BREXIT ESSAY QUESTIONS

Questions Prompted by Brexit

{First of the European Crises Under Review]

You might think of writing your 5-7 page term paper on one of these.  If so, you can start and finish the paper early.

1. To what extent can Brexit be understood as a peculiarly British phenomenon? And to what extent can it be understood as part of a more general Western phenomenon?

2. What outcome (“hard exit.” “soft exit,” “no exit”) will/ought Her Majesty’s Government (HMG) pursue?    What outcome (“hard exit.” “soft exit,” “no exit”) will/ought the EU offer?

3. To what extent can the causes of Brexit be reduced to immigration?

4. In what ways are Farage and Trump (and the movements they inspire) similar and different?

5. Did the EU make a mistake in not offering Cameron better terms in the lead up to the Brexit vote?

6. Should the EU offer Brits. European passports?

The Eurozone Crisis: An Annotated Bibliography (Part One)

The Eurozone Crisis: An Annotated Bibliography:

INTRODUCTION:

One of the great puzzles in explaining the Eurozone Crisis (EZC) is to know where to begin. Is it part of the Great or Global Financial Crisis (GFC) (2008) or a separate crisis?

Let’s leave that historical puzzle aside, at least for a moment, and focus instead on an ostensibly easier question:

What is the Eurozone Crisis?

Der Spiegel defines it this way:

“First Greece—then Ireland, Italy, Spain, and Portugal: The European Common Currency has come under pressure from large national debts and the effects of the great financial crisis, ultimately requiring a rescue package close to a trillion euros.”

On this view, the EZC is a sovereign debt crisis.  What is sovereign debt? And why should debt lead to a crisis?  The country with the largest government debt --Japan--is not in crisis; its economy is relatively robust; and its currency remains strong.

[Der Spiegel gives a backwards running commentary –i.e. from most recent newsworthy events to most distant. 

It is well worth scrolling back through these. Start at the beginning.

We are talking about hundreds of stories here.

Interestingly, the first article included in their EZC archive is this—dated December 2009: note the focus is still on the financial crisis of 2008—otherwise known as the Great Financial Crisis (GFC) or Lehman Crisis, but fears are brewing:  

“Practically unnoticed by the public, an issue has returned to the forefront in recent weeks -- one that was a cause for great concern at the height of the financial crisis but then, as optimism about the economy began to grow, was eventually forgotten: the fear of a national bankruptcy in the euro zone. And the question as to whether such a bankruptcy, should it come about, could destroy the common European currency. Greece was always at the very top of the list of countries at risk. But now the danger appears to be more acute than ever.”]

Wikipedia defines it this way:

“The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign debt crisis) is a multi-year debt crisis that has been taking place in the European Union since the end of 2009.”

Let’s assume then, at least for the moment, that the EZC is a sovereign debt crisis. 

Immediately, this requires us to say something about debt. What is sovereign debt? And when does it become a crisis?

Sovereign Debt (as defined by the Financial Times)::

This is debt that is issued by a national government. It is theoretically considered to be risk-free, as the government can employ different measures to guarantee repayment, e.g. increase taxes or print money.

In practice, there have been multiple cases in which governments could not serve their debt obligations and had to default. As a consequence, investors ask for different yields across countries. The more a country's repayment ability is in question and the riskier sovereign debt becomes, the higher is its yield

Very simply--the more risky a country is; the more it must pay in interest to borrow money. Risky countries thus have high-yield bonds.

Sovereign debt (also known as public debt, national debt, or the national debt) must be distinguished from private debt--which is the debt run up by individual households (credit card debt, mortgages etc) and private corporations (including banks).

It is important to distinguish between sovereign and private debt, because different countries have different levels of each.

First some figures/Tables (as of 2010 when the EZC became a big problem).

ICELAND AND IRELAND

Perhaps not surprisingly, the first country to blow-up financially was Iceland (not a member of the EU or the Eurozone) in 2008. Its problem was private debt—the debts run up by its banking sector.

