Tuesday, October 31, 2017

Ths Rise and Fall of Socialism

The DOC (Dialogue Of Civilisations) Research Institute, Berlin, has funded a research project led by Vladimir Popov on “Inequality: Economic Models and Russian October 1917 Revolution in Historical Perspective”. The project (an earlier full draft of which is here) seeks to examine why capitalism was successful for several centuries, why it failed in the XX century and was replaced by socialism in about one third of the world, and why socialist societies did not succeed and eventually made a transition back to capitalism.

The project’s key hypothesis is that the income inequalities associated with capitalism initially raised savings and investment promoting economic growth, but later their negative implications dominated.  Soviet-type socialism failed, but rising inequalities of capitalism today are bound to generate rising social tensions eventually becoming unbearable and leading to a costly social revolution. A better alternative is the successful establishment of a “new socialism” “that will not necessarily mean a total elimination of markets and private property, but is likely to limit both substantially for the sake of achieving lower income inequality” - with the pursuit of redistributive policies, more regulation and taxation, more public property. The introduction of such “new” socialism in a few countries in a capitalist world would make them more competitive and drive their less enlightened competitors “out of business”.  Thus Popov stands “socialism in one country” on its head, turning it from a handicap into a competitive advantage.

Vladimir Popov, a distinguished Russian economist known to this Blog’s readers from several guest posts already published, was brave enough to assign to me a paper on “The rise and fall of socialism”, and I was unwise enough to take on such a daunting task for presentation at the Berlin conference of 23-24 October. 

My Berlin Conference PPT Presentation is available HERE. Comments welcome. 

Friday, June 9, 2017

Michael Ellman on the UK Elections

Professor Michael Ellman, of Amsterdam University and an old colleague, co-author and friend, appears to have become our resident phsephologist. He promptly sent me his valuable comments on the UK elections, authorising me to publish them as a Guest Post on this Blog, which I am delighted to do at once. Here is Michael's assessment on the day after (DMN).

(1) Theresa May took a gamble and lost. She was misled by opinion polls that showed a huge lead for her party before the election was called and also by the fact that a majority of Labour MPs had no confidence in Corbyn.

(2) Nevertheless, the Conservatives can form a new government and carry on. The Conservatives will be the biggest party in the new House of Commons and have almost half the total number of MPs. Together with one of the Northern Ireland parties (the Democratic Unionists) the Conservatives will have a (small) majority and will be able to push their legislation through Parliament (provided that their own party remains united).

(3) May's own personal position has been seriously undermined and she will not be able to last five years as Prime Minister. Some other senior figures in the Conservative party (such as Boris Johnson) will seek to take over. Even for her to last 12 months will be very difficult.

(4) The Conservatives got 42% of the vote. That shows that there is a solid block of the population (private sector, professionals, business people, the elderly) who back them.

(5) The Labour party got 40% of the vote. Thuis shows that there is a solid block of the population (students, public sector employees such as teachers and nurses, tenants facing high rents, low-income groups, minority ethnic groups) that opposes austerity and cuts to the public sector. Allowing for the 3% gained by the SNP (Scotttish National Party) which has a similar economic outlook to the Labour party, this shows that slightly more people voted againt austerity than supported it.

(6) Jeremy Corbyn ran a very successful campaign. That shows that in the UK and USA a candidate to the Left of orthodox opinion, such as Bernie Sanders or Jeremy Corbyn can enthuse a large part of the population, especially the young. (Turnout rose a couple of percent compared with the last election.)

(7) The decline of the SNP in Scotland and the improved showing there of Unionist parties, notably the Conservatives, make the break-up of the UK less likely.

(8) As far as Brexit is concerned, about half the population (supporters of Labour, SNP and the Liberal Democrats) voted for parties that would prefer a so-called soft Brexit (e.g. membership of the European Economic Area à la Norway) to the complete break that Theresa May seems heading for.

We live in interesting times.

