Economics and politics - comment and analysis

The Brexit referendum, one year after. Part 2: not Brexit, but fighting the European institutions

Chesterton’s pub fallacy

In the first part of this article, I showed that the UK has done poorly economically since the referendum. GDP growth is down. It is now 0.4% lower than the EU average of 0.6% (less than GDP growth in Greece!). Add to this that the EU average is a grotesque failure in itself. The Sterling has depreciated, but the country lacks the opportunity to take advantage of it, as much of British industry remains uncompetitive. Imports became more expensive, inflation is rising, real wages are falling and household savings are at their lowest level since 1963. To these figures a plethora of other negative effects can be added. The picture is clear. As Wren-Lewis says, there are no major economic pros to the Brexit that need to be compared with the cons. Instead there are just economic costs, and the debate is about how large these will be (see here). Still, incredibly, some on the left continue to support the Brexit.

DDk5keFW0AAxA0cFigure 1: GDP growth in the first quarter of 2017 (Source: The Economist). 

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Figure 2: Annual real wage compound rate (Source: OECD). 

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Figure 3: Real household disposable income evolution (Source: The Independent). 

G.K. Chesterton tells the story of an English pub that serves poisonous beer. People are dropping dead. Some citizens have the beer analysed, discover that it contains poison and petition the local magistrate to close the inn. Incredibly, the magistrate disagrees: “The house you mention is one in which people are systematically murdered (…) But before you demand so drastic a course as that of pulling it down (…), you have to consider a problem of no little difficulty. Have you considered precisely what building you would put in its place (…)?” (see here).

Chesterton’s point is of course fallacious. When something is bad enough, you do not have to put anything in its place: just remove it and be glad to be rid of it. This makes perfect sense, on the condition that what comes in its place is better than what preceded it. Even very bad things can still get worse! The left proponents of the Brexit all failed this evident test. They all wanted to get out, but they failed to articulate with any degree of realism what they were getting into.

The “leftist” pro Brexit argument

German mercantilism

It is not that the pro-Brexit Left has no point. What they lack is a proper strategy. A full nine years after the outbreak of the financial crisis, the economies of the EU are still lagging behind. Recovery has been slower than anywhere else. Why is this? Flassbeck has diagnosed Germany’s model of wage moderation as mercantilism. I suspect that the meaning of this term is not always clear to the general reader. Mercantilism means that for a country to be rich a substantial number of its citizens have to be poor. Since Germany is forcing its model upon the other members of the Union, this means that the EU’s economic model requires that a substantial number of EU citizens have to be poor. Those who disagree, conveniently forget the historical record of mercantilism and ignore the current evolution of income inequality in Europe. During the last five years, European top income earners have seen their fortunes increase by 19% (see here). On the other end of the scale, according to Le Figaro (hardly a Marxist publication), today more than 120 million Europeans live on or under the poverty line (see here). According to Le Figaro, 9 out of 10 French people are worried that their children will end up being poorer than themselves. Of those now in secondary education in France, 60% is afraid of becoming poor later in life (see here). Read here on rising inequality in Germany and here about the fakeness of the German ‘jobs miracle’. As the figure shows, employment went up and hours of work went down. It is the joke of one guy saying ‘Have you heard that government created 5 million new jobs?’ ‘I know,’ says the other guy, ‘I have three of them.’

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Figure 4: evolution of employment and total hours worked in Germany (Source: Financial Times). 

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Figure 5: growing inequality in Germany is nothing new (Source in picture). 

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Figure 6: Low-wage earners as a percentage of all employees (Source: Google). 

Why does mercantilism demands poverty of a substantial number of people in order for its economy to flourish? The fallacy is well-known. In the days of mercantilism, economists urged nations to accumulate treasure through a surplus of the trade balance. The policy implication of bullionist orthodoxy was that nations with gold mines should invest capital and labour in digging up gold and that all nations, and especially those without mines, should strive to trade valuable use products for the relatively useless gold that represented the wealth and the power of the state. Since trade was competitive, this means that costs had to be kept as low as possible. Since labour was the major cost, wages had to be low.

For the capitalists of a country to be rich, therefore, many others had to be and remain poor, so that they could be forced to dedicate themselves to produce, either directly in the mines, or indirectly, through trade, something which had no use to them as individuals. Furthermore, since a surplus balance of payments is not a goal that can be attained by all countries, a balance surplus can never become a general goal. This is a prime example of the fallacy of composition (my surplus is always someone else’s deficit).

