A World of Patriots and Dreamers

Last week’s UN General Assembly reflected a number of emerging trends – the miring of public life in older democracies (US and the UK) in banality and controversy, and the flourishing of climate change as a mainstream political issue, are just two.

These trends are part of the fracturing of the old-world order, and pointers as to where the new order may lie. Underlying each of them is the contentious issue of how political debate is conducted.

One striking statement at the UN was President Trump’s remark that ‘The future does not belong to globalists. The future belongs to patriots’. Practically, coming from the leader of the world’s superpower it is another nail in the coffin of globalization, in addition to being an embarrassing conflation of the meaning of nationalism with patriotism.

One of the ironies in Trump’s many grand statements is the way they echo in China. In fact, China is well ahead of Trump in conceiving of how to put the ‘country ahead of the global’. A memorable example was the 2017 World Economic Forum when the Chinese leader Xi Jinping made a speech that claimed the mantle of globalization for China (from the USA).

The curious aspect of this is that while China is a large spigot in the world economy, it is one of the least globalized countries in the world (it ranks in the bottom quarter of nations according to my own measure of globalization). In his own way, Trump is reacting to this, but his crude view of China does not do justice to its history nor the amplitude of its ambition.

Well before MAGA (Make America Great Again) Xi Jinping coined the term ‘China Dream’ in a speech when visiting the National Museum of China in November 2012, having taken the office of general secretary of the Communist Party. The 70^th anniversary of the founding of the People’s Republic which occurs next Tuesday 1st October, will bring this into sharper focus.

China’s view of itself in the future, or the Chinese Dream, is colored by past generations of economic and cultural greatness. Recall that at the time of the Founding Fathers, the United States was but an emerging, even frontier economy and that at that time China accounted for nearly 40 percent of the world economy. By 1950, 150 years later, America made up a third of world economy, and China’s share had shrunk to 10 percent.

Given this backdrop China wants to elevate itself to a position of economic power (perhaps regional dominance) and of policy power in Asia with its own regionally relevant rule-based order so that it is, at the very least, not subject to the domination of Western countries and institutions (the film Amazing China, to be found on Youtube,gives a sense of this and of what is ahead).

China’s rise over the past thirty years has not been given enough credit by commentators and politicians in the West. Few of them are really curious about Chinese history and the Chinese approach to economics, politics and society. Mike Pence’s speech to the Hudson Institute last October was a sign of this, and one of the great challenges China will face in coming years is the realization in Washington and Brussels that China is pulling level with them in some domains.

Looking ahead, the great risk for China is that the ‘Dream’ runs out of momentum, economically in that growth slows, and politically in that people in China question a model that exchanges liberty for stability. The underlying risk is that not having experienced a formal recession in close to twenty years there is a great deal of inefficient capacity built up in China and that a downturn will expose this. If it does, rising unemployment will create a new political challenge for the all-powerful Xi Jinping.

In this respect, the manner in which China manages the protests in Hong Kong will provide a clue as to how the Communist Party will manage emerging political challenges. A physical, confrontational approach will open up many risks – political contagion, sanctions on the Hong Kong economy and a loss of soft power. A more drawn out approach that contests the legitimacy of the ‘two systems’ and that penalizes locals in Hong Kong by slowing the local economy may well dampen the crisis from a Chinese perspective. It must then confront the tenor of elections in Taiwan in early 2020.

Political volatility is thought to be the preserve of the West. One of the great surprises of the early 2020’s may be the way it spreads across emerging countries, with China as no exception.

Have a great week ahead,

Mike

Beyond Brexit – a plan for Northern Ireland

I am trying hard not to write about Brexit, partly because it is so unpredictable and partly because so much else has been written and said about it. There are however two economics related angles that are worth mentioning. The first relates to the challenge of reviving the British economy after Brexit, and I covered this in a Times oped earlier this week (Times.html). The other is the longer socio-economic future of Northern-Ireland.