Sunday, June 4, 2017

Michael Ellman: An Update on Dutch Elections

I received the following Update on Dutch elections from Professor Michael Ellman (Amsterdam University) and I am delighted to publish it as a guest post:

Dutch politics have vanished from the headlines after the party of Wilders failed to become the biggest in the lower house of Parliament. However, up till now it has proved impossible to form a new coalition government. 

After some weeks of negotiating, the first attempt to do so has collapsed on  the issue of migration. The right wing parties (Rutte & his Christian Democratic friends) wanted strict control over non-EU migration. The Green-Left party (which did well in the recent elections) was against this. However, I expect that one way or another a coalition will be cobbled together (the public does not want new elections and regards it as the obligation of the politicians to overcome the difficulties). 

Even if it proves impossible to form a coalition with a majority in Parliament, it is always possible to form a government with a large number of seats but still a minority (considering the divisions among the opposition parties) but this is generally considered undesirable since it makes it very difficult to pursue coherent and consistent policies (if the opposition parties unite they can defeat any government proposal they do not like). A coalition with a majority is obviously much more desirable and has a reasonable chance of being realised after further inter-party negotiations. 

Prolonged inter-party negotiations after elections are normal in the Netherlands. They result from a proportional representation system without a threshold (such as 5%) and which therefore enables any party with more than 0.67% of the votes to get a member into the 150 seat lower house. This has the advantage that it enables all shades of opinion to be represented (for example, there is an animal rights party, and two Calvinist parties, amongst others in the lower house) but makes forming a majority government difficult. The strong position of the Wilders party and the Socialist party (both regarded as unacceptable coalition partners by the mainstream) obviously makes coalition-forming more difficult than usual.

Thursday, March 16, 2017

Michael Ellman on the Dutch Elections

The Dutch elections of 15 March have been widely interpreted as a “resounding defeat” for populism. This is very hard to reconcile with the government coalition losing 37 (8 out of 41 Rutte’s VVD, in spite of having moved towards Wilders’ agenda – “Be normal or Begone” - and 29 out of 38 Labour Party PvdA) i.e. almost half of its former 79 seats. Rutte will need new allies to form a government. Geert Wilders’ Party instead gained 5 seats and rose by one third to become the second party of the Netherlands. "Everyone is entitled to his own opinion, but not to his own facts" (Daniel Patrick Moynihan). So I asked Professor Michael J. Ellman, of Amsterdam University, for his assessment of the results. Here is his reply, which I found particularly enlightening, and which I have his permission to reproduce as a Guest Post on this Blog, with many thanks.

From Michael Ellman (16 March 2017):

It seems to me as follows, subject to the fact that currently we only have preliminary results and the final results may differ somewhat.

(1) The turnout rose significantly. This indicates that in addition to the people who normally vote, there were some additional people who strongly wanted to express their disapproval of the policies of the ruling coalition and others who strongly wanted to express their fears about Wilders.

(2) The coalition which has ruled since the last elections (in 2012) has done badly. They have gone down from a majority (79 in a 150 seat Parliament) to a minority of only 42. This indicates that the majority of the population rejects the policies of the last four years (fiscal orthodoxy/austerity).

(3) The main loser is the traditional Social Democratic party, the Labour Party or from its Dutch initials PvdA. This party has played a major role in Dutch politics since 1945 but fared dismally in these elections. I think the main reason is that it was the junior partner in the coalition and went along with fiscal orthodoxy/austerity which hit many of its traditional voters who turned elsewhere to express their dissatisfaction. For many years now it has been a 'New Labour' type of party and not a home for victims of globalisation. This has not pleased many of its traditional voters. It is also a culturally liberal party which also did not go down well with many of its traditional voters.

(4) Prime Minister Rutte can feel pleased with himself. Although the coalition which he led did very badly, his own party did not do too badly, losing only 1/5 of its voters and becoming by far the biggest party (at the last election it was only just ahead of the Social Democratic party). In addition, many of the votes he lost went to the Christian Democrats who are ideologically close to his party. Furthermore, Rutte's party did substantially better than the party of Wilders. As a result, Rutte's party will play a dominant part in the negotiations to form a new coalition.