Iceland is an important case, because it suggests that the Euro is not the source of all problems in Europe.

Ireland was to run into very similar problems.

For the Iceland story, see this short documentary and these articles: here and here and here and here; and for a comparison of the Iceland and Ireland situations, see here.

For a short documentary introducing the problems of Ireland (from 2011), see here and here

So was the EZC a crisis of public debt (too much government spending) or a crisis of private debt (too much debt –or leverage—from the banking sector)? Clearly, a different story is needed for different countries.

Which Eurozone Countries had what problems?


Greece...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

Italy....Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?........Low Growth?

Ireland....Budget Deficit?...Sovereign Debt?...Private Debt?...BoP Deficit?....Low Growth?

Portugal...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

Spain......Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

UK....Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?

Japan...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?.

USA...Budget Deficit?...Sovereign Debt?....Private Debt?...BoP Deficit?....Low Growth?.

When do these debt, deficit and growth problems become "a crisis?"  



The best sources of economic data:

Eurostat

Trading Economics

OECD

EU Commission, General Government Data

EXPLANATIONS OF THE EZC

For some scholars, the EZC is neither a public or a private debt problem but a balance of payments crisis.  This is the view of Martin Wolf and Paul Krugman, see here. 

As Krugman puts it:

What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. It’s not a perfect fit — Italy managed to have relatively high inflation without large trade deficits. But it’s the main way you should think about where we are.

If Krugman is right, the EZC can be boiled to the problem that Northern European countries (Germany in particular) was much more competitive and exported more than Southern European Countries (Greece in particular but also Portugal, Italy and Spain). The surplus from the Northern European countries was recycled into loans to Southern European Countries, which overloaded the banking system and led to a debt crisis.

In countries with their own currencies, a balance of trade imbalance typically leads to currency adjustments—appreciation in one country; depreciation in the other.  In the Eurozone, currency adjustments are not possible. 

Broadly stated, it is possible to distinguish 7 schools of thought on the causes of the EZC (these explanations are not mutually exclusive):

1.    Those who view the EZC as part of the GFC (or Lehman Crisis). Let's call this the One Long Financial Crisis explanation. This points us to theories of the GFC. (See the Lo article below).

2.  Those who see the EZC and the GFC as a function of the inevitable and incurable faults of capitalism.  (This Marxist explanation informs, for example, the view of John McDonnell, current British Shadow Chancellor: ‘We’ve got to demand systemic change. Look, I’m straight, I’m honest with people: I’m a Marxist....This is a classic crisis of the economy – a classic capitalist crisis. I’ve been waiting for this for a generation!...For Christ’s sake don’t waste it, you know; let’s use this to explain to people this system based on greed and profit does not work.’)

3.  Those who pin the blame on the faults of the Eurozone—the Euro, they argue, was a mad idea from the get go and should never have been invented. (US economists like Martin Feldstein and Joseph Stiglitz and Paul Krugman hold this position.)

4.    Those who pin the blame on the faults of the European Central Bank, (and more generally the so-called Troika (IMF, ECB, and EU), whose austerity-focused policies have turned a minor financial crisis into an existential crisis for the EU (Many European economists hold this view, including Mark Blyth and Barry Eichengreen and Charles Wiplosz and Martin Sandbu.)

5.    Those who pin the blame on the Germans, partly because they support 3. and partly because their economic and trade policies are mercantilist and lead to a beggar-thy-neighbour dynamic (Simon Wren Lewis holds this view; as does Adam Posen)

6.    Those who blame the Greeks (and other Southern European countries) for social, economic, and political practices that led--and continue to lead to--an uncompetitive economy (Stathis Kalyvas, for example, holds this view with respect to Greece; as do many German economists, including the German Finance Minister Schauble; and the Head of the Bundesbank Jens Weidman);

7.    Those who think that the Northern and Southern economies are structurally incompatible. This amounts to a version of position 2. But focuses on internal structural features of the different economies rather than the European Monetary Union itself.  (Peter Hall and the so-called Varieties of Capitalism literature holds this view; this view also informs some of Wolfgang Streeck's writings, including his critique of Sandbu here)

More recently, a number of economists have tried to come up with a multi-causal explanation, which they hope can form the basis of a consensus narrative. See Richard Baldwin et al here.


