Mrs May: Deadline or Deadbeat?

Theresa May has announced her intention to confirm March 2019 as the date on which the UK will leave the European Union; and has indicated an intention somehow to establish that date in law.

On the same day, a spokesperson for the European Union has said that unless there is to be a 'hard border' in Northern Ireland [which no party in Ireland will accept; and which the British state cannot afford to enforce] Northern Ireland must remain under EU jurisdiction permanently: regardless of what arrangement will apply to the rest of the UK. The Democratic Unionist Party, whose votes in the Commons keep Mrs May in power, thus faces a huge dilemma. The one thing that can deprive them of their majority mandate in Ulster would be for them to be seen on the island of Ireland as the group who  would vote to enforce a hard frontier. However the DUP may decide that dilemma, there is a bigger one facing the UK government.

Can any UK government [Tory, Labour, fragile coalition - LibLab - or 'grand' coalition of three or more parties] contemplate bearing the cost or the odium of renewed conflict in Northern Ireland? This is an intractable question, to which I have drawn attention on previous occasions. The headbanging Brexiteers have put Ireland into the 'too difficult' file, as they busily fantasize about trade deals with countries that have no particular interest in doing Britain a good turn. Ireland has been a determining factor in British politics for centuries: and it is worth remembering that whenever the British think they have found an answer to 'the Irish question' the Irish change the question.

By a vote of 52% to 48% the UK population voted in favour of ceasing to be a member of the European Union: without any deep understanding of the implications of that question. Now that the ramifications of just a few of the implications are becoming clear, the proportion of the literate classes [especially of the civil service, which would have to administer Brexit Britain] that favours Brexit has declined rapidly.

Millions of people - including me - voted 'out' in genuine opposition to the ever-closer union of a corrupt political dictatorship [masquerading behind a facade of democratic institutions]; we also wanted to cock a snook at the British political class [represented by Cameron, Clegg and Osborne] who were the principal advocates of Remain and of austerity. None of us wanted to ruin the country economically. Some 'out' voters accepted assurances that that the world was open for free-trade deals on WTO terms. Some - me included - believed that, in the unlikely event of the 'outs' winning the vote, a continuance of the [Liberal-supported] government that had given us the referendum would negotiate terms that enabled stable economic life to continue. Nobody expected David Cameron to be such an utter coward as he proved to be. Nobody much minded what happened to Osborne: as he has demonstrated, he could move on to adopt half a dozen lucrative careers at once. On the day of the referendum nobody contemplated Mrs May being the prime minister; and we could not have conceived that she would place herself in thrall to people who actually would be prepared to see the British economy dismembered: starting with the crown jewels in the City of London.

Today, in the Silent Ceremony at Guildhall, a new Lord Mayor of the City will be installed. By the end of his year, the die will have been cast as to whether Britain will survive [and thrive] as an economy in association with the European Union, though with greater facilities for trade with the rest of the world.

Yesterday's two announcements - Mrs May's 'firm deadline' for leaving the EU, and the EU's comments on Ireland - are incompatible and will almost certainly ensure that no kind of Brexit happens in March 2019. Meanwhile, Mrs May's government looks increasingly unlikely to survive even to March 2018. The Tories will implode, even if the DUP do not simply repudiate their voting pact. Mrs May's chances of winning a by-election, even in the leafy home counties, are vanishingly small. Politics has become far too exciting; and that is before the inevitable mass movement against economic suicide begins to capture the headlines.

Brexit Buffoons and the WTO

Nobody who voted, either way, can claim to have understood the full implications of a 'Remain' or of a 'Leave' vote in the 2016 Referendum on Britain's place in the European Union.

It is almost certain that the great proponents of Remain - Cameron, Clegg and scaremaster Osborne - had no idea in advance how they would interpret, then implement, the Leave vote that occurred. Cameron ran away from responsibility:and even a gold-plated palace would not be a sufficient environment in which to write the exculpatory memoirs from which he hopes to make a pile of pennies. The fact that he has bought a sort of gypsy caravan, reminiscent of certain dead children's writers, for the purpose displays his ability to compound folly with ever-deeper illusion. Since the guilty men and their followers [and their mentors] had put the question to the nation, they should at the very least have had transparent contingent plans. They evidently did not. Nor did the civil service have anything like an adequate plan for what would happen after Cameron ran away, Clegg went into obscurity with his party, and Osborne's toxicity with the electorate was recognised by the new prime minister [of whose judgement and capabilities Osborne had been a vigorous critic when they had sat together in cabinet]. Evening Standard editor Osborne has been intermittently sensible in his comments on the Brexit situation, but he remains so much in the public mind as the author of the twin disasters of the Cameron era - austerity, and 'operation fear' in the Brexit campaign - that his political resuscitation is most improbable.

