Fantastic Corruption!

In May 2016, at a summit on anti-corruption the then British Prime Minister David Cameron said in hushed tones to Queen Elizabeth, ‘We’ve got leaders of some fantastically corrupt countries coming to Britain… Nigeria and Afghanistan, possibly the two most corrupt countries in the world’.

A month later he lost the Brexit referendum and the UK has been in a state of chaos ever since.

Nigeria most likely had little hand in Brexit, but the complacency of Cameron did. So too, according to last week’s Commons Intelligence and Security Committee’s report into Russian influence in British politics, did the openness of the Cameron government (and others) to the generosity of Russian donors (fourteen ministers in the Johnson government, including six cabinet ministers have accepted donations from Russians living in the UK).

Britain, which for so long and in the eyes of so many, is the country that has epitomized the rule of law (for instance see Tom Bingham’s book of this title). Its lackluster response to financial and other incursions by Russia, the politization of policy (Cummings v Whitehall) and the faulty response to the COVID 19 crisis have contributed to the view that the robustness of institutions and the rule of law are in decline in Britain.

It is not alone. Last week in an interview with CNN House Speaker Nancy Pelosi declared that the stock market was ‘rigged’, and that this might not be such a bad thing. For a country whose value set is based on capitalism, this is an astonishing admission, though less surprising in the context of the vandalization of the rule of law and institutions in the USA by the President. Most US Presidents have underlined the importance of the rule of law, from Eisenhower to Kennedy to Reagan, but not Donald Trump.

Like Downing Street, the change in moral tack at the White House points to the testing of core values in the two countries whose empires formed the basis of globalization (Britain in the 19^th century and the USA in the 20^th century), and in that respect, is yet another crack in globalization.

Policy makers in each country should play attention to the elaboration of the link between the erosion of the rule of law to the end of empire by Edward Gibbon in ‘The Decline and Fall of the Roman Empire’. More recently, there is plenty of evidence to show a link between economic growth, financial stability and the rule of law across countries.

If politicians in say the UK, or any other European country for that matter, are happy to take donations from citizens of Russia and China, it is harder for them to claim the moral high ground over China in foreign policy. It is equally problematic for US Secretary of State Mike Pompeo to travel the world looking to build an alliance of democratic countries against China whilst the rule of law is undercut in the US.

If the idea of the rule of law is going out of fashion in Washington and London, it is gaining some allure in Brussels.

Much has been made of the hard won result of last week’s European leaders’ summit (it was the second longest ever, only 25 minutes behind the Nice summit in 2000) in the sense that it has created fiscal capacity for the EU. While the classic division between fiscally conservative or ‘frugal’ countries and those like France and Italy who are fiscally indulgent was on display, a new fiscal fissure is opening up.

The agreement reached last week introduced some (yet mild) conditionality around the rule of law in terms of how it binds aid to EU members (the likes of Bulgaria, Romania and Poland are on the minds of Brussels). Though no sanction has yet fallen on the Viktor Orbans of the world this move is part of a new trend where European values are going to play a more prominent role in political discourse (seven of the top ten countries in the World Justice Project report on Rule of Law are EU states).

In the future, collaboration will be done less on the basis of geography and more on the basis of shared values – this might mean that bodies like NATO and the EU may lose rather than gain members.

It also means that the nations of the ‘old’ world need to realise that their economic and political advantage comes from the rule of law, and that the current race to the bottom in terms of practice of the rule of law, is self-defeating.

Have a great week ahead,

Mike

The Restoration

The middle of the 17^th century was an extraordinary period, especially for political and institutional innovation. The Treaty of Westphalia in 1648 gave us the nation-state, books like Hobbes’ ‘Leviathan’ were produced and in England the first expressions of popular constitutional democracy were aired. The tumult of the period was dampened with the return of King Charles II to England, in what was called ‘The Restoration’, which is a phrase that comes to mind when I think of Joe Biden’s Presidential hopes.

To start with, I won’t try to map the US in 2020 on to Europe in the late 17^th century, save to say that both periods are marked by a sense of a ‘world turned upside down’.

However, the notion of an American Restoration is appealing in the sense that a Joe Biden Presidency would restore the thread of Democratic policy (through Obama to Bill Clinton), and very importantly would restore the competent workings and full staffing of institutions like the State Department. The idea is that the American machine of state (I wrote about the French one last week) would once again purr into action, and American credibility would be restored. The question for Biden, the Democrats and America, is whether he can accomplish more than ‘a Restoration’.

With Biden now well ahead of the President in most opinion polls on national and state by state levels, and Donald Trump sacking his campaign manager last week, the prospect of a Biden Presidency is now very real, though financial markets it seems are not yet pricing this in.

The success of Biden’s campaign and the tenor of his potential presidency will rest in good part on the extent of the economic damage ahead. If high unemployment and bankruptcies are a reality into the presidential debates in September and October, the tone of policy will tilt much more towards social justice (a topic where both Bernie Sanders and Elizabeth Warren are very comfortable).

A Biden White House would likely focus much of its stimulus effort on infrastructure, particularly so in the ‘green’ economy. What is much less clear is the extent to which they would consider rejigging the tax system to place a greater tax burden on wealthier Americans and corporations. This may well be teased out in coming months. I also expect that foreign policy under Biden will be much more assertive, especially so towards Russia and China.

Biden’s next step is to choose a running mate. My judgement is that Biden will choose Kamala Harris as his VP, not least because she has a track record in policing and justice, which is one policy area which the Trump campaign is likely to amplify. Other VP candidates like Susan Rice may suffer from the fact that the Biden team already has a very well stocked foreign policy and security bench.

For his part (and provided he doesn’t drop out of the race!) Donald Trump will inevitably contest the election in a divisive way. Trump’s key weapon over Biden is his social media and network TV reach, and here he can do plenty of damage (to himself also).

There is plenty that he can agitate on – such as contesting the logistics of the election (i.e. postal voting), to stoking tension of topics that resonate with some voters – China, defunding police forces and the prospect of more economic stimulus. He may even claim credit for a COVID-19 vaccine, should it materialize before November.

However, such an approach may not win him a second term as it may merely serve to reinforce the views of the 40% of Americans who think ‘he is doing a good job’. Moreover, with a record number of women now contesting elections for Congress, and more states reacting in a constructive way to racial and other inequalities, the broad socio-political tide may be turning against Trump.

It is now widely recognized that Trump has vastly diminished America – it is financially weaker, its soft power is squandered and its institutions are less admired. He may now also wreck the Republican Party.

Should the Democrats take control of the Senate, it is not impossible that the rump of the Republican Party might split into those who share Trump’s political convictions, and those for whom he was a convenient political force. The ‘convictionists’ could form a harder right wing party, while the ‘conventionists’ might repent and try to rejoin the mainstream in the fashion of the country club Republicans of the Reagan era, led potentially by someone like Liz Cheney.

For their part, the dilemma is what tone to strike across states so that they take back the Senate. A mild ‘re-unite’ America approach is the most likely one, at the expense of the muzzling of the likes of Bernie Sanders. Once in power, the Democrats will be more interesting in that they feel more comfortable following the tack of the likes of Elizabeth Warren, and more emboldened in reinforcing regulation in areas like corporate governance and environmental protection.

A scenario that (according to polls today) brings about an end of Trump politically, cripples the Republican Party and reinstates the Democrats may well restore stability to America, but my worry is that it won’t change it, and much less so may postpone some of the radical policy that is needed to truly revitalize America.

The manifest social tensions, political stasis, and extremes in wealth/inequality as well as declines in human development indicators point to the need for more than a simple restoration.

Have a great week ahead,

Mike

Dans l’Ombre de Sully

I confess that on more than one occasion that I have joked to French friends that ‘Sully’ (Maximilien de Bethune, Duke of Sully) the chief minister of France for twenty years around the turn of the seventeenth century is an ancestor of mine. Most are unimpressed, and American friends suggest I would be better off being related to the other ‘Sully’ (Captain Chesley Sullenberger the US Airways pilot who famously landed his plane on the River Hudson).