Clearly there is a lot of material to get through. So what should I read first:

1. Paul Krugman, Can the Euro Be Saved?

2. The Economist, The Origins of the Great Financial Crisis

      3.  Andrew Lo, Reading About the Financial Crisis: A 21 Book Review (Skim)

.

European Citizenship

Maurizio Ferrera discusses my proposal that the EU offer pro-Remain Brits citizenship (in Italian)

English version here

Winston Churchill and the United States of Europe

Churchill's status as a founding father of European Integration is much contested.

Yes, his famous Zurich speech can be quoted in support of his position as a FF:

Yet all the while there is a remedy which, if it were generally and spontaneously adopted by the great majority of people in many lands, would as by a miracle transform the whole scene and would in a few years make all Europe, or the greater part of it, as free and happy as Switzerland is today. What is this sovereign remedy? It is to recreate the European fabric, or as much of it as we can, and to provide it with a structure under which it can dwell in peace, safety and freedom. We must build a kind of United States of Europe. In this way only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living. The process is simple. All that is needed is the resolve of hundreds of millions of men and women to do right instead of wrong and to gain as their reward blessing instead of cursing.

But Churchill never expected Britain to be a member and remained a nationalist and an imperialist.

WINSTON CHURCHILL

“Great Britain, the British Commonwealth of Nations, mighty America, and I trust Soviet Russia must be the friends and sponsors of the new Europe and must champion its right to live and shine.”

As Prime Minister in 1953, he was explicit that Britain should not be part of the arrangement. He told the Commons: “Where do we stand? We are not members of the European Defence Community, nor do we intend to be merged in a Federal European system. We feel we have a special relation to both. This can be expressed by prepositions, by the preposition ‘with’ but not ‘of’ – we are with them, but not of them. We have our own Commonwealth and Empire.”

See the very useful materials gathered on Jon Danzig's blog page.  Danzig, however, take the view--which I don't share--that Churchill would have been in favor of British membership in the EU.

Nebbiolo Region

Passporting

Useful comment in today's FT:

Coase Theorem5 hours ago

1. The City will lose the most of its European business without passporting - 20 per cent of revenue seems a fair estimate

2. The City will obviously survive and still be a major financial centre without passporting - but the loss of business will hurt. Anyone who says otherwise isn't in business. 

3. This loss will impact jobs and most importantly government tax receipts - it isn't to be scoffed at

4. The entities to watch are non-European ones - with the exception of DB, European banks aren't in London to service EU business - the French ones do that from Paris, the German ones from Frankfurt. But US and Japanese banks are in London to service EU business so the places to look for job losses is there

5. A lot of this will take the form of staff being let go and not replaced and cheaper more junior replacements emerging in Frankfurt rather than someone formally declaring they are moving 5000 jobs to Frankfurt, so like the air going out of a tyre - but some big job moves wouldn't surprise me

5. The City is adaptable and so are its staff - more so than employees elsewhere in the UK - but the dislocation over the next 10 years will be painful with winners and losers

6. From an economics perspective it will be interesting - because Brexit will effect people in London and SE England more I suspect than people in the North etc; I see passporting being lost but free trade in goods is easy to agree

7. Equivalence is not a solution - it isn't as good as passporting, it isn't tested, it doesn't cover retail, credit institutions or insurance. 