The prominent 'leavers' - who were far fewer than the high-profile 'remainers' - appear to have undertaken even less preparation than the remainers to meet the contingency that their side would actually win. The clownish assertion - written on their battle bus - that the net amount someone had calculated on a chewing-gum packet as the net annual payment made by the UK to Brussels would instantly be available to allocate to the National Health Service, resonated with a population that was all too aware that osbornian austerity was depriving family and friends of treatment that could be available. Whether the sum was in any way valid as an arithmetical calculation or an allocable fund did not count with those who used it. It was merely one  of a few desperate claims that they made to align themselves with a population that was disgusted by the failed political class and utterly unconvinced by the econocratic arguments that underpinned austerity. Boris Johnson became a more popular buffoon, becoming recognised outside greater London. Michael Gove surprised people with his articulateness: only to earn buffoon status for himself by his last-minute, half-cock, ill-considered decision to stand for the party leadership after Cameron scuttled away [thereby sparing the party from the embarrassment of having Johnson as their leader].

Mrs May began her period as prime minister well, with conciliatory speeches and the dismissal of Osborne; since which she has got everything wrong that was within her power to influence. She called an election unnecessarily then threw it away. She activated the withdrawal procedure with the EU before she had any clear plan. But from the start she made clear her utter incomprehension what she was dealing with, when she said 'Brexit means brexit': while everybody knows that the word itself is totally meaningless. While she has struggled, with a group of spectacularly inadequate ministers, to define what Brexit might mean the country has drifted towards the disaster of leaving the EU with no interim deal that will keep the UK effectively [under deep make-up] within the European Economic Area.

This has created a field day for the couple of dozen Tory MPs who appear really to believe - in their enfeebled minds - that the World Trade Organisation [WTO's] tariff regime will enable Britain to survive as 'the fifth-largest economy in the world'. The whole point is, that it is NOT tariffs but REGULATIONS that are used by all countries and economic communities to keep out unwelcome competition. Inside the European carapace the UK necessarily conform to the rules, and thus its trade with other  EU members states can move freely. To loose that benefit, with the block that sends and receives about half of Britain's imports and exports, would be irreplaceable. The assumption that German motor manufacturers and French wine growers will 'see us right' is infantile. Professor Minford's calculations of the 'benefit' for Britain of trading on WTO terms with the global community - including the EU - are agonisingly bereft of any allowance for the predominant pattern of restrictions on trade, that would be tightened against an innovative economy such as the UK if we were adrift in the world and thus are extremely dangerous. But those are the argument to which the headbangers adhere: because they have nothing else. Yet they hold the government in awe; and are increasing their power to ruin the country. I will have to return to this topic in the coming days, as the argument gets more fraught approaching the deadline for the next meeting of EU heads of government.

Providential Penalties: A Salutary Case of Point Protectionism

This blog has often referred to point protectionism, my term for the myriad instances where governments override [or ignore] trade agreements - including those which are supposedly universal under the World Trade Organisation [WTO] - in order to give advantage to their native producers or to disadvantage alien producers who can outsell their native producers in some markets some of the time.

The recent cause celebre in this category is the action that the US government has taken against the Canadian aircraft firm Bombardier at the instance of Boeing, a US-Based competitor. Britain has a particular interest in this case as the wings of the aircraft under challenge are made in Northern Ireland. In the first instance, last week, the US slapped a 220% tariff on the import of the 'planes on the grounds that the Canadian and British governments had given grants to Bombardier. Yesterday the US took a second bite of the cherry, and added another 80% tariff. This 300% imposition is extremely high: in most cases where the US has accused another country of 'dumping' produce at lower prices than US firms can match, the levy has usually been below 100% of the sale price: as has happened in recent years with imports of basic classes of steel from China.

Britain and Canada have pointed out that Boeing is one of the most heavily state-supported companies in the world; which, of course, cuts no ice with the US Administration.

This is a crude and simple case where a competitor to the US market leader has introduced a product [to which no US firm currently provides a direct competitor] which is obviously highly desirable to US airlines. So the new product is to be priced-out of the American market.