Sully, the elder that is, is worth pondering for two reasons. First, he was one of the longest standing holders of the office of prime (chief) minister of France, and secondly, he was the architect of some of the early, institutional apparatus that forms France’s highly centralized system of government. Both of these elements are now in focus with the replacement of Edouard Philippe as prime minister by Jean Castex.

With many other senior ministers still in place, the removal of Edouard Philippe is a political statement by Emmanuel Macron that he and he alone is the captain of the ship of state, with M Castex in the boiler room running the complex machinery of the country. For his part, M Philippe, now mayor of Le Havre, may spend his spare time writing (check out ‘Dans l’Ombre’ written with Gilles Boyer) and cultivating a network of regional support that might equip him to challenge Macron for the Presidency. If so, it will be an enthralling battle.

However, there are other reasons to focus on France, not least next week’s 14^th July celebration.

From a European point of view, a lot rests on the collective views and behavior of the French government – which in a country with relatively tame inequality, is one of the most elitist and homogenous in terms of personnel and thought process. There are maybe three challenges to watch.

The first is Europe. With the French-German political engine now whirring again, the approaching end of the Merkel era and the long running absence of a strong German foreign policy, Quai d’Orsay will be the driving force behind EU foreign policy. This is a positive given the policy energy of Macron and the unambiguously pro-European stance of his administration. It will be problematic in the sense that France, as Europe’s military power and a UN Security Council seat holder, also prosecutes its own foreign policy – notably on Russia and Libya.

In this way, France must decide whether it is what I’ll call a ‘great’ country or a ‘strong’ country. ‘Great’ countries have had or desire empires, they have nuclear missiles and soldiers stationed abroad. Their foreign policy is grand, ambitious and causes headaches for other nations. The US, China, Britain and Russia fall into this category. France is easily a peer of theirs.

‘Strong’ countries are the poster children of the post-coronavirus era. They are generally well lead, but not bumptiously so. They value public goods like education and healthcare, have well thought out tax and welfare systems, and are resilient to shocks. Norway, Singapore and New Zealand are in this category, and France might wheedle its way in too if we consider factors such as its state lead approach to innovation.

To draw these strands together, France’s challenge is to make Europe more ‘great’ and itself more ‘strong’, especially in the sense of opening itself up to and integrating more diverse influences. Corporate France is an example, very few women and few foreigners run French companies – unlike say the UK. This is just one rigidity in the French system. Another is a groupthink across the state on the Cartesian need for uniformity. This is dangerous when applied beyond French borders on the European stage.

The mantra that there should be a common fiscal policy amongst nineteen very different euro-zone countries risks handicapping many and robbing the system of the flexibility it needs in the context of a common monetary policy. Moreover, as a mantra it allows policy makers to be blind to the reality that mounting debt loads and perennially weak fiscal deficits have made the fiscal rules of the euro-zone meaningless, to the point that they are replaced by the ‘rule-all’ policy of the ECB.

If Emmanuel Macron is a revolutionary politician, as he tells us, then his economic policy must do at least two things. The first is to reduce debt – here the sale of state assets is perhaps less unpopular than cutting state spending. The second, more important one is to cultivate the narrative that economic growth is positive and necessary. France’s lack of growth (trend growth over the last ten years is just above 1% ) is perhaps the one thing that distinguishes it from ‘great’ countries (e.g China, US) and ‘strong’ ones (i.e. Ireland, Singapore and New Zealand. Macron’s policies to help entrepreneurs for example are meaningful, though underestimated beyond France. He now needs to redouble his efforts.

The Duc de Sully took twelve years to turn around the French economy (1598-1610), Emmanuel Macron has two years left to secure a rebound.

Have a great week ahead,

Mike

Seriously Stimulating

In last week’s missive I referred to the ‘coup de whisky’ monetary stimulus enacted by the Federal Reserve in 1927, which kick started the market boom that later ended in a resounding crash.

This week I want to focus on the fiscal side. With the US employment assistance program running out at the end of July, new prime ministers/cabinets in Ireland and France, many governments will be turning their minds to the construction of economic stimulus programs. Indeed in the last week, Italy and the UK for example have made headline grabbing announcements.

While Boris Johnson made much of a five-billion-pound building spree, I think that his government’s promise to give citizenship to three million Hong Kong citizens is the very best stimulus it could enact – if they come, the Hong Kongers will bring entrepreneurship, wealth, erudition and culture.

This cuts to the central dilemma in any post COVID 19 stimulus effort – should, in the context of already eye watering indebtedness, governments try to aggressively restart economies in as sharp a ‘V’ shaped recovery as possible, or should they try to remodel economies to the realities of the post COVID19 world. The fact that the virus has exacerbated and exaggerated many of the emerging faultlines in the world economy suggests that a far sighted rather than electoral cycle driven view is required.

In addition, a short-termist view is complicated by two facts.

First, there is a risk that many economies suffer credit crunches and bankruptcies as we move towards September (anecdotally many businesses, shops, bars and restaurants I know are struggling but that might just be O’Sullivan curse). Without seeming like a monetary masochist, it is often better to allow this credit unwind to occur than to forestall it, and then to help entrepreneurs and business owners restart quickly.

Second, one practical economics lesson is that it is always easier to enact a stimulus program if your neighbours and trading partners are doing the same. For example, in the early 2000’s Germany was able to digest tough labour market reforms because its trading partners across Europe were all growing. In that context, Ireland is in a bind because two of its ‘neighbours’ and trading partners, the US and UK, do not have COVID19 under control. What is worse is that there is very little economic coordination between the large economies of the world, and this will complicate the overall stimulus effort.

The stimulus conversation in most countries will be coloured by references to Keynes, and to the word ‘multiplier’ or rather, the sensitivity of economic activity to different types of policy ‘boosts’. Yet, the accuracy of multipliers is not great, as the debate during the euro-zone crisis showed. With the world economy having had ten years of sluggish expansion and as such at the very late stage in the business cycle, overall ‘multipliers’ are likely to be low. This means that politicians need to think very carefully how they spend capital and what the intended effect is going to be.

There are a few principles to think of.

The first is the idea of a ‘quid pro quo’. As mentioned in a recent post, the phrase entered the lexicon of American politics through George H Bush, and then in the current President’s impeachment case. The notion of a quid pro quo should reign over policy interventions, in potentially, a range of ways that will produce a more sustainable and resilient economic model. Specifically, sectors or industries that are helped out are required to change their business models in return for fiscal and monetary help – these could be agriculture (more climate friendly), transport (better governance and management).

A second factor to consider is the view that there needs to be a sense of building the economic model of the future under the steam of a stimulus – this approach would see money devoted to reskilling and work experience, and also on green technologies or industries that the state deems to be strategic or ‘of the future’.

Here there is a need for the EU to stop and think, in two respects. There is too much time spent on how the Recovery and Resilience program will be distributed (loans or grants) and not enough on what it will be spent on. Also, there should be some coordination across national stimulus programs, so that they all point in much the same direction.

With Europe still in mind, one factor that has changed noticeably from the global financial crisis is the absence of an ‘austerity’ narrative. This is partly because austerity is now seen to have failed as a policy, partly because markets do not appear overly concerned at the largesse of government spending across Western economies (with thanks to central banks)

A third idea is that in addition to financial support, new growth oriented industries will also need the help of better ‘soft’ infrastructure to help them survive. What I mean here is that industrial ecosystems are as much enabled by regulation, standards and human capital as they are by capital. A good example is the need for an overhaul of fintech and payments regulatory frameworks in the wake of the Wirecard scandal.

While it is right that governments will want to support labour markets – and most European policy responses have done a good job here – they should stop and think before splurging cash on stimulus programs – the road to recovery will be a long one.

Have a great week ahead,

Mike