Citizenship in Post-Brexit Europe

Citizenship in Post-Brexit Europe

Glyn Morgan (Maxwell School, Syracuse University)

While the British press is mired in a fruitless debate about the merits of Hard Brexit (i.e. exit of the Single Market and Customs Union) versus Soft Brexit (i.e. exit of the EU but not the Single Market or Customs Union), a debate which assumes that the EU will even allow the British Government such a choice. Much less attention has been paid to the question—what should the EU offer Britain? Or to put this question in more alarmist terms: How do we prevent Brexit from destroying the European project of integration?  

If the European Union wants to avoid the dangers of a Brexit-provoked disintegration, it has three options--which are not mutually exclusive.  First, it can adopt an uncompromising position in the negotiations with the British government over access to the Single Market. Some in the British pro-Leave camp hope to stay in the Single Market, but without allowing freedom of movement for EU citizens and without the financial contributions that the EU requires.  The EU would be crazy to allow the British Government to attain this asymmetrical benefit, if only because it would encourage other EU countries to follow Britain’s lead. Less ambitious Leavers are willing to give up membership in the Single Market in the hope that Britain can still negotiate relatively favorable access to the Single Market. The British Treasury is particularly eager to retain so-called passporting rights for UK financial services, which make up such a significant proportion of the economy; the Treasury further hopes to maintain not only zero-tariff access to the Single Market for export goods, but somehow keep in place the full range of non-tariff measures that grease the wheels of European trade. 

From the perspective of this first option, the EU should refuse to extend Britain any favors at all. Banks should be required to move Head Offices to the Continent, before they have equal access to the various European financial markets. Along the same lines, the EU should exclude British universities and researchers from European research grants; and—as happened to the Swiss—British students should be excluded from the Erasmus plus program.  Furthermore, the EU should require the many important regulatory agencies based in Britain—including the European Medicines Agency and the European Banking Authority—to relocate to a EU country. By the same token, the EU could make crafty use of non-tariff measures to hinder British exports.  In short, Britain needs to be made to pay an economic price for Brexit pour decourager les autres.

A second option—not inconsistent with the first—is to encourage British isolation and make no efforts to reintegrate Britain into European affairs.  Britain has always been something of a reluctant member of the EU. It was late to the party and in recent years has focused its efforts on seeking opt-outs, vetoing new projects, and dampening enthusiasm for further integration. Absent Britain, the more enthusiastic integrationist member states—hopefully including the three big powers France, Germany, and Italy—can move together in a more federal direction without having to worry about British wet blankets.  The danger of pursuing this option, however, is that a Britain outside Europe could still pose a threat to the integrationist project. Britain could become a very low tax and lightly regulated competitor, better able to attract large-scale foreign direct investment.  If this isolationist option is to be pursued, it would still need to be done in conjunction with option one. Britain cannot be allowed to undercut the EU.  It cannot be allowed to pursue beggar-thy neighbor policies that undermine what passes for  the European Social Model.

A third option—which represents an alternative, altogether more positive and progressive path—is for the EU to pursue a long-term project of re-integrating Britain. It must be remembered that 63% of British adults did not vote for Brexit; the vote was split very closely 52%-48%. There remain a large number of voters who want a second referendum; that number will grow if Leave is seen to fail (hence the irresistibility of option one).  It is unlikely, however, that the EU could improve its popularity without employing both carrot and stick.  The EU needs to reward those British voters who remain loyal to the EU. It needs to increase the relative size of the pro-Remain camp by making the EU more attractive than it now is.

One step in the right direction would be for the EU to move towards a form of European citizenship unmediated by any prior national citizenship. At the moment, people in Europe are offered only the status of being hyphenated Europeans (French-European; German-European, Italian-European etc.) rather than Europeans as such.  Brexit provides an opportunity here. Sixteen million Brits voted to remain in the EU. These people will now lose even their meagre hyphenated status and become, for the most part, reluctant national citizens of a country in the grip of populist nativism. The EU can rescue pro-Europeans from their fallen state by offering them European citizenship--European passports unmediated by national citizenship, which will provide them with the right to live and work anywhere in Europe. Many British citizens will jump at the opportunity. 