(5) The mainstream parties won 2/3 (102) of the seats. This indicates that Dutch politics and society are quite stable. The coalition negotiations may well take some time (this is quite normal) but the resulting government will be a mainstream one.

(6) The election was largely fought on cultural/identity issues. Traditional economic issues played a lesser role. Dutch national identity, the role in the Netherlands of ethnic minorities, migration, and the role of the Netherlands in the EU were the main topics. (Of course migration also has an economic aspect.) The resulting Government will be very sceptical about plans to increase EU integration or expand its membership (in 2 referenda in the past, on the proposed EU constitution and on the Ukrainian trade agreement, majorities rejected the EU-preferred policy.) This means, inter alia, that the Netherlands will be hostile to plans for an EMU bank union or a transfer union. One of the 6 founder members of the EU is now opposed to deeper integration.

(7) In order to win and beat Wilders, Rutte took over some of his main themes. The need for immigrants and their descendants, if they want to be welcome, to assimilate, abandon some of their customs and accept Dutch ones, was strongly emphasised by Rutte. Also the stand he took against Turkish ministers holding open-air election rallies in the Netherlands was popular and probably won him votes.

(8) Although Wilders can be pleased that some of his themes have entered the mainstream and are repeated by the Prime Minister, he must be dissatisfied with the result. It is true that his number of seats has increased by a third. However, whereas at one time it was thought that his party might emerge as the largest one, it remains a long way (20 to 33) behind Rutte's party. Hence Wilders has not the slightest chance of entering the Government and becoming a minister.

(9) The other populist party (which gets less publicity outside the Netherlands) is the Socialist Party. This is a traditional leftist party in favour of more public expenditures, higher wages, lower rents, higher taxes on the rich and on companies etc. It seems that it will fall from 15 seats to 14.

(10) The result of the relatively poor showing of the 2 anti-system parties is that politics as normal, subject to a cultural/nationalist shift to the right, has won. For 'Brussels' that might be reassuring, but the lack of support for further EU integration and expansion, and the general acceptance of a more nationalist stance will not seem so positive.

(11) What policies the new coalition will agree on is highly uncertain at the moment (in the Netherlands the parties forming a coalition have to agree on policies, set out in a detailed written Coalition Agreement, before the new Government is formed and takes office - in the meantime the old ministers remain in office but are expected not to take any radical measures). To what extent the popular rejection of austerity and concern for national identity will influence future policy remains to be seen.

Saturday, February 4, 2017

Vladimir Popov: EU – Nationalism and Inequalities

I am grateful to Vladimir Popov of TsEMI, the Central Economics and Mathematics Institute of the Russian Academy of Sciences, Moscow, for contributing this guest post to our Blog as an extended comment on my previous post on Seismic Faults in the European Union.

Vladimir Popov on: EU – Nationalism and Inequalities

             “Imagine there's no countries ... And the world will be one.
             It may happen, if the current rise in inequalities is reversed.

Mario Nuti predicts new difficulties for the EU and believes Lenin was right, when stated that United States of Europe are either impossible or reactionary (post of January 8, 2017).  He may well be right, as he has been so many times, but I wish he wasn’t.

In the EU for the first time in history member countries voluntarily decided to eliminate borders – a dream of many since ancient times. It was by the way also one of the staples of the communist ideology – nations eventually, after the full victory of communism, will merge, borders will disappear, a brotherhood of men will share the whole world.  As the best poet of Soviet era Vladimir Mayakovsky put it,

“For we want this world to be a common earth
Without Latvias and without Russias”.

Many of those born and raised in the USSR cherish this dream and admire the EU that seemed to have been able to achieve this goal without coercion and violence. It would be most regretful, if EU project will not succeed.

This is the moral argument in favor of the EU that does not prove, of course, that Mario is wrong. Many inevitable trends may be undesirable for large groups of people. Below, however, are some “hard core, material” arguments, why current centrifugal forces in the EU and the world may be only a temporary phenomenon.