This can happen in any sector of the economy, where a foreign firm attracts American customers to a new or redesigned product: and it probably will, as the world becomes ever more highly competitive. This is a timely and salutary lesson for the bonkers Brexiteers: those who say that Britain can thrive on its own in the world, under WTO Rules. Whenever it suits the USA, Australia, Brazil, Russia or any other country - however comprehensive a trade agreement Liam Fox can dream up with them - they can say "We have imposed this tariff! The WTO can whistle for their rules to apply; and the UK can put its trade deal where the monkey put the nuts." At such times - and there would be an infinite number of them - a solitary post-Brexit Britain would suffer immense disadvantage. To imagine otherwise requires a high degree of intoxication in a very small mind.

In the 2016 Referendum I voted for exit from the political absurdity of the European Union. I did not vote for this nation to die slowly, of starvation. We must stay within the European Economic Area, on the best terms that can be obtained. As Mrs May's moribund government fails to say what it wants to achieve, with any precision, the Torygraph today has a banner headline to the effect that the EU has opened up stronger channels of communication with Mr Corbyn and his associates. Mr Corbyn has learned a lot in the past year - more than I had previously thought possible - but whether he can absorb this particular lesson in Political Economy before he comes to power remains to be seen.

Brexit Buffoons, Regulations and Point Protectionism

Boris Johnson has sounded-off again, this time to the Sun, with his demands about Brexit. The transition must be absolutely no more than two years, and the UK should not accept new EU regulations in that period. This keeps him in front of the 'hard Brexiteers' in the Conservative Party, ahead of what is certain to be a very painful party conference for the Prime Minister who decided to hold an election, then ran it the way her close advisers suggested, and so lost her parliamentary majority. Members of the party from all factions know that the Corbyn-McDonnell chances of winning a general election [in England, Wales, and - just possibly - the lost Labour heartlands of Scotland] are astonishingly high. Thus the Tories dare not topple the leader, simply because there is no obvious alternative who could surely prevent the party from disintegrating sufficiently to force a general election.

Thus the Conservatives have to negotiate Brexit: with an increasing majority of the party daily becoming more aware [as are Labour MPs] that the complete separation of the UK from the European Economic Area would put the livelihoods of all sixty million people who depend on the UK economy in grave jeopardy. The Minority of fervent Brexiteers, together with the ambitious chancers who have joined them, assert that the UK can open up huge vistas of trade all over the world, by making trade agreements with a whole raft of countries under WTO Rules.

The World Trade Organisation had its origins in GATT - the General Agreement on Tariffs and Trade - which was set up alongside the International Bank for Reconstruction and Development [normally called the World Bank] and the International Monetary Fund [IMF] by the victorious allies at the end of the Second World War in the belief that the two devastating wars of the twentieth century were largely economic in origin. The USSR was wholly, dogmatically convinced that the First World War was the result of expansionist imperialist competition between the European powers; and they ascribed the second to a re-run of the same conflict between a resurgent Germany and the 'Anglo-Saxon' states that had succeeded in 1918 and then dissipated the fruits of victory in the Depression of the 'thirties. The USA and the UK shared the view that the competitive inefficiencies of capitalism had exacerbated the economic problems of the late 'twenties and early 'thirties. The idea behind the new system was to provide transparent means by which each economy could grow as part of a successful international community.

The USSR soon withdrew from active participation in the institutions, and compelled its satellites to leave as well. Then the international organisations served the 'capitalist' world, in an uneasy relationship with the 'third world' of notionally 'non-aligned' countries [which asserted their independence of both the USSR-led and US-led pattern of alliances that maintained the cold war from 1949 to 1992]. During that period the GATT became the WTO, and had to accommodate itself to a global reality where the rhetoric of free trade was greatly modified by each country building up defensive mounds of regulations that kept out many imports that other countries could offer them in greater quantity and of more sophisticated design than their own factories  could produce; without imposing tariffs that openly breached WTO rules. When such rules failed, and a government wanted to exclude some import, they could - and did - simply impose 'extraordinary' tariffs, usually 'temporarily' to keep out the unwelcome export. That is what I have called point protectionism in this blog. The recent spat engineered in the USA by Boeing is merely one of thousands of examples.

If Boris Johnson and Liam Fox are such starry-eyed innocents that they believe that WTO Rules will be enough to ensure that the UK can make a safe transit into a post-EU trading world, they are profoundly dangerous.

Globalism and Money

The impending admission to membership of the Russian Federation - the world's eleventh-biggest economy on the currently accepted statistical formulae - will bring over 95% of world trade under the auspices of the World Trade Organisation [WTO]. The eagerness of the emergent countries to be members of this organisation indicates that there are significant benefits that attach to membership; but a quick check on recent press coverage indicates that the WTO is a faltering set-up.It has never quite delivered the hopes that are routinely expressed by the member states' negotiators as they enter the conference room at the start of each of an endless series of 'rounds' of deliberation which have been intended to improve the openness and proper reporting of world business. Yet the WTO is nevertheless recognised that it is the best mechanism that is available for fostering relatively free trade around the whole world.