One small problem with this proposal is that it offers the British an advantage not currently extended to other Europeans, including, most worryingly, those now living in Britain who are threatened with losing their right to live and work there. To address this problem, the offer of unmediated European citizenship for Brits could be made conditional on Britain offering current EU citizens full national citizenship in Britain. Doubtless, the current Tory Government backed up the anti-immigrant UKIP will reject this suggestion.  Alternatively, the offer of EU citizenship for Brits could be made contingent on certain forms of equitable treatment for current EU citizens resident in Britain.  Such contingent offers from the EU will further encourage the pro-European British citizens to fight for the rights of current EU citizens in Britain. Any future British government that might wish to play fast and loose with such people will face the ire of the pro-European British eagerly awaiting the opportunity to acquire EU citizenship.

More generally, it might be objected that this citizenship proposal rewards secessionists like Britain by offering the British a desirable form of unmediated citizenship that is not extended to other more loyal Europeans. This objection can be met, however, by offering any current EU citizen unmediated European citizenship free of charge, but charging the British, say €10,000, to acquire European Citizenship. This policy will not only provide the funds to finance the Citizenship Office, which will have to be created de novo, but will discourage countries from thinking that they can secede from Europe while enjoying the full benefits of membership.  If €10,000 is too much for some people, they could be offered European citizenship for free in return for working on pro-EU projects, which could be arranged and overseen by the new Citizenship Office.

These three options are clearly not the only ones available.  The nationalism that infuses UKIP and other right-wing parties in Europe represents a mortal threat to the project of European integration.  Liberals who have grown accustomed to a relatively stable broadly democratic European continent cannot afford complacency, if they want to avoid complete European disintegration.  The EU has done a very poor job in managing recent crises, whether those involving the EMU or North African immigration. If it is to recover its popularity, it needs to rethink some basic assumptions concerning the processes of integration, which, in the past have relied heavily on functional spillovers and intergovernmental bargains.  European citizenship has always been secondary to economic and legal integration. Brexit provides an occasion for re-thinking European citizenship, such that a citizen of Europe has tangible benefits guaranteed by the EU and unmediated by membership in a nation-state.  If the EU plays its cards right, the British can be the guinea pigs to test this new form of citizenship.

No Exit

The idea that Britain will not leave the EU--regardless of the vote--has been put forward by Andrew Moravcsik (back in April 2016) and, more recently both David Allen Green and Gideon Rachman also in the FT).

The first thing to ask about these arguments--and Moravcsik's is the one I reproduce here--is whether they are meant normatively (what ought to happen), predictively (what will happen), and/or explanatorily (why or how something will happen):

Moravcsik's Argument:

The Remain camp seems likely to prevail since the opposition, business, foreign investors and most educated commentators all back the government. In referendums, more­over, undecided voters tend to favour the status quo — a tendency reinforced by uncertainty about exactly what Britain would do after Brexit. Still, critics are correct that Mr Cameron is playing with fire. Referendums are unpredictable, especially when issues such as migration and terrorism are in the mix.

This uncertainty would be more troubling if the referendum really mattered. Yet Britain looks unlikely to exit Europe even if its citizens voted to do so. Instead, the government would probably do just what EU members — Denmark, France, Ireland and the Netherlands — have always done after such votes. It would negotiate a new agreement, nearly identical to the old one, disguise it in opaque language and ratify it. The public, essentially ignorant about Europe, always goes along.

In contemplating this possibility, leading Eurosceptics have shown themselves to be the craftiest political illusionists of all. Now that Brexit appears within their grasp, they are backing away from it. What they really seek is domestic political power. If Britain votes to leave, the government will fall or, at the very least, the cabinet will be reshuffled. For Eurosceptic backbenchers, this is a once-in-a-lifetime opportunity. Yet they lack parliamentary and popular majorities to govern alone. They would have to strike a deal, which means moderating anti-European demands — all amid post-referendum economic chaos. Renegotiation inside the EU would be almost inevitable.

