Though Cowards Flinch

Blair gets it right(ish)

As European leaders prepare for the latest ‘make or break’ summit later this week, it’s important to reflect on what Tony Blair thinks. 

No really. 

Most of what he had to say to Andrew Marr on Sunday about the need for a ‘grand plan’  was of course absolute pap, consisting of the usual reiterations about the need for Greece et al. to take the “pain” if Germany is to come up with the readies, he did make one important point when he acknowledged that the introduction of the euro had been:

 motivated by politics and delivered in economics.

Blair is right that the political will to introduce the common currency meant that it happened before the level of economic competitiveness between the various countries was equal enough to ensure its long-term smooth functioning.  Leaders kidded themselves and their electorates that a combination of the trade flexibilities offered by the new currency itself , along with the continued judicious use European Structural Funds would be enough to finish the job.

We need to be clear then, as Blair appears to be, that monetary union didn’t create the imbalance problems Europe now faces.  The problem dates back to the creation of the Single Market itself;  even before having the same currency ruled out devaluation as a means to change the balance of trade, the Single Market meant that underlying differences between economies could not be addressed through the application of import duties and export subsidies. 

The three solutions

Come 2012, three ‘solutions’ to the current mess, of varying wrongness,  are being proposed. 

First, there is the idea that self-defeating austerity will suddenly come good.  Enough said…it’s hurt and it’s not worked.  

Second, there is the hope that Germany will play ball and sign the Eurobonds. That’s better, and it may happen, but it still only offers a reprieve. 

Third, and most pernicious of all, is the ‘radical’ solution – put forward by people who don’t live in the real world or at least don’t care much for those who live in the real word – that the euro should be allowed to go to the wall.  This will cause chaos and meltdown, with the impact heavily weighted to the poor in the poorer countries, but however pleasurable that might be for the UKIP nihilists, it STILL doesn’t address the fundamental problem, which is nothing much to do with the euro, and lots to do with underlying economic imbalances.

The grand plan

But there is a fourth option, and Blair (however unwittingly) leads us towards it.   There is a grand plan.

This is to go back to first principles, dismantle the Single Market as it exists at the moment, and rebuild the European economy around a cooperatively agreed, flexible set of import tariffs/export subsidy permissions, aimed at allowing the countries with relatively poor trade balances to improve them through increased exports (including via limited inward investment based on these export advantages) and import substitutions processes.

“Ah”, will say the gainsayers, “that’s against European law, and its introduction will spell the end for the European Union”.  But, as I set out here, that’s not actually the case; Article 32 of the Lisbon Treaty allows wiggle room on the ”prohibition” of “duties on imports and exports and charges having equivalent effect” in cases where there is a need to:

avoid serious disturbances in the economies of Member States and to ensure rational development of production and an expansion of consumption within the Union.

If events we’re witnessing now in Europe aren’t serious disturbances in need of a whole lot of rational development, then I don’t what events are.

The unthinkable about the Single Market needs to become the thinkable.  After all, restriction of worker movement within the EU, the other key principle underlying the Single Market,  has suddenly become thinkable again. 

Such restriction are also permissible under the lesser read provisions of the Lisbon Treaty and, as Alasdair Palmer at the Telegraph rightly suggests (though the glee with which he suggests it, and the comments which follow make me nauseous), such restrictions will soon become very attractive to member states desperate to be seen to be doing something, and cynical enough to make that something ‘tough action of immigration’(1).

The radical re-engineering of the Single Market, as a co-operative means of equalising trade balances (2), is not of course, the whole solution.  As Yanis Varoufakis has pointed out:

What is going on in Greece is no recession! Here, everyone is going under. Efficient and inefficient alike. Productive and unproductive. Potentially profitable and loss making enterprises. I know of factories that export everything they make to satisfied customers, that have full order books, a long history of profitability; and, yet, they are on the brink of bankruptcy. Why? Because their foreign suppliers will not accept their bankers’ guarantees in order to provide them with the necessary raw materials, as no one trusts the Greek banks anymore.

The answer to this, Yanis argues, can only be direct bank recapitalisation.  Without a functioning system of credit, a change to the Single Market in Greece’s favour will have little effect.

With this proviso, a move towards tariff/subsidy allowances would do wonders for the Greek economy, where there is export potential (while exports to the EU fell by 8.6% in the first quarter, largely because of  credit meltdown that Yanis refers to, they actually rose to China by a staggering 269% (perhaps because these exports are based more on primary products (e.g. cotton).

Of course, in the longer term, the introduction of cooperatively agreed tariff/subsidy ‘allowances’ (3) (reduced over time as economies start to converge) is in many ways simply a different route to money transfers between Germany and other European countries, and there would be pinch points to co-operation if, say, a German car manufacturer suddenly decided it liked the idea of Greek export subsidies and announced relocation – there would almost certainly be a need for some restriction on inward investment as a means to cut costs on existing trade (as opposed to new investment).  Even so, a system of transfers within a growing economy is likely to be much more attractive than one forced upon Germans in a stagnant Europe.

Dedicated to Tony

So will this grand plan, or a variation on it, happen?  Well I wouldn’t bet my bike on a fundamental reform of the Single Market emerging from this week’s latest crisis talks.

Even leftwing economists, who are supposed to understand the bit about capital serving people and not the other way round, currently seem reluctant to offer such a fundamental challenge to the orthodoxy that free trade is good, preferring to look at ways in which fundamental imbalances can be mitigated, rather than actually removed through co-operative European government (4). 

So I don’t expect the lightbulb to go on above Monti or Samaras’ head anytime soon.

But even if we need to dip further towards economic mayhem before the (good) unthinkables really do become thinkable, it might be worth people better than me at economics-speak running with the idea of a this grand plan and seeing how far we get.

Hell, I’d even call it Blair’s grand plan, and vote for him as President of Europe, if it worked.

 Stuff I couldn’t squash in above

 (1) Palmer is in fact wrong to suggest, as he appears to do in his blog that, the member states’ unilateral move on Schengen on 7th June is a restriction in itself, as it is concerned with policing entry from outside the EU, but he is right to say that the way the member states have acted without regard to the European Parliament is indicative of a change in mood).

(2) For a primer on the importance of trade balance, look no further than this succinct post from TCF’s occasional guest Paul Cockschott, in which Paul argues that the Balance of Trade (his focus is on the Uk economy) is the “elephant in the room”, disregarded as a major indicator of a country’s economic well-being since the 1980s.

(3) I am aware that the World Trade Organisation would be a major stumbling block here, but in the end the EU can argue for primacy of law within its own jurisdiction, and that the WTO has never objected to Article 32 to date.

(4) When I consider the conceptual difficulties of creating a coherent challenge to the orthodoxy of  ‘free trade is good’, without it looking like a backward step, I am reminded of the difficulties experienced a 100 years ago by late Victorian/Edwardian Conservatives, trying but failing to create a coherent case for tariff reform.  They could see clearly enough the negative consequences of free trade for people of their core constituency – and this was not solely the propertied – and were attracted to the reconstituted  ‘moral economy’ which tariff reform appeared to offer, but were unable to present this in such a way that they didn’t look like ‘dinosaurs’ from an earlier age of political economy. 

For more, read EHH Greens magisterial study The Crisis of Conservatism: The Politics, Economics and Ideology of the British Conservative Party, 1880-1914

 BoT importance primer