One could smile and shake one’s head in disbelief at the mercantilist model – how stupid were these people? – only to realise that nowadays these same fateful policies, with their inherent contradictions, impossibilities and dysfunctions, are being fostered and implemented by the EU. The wisdom of these people truly is unfathomable. It is not that we learned nothing. The problem is that what we know is impotent in the face of brute power. Today, EU governance promotes and forces Europe into a dysfunctional model of economic development. Finally then, it is only a little step to argue that the EU is so fundamentally rotten and undemocratic that the best thing to do is to drop out. Who wants to be a member of such a club? This is a very legitimate question. The problem is that those who wanted to drop out so badly had the responsibility to explain what they were dropping into. What sort of building will you put in its place? Except for explorations in fantasy land (the Brexit constitutes the end of austerity, the end of the euro zone, Keynesians will run the Bank of England) the answer to this question has been deafening silence. And that is irresponsibility to the highest degree.

According to Wren-Lewis, for every economist who was pro Brexit, 22 were against it (see here and here). While some of the terminology might be different, the explanation above is close to Steve Keen’s pro Brexit argument. Keen also provided a damning account of the lack of democracy within the EU institutions. No doubt, Keen is right about that. But are things better on the national level? This question is not being addressed, of couse not, otherwise the “leaving” non-solution would show itself for what it really is. If we look at the political side, did the Brexit, which is of course being discussed everywhere, lead to more or to less popular support for the European institutions? If the peoples of Europe are so displeased with the EU, it should make sense they find solace and support in the decision of the UK to harm itself. But this is not the case. Amazingly, popular support for the EU increased among the European population in 2016. Incredibly, popular support for the EU even increased in Greece! Irrational or not, this proves that the political side of the Brexit also failed. What did the prospect of the Brexit deliver for the rest? Today, German dominance in the Union is bigger than ever before. Given the “Mercron” phenomenon, the German-Franco axis is becoming a reality. In the meantime, in the UK there is no longer a majority for the Brexit among its voters.

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Figure 7: political support for the EU in the member states (source: Eurostat). 

The undemocratic nature of the EU institutions

The case that Steve Keen has been making consists of a long list of EU evils and dysfunctions. Keen called the EP “a weak, diversionary figurehead” and observed that “a ‘remain’ vote will strengthen the power of this anti-democratic elite and do nothing to tame the forces of racist nationalism that have arisen in reaction to their failed economic policies.”

In the European Union, there are two sources of democratic legitimacy: the European Parliament, directly elected by the people of the European Union and the Council of the European Union (the council of ministers), together with the European Council (the heads of national governments).  The European Commission is appointed by the two bodies. Much negative has to be said about the EP, but whose fault is it? Since 1979, when the first election for the EP took place, the social democrats were the biggest group in the parliament for some 25 years. During this whole period, on not a single occasion the group stood up to confront the Commission.

The EP is hardly different from national parliaments. True, members of national parliaments have the power to propose legislation. This is not the case for MEPs. The EP can only make amendments that the Commission subsequently accepts or refuses. But what does this mean in practice? In national parliaments on average less than 15% of legislative initiatives originating from individual members of parliament become law (see here). Very few members of parliament, if any, will ever propose legislation that has not been approved beforehand by their party or which is not the product of negotiations with coalition partners. The truth is that the EP does hardly worse than the national parliaments. This is of course not an argument for not opposing it then. But it fully shows the futility of the “leaving” argument.

The EU institutions are an empty box if the national governments are not backing up European policy-making. Voting in the Council happens either by qualified majority voting or by unanimity. All these decisions are made by national representatives. The same is true for the executive board of the European Central Bank. There is a president, a vice-president and four other members. All of these members are appointed by the European Council. The decisions of the ECB are made by these six members plus the governors of the national banks of the 19 euro zone countries.

Varoufakis has consistently put the blame for the Greek drama on the ‘deep European establishment’ (see here). Rather incredibly, this story continues to retain credibility. Just to address one point: when in 2015 the Greeks were trying to win support for their cause, they found no one. None of the other crisis countries were willing to speak up on their behalf. With the exception of France, whose minister spoke up a couple of times in their favour but ultimately did nothing, no one helped. According to Varoufakis, this is because the countries were afraid of the German reaction. It is a nice hypothesis and there is probably some truth in it, just as there is some truth in it that the individual countries, with their right wing governments, implemented austerity because they believed in it.

Admittedly, the situation within the Commission is worse. The Commission has a president who is being elected by the EP. Juncker’s name was the only one on the ballot. The other 27 commissioners are un-elected, meaning that their position is a result of negotiations between national governments. Over the years, it became custom to adopt legislation in a single reading.  Crucial new economic governance packages, such as the Fiscal Treaty, the Six-Pack, the Two-pack and the European Semester were adopted in ways that are fundamentally undemocratic. Again, this is not different from national legislation all over Europe. Austerity and reforms have been debated in the national parliaments until the minority voted against it and the majority approved it, bar the lonely defector here and there. No national government in Europe fell as a consequence of the introduction of austerity measures. It is therefore radically wrong to locate the problem at the European level. All over Europe, in practically every country, the legislative branch has been on the losing end in favour of the executive branch. Without the macabre obsession with ordoliberalism, monetarism, competitiveness, mercantilism and ‘structural reforms’ at the national level, the EU would be powerless to push this agenda. The Brexit proponents never spend a word on this. The reason is clear: it flatly invalidates their great “leaving” strategy.

The left against migration – or what happened to socialism?

After the referendum, Bill Mitchell, another prominent modern monetary theorist, wrote several pieces on the Brexit. The one I quote from bears the title ‘Why the Leave vote was a great outcome.’ Mitchell wrote, for example, that:

“But, at any rate, I was told, categorically, in non-elite language, it seems (by the pro-EU liberals – WD), that anyone who feared for their jobs and opposed a flood of non-unionised workers who would work below minimum wages coming into their local labour markets, were despicable racists who should not be able to vote on these important issues” (see here).

This is really rather beyond belief.

In the year since the referendum, the UK population has seen its sharpest increase in 70 years, driven principally by immigrants. Yet in the same year the number of migrants from Eastern Europe registering to work in the UK has dropped to its lowest level in a decade and those applying to work in the NHS have dropped off a cliff (most immigrants in the UK come from India). It is simple enough: fewer EU citizens are coming and more Britons are leaving. This means that the new immigrants are coming from outside the EU. What is the Brexit going to do about that? Hopefully nothing, because the UK needs these people.

The UK’s economic problems have nothing to do with immigrants whatsoever. Germany has higher immigration than UK yet has seen a 14% real wage increase (still way below its productivity gains) as the UK’s fell 10%. Where is the flood of non-unionised workers who steal jobs in Mitchell’s “local labour markets”? Local, according to who? Evidently, behind any immigrant willing to work below the minimum wage stands an employer who is breaking the law by doing so. Chasing down poor immigrants with no voice and no political influence is easier than upholding the law and punishing the real culprits. The show also greatly amuses the brainless part of the electorate. It is absolutely despicable, morally wrong and economically dysfunctional.

The empirical evidence shows that Mitchell is categorically wrong. His flood of non-unionised workers who come to steal the jobs of natives simply does not exist (see here). Hence, the Brexit does not need stopping them. Research shows that neither immigration as a whole or EU immigration has had negative effects on employment, wages and wage inequality for the UK-born population. The immigrant share in new jobs is broadly the same as the share of immigrants in the working age population. Areas of the UK with large increases in total or EU immigration did not experience greater falls in jobs and pay of UK-born workers. The falls in wages are associated with the global financial crisis, the weak recovery and counterproductive austerity. There is little effect of immigration on inequality and the relative pay and job prospects of less skilled UK workers. Changes in wages and unemployment for less educated UK-born workers show little association with changes in immigration. And, lastly, as has been well established for a long time, immigrants pay more in taxes than they take out in welfare and use of public services, while there is little evidence that immigrants have negative effects on crime, education, health or social housing. In conclusion, immigrants have basically nothing to do with the UK’s economic and social problems. In order to appease the racists and satisfy her xenophobia, May is trying to kick out thousands of foreign NHS workers. Today, many researchers are desperately trying to find a new institution outside the UK. But this stupidity and the injustice and the human misery it creates are of no issue here: it is not the EU which created it.

The leftist case: Brexit, but not now 

I will provide one more example. Paul Mason presented the leftwing case for the Brexit in the Guardian. The EU, Mason wrote, “is not – and cannot become a democracy.” It provides “the most hospitable ecosystem in the developed world for rentier monopoly corporations, tax-dodging elites and organised crime.”

For the rest, there are comments that one has been hearing every day again and again:

“State aid to stricken industries is prohibited. A Corbyn-led Labour government would have to implement its manifesto in defiance of EU law.”

This fairy tale is widespread among the left. If I am not mistaken, it is Tariq Ali who came up with it. It would take a journalist like Mason, or any other, ten minutes to find the relevant sources and learn that it is not true.

“Europe’s leaders having signed a morally bankrupt deal with Turkey to return the refugees, there is now the prospect of that deal’s collapse.”

Mason is quite right: the deal with Turkey is morally bankrupt and opens the possibility of eternal blackmail from the Turkish side. I am not so sure that the British are in a position to complain about it, given how very few refugees they took up and approved, compared to countries like Sweden (with a population of barely ten million) and Germany. According to the British Red Cross, there are an estimated 118.995 refugees living in the UK. That’s just 0.18 per cent of the total population of 65.1 million people. The UK received 38.500 asylum applications in 2016. This was somewhat less than Germany (587.346) and Sweden (83.103). Sweden took up almost one million refugees between 2010 and 2016 (see here). In 2015, just 45 per cent were granted asylum and allowed to stay in the UK (see also here). If there is one country in Europe which should hang its head in shame for its position towards the refugee problem, it is the UK.

Mason then goes on to destroy his “leftwing” case. As he writes, the time is not ripe because:

“the Tory right is seeking a mandate via the referendum for a return to full-blown Thatcherism: less employment regulation, lower wages, fewer constraints on business. (…) Johnson and Gove stand ready to (…) turn Britain into a neoliberal fantasy island (…) Worse, the Tories will be free to use the sudden disappearance of our rights as EU citizens to reshape the UK’s de facto constitution. The man who destroyed state control of education and the man who shovelled acres of free land into the hands of London developers will get to determine the new balance of power between the citizen and the state. (…) So even for those who support the leftwing case for Brexit, it is sensible to argue: not now.”

Okay, not now then, but soon, because the EU, as a flawed democracy, fuels the rise of fascism: “do I even want to be part of the same electorate as millions of closet Nazis in mainland Europe?” Wonderful, except that across England and Wales hate crimes against ‘vulnerable groups’ have risen by more than 100% since the Brexit (see here). The police can class five types of racially or religiously aggravated offences as hate crimes: assault with injury; assault without injury; harassment; public fear, alarm or distress. These vulnerable groups mainly consist of people with an accent and people of colour.

Personally, if I would be British, I would concentrate on that first. But that is the last thing to ever happen:

“The EU, politically, begins to look more and more like a gerrymandered state, where the politically immature electorates of eastern Europe can be used – as Louis Napoleon used the French peasantry – as a permanent obstacle to liberalism and social justice. If so – even though the political conditions for a left Brexit are absent today – I will want out soon.”

Because when was anything ever our own stupid fault, is it not?

What to do?

As long as there is the illusion that any country is capable of solving its own problems, nothing can be done. Flassbeck calls this ‘the European disease.’ Instead, the peoples of Europe need to work together. The comprehension that European institutions are forcing a dysfunctional model upon the Union has to grow. Instead of joining the Germans (Macron’s way), they need to be confronted. It suffices that a united left front wins seats in the EP, so that the workings of the Commission can be effectively blocked. In every democratic system, the legitimacy of power ultimately belongs to the parliament and not to the executive. The left has to unite so that the power of the Commission can be broken. Whenever anyone – like Melenchon – says this, Social Europe publishes 55 articles on the populist rebellion and its anti-democratic tendencies and characteristics. This should not hold back anyone. What the EU needs is a couple of Corbyn-like figures in several countries – Germany, France, Italy and Spain come to mind – but Corbyn-like figures who oppose Brexit and lexit fantasies and are ready to oppose the enemy straight on and take over the institutions. It would be the most democratic, most relevant, most morally just, most intelligent and most emancipatory rebellion of all time.