Nationalism and inequalities
Conservative politicians all over the world have recently spoken against globalization. As former French Prime Minister Dominique De Villepin put it recently, ”globalization, on the one hand, promotes cooperation, on the other hand, brought new mutual exclusion, isolation and radicalization”. And Donald Trump wants “Americanism, not globalism”.

It would be wrong, however, to blame globalization for all the disasters and misfortunes, from non-growing real incomes to the rise of nationalism. History does not repeat itself, but it rhymes. Those who blame globalization today for economic and social misfortunes are similar to the luddites of the XIX century that believed that the use of machines leads to the rising unemployment and falling wages. 

There are cases when globalization works leading to rising incomes of the masses. Theoretically greater international flows of goods, ideas and technology, capital and labor should increase productivity, but in reality this happens only if these flows are carefully managed (Popov, 2014, Chapter 5)..

Why in some countries greater economic interaction with the world was accompanied in recent several decades by rising income and its relatively even distribution (China and other East Asian countries), whereas in other countries modest growth of income coupled with rising inequalities left large masses of  population worse off (many Western countries, including the US, Eastern Europe and former Soviet Union)? The answer is that policy matters a great deal and many good policies that allow gaining from globalization are often non-orthodox and counterintuitive (Polterovich, Popov, 2005). If globalization is accompanied by the increase in income and wealth inequalities within countries, so that gains from globalization are appropriated by the few better off, whereas the masses get nothing or very little, it is only too easy for the interested political forces to blame globalization for the negative developments.

The central argument of this post is that the reversal of the previous trend towards the decline in income inequalities in the last three decades in most countries created favorable grounds for the rise of nationalist and anti-globalization feelings (Popov, 2016). Lindert and Williamson (2016) claim that income inequalities breed populism and attribute the rise of inequalities to globalization (especially in the two periods of American history – Gilded Age of the late 1800 and recent three decades since the 1980s). My argument is that income inequalities indeed contribute to the rise of populism and nationalism, but that globalization does not necessarily lead to the rise in inequalities.

Trends in nationalism are explained, among other factors, by both between the countries and within the countries inequalities. If the gains from globalization are distributed evenly, the public is willing to embrace it, but if the gains are appropriated by few, it is easy for nationalist political forces to turn the public against globalization.

Hence, there are several globalization models, depending on the trend in inter and intra- country inequalities in recent three decades:
·        Great gains from globalization for the country as a whole and relatively small rise in within the country inequalities (Japan, China, SEA, Scandinavian countries, the Netherlands);
·       Small gains from globalization for the country as a whole, but decline in domestic inequalities (some LA countries, including Brazil);
·       Large gains from globalization for the country as a whole, but increase in domestic inequalities (Britain and some continental European countries);
·       Small gains from globalization for the country as a whole and increase in domestic inequalities (US, Russia in the 1990s).

The worst conditions for the rise of nationalism would be in the first group of countries, the best – in the last, fourth group, with the 2nd and 3rd group falling in between.

The rise of nationalism in recent decades in the EU and many other countries seems to be associated with the increase in within the country income inequalities. In some countries income inequalities did not increase and nationalist and anti-globalist feelings are more related to the slowdown of growth and other reasons, but in most countries there was an increase in income and wealth inequalities since the 1980s – a reversal of the trend of over 50 years that created a fertile ground for rise of nationalism (Popov, 2016).

Recent trends in income inequalities in EU
The fall of the Berlin Wall, collapse of the USSR and the conversion of Eastern Europe and former Soviet republics to capitalism, added additional push to the growing income inequalities trend due to both – the disappearance of “socialist counterbalance” for the Western capitalism and the rise in inequalities in the transition countries of Eastern Europe and former Soviet Union themselves (Jomo, Popov, 2016).