The predecessor of the WTO was established in parallel with two new institutions for managing the world's monetary system: technical devices which could support statesmen in their effort to establish an open world economy, starting at the end of the Second World War. The International Bank for Reconstruction and Development [commonly called the World Bank] was designed to raise capital in the relative rich areas of the world to lend to governments and agencies which could invest in damaged or underdeveloped regions and industries. The International Monetary Fund {IMF] was intended to serve as a Central Bank for the world economy.

To a limited extent, the World Bank has performed the role that was allocated to it; though from the very early days after its foundation the refusal of the then-USSR to participate in World Bank activities, or to allow its satellites to join, meant that between1948 and 1992 its loans were confined to the de-industrialising powers and the non-communist post-colonial countries. In many instances the political affiliations of undemocratic 'pro-western' regimes enabled them to get World Bank loans and technical support. The USA - including the 'military-industrial complex' - had the predominating influence over the Bank because the US was by far the greatest contributor as well as the host to its head office.

 The IMF was also barred to the communist world by Stalin's decree. Thus until the nineteen-eighties the IMF was an organisation of the 'capitalist' world; though most of that zone adopted the aspirations of the 'mixed economy'. Following the second world war the majority of democratic governments significantly increased the services and benefits that they provided for their citizens, at a rate far greater than the rate of growth of their economies. They were enabled to achieve this apparently impossible trick of stretching consumption ahead of production through adopting a bizarre combination of bowdlerised Keynesianism with massive financial manipulation by the state.The inevitable consequence of this self-deception was the great inflation of the nineteen-seventies; which was followed by the adoption of monetarism, under which regime state spending continued to run in excess of the taxation yielded by the economy in many countries. Alongside excessive state spending - which was matched by an increase in the public debt - private spending was also allowed to rise above earnings at the cost of increased individual and household indebtedness. The United States edged towards its own version of the welfare state in very small steps throughout the postwar years, increasing the pace when European and Australasian governments began to reduce and remove some elements of social provision as the impossibility of perpetually expanding the deficit became apparent. The cost of welfare and health care to the US authorities become a notable drag on the national economy only under the Clinton Administration. Thereafter it proved intractable under George W Bush as he accepted the necessity to keep social stresses at a minimum within the USA as it engaged in the overseas adventures by which the Administration responded to the attack of 11 September 2001.

 The Vietnam War had stirred huge protests in the US, where domestic socio-economic disasters - especially the racial divide - had created a huge segment of the population who were profoundly and personally disaffected, and the anti-war movement had provided them with an urgent moralistic focus for their dissent. There was no similar opposition to the Iraq or Afghan wars, though their cost to the US Treasury was colossal. The US government was able to sell all the debt it created, largely to China and to other emergent powers, while US consumers cheerfully bought imports that were cheaper than US-made products: which increased unemployment and welfare dependency in the USA and reduced the potential growth of the taxable capacity of the economy; while public and personal indebtedness increased. The Obama presidency heralded a massive expansion of spending on healthcare: offset only to a small degree by the termination of the Iraq war and a general cap on defence spending. A huge programme of public works, designed to slow that rate of growth of unemployment, was funded by selling yet more debt to the new industrial powers and to the oil exporters: whose investments in US stocks was so great that the US Administration was unafraid of the lenders ceasing to support the finances of the USA.

Since 1945 several governments have become incapable of perpetually convincing the holders of their debt certificates that they were safe assets: so the market in that state's debt collapsed. Countries including Argentina, Mexico and [in 1976] the United Kingdom needed the assistance of the IMF to stabilise their finances. It did not serve any good purpose for the rest of the capitalist world if a country was allowed to fail economically. In cases where default was iminent the IMF tried to strike a deal with the existing government if it was considered to be able to maintain law-and-order and to enforce austerity measures on the population. If the pre-existing regime could not meet that specification a government had to be set up in which the IMF had some confidence before a deal could be done, as has been seen in Italy and Greece in recent weeks. Greece and Italy are unusual among petitioners to the IMF in that they are parts of a common currency zone: their deals with the IMF had to be brokered and supported by the EU and the eurozone, which made the negotiations more complex and the issues involved less easy for outsiders to assess.