Excessively cynical? Hardly. Few Eurosceptics are more prominent (or ambitious) than Boris Johnson, and he has signalled his willingness to compromise. The mayor of London’s soundbites remain flamboyant: “The door of the jail [is] open, and people can see the sunlit land beyond.” But read the fine print.

When the referendum was announced, Mr Johnson said that voting to leave need not necessarily mean leaving. Britain might renegotiate a better deal inside the EU, followed by a second referendum. So voters need not worry: “If you vote to leave, all your options are good.” The prime minister has, for now, dismissed that option, but Mr Johnson’s statements continue to leave just enough wriggle room.

A flip-flop? Not at all. Mr Johnson reminds us that he supported Brexit only at the last minute, after Mr Cameron’s EU deal failed to include his proposed wording recognising “parliamentary sovereignty” — just the type of frothily symbolic concession on which future renegotiations could be based.

Finally, what if Messrs Cameron and Johnson and other politicians lose control of domestic politics, or if other EU leaders tire of Eurosceptic obstreperousness and toss the Brits out? Even in this worst-case scenario, Britain would not really leave Europe.

Eurosceptics propose that Britain negotiate with 27 frustrated European governments, under tumultuous economic conditions, simply to re-establish its current economic status outside the EU. Britain’s bargaining position in such a negotiation would be exceedingly weak because it is much more dependent on Europe for exports and investment than vice versa. The inevitable result, as the Swiss know only too well, is that Europe will dictate which regulations Britain must accept. Worse, Britain will surrender any future democratic control over their making.

The lesson is simple. Europe is real because globalisation means every day more British people rely on the EU to secure and stabilise trade, investment, travel, litigation, national security and political values. So the same politicians who lead a majority of Britons down the path to leave Europe would have to lead them back up again the next day to save their own political skins.

Hard Exit; Soft Exit; No Exit

Whether you are thinking through these issues from a normative point of view (what ought to happen), a predictive point of view (what will happen), or an explanatory point of view (why or how it happened/will happen this way), it is helpful to recognize that the different key actors have different preferences:

OPTIONS:

Hard Exit--Britain leaves the EU, the Single Market, the Customs Union, and does not negotiate access to the Single Market by way of the EFTA (Liechtenstein Option) or EEA (Norway Option) but trades with the EU under WTO rules--or perhaps WTO rules plus some newly worked out arrangements.

Pro: UK would gain sovereignty and "take back control" of immigration. (These things matter for the Tory Right and Ukip and even for a few left-wing national/parliamentary sovereignty zealots).

Con: UK would lose privileged access to the Single Market, including loss of "passporting rights" for Financial Services.

Soft Exit--Britain leaves the EU but negotiates privileged access via some form of EFTA/EEA arrangement. (For a useful collection of monographs on this option, see Richard North's monographs on the topic.)

Pro: UK gains sovereignty and retains access to SM.

Con: UK cannot control immigration from EU and must accept EU regulations, the authority of the ECJ and pay into EU budget, but has no/or very little say over EU rules and regs.

Personally, I think Soft Exit is a political non-starter: the EU will not offer it; and May can't go down this route without provoking a right-wing coup against her led by people like Boris Johnson, David Davies, and Liam Fox.

No Exit--Britain stays in the EU, whether de facto or de jure.

Pro: Uk continues to trade with EU on favourable terms.

Con: Leave voters will be mightily pissed-off.

More on this in the next post.

ACTORS:

Tory Left:

The position represented by Philip Hammond and a few others.

Tory Right/UKIP:

The position of people obsessed with sovereignty (Daniel Hannan, for example) and/or immigration (Nigel Farage).

Labour Left/Corbyn:

The position of the so-called Lexiters. (For my take on the Left's problems with Brexit, see this piece--written the day or so before the vote.)

The City/MNCs:

The EU/European Commission:

Mrs Merkl:

Theresa May: