SILENT NIGHT AT THE WEXFORD OPERA FESTIVAL

My wife Finola and I attended the Opera, “Silent Night”, at the Wexford Opera Festival this week. This Opera, composed by Kevin Puts, won the 2012 Pulitzer Price for Opera, and its European premiere in Wexford during the centenary of the event it recalls is timely

It is set on Christmas Eve and Christmas Day 1914, when, for a day or so, there was in informal truce on parts on the Western front, and soldiers from the German and Allied  armies mingled with one another in No Man’s land, sang Christmas hymns together, played soccer, exchanged drinks, and buried their dead.

The message of the Opera is that war in unnatural, and that, given an opportunity, people prefer to be reconciled to another, as the soldiers were, all too briefly, 100 years ago. It also brings out the pain of separation from family that is part of modern war.

It was a thought provoking, and beautifully staged event.

FRANCE....SOLVING THE PROBLEMS OF THE EUROZONE’S SECOND BIGGEST ECONOMY

I attended a conference last week that looked at France’s domestic economic situation and at the impact that has on France’s global and European role.

According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels.

If France, as a big country making up 20% of the Euro area’s  GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller  euro area countries, this would do great damage to the credibility of the euro, and potentially this could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to Ireland that France overcome it’s problems.

In recent years, France has lost competitiveness, and it is consequently running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.

The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.

The loss of competitiveness of France is due to several factors

+  Fewer people  are working fewer hours. For example, of people between 55 and 64 years of age, only 44% are working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and  58% in the UK.

+  There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones. Last year 80% of all new jobs created in France were on temporary contracts.

+ The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire.  So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has.  90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.

+ Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to the loss of exports by French companies.

There was a strong sense among the participants at the conference that the current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, would be slow in coming, perhaps not in time for the 2017 elections.

There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success.

Faster growth is crucial, and the margin between success and disaster is very narrow.  If the French economy grows at only 1% per annum over coming years, France could be on the road to default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties. 

The stimulus for French growth will have to come to come both from inside and  outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.

The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf.

Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.

France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other  EU countries’ energy industries do.

Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.

But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth.

HANGZHOU, CHINA

I  have been in Hangzhou in the past week attending a Global Investment Conference organised by Euromoney. Hangzhou was for a time the capital of China and the biggest city in the world. It is about 200 km from Shanghai, or an hour’s journey on the high speed train, a trip that I was told costs only 10 euros.

Hangzhou was a centre of the silk business and was visited by Marco Polo. Silk from Hangzhou went along the ancient Silk Road all the way to Europe, thereby making Hangzhou one of world’s first globalised economies.

I spoke in Hangzhou just as the Asia Europe Economic Meeting (ASEM) of heads of Government was taking place in Milan. As the President of the European Council, I attended the first ever ASEM meeting  in Bangkok in 1996. I met the Mayor  of Hangzhou and key commercial and political figures.

Since 2010 there has been a huge surge in outward investment from China in the rest of the world, jumping from 6.1 billion euros to 27 billion euros in just three years. This investment is going into  buying high tech companies, companies with globally known brands, and tourist resorts (like Fota in Cork). Just as China’s export drive enabled it, not only to gain income but also to gain market knowledge, this wave of investment is also designed to strengthen China’s global competitiveness and sophistication. 

Children in the Shanghai are getting the highest test results in Maths, Science and Reading comprehension in the global PISA tests, which shows that they will provide strong competition for European and Irish children in the global economy. Irish Universities are accepting Chinese students and also investing in developing University facilities in China. This will help China to become a high income economy, its people enjoying lifestyles that will make similarly exorbitant demands on global resources, to the ones already being made by  European and American lifestyles consumers.

Wage levels are rising fast in China, as demand for workers is beginning to exceed supply, partly thanks to the one child policy.  China is losing low cost jobs to Vietnam and Mexico, so it has no choice but move higher up the value chain.

There is a shift in the allocation of credit away from big, relatively inefficient, state owned heavy(and often polluting) industries, towards privately owned businesses in the consumer goods sector. While the raw GDP growth rates in China may decline as a result, the life style enhancing quality of future GDP will improve.

China is becoming a middle class country, with middle class tastes and material aspirations. With wealth has come anxiety, with many Chinese wanting to invest some of their savings overseas. This provides opportunities for the Irish international financial services industry.

While I was in Hangzhou, the protests in Hong Kong were still under way. The protesters wanted anybody to be eligible for election, not just candidates approved by a single nomination committee. I read an article on this controversy in the “China Daily”, by an Indian Professor, M D Nalapat,  entitled  “Hong Kong must avoid the democracy trap”, which challenged the notion that, at every level of economic development, democracy is a guarantor of economic success.

He said

“Political chaos can act as a speed breaker for rising Asian economies, dampening the challenge they pose to western counties. Iraq, Egypt, Libya and Ukraine are examples of countries where hundreds of thousands of youths believed that replacing of existing structures through street protest would result in a better life. Instead what they have got are deteriorating living standards and  increasing insecurity.”

This is unfortunately a fair comment, and demonstrates the danger of making exaggerated claims of automatic economic advantages from any change of governmental system. Democracy requires patience and self restraint, sometimes absent in recently liberated societies.

Professor Nalapat went on

“Hong Kong is still moving upward, when the present generation in the US and the EU are worse off than the generations preceding it”

This  is a  superficial comment. Mature economies will never have, or need to have, the same rates of economic growth as economies, like China, which are in the “catch up” phase. Indeed, there is a case to be made that, beyond a certain level of economic development, diminishing returns in human wellbeing and environmental quality set in. 5% plus annual growth rates cannot continue to infinity.....anywhere in the world.