In most European countries income inequalities increased since the beginning of the 1980s – the reversal of the trend that predominated since early 20th century (fig. 1). This increase in inequalities may be the single most important reason for the rise of nationalism. In Eastern Europe there was a transformational recession of the 1990s associated with the transition to the market economy – output fell by 20-50% in the course of 2-5 years (Popov, 2000), which certainly contributed to the rise of nationalism. But in Western Europe there was no major recession (except for Greece). Even though economic growth was not very strong, it was  rather stable, recessions of 1993 (per capita GDP fell by 0.4%), 2009 (-4,7%) and 2012-13 (-0.4%) were overcome and average incomes, unlike in the US,  by 2016 were way higher than in the 1980s. However, the progressing unevenness in income distribution undermined real incomes and social status of large groups of European population making them an easy target for the nationalist politicians.

Britain may be the case in point. The rise in nationalism is often explained by unfairness and humiliation experienced by the whole nation (for instance, Germany after the First World War or developing countries where costs of globalization are often higher than benefits).  In Britain, however, the recent rise of nationalism did coincide with the relatively successful economic development and with the improvement of its economic positions versus the major competitors. Britain was falling behind continental Western Europe in terms of its per capita income and this trend was reversed only a decade after Britain entered the EU (fig. 2).

However. only a minority of the population benefited from the acceleration of economic growth since the early 1980s – income inequalities increased (fig. 1) and so did wealth inequalities (fig. 3).

From the point of view of economic efficiency and future growth, Brexit is bad for the EU and especially bad for Britain. But the majority of British voters apparently blamed economic difficulties not on policies that allowed inequalities to increase, but on the European integration and globalization.

There may be at least two scenarios for the EU and the world. First, if the rise of income inequalities would continue, social tensions in some countries will become unbearable and will produce a social turmoil and anti-globalisation, nationalist sentiments. And the rise of nationalism may lead to conflicts, if not wars, between countries, with the collapse of the international trade and capital flows, like in the 1930s. Then the world may once again get into the familiar 20th century historical track and there may be a pause in or even the reversal of globalization, like during the Great Depression, when the outburst of protectionism led to the decline of the international trade and capital movements. This is the worst scenario: the world degrading into social and national conflicts.
Second, countries that carry out successful policies of limiting inequalities would become more competitive, driving other countries “out of anti-globalisation business”. Even small countries, if they are successful, may create a counterbalance through the demonstration effect to the tendency of unconstrained capitalism to cut welfare programs and increase inequalities. These countries may regulate the functioning of the market mechanisms through direct interventions and high progressive taxation to reduce bubbles and windfall profits. Besides, the crucial way of lowering inequalities is public and collective property, so it could be expected that state enterprises, non-profit institutions, labour managed enterprises and coops, operating not for profits, but for public good would become more common. Such a more optimistic scenario implies that social upheavals within countries and national conflicts between countries could be largely avoided. EU in this case would have a bright future.

Facundo Alvaredo, Anthony B Atkinson, and Salvatore Morelli (2016). Top wealth shares in the UK over more than a century, Working Papers Department of Economics Ca’ Foscari University of Venice No. 01 /WP/20.
Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez (2012). ‘The World Top Incomes Database’, http://www.wid.world/#Introduction
Jomo, K.S., V. Popov (2016). Income Inequalities in Perspective. Develoipment, No. 2, 2016.
Lindert, P. and Jeffrey Williamson (2016). Unequal Gains: American Growth and Inequality since 1700. Princeton University Press, 2016.
Maddison project (2013). http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.
Popov, V. (2000). Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession) – Comparative Economic Studies, Vol. 42, No. 1, Spring 2000, pp. 1-57 (http://www.nes.ru/%7Evpopov/documents/TR-REC-full.pdf);
World Wealth and Income Database. http://www.wid.world/#Database:

Mario Nuti’s reply:

I agree with Vladimir that a world without borders would be very attractive, as a realisation of both human freedom and economic efficiency. However it is no accident that it was part of communist utopia only after the expected universal diffusion of communism. For a world without borders involves - as I pointed out in my previous post - global communism in access to national social capital (however defined, whether as physical infrastructure, social cohesion and trust, or welfare state institutions and provisions). This is neither feasible nor desirable nor sustainable in a world where private ownership is globally prevailing and fully protected. I take it that Vladimir would not support unrestricted full communism – in the sense of abolition of both private and national social property – on a global scale or even in a single country or just in the European Union. I regard Vladimir’s unconditional endorsement of the Schengen Area abolition of internal borders (and neglect of external ones) not as a cogent argument in favour of a world without borders but merely as evidence of his generous nature.

