Micro-Powers

Emirates a micro power

Magazine covers can often offer the best guide to the future – though upside down. I am thinking of the famous BusinessWeek cover of August 1979 that proclaimed ‘The Death of Equities’ before the beginning of the 1980’s bull market, the 2014 Time magazine cover with the headline ‘Can anyone stop Hilary ?’, or the Economist cover ‘Brazil takes off’ in November 2009 just before its markets collapsed, and then ‘Has Brazil blown it ?’ in September 2013 as the country was about to boom.

In this light, I was wary to recently read the Economist magazine (August) declare Ireland as an ‘unlikely diplomatic superpower’ because of the array of important policy seats it holds (UN Security Council, Chief economist ECB, etc). The Economist curse soon struck, and Ireland lost hold of the EU Trade Commission.

In many respects, Ireland is very powerful diplomatically, not least compared to other similar sized states. This largely due to the performance of its superb diplomatic service (which is very much underestimated in Ireland) and outward focused state organisations like the IDA (Industrial Development Authority). Also, Brexit has been an excellent proving ground for Irish diplomacy and in addition, should Joe Biden be elected as US President, this will significantly bolster Ireland’s place in Europe (Biden is likely the most fervent Irish American President).

However, the secret of Irish diplomatic success is that in general Irish people do not take themselves too seriously, and many would laugh at the notion of being a diplomatic superpower.

Maybe a ‘micro-power’ is a better term for a geopolitically influential small state. I’ve derived this from former French foreign minister and commentator on diplomacy, Hubert Vedrine’s term ‘hyper-puissance’ which means ‘hyper power’, or more than a superpower.

The idea of the ‘micro-power’ really came to mind when Israel and the United Arab Emirates recently normalised diplomatic relations. Both are powerful, small states. Israel’s power derives from its military, its diaspora and technology industry while the Emirates is politically powerful across the MENA region and financially and economically very influential (Indeed, one expert, Afshin Molavi, has described Dubai as the ‘Hong Kong of India, or the Singapore of the Middle East’).

While the deal between the two countries very much sidelines the cause of the Palestinians, it reflects the speed and complexity of political change across the Middle East, and, in my view the ambition of both states to be considered ‘micro-powers’. The deal means both Israel and the UAE will gain new markets, cement relations with the White House, and deepen their collective rivalry with Iran.  

In a world that is quickly leaving globalization behind, entering a multipolar world order, the idea of the ‘micro-power’ may be one of the new diplomatic constructs of the 21st century. Regular readers will know that I have written a lot about the small, advanced economy model (and David Skilling’s newsletter on this is worth a read https://davidskilling.substack.com/) but not all small, advanced states are micropowers – Austria, Finland and New Zealand all top the list in terms of socio-economic models, but their diplomatic reach is not overawing.

My criteria for a micro-power are that it must be regionally dominant, count upon a significant resource (in Ireland’s case its diaspora, in the Emirates’ case its wealth and reputation for vision), and must be durable (Switzerland is the best example here).

As the idea of the ‘micro-power’ takes hold (I hope), there will be a number of considerations to bear in mind. One is that like superpowers, we already have the first ‘micro-power’ cold war between the Emirates and Qatar (it has thawed in recent months). Another question is what micropowers are for, beyond bolstering their own influence in the world.

In general, in a world that is transitioning from being driven by geographical to values based alliances, micropowers such as Norway, Ireland and Switzerland can act against the denigration of the rule of law and democracy internationally, and can and in my view should take the lead in pushing the remaking of international institutions – from the UN to the World Health Organisation (WHO).

Some micro-powers in the making, like Singapore, may choose to dodge competing value systems – they risk being subsumed in the crush between the USA and China – and try to foster a form of regional neutrality. Others, like Scotland, have a long way to travel if they want to become micro-powers, but at least they have their history to guide them. Scotland was once the intellectual fulcrum and centre of innovation of Great Britain, and in time could again take on this role.