One of the frustrating and revealing aspects of Brexit is the way it has shown a lack of real interest in the North from some British politicians. For instance, in the recent past Boris Johnson has compared the border between Ireland and Northern Ireland to the boundaries of London’s congestion charge zone.

This level of ignorance is a pity because the reality is that Northern Ireland is one of the poorest economic regions of the UK, falls well behind the level and rate of growth of Ireland the Irish Republic and continues to suffer social, political and economic rigidities. Social divisions are being mended all too slowly, local politics at Stormont is inadequate and the economy remains embarrassingly overdependent on government spending.

Brexit has shone a light on many of these issues and has illuminated the lack of appreciation many in Westminster have for Northern Ireland in particular and Irish history in general. Arguably, a film (‘Titanic’) and tv series (‘Game of Thrones’) have done more for Northern Ireland’s fortunes than its local and London based leaders.

In particular Theresa May’s Brexit strategy was fatally snared by a shoddy understanding of the complexities presented by the border between Northern Ireland and the Republic. Indeed, there is a risk for Britain that Brexit is replaying the divisions and debilitating bitterness of the Ireland’s separation from Britain in the 1921 Anglo-Irish treaty.

Yet, while there have been very few if any winners in the Brexit process so far, it does represent a valuable opportunity for London, Washington, Dublin and Brussels to recognize that Northern Ireland needs a second wind in terms of its socioeconomic development. Irish America can add an important voice of support here. Northern Ireland should not be parked as a political issue but should be cultivated economically and socially.

A provocative but potentially fruitful suggestion is that a portion of Britain’s Brexit exit ‘settlement’ to the European Union be set aside as the basis or seed capital for a Marshall Plan–type fund for Northern Ireland. This could then become a joint UK-EU financed fund with further funding from the UK, the EU and its institutions like the European Investment Bank. The fund would not substitute for spending in Northern Ireland by London but would have the long-term aims of increasing socio-cultural harmony, human development and the economic potential of Northern Ireland’s economy.

Another interesting source of funding is the growing appetite in capital market for social impact investment opportunities. This potential supply of funding is not yet met with a large, coherent supply of impact investment projects, partly because this kind of investing is not yet well understood and partly because it is difficult to create large scale projects here. Northern Ireland could be a model for doing social impact investing in a meaningful way.

The really interesting part of the proposal is that neither London, Dublin, Brussels or even Washington would be involved in planning and running such a program. This would be done by a group of small, advanced economies – the likes of Sweden, Singapore and Switzerland.

This approach would have political and economic attractions. The first is that few if any of these small, advanced countries has political ‘baggage’ with respect to Northern Ireland and would be therefore less likely to fall foul of the distrust that bedevils politics in the North (for example, the advice of New Zealand technocrats might be easier to take, and more credible than policies crafted in London or Washington).

Secondly, and more tellingly, small advanced countries are the source of the secret sauce of economic, social and human development. They tend to dominate the league tables of socio-economic success, from ‘most globalized’ to “most innovative nation” or most “prosperous nation.” Indeed, the small advanced country model is acknowledged in Northern Ireland’s ‘Economy 2030’ plan.

What small, advanced and open economies have in common are drivers like education, strong institutions, the rule of law, and the deployment of technology—their intangible infrastructure. Northern Ireland needs better ‘intangible infrastructure’, applied in an imaginative and constructive way.

A few examples of what a small state led fund might tangibly focus on include the kind of skill-based apprentice schemes found in Austria and Switzerland, rezoning of housing from deeply politically entrenched areas using the social-impact-investing model found in Belgium, investment in cultural projects that are common to all communities (such as is done in Scandinavia and Switzerland), and the establishment of poles of excellence in certain professions, such as legal financial services.

Such a fund might draw on the expertise and governance capabilities of small states. This might well add energy and transparency to policy decisions and the employment of detailed rolling five-year plans might help speed up what is at times a sclerotic policy process.

Given the frequent and urgent manner in which parties to the Brexit process annunciate the risks to Northern Ireland in general and the Peace Process in particular, it is time they do something to set it on a positive course. It is also high time that Brexit produces at least one good news story.

From Rotten Heart to Braveheart?

Regular readers, especially those toiling away in dusty cities will be less than amused that I have written this note in the beautiful setting of Nafplio, in south west Greece, whilst attending the excellent Eliamep/JeanMonnet30 seminar.

That the Greek stock market is up 35% this year and its bond yields trade some 33 percentage points below their levels of five years ago suggests some closure on the euro-zone crisis.

Another sign of this came in the market reaction to additional stimulus from the ECB. Effectively European asset prices did nothing, which I hope will persuade the ECB to move on to other policy aspects of the euro-zone system such as the need to properly regulate Europe’s fintech and payments sector.

Another important milestone in the ‘story for Europe’ came with the announcement of the composition of the von der Leyen Commission. In a previous Sunday note I have mentioned the method behind the creation of European Commissions found in the tale of political ‘three cushion billiards’ recounted by the late Wilfried Martens, formerly Belgian Prime Minister, in his 2009 book ‘I Struggle, I Overcome’.

The Commission has done well this time, though it was not always the case. One of the first books I read that helped to explain how Brussels worked was Bernard Connolly’s ‘The Rotten Heart of Europe’. It was a huge hit (in the UK) and hugely controversial. Indeed, a second edition came with a cover recommendation from the then editor of the Spectator Boris Johnson (‘one wanted to stand on the desk and cheer’).

The book did much to propagate Euroscepticism in British politics, and I suppose we might trace some of the roots of Brexit to it. With some irony, Brexit has however shown that the Commission can function in a forceful way. The challenge for the EC is to now step up a level and reinforce itself for a multipolar world where it will compete more acutely with China and the US, with at the same time Russia snapping at its heels.

Perhaps for this reason the new EU President referred to her Commission as a ‘geopolitical one’. It is welcome that there is a growing realization in Brussels of the implications of the emerging multipolar world, but for my liking, Europe-Brussels does not yet have a strategic mindset, and does not fully have a sense of its power and identity in the world.

There has already been some controversy over the designation of a Commissioner with responsibility for migration as one who would ‘Protect our European way of Life’. This clumsy effort at communication is likely a nod to right wing parties across Europe, the kind of people who ‘value the Church and families as opposed to bike riding vegetarians’ as one person put it to me.

What this incident should do, is spark a serious debate on what the core values of the EU are, and in ‘The Levelling’ I invoke Alexander Hamilton to do this. The more public life in the US and the UK disintegrates, and the more heavy-handed China is in Hong Kong, the more we are reminded that liberal democracy is at the core of Europe’s value system. One of the challenges is to make the benefits of this clear to people in Poland and Hungary whose leaders contest such a view of the world.

Back to the Commission, where several appointments will have macro and investment implications. Overall, the Commissioners are less wealthy than the Trump cabinet, better organized than the Johnson government and more colourful than the Xi Jinping administration.

Trade first. The appointment of Irishman Phil Hogan as trade commissioner means the EC will hold a firm negotiating line on Brexit, and that it is increasingly focused on the risk that President Trump might open up a trade war with the EU. The appointment of Sabine Weyand to the trade team reinforces this view.

Then, the re-appointment of Margaret Vestager as EU Competition Commissioner underlines the fact that a growing market trend will be regulatory risk to large US tech companies. Europe has already taxed and fined the FAANG companies and some Democrats increasingly agree with this stance. As the 2020 election approaches, tech will be increasingly under regulatory scrutiny and like it or not Europe will lead the way.

The final point worth waking here is the emphasis that the EC is putting on green investment, on governance in Eastern European countries and on socially responsible finance. This all adds up to a much greater emphasis role for ESG (Environment, Social and Governance) in investing and markets, not just in Europe but further afield.

So, the EC is moving away from ‘Rotten Heart’ but is not yet ‘Braveheart’!

Have a great week ahead,

Mike

The consequences of bad behaviour

In chapter five (page 127 to be exact) of The Levelling I wrote about the apparently growing tendency for some politicians to be self-centered and incompetent, and drew a contrasting portrait of Boris Johnson MP and the late Peter Carrington. It went as follows…

‘A further contrast in political types might help illustrate this point further. In July 2018 Boris Johnson resigned as British foreign secretary. Britain no longer has an empire, but the office of foreign secretary is still respected. During his tenure, however, Johnson made a number of gaffes and was generally seen to have damaged rather than advanced Britain’s interests. Similarly, in the aftermath of the Brexit referendum, he was also seen as a natural leader of the Tory Party, but the way he has conducted himself since then has led many party colleagues to the view that, even by the standards of politicians, he is too self-serving, and he has lost support within his party.

The day after Johnson resigned as foreign secretary, the death of Lord Carrington (at the age of ninety-nine) was announced. Carrington had been British foreign secretary from 1979 to 1982. He was generally recognized as an exemplar of integrity in public life. Early in his political life, he had served in Winston Churchill’s cabinet of the early 1950s; later he was defense secretary for Edward Heath and then foreign secretary to Margaret Thatcher. To cut a long and good story (of his life) short, he resigned as foreign secretary three days after the Argentine invasion of the Falkland Islands on the grounds that the invasion happened on his watch and was therefore his fault.

As political resignations go, this one was seen to be selfless and principled and stands in contrast to the tactical maneuvering of some politicians today. Carrington, along with many contemporary central bankers (Paul Volcker, Ben Bernanke, Janet Yellen, and Mario Draghi, for instance), is a good example of sincere public service and his behavior stands in contrast to that of successors like Boris Johnson.

The distinction I wish to draw is to have policy makers who are more responsible for and focused on policy making than on their own personal advancement. Advancing oneself is, of course, prevalent across all organizations and institutions, but the difference with politics is that people’s lives are affected by bad policy making’.

At the time, I did not think Boris Johnson would become Prime Minister, though there was a good chance that this might happen. Further, given everything that has happened with Brexit so far, it was still hard to imagine that in a few weeks his government has managed to effectively destroy the Tory Party, the Union and the very large stock of goodwill that Britain has built up with neighbouring countries like Ireland.

I believe that the Tory Party will soon formally split, and that the nucleus of a new centrist party in British politics will be formed around the twenty one MP’s who were expelled from the Conservatives.

Another consequence is that the barriers to Scottish independence are falling. Most of the arguments deployed by Brexiteers for ‘taking back control’ appear logical in the case of Scottish independence. Everything the Johnson government does shears away at the moral and emotional ties between London and Scotland. Moreover, the departure of Ruth Davidson as head of the Scottish tory Party will hand back a number of seats to the SNP. The challenge for Nicola Sturgeon now is to convince Scots that the SNP can execute new policy ideas that will make Scotland more stable economically, and richer in terms of human development.

Then, both the Irish government and the EC will feel that their opposite numbers in London have no credibility and no sincerity. Whereas they were often puzzled by Theresa May, Boris Johnson has done nothing to encourage Brussels to trust him. That is a pity because once Britain leaves the EU, the truly complex business of negotiating its future relationship with the EU will only begin. This is apparently lost on the Johnson government.

To return to the distinction I drew between Johnson and Carrington, there is an emerging theme in public life that the consequences of bad behavior are in many cases low. There are many instances, Jeffrey Epstein is the latest, where individuals have engaged in enabled, persistent abuse. Politics is sadly becoming similar. The world stage is increasingly replete with examples, with little distinction between leaders in emerging or developed countries.

In time, very bad, divisive behavior in politics hits its limits and is sanctioned. What is disappointing is that those limits are being stretched to breaking point. At times, markets can sanction bad policy by politicians, but bad personal behavior is seemingly harder to check. Infuriatingly, social media seems to amplify and reward bad behavior in politics.

A more profound policy issue is that the lack of real economic growth, and the poor distribution of its benefits (in countries like the US) means that voters will look beyond reckless policy in search of economic rewards. In the US specifically, few on the right are prepared to stand up to the President. They might do well to look at the example set by the likes of Ken Clarke, Jo Johnson and Rory Stewart last week. Boris Johnson himself might do well to look at the example set by Peter Carrington.

Have a great week ahead,

Mike

Faultlines in a fracturing world

Cracks appear in the world order Source: Esquire

The front cover of ‘The Levelling’ – clearly the best part – shows a deflated globe. Another way of getting this message across might have been a crystal globe, with cracks appearing.

This came to mind last week as I was summing up some of the important geopolitical and economic catalysts for my first column as a contributor to Forbes, where the aim is that I write on events outside the USA for a largely USA centric audience (https://www.forbes.com/sites/mikeosullivan/2019/08/29/faultlines-in-a-fracturing-world/#3f9c31415890))

My sense, which is now reinforced daily by events such as the trade war, is that there is a fracturing of the old world order that is exposing a range of faultlines. The established world is cracking, the question is whether it will shatter, or whether it can be repaired.

There are at least two varieties of faultline. The first set is where we have the intersection of a disruptive macro development with an existing or incumbent industrial structure – think of the impact of negative interest rates on the European banking system, or the effect of the trade war on corporate supply chains or increasingly, the collision of ethics and technology (for instance opioid drugs or big data).

The second element in the fracturing of the world order relates to geographic areas and/or nation states. A number of them are increasingly making the news and are beginning to cause market ripples. Strikingly, in each case the fracturing is picking up speed at an alarming rate such that we now go into September beset by three full crises.

The one that preoccupies me most is the situation in Hong Kong, partly because I love the city and mostly because the ongoing demonstrations there are a microcosm of grander political battles to come – between a state of the world where people sacrifice their liberty for order and economic growth or one that we could call an open society/open economy model.

Should the situation deteriorate further, the onus will be on the US, EU and especially the UK to speak out more volubly, to China’s chagrin. Police violence and the recent arrest of some of the prominent demonstrators is an escalation in this conflict – I am not sure whether this is simply an error or a provocation to the protestors.

I have underlined in past notes that the Hong Kong protests are primarily an issue of liberty and identity, but market and investors are now also been drawn towards it with some focusing on the Hong Kong dollar peg as a source of volatility. I am not so sure – only a major political event such as a Chinese takeover of Hong Kong could push the peg to the top of its range. A more obvious Hong Kong contagion play might be the Chinese currency itself, with a long yen trade as an additional way of expressing risk aversion in Asia.

The situation in Hong Kong would be more alarming if we did not have Brexit as a benchmark, which was the first big rupture in the ‘end of globalization’ thesis. In a sense, nothing has happened with Brexit in that the UK has not yet left the EU, but at the same time the road to Brexit has taken a mind-boggling series of twists and turns.

A difficult, messy ‘hard-Brexit’ looks likely in late October, largely because Boris Johnson has caused so many people to lose faith in him and has whittled away any goodwill he had with Brussels. The step to prorogue Parliament took Brexit into a new realm, a very disturbing one for those who hold the view that what makes Britain are its laws, democracy and institutions. The move will possibly make a hard Brexit more likely, and certainly means that the post Brexit political climate will take on the bitterness of a civil war.

Finally, I am keeping an eye on the two biggest economies in Latin America – Argentina and Brazil. Both represent last chance experiments for populist politics, with the possible electoral overthrow of Mauricio Macri by Alberto Fernandez in Argentina and the increasingly troubled tenure of Jair Bolsonaro.

I recently wrote that the steep fall in the Argentine peso and in its government debt means that it is one of the few countries where sovereign risk is now beginning to be correctly priced, though the implications of Argentina’s attempt at yet another debt restructuring could lead to further downside for the currency and stock market. This would spill over to Brazil, whose stock market is vulnerable to an increasing lack of clarity in policy making and an increasingly contentious foreign policy. In each case, the strong dollar is an unwelcome financial headwind.

A potential formal default by Argentina may well also further damage the credibility of the IMF and by extension Christine Lagarde. The only good news is that Argentina’s woes will mean that austerity is no longer the knee-jerk response of bodies like the IMF to financial crises.

September promises to be lively.

With best wishes,

Mike