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.

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.

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.

Eurobond, Public Deficit

The following comments on the last three posts were e-mailed by Professor Michael Ellman, Chair of the Department of Business Studies, University of Amsterdam. They deserve wider circulation and are reproduced below with his permission.

Dear Mario,

I read your paper [merging the two recent posts on the Euro crisis] & blog [the post on Schuldenbremse] and am naturally in sympathy with both. I have a few comments:

(1) at the end of your paper you seem to suggest that a default by a EU member state would mean the end of the Euro or even of the EU itself. But why should it? The default of US municipalities or states has never threatened the dollar or the USA. If Greece defaults this will raise interest rates on bonds issued by other 'suspect' EU members and hit badly banks, insurance companies and pension funds that hold Greek debt. This may require the governments of the countries where these institutions are based to recapitalise them, which will worsen their fiscal position. The rise in interest rates for the other 'suspect' countries will worsen their fiscal position and possibly cause more defaults, which might lead to a change in the membership of the EMU. (As for Greece, if it stayed in the EMU it would have to balance its budget immediately since it could neither issue debt on the capital market nor borrow from the central bank, unless - like the UK in World War II - it forced its own banks and other financial institutions to buy national debt which would undermine their solvency and reduce credit to the private sector, as happens under wartime conditions). Of course, if retail depositors were happy to put their money in institutions mainly holding public debt - like the Soviet/Russian Sberbank or the Japanese postbank - then the situation could be stabilised.

(2) motivation for creating the EMU

It is generally considered that the creation of the EMU was a political bargain between Germany and France in which France agreed to German reunification in exchange for Germany giving up its DM. The point of that, from the French perspective, was to end Germany's dominance of European interest-rate policy. However, it now seems that an important result of the EMU will be to impose German ideas about fiscal policy on the EMU - a development which you and I think harmful. It is ironical that an institutional change designed to end German dominance in European monetary policy seems to be heading in the direction of creating a German dominance of fiscal policy.

(3) debt as a "burden"

Naturally John is right that debt interest is a transfer payment. But transfer payments require taxes to pay them. To say that rising debt payments are not a burden is analogous to saying that rising pension payments are not a burden. Rising interest payments on debt are only not a burden if they are of such a magnitude that they do not have negative economic effects (growth of informal sector, emigration, reduction of economic growth). The actual effects are likely to vary from country to country depending on growth rates, employment levels, economic institutions, tax levels, fiscal situation, etc. Try explaining that taxes have no economic effects to Irish ministers under pressure to increase their corporate tax rates.

(4) balanced budgets

There is another aspect to this - the demand for public debt. If states do not continuously issue new debt, where will financial institutions invest the "risk-free" tranche of their investments? To issue too little public debt is to risk a bubble in private sector assets.

(5) EU solidarity

You are quite right to stress that some much discussed possibilities are political non-starters because of a lack of EU solidarity. Here in the Netherlands (which was a gold bloc country in the 1930s) the main aim of economic policy is to bring down the deficit by expenditure cuts (and tax increases) and to bring back the debt level to the 60% level. Support for fiscal transfers to sinners is conspicuous by its absence. Support for EU integration, both among the public and the political elite, has declined markedly in recent years, partly for this reason. Despite everything the Dutch economy is doing reasonably well, with relatively low and declining unemployment. But this is entirely a result of external factors - growth in Germany and elsewhere in the world. Small foreign-trade dependent countries have their level of economic activity largely determined externally. Fiscal orthodoxy enables them to have relatively low interest rates with favourable economic effects.

Best wishes, Michael