidiaries with activities and ‘expectations of profit or gain’ in the EU. They can use ISDS and other provisions to feed their growing appetites. EU corporations can sue the government of Canada, but also use Canadian subsidiaries to attack European regulations they find inconvenient, reinforcing the EU’s current retreat from regulation.

For long decades, labour has been fighting purely defensive battles against the neo-liberal trade and investment agenda; we lack an agenda of our own. Lost ground will not be reclaimed on what is fundamentally hostile territory. Crisis, stagnation and the longest investor strike in recent history will not be reversed through stronger doses of neo-liberalism. Substantial programs of public investment are needed to address mass unemployment, inequality, disintegrating public services and climate change. CETA and its flanking treaties effectively preclude them.

[1] The leaked TTIP draft chapter on Technical Barriers to Trade makes creative use of most-favoured-nation to establish that ‘Each Party shall allow persons of the other Party to participate in the development of standards, technical regulations, and conformity assessment procedures,’ and ‘Each Party shall permit persons of the other Party to participate in the development of these measures on terms no less favorable than those it accords to its own persons.’

References

CETA (Comprehensive Economic and Trade Agreement) 2014.

Eberhart, P. (2016) The Zombie ISDS, Brussels: Corporate Europe Observatory.


POSTSCRIPT
Our Italian readers will find useful these links on the subject:
http://nuke.carloclericetti.it/CetailcavallodiTroia/tabid/473/Default.aspx on the Trojan horse nature of CETA in the event of TTIP not going through, and  http://clericetti.blogautore.repubblica.it/2016/07/06/il-ceta-passera-dai-parlamenti/ on the European Commission decision, last July, to treat CETA as a “mixed” issue, thus requiring the necessary unanimous approval by all 36 European Parliaments (some member states have more than one). The decision was taken under pressure from Austria, Germany and France, whereas Italy had originally supported treating CETA as a “European only” issue requiring only qualified majority of heads of state and government, and subsequent ratification by the European Parliament without possibility to introduce changes. However, as Peter argues in his guest post above, CETA will be provisionally implemented from approval by the European Parliament.

For an earlier discussion of CETA ìn Italian see also http://goofynomics.blogspot.it/2016/07/ceta-ue-e-brexit-oculos-habent.html