Okay, I admit it. I do love a good scrap, and there’s nothing I enjoy more than those interminable struggles that manage to combine the best and the worst of both politics and economics – ideally with the occasional inference for the securities and investment industry thrown in. But this year’s slugfests have been just a little too much for even my tastes.
You don’t need me to tell you that all eyes are on the United States at the moment, as President-elect Donald J. Trump weighs up the tough decision as to where to hang the diamante moose antlers on the White House staircase, or whether he should order two festive gold statues of himself for the lobby, or maybe six. With a little luck, we British will be getting over the worst sense of outrage by the time Christmas comes, and we’ll be focusing instead on what’s good about his vague economic policies and what’s bad.
But the perspective from continental Europe is a little different. If you think Theresa May is getting a rough ride from her European partners over her plans to activate Article 50 (“get on with it!” seems to be the battle cry), it’s only partly that they really want to see us go. More to the point, they are anxious to head off a rising tide of nationalism and anti-EU sentiment in half a dozen other member countries, and – most importantly – to be seen as the kinds of people who aren’t easily to be crossed.
And the economy?
On the face of it, the European Union’s prospects don’t look too bad. According to the European Commission’s autumn forecast, which was published on 9th November, this year’s 1.8% economic growth for the EU (and 1.7% for the euro zone) will dip slightly in 2017 to 1.7% and 1.6% respectively before returning to their 2016 levels in 2018. But those unexciting projections mask some serious concerns.
First, because they’re modest. But secondly, as Brussels concedes, there are “a number of hindrances to growth and a weakening of supportive factors.”
“Political uncertainty, slow growth outside the EU and weak global trade weigh on growth prospects. There is also still a risk that the economy’s weak performance in recent years could hold back growth, and persistent slack points to the possibility of faster growth without undue inflationary pressures. Moreover, in the coming years, the European economy will no longer be able to rely on the exceptional support it has been receiving from external factors, such as falling oil prices and currency depreciation.”
“The euro area aggregate budget deficit is set to continue to edge down,” it says, “while the fiscal stance is projected to remain non-restrictive.” And although it says that investment is set to continue increasing, the commission has probably not managed to take in the latest decisive indicator – the rising interest rates which Donald Trump’s presidency are also to bring with them. And that factor in turn is capable of upsetting the apple cart in other ways. As we shall see.
In, out, shake it all about
You could say that we in Britain have already had some practice at coping with disappointment since the Brexit vote on 23rd June, which not all of us remember very kindly. But the thing is that, even if not all of us Remainers are feeling cheered by the economic downturn since then, we have at least come to accept that it was an exercise in democracy in action. Pity, then, our European cousins, who are now facing a double whammy of uncertainty, soon to be followed by a third, fourth, fifth and probably sixth.
We are, of course, talking about the growing possibility that nationalists and separatists in several key European states may decide to take their cue from Mr Trump and Mr Farage and push for some form of secession from the European Union. Or at least from the Single Market, which a surprising number of the biggest fiscal beneficiaries are keen to ditch.
- Italy is likely to be the first such battleground. On 4th December the government of Matteo Renzi was due to face a referendum on constitutional reform which seemed certain to strengthen the hands of the Eurosceptic M5S movement, led by former comedian Beppe Grillo. Grillo’s people already control the local authorities on Rome and Turin, and they have demanded a Brexit-style referendum on membership of the euro group – which, they claim, is being unreasonably dominated by the suits in Frankfurt.
- France is probably the most nervous EU member, given that the Eurosceptic National Front party of Marine Le Pen is unquestionably the best organised far-right grouping in Western Europe. Having got 27% of the vote in last December’s local polls, few doubt that she will make the final cut in the next presidential election. Ms Le Pen greeted Donald Trump’s election as “a new world emerging”, which she said ”redefined” the global balance of power.
- Germany’s Chancellor Angela Merkel would have been in enough trouble even without the ghastly incidents involving Syrian migrants which have attracted so much unwelcome attention. For many years now, her Christian Democrat (CDU) government has seen its power eroded by the far-right Alternative für Deutschland (AfD), which beat her own party into third place in last September’s state elections in Mecklenburg-Western Pomerania. Needless to say, the nationalists largely favour getting rid of Germany’s EU ties; they are also becoming increasingly anti-Islamic.
- The Netherlands faces a blistering assault next March from the populist Freedom Party (PVV) of Geert Wilders, who is violently anti-EU and who has repeatedly got into trouble over his comments about Muslims. Polls indicate that the PVV ought to get 27 seats in March – about equal with the liberal VVD of Prime Minister Mark Rutte.
- Austria came within a whisker of getting a far-right, anti-immigration president last May, when Norbert Hofer, the head of the Freedom Party, lost the ballot by only 1%. A new election was called for 4th
Why all the dissent? The same reason that Britain went for, of course, and America too, in its way. The sense that the political classes had become detached from the working populations who supported them, and that the whole essential thrust of international co-operation had become politically diverted in a way that favoured the piggies with the biggest snouts.
For Britain, as we know, it was all down to three factors: the substantial net contributions that we make to the EU budget; the fear that rule from Brussels would overpower our national sovereignty; and the worry that the free movement of labour that came with the Single Market would attract freeloaders, cut-price labour and possibly even terrorists from outside our sacred shores.
It may surprise you to hear that, for EU members, many of the same reasons applied. Even the biggest net beneficiaries (France, Italy and Spain) were being heard to protest at the overpowering economic clout that Berlin was exerting on everything. And, given the way that the economic weighting system works, it was no surprise that Greece, Italy and Spain all felt politically steamrollered by the affluent Germans – who, in turn, were getting just a little fed up in their own right about the whingeing from the spendthrift, bone-idle Mediterranean states. And so on, and so on.
That in itself would have been a major problem even if the German government of Angela Merkel hadn’t flung open the welcome doors to Syrian refugees and got some pretty medieval social mores back from some of the newcomers. All of which helps to explain the rise of the nationalist right, which may yet derail her hopes in next year’s parliamentary elections.
And then, finally, there’s the issue of globalisation. I’ll confess that it took me longer than it should have to make the connection between globalisation and the awkward fact that so much of the proceeds of economic growth were going to the one per cent and not to the ninety-nine. And to be honest I still don’t entirely buy the link.
According to the Trumpers and some of the Brexiteers, globalisation has been a double-edged sword. On the one hand, it has promoted economic growth in the developing world, reduced the price of goods and linked the nations of the world in positive ways.
On the negative side, it has opened up the domestic markets of the west to aggressively cheap imports which have created industrial black spots. And, more damagingly, it has allowed giant corporations to slide their profits around the globe, in a constant search for tax havens, with the result that the likes of Google, Starbucks and Apple have contributed far too little to national tax takes, so that the very rich get richer at the cost of the poor. That’s something that might be righted by President Trump’s programme to bring expat companies’ profits back onshore to the United States. Except that, for some European tax havens (Ireland?), it may entail a fiscal loss that we’ll need to anticipate.
Turkey without the trimmings
And as if that weren’t enough, the growing tensions with Turkey’s Recep Tayyip Erdogan seem set to cut off the far south-eastern flank of pan-European co-operation. The deteriorating political climate since July’s attempted coup has seen the authoritarian Turkish leader not only stepping up his Islamist political direction but also shouting loudly at Brussels for having kept Turkey waiting 40 years for EU membership.
That would be inconvenient enough, were it not for the fact that Turkey is currently accommodating some three million refugees, many of them Syrians who were sent back to Turkey with a promise of an aid deal by EU members that didn’t want them flooding their own boundaries. Part of the deal here was that Europe would open up its own borders to Turkish migrants who wanted access to the EU – but to date, that hasn’t happened. Can you guess why?
Complicating the matter further is the fact that Turkey is a hefty bulwark of NATO and an essential landing-strip zone for US military aircraft on service throughout the region. Ankara threatened in August to leave NATO if it didn’t start to get a better deal from the EU – and, by inference, it was expected to cosy up more closely with Russia. Now, consider the growing expressions of affection between Presidents Trump and Putin, and you have a tricky situation in which Brussels can hardly fail to come under pressure to admit a country that is very likely to reinstate the death penalty.
My word, my bonds!
And finally, to the ultimate reason why Trump’s accession may upset the fiscal applecart – and, in the process, the entire fixed interest system too. It’s simple when you think about it.
We don’t know much about Trump’s plans yet, but what we do know is that he’s going to be issuing a lot of new government paper between now and 2020. His super-soft tax proposals allow no other interpretation. That in turn will depress demand by diluting the market for new paper. Which will push up yields.
We know that Trump favours a return to higher interest rates, and that inflation is likely to rise if his tariffs on Chinese and Mexican imports are put into place. That too will exert an upward pressure on treasury bonds.
But the third plan, which is still being explored, is to “renegotiate” existing bond obligations with bondholders. Which is something that we called a haircut when Greece and Cyprus did it. And which may yet expose weaknesses in banks, hedge funds and other institutions that seem quite solid at present. Remember, it didn’t take much counterparty risk to start the subprime mortgage crisis of 2007/2008, did it now?
Will these things happen? We have no idea. But if Theresa May’s European counterparts seem a little too preoccupied at present to be able to give her the time she thinks she deserves, it might just be that they’ve got more important things on their minds than Article 50.