Nevertheless the essential components of every IMF 'rescue' have been the same: the country concerned is required to apply  strict controls to its spending and borrowing, to reduce its welfare state [and usually its defence spending as well], and in some cases it is encouraged to default on part of its debt. In that eventuality the government issues replacement debt certificates that are expressed in devalued currency units and/or for fewer units of currency. Such measures are justified by the assumption that the creditors should have recognised that the debt certificates that they were holding could not possibly be paid off in full by the debtor state. If banks, other businesses and individuals were holding debt certificates that had lost value, from greed, stupidity or inertia, they deserved to 'get a haircut'.

The IMF reconstruction loan came in the form of another currency - usually US Dollars - which boosted the reserves of the Central Bank of the state that was restructuring its economy and its debt. In exchange for giving 'assistance' the IMF was able to impose a degree of discipline on the defaulting state, and to check that the restrictive policy was more-or-less being followed by the government until the internal finances and external balances were in an acceptable condition. This last-resort enforcement role of the IMF was a far cry from what Lord Keynes had proposed during the second world war. He suggested that they way to avoid any repetition of the depression of the nineteen-thirties was to have an international monetary agency that issued its own money - bancor - that would be recognised by all states and controlled by global consensus. Countries would settle their debts with each other by making transfers of bancor at the IMF, and if a state had a good reason to run a deficit for a period  - usually to finance a promising major investment - it would borrow bancor to make the necessary settlement: and duly repay the debt to the IMF in bancor over an agreed timescale.

As the major contributor to financing the war that was coming to its conclusion, and in the expectation of gaining massively by trade with war-torn countries, the US did not agree to Keynes's model. Its negotiators insisted that the US Dollar must remain unconditionally under US sovereign control, and should maintain its 'real' value as being exchangeable for one thirty-second of an ounce of gold [i.e. one ounce of gold was - notionally - exchanged for $32]. Hence the IMF was set up with the dollar as its unit of account and all the other member countries had to fix their currency at so-many dollars and cents per unit. The British pound sterling entered the system at $4.

Under the original rules of the IMF, when a country ran up an excessive balance-of-payments deficit it was compelled either to impose financial discipline that brought payments and receipts into balance and instituted a plan to pay down the accumulated deficit, or it had to obtain the consent of the IMF to devalue its currency formally; which resulted in the cost of the debt being reduced in terms of foreign currencies. As Britain's welfare state repeatedly led to excessive consumption vis-a-vis economic output, the pound was devalued from $4 to $2.8 after only three years, and was devalued to $2.4 in the 'sixties. Then in 1973 the USA was not able to maintain the parity of the dollar: Richard Nixon abrogated the gold valuation of the dollar and since then countries have engaged in a process of devaluations by default: they have allowed inflation to take place, enabled borrowing to run ahead, and granted the masses living standards that were not sustainable in the long term. Commentators with limited historical understanding have expressed concern that countries and currency zones could now engage in devaluation competitively with other countries, in the hope of exporting economic stress; as was tried with disastrous consequences in the early nineteen thirties. Such expressions of concern miss the simple truth, that competitive devaluations have been taking place since 1973. If there is an intensification of the process in the near future this will exacerbate the already-obvious danger that world trade could grind to a halt.

None of the weak eurozone countries can devalue the euro unilaterally and the IMF is keen to keep the eurozone in being to serve as a co-disciplinarian over the member countries that are at-risk of default. A common argument being voiced in Britain is that the IMF is constituted to help countries, not currency zones; so the UK should not provide extra funding for the IMF to support the euro even though the lack of such support might destroy the common currency. Despite British hesitation it appears that China and the USA are willing for the IMF to take a punt on the euro, in the interests of stabilising global trade and employment and business: so it is likely to continue with its efforts. The eventual outcome is unpredictable; but the extent of the disaster that would follow a failure of the euro will increasingly be emphasised.

How different things would have been over the past helf-century if Keyenes's version of the IMF had been operational since 1945! Bowdlerised Keynesianism would have been impossible to apply within any country; so in the absence of rampanty inflation monetarism would never have arisen. Living standards and benefits systems would have remained more modest and affordable, de-industrialisation would have been dismissed as an absurd  notion and industrial innovation would have been encouraged in the absence of casino banking. It is highly desirable that the International Monetary Fund should look at options for fundamental reform of its structure and its policies, which could enhance its role as a global economic provider and - when necessary - as a monetary and fiscal police force. It should begin by dusting-down Keynes's propositions from 1944 and assessing how much a modern version of them could serve the world far better than the current arrangements.