I particularly like Vladimir’s characterisation of the relationship between globalisation and inequality, with his four country cases: (a) large gains, small rise of inequality; (b) small gains, inequality decline; (c) large gains, [significant] rise of inequality; (d) small gains, inequality increase. The first case would make people approve of globalisation; the last case would be associated with strongly nationalistic, anti-globalisation feelings and policies; while the two intermediate cases also would be somewhat nationalistic and anti-globalist but to a lesser extent. And at the global level, I would add even more positively and forcefully than Vladimir, globalisation has halved the incidence of poverty in the last twenty years – lifting hundreds of millions of Chinese from starvation to obesity – and achieved the reduction of inequality among the citizens of the world.  
However, globalisation, including migrations, does not lead to “gains … appropriated by the few better off, whereas the masses get nothing or very little benefit”, as Vladimir conjectures. It does yield net benefits, as I readily recognised, but it actually makes a non-negligible number of people worse off. In theory we can imagine a redistribution of gross gains to gross losers so as to make everybody better off - which is how Vladimir would be able to achieve a win-win situation. But such Paretian redistribution is not possible, because it would have to be international and/or regressive. International redistribution is presently impossible for lack of political globalisation, i.e. global governance by institutions capable of global taxation and expenditure. Regressive redistribution from gainers who tend to be poorer to losers who tend to be richer would be undesirable, as I trust Vladimir would agree.  

And even if everybody gained from globalisation, inequality in the distribution of gains would legitimise some opposition to unrestricted, raw globalisation. Vladimir’s comparison with the Luddites is very apt, but with opposite implications with respect to the one he draws: technical progress in the early 19th century (and today’s automation) also yields net benefits but makes some people worse off, just like globalisation and migrations, therefore justifying – unless there was compensatory income redistribution from gainers to losers – resistance and even forceful opposition by the losers.

The dividing line between populism and democracy is very thin. It is no accident that today we talk of right wing and left wing populism. "The accusation of populism can easily become an instrument to maintain and extend the power of oligarchies, and their influence on public life and decisions, reducing any protest attempt from below to irrationality or intellectual or moral laziness.  Anti-populism therefore can become a weapon in the hands of the élite, a weapon that jeopardizes the essence of democratic coexistence. While populism, if properly articulated, may be useful to democracy" (my translation from Lorenzo Del Savio e Matteo Mameli, "Il populismo è democratico: Machiavelli e gli appetiti delle élite" 2014), whose conclusions are based on a recent debate on Machiavelli's theses in his Discorsi sopra la prima deca di Tito Liviohttp://ilrasoiodioccam-micromega.blogautore.espresso.repubblica.it/files/2014/02/machiavelli-populismo.pdf.  Though growing support for populist parties is also due to non-economic factors, such as the feeling of marginalisation, of a falling standing in society, of having lost control over one’s condition, determined by the establishment élite; there are also cultural, ethnic and religious diversities coming into play. When these factors determine electoral choice there is no reason to dismiss the results as expression of populism instead of an integral part and parcel of a democratic system.

Vladimir offers two alternative visions of the future. A pessimistic scenario involves rising inequalities and anti-globalist policies, the rise of nationalisms with possible commercial or even hot conflicts, a pause or even reversal of globalisation. An optimistic vision, favoured by Vladimir, involves the containment of inequality, the restoration of the welfare state funded by progressive taxation, the build-up of public and collective enterprises (including self-managed non-profit cooperatives). “The EU in this case would have a bright future” – he writes. Unfortunately there are other fault lines in the EU today, which I tried to spell out in my post and are left unscathed by Vladimir’s reflections, which do not alter my fundamental pessimism.  

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.



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