Have a great week ahead

Mike

Seriously Stimulating

What would Keynes think?

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

Will the political recovery be U, V or L shaped?

Collecting votes in Ireland

The term ‘paradigm shift, rather like ‘black swan’, is often misused and overemployed. However, the increasingly fractured world order is beginning to throw up more and more examples of genuine paradigm shifts, such as the result of the recent Irish election and the turmoil at the heart of German politics.

Both correspond to the broad terms of a paradigm shift – the crumbling of a long-established order, a fallow interregnum marked by disorder and questioning, followed by the making of a new way of doing things.

In the case of Ireland, the aftershock of its financial crisis has seen Fianna Fail slip from a period of multi-decade political dominance, Fine Gael’s failure to supplant Fianna Fail, the rise of many independent TD’s (members of the Dáil, the Irish parliament) and new parties, and now the sudden rise of Sinn Fein. When the dust settles, the Irish political spectrum will likely follow more traditional lines, Sinn Fein leading the left, Fine Gael to the right with Fianna Fail disintegrating towards both the left and right.

In Germany, Angela Merkel’s decision to welcome over a million refugees into Germany was her ‘poll tax’ moment, and this set in train the rupture with the stability that stretched back to Helmut Kohl. German politics is now in the disordered interregnum, where parties of the centre are trying to adjust to new issues (climate change, immigration, geopolitical shift), as those of the fringe attack the old consensus. The easy populist solution would before a centrist politician to spend some of Germany’s budget surplus, though this may not resolve the identity crisis in German politics and society.

The cases of Ireland and Germany can be added to a heap of plausible examples of paradigm shift – Brexit and Trump obviously, the role of central banks in markets and the impact of technology on our lives. As such, many people no longer push back on the idea that we live in a ‘world upside down’.

To come back to politics, US academic Larry Diamond has written of a democratic ‘recession’, and political theorists might, as economists did then years ago, debate whether the political recovery will be U, V and L shaped.

In that respect, what is of interest for politicians in Ireland, Germany and the likes of Spain, is to see how other ‘paradigm shifts’ are evolving.

In Europe, Emmanuel Macron’s playbook (perhaps I should say ‘stratégie’ or Grand Plan) has been to capture and hold the political centre, which in my view makes a great deal of sense. He has also aligned the apparatus of state, in that most institutions willingly work to his agenda (the same would not be true if say Jeremy Corbyn had become British Prime Minster). Given the economic and political tasks he is taking on in France and Europe respectively, his performance is easy to criticize, and many take advantage (as the Griveaux incident shows).

Viewed from Cork or Dublin though, he has two blindspots. One is to make the style of government more human and grass roots driven. The other is to take credit for the sharp fall in French unemployment. If unemployment in France falls below 7% by the end of this year it will have a wholly underestimated, positive effect on state finances, on ‘happiness’, human development and on the integration of immigrants. Macron should acclaim this achievement more.

One politician who would not be shy of doing so is Donald Trump, who while not consciously holding the centre, is using the prospect of rising financial wealth, a strong economy and his willingness to harry economic competitors as an inducement to Americans to tolerate ‘four more years’. Unless the Democrats can reverse the shift to the left that most of their candidates have taken, they risk being perceived to demand that middle America commits to an uncertain economic future.

This sense of the unknown was what finished Labour in the UK. However, instead of cementing his political capital at the centre of UK politics, Boris Johnson, by shedding the services of so many capable Tory MP’s and ministers (Julian Smith the former Northern Ireland Secretary was voted politician of the year by the Spectator) is drifting towards the touchline of British politics.

A person to person comparison with say the macron government, or even with the cabinets of John Major and Tony Blair, shows the new Johnson cabinet in a poor light. This makes me think that the paradigm shift in UK politics is by no means over. The centre is being deserted and there is an opportunity for Labour, or more likely in my view, a new party, to fill it.

Have a great week ahead,

Mike