It is not surprising that an article like Professor Nalapats’ should appear in the “China Daily”, but is troubling that it should be written by an Indian, an inhabitant of the world’s largest democracy, a country in which there are 3 million freely elected  legislators at differing levels of government, with real competition between parties unlike the tightly controlled system obtaining in China.

But Professor Nalapat is showing that people in the developing world are watching European and North American democracies, as we squabble about how to restore dynamism and optimism in the wake of the 2008 economic crisis, and are drawing conclusions about our systems of government, and the capacity of those systems to enable us to get our economic act together, and democratically to reconcile citizens expectations with economic realities.

THE EU’S SYSTEM FOR KEEPING EURO STATE BUDGETS ON TRACK IS AS IMPORTANT AS EVER NOW.....ESPECIALLY WHEN INTEREST RATES ARE LOW

Bond markets are notoriously fickle. They often seem to be driven by sentiment rather than deep analysis. The experience of 2006-2008 shows that they are not infallible. They are not a good guide to long term economic prospects. Rating agencies seem to follow sentiment rather than lead it. They are like a bus driver who is looking out the back window of the bus rather that at the road in front.

This is the context in which France and Italy should be assessing the wisdom of submitting draft budgets this month to the European Commission, in accordance with the Stability and Growth Pact,  that go back on commitments they had previously given to reduce their budget deficits to below 3% of GDP.

The low rate of interest at which most European governments can borrow at the moment can be explained by two factors, which are not necessarily permanent

1.) Sovereign bonds, that is bonds issued to allow governments to borrow, are treated as entirely risk free assets in the balance sheets of banks under the rules the EU has set for calculating the solvency and adequacy of capital of banks.  This is a somewhat artificial assumption, in that it implies that there is a ZERO risk that a European Government will ever default on its bonds ie. fail to pay all the interest due and repay the bond in full and on time. The scale of debt relative to income of some European countries might lead some to question this assumption, unless of course there is a big surge in either inflation or economic growth

2.) Prevailing interest rates are now so low, the amount of money seeking a home is so great, and high yielding investments are so scarce, that it is not surprising that investors are turning to government bonds, and thus driving down their interest rate. But if the flow of funds slowed, or if the availability alternative better yielding investments were to increase, the demand for government bonds would immediately slow. Then the interest on government bonds would have to increase, if governments were to sustain their borrowing levels.

It is against this background that the budget plans to be submitted by member governments of the euro  on 15 October will have to be assessed. The European Commission, in assessing the draft budgets of member states, would be unwise to assume that present low interest rates on government bonds are a permanent condition.

Ironically, while governments may defy the European Commission, they would not be able to defy the bond markets, if, for any reason, bond markets were to change their minds about sovereign bonds, and look for a higher interest rate. Bond markets can be less forgiving and less attentive to rhetoric or political argument than the European Commission or Ministerial colleagues in the European Council of Ministers.

That could happen quickly, leaving little time for adjustment. 

It is less likely to happen if the EU’s system for coordinating the budget policies of the 18 euro area states (the Two Pack and the Six Pack) are seen to be respected, especially by the big countries like France and Italy. This is backed up in a very specific way by Article 126 of the European Treaties.

If the system is defied, or reinterpreted in a way that removes its meaning, the fickle bond markets could get nervous again.

Ireland knows, better than most, how difficult that can be for a state that needs to borrow to fund services, or repay maturing debts. 

THE GROWTH OF SUPPORT FOR POPULIST PARTIES....

UNDERSTANDING THE NEED FOR RESPECT, AND FOR RECIPROCITY, ARE THE KEYS TO THE FUTURE OF THE EUROPEAN UNION.

What have the following in common?

+ The Scottish 45% YES to break up the UK....+ The Growth of National Front in France....+ English anti EU sentiment and support for UKIP.... + The strength of Tea Party  and the polarisation of politics in the  USA and + The growing support for anti immigrant parties in Sweden, Denmark, and the Netherlands.

They have this in common. All these parties want to withdraw from some international commitment or other, and shut the doors of their nation to outside influences. 

What support for these parties shows is that an introverted and recessive Nationalism is on the rise again. This is a reaction against globalisation by those who have benefitted less from it than others did. 

It should be noted that all have benefitted from globalisation through cheaper food, clothes, and cheaper communications. But some have benefitted much more than others, and the “others” are expressing their disgruntlement through votes for these populist parties.

These parties want a repatriation of powers to the national level, and even complete withdrawal from international bodies like the WTO, the European Union, and the European Convention on Human Rights.

People supporting these parties say they do not understand how Brussels works, or how Westminster or Washington works. But do they really understand any better how their local council works ? 

This is why I am unconvinced that concession of their literal demands would actually remove the discontents that lie behind support for these parties. 

For example, I am not convinced that an elaborate system of federalism within UK, or UK withdrawal from the EU, would actually assuage the anger being expressed through UKIP votes. The experience of post Franco regional devolution in Spain is not completely reassuring.

In Scotland, the younger and the poorer sections of population   were the most alienated, and voted most strongly for Scottish independence . This is despite the fact that public spending per head, on which poorer people depend more, is already higher in Scotland than it is in England.

It is £10,152 per head in Scotland, as against £ 8,529 in England. On those figures, complete fiscal would worsen the position of poorer Scots.

A SENSE OF BEING RESPECTED IS WHAT IS MISSING

I believe these vote reflect a sense of not being listened to, of not being respected, than they do a demand for particular constitutional or institutional changes. 

Do Scots feel respected, and listened to, in UK? 

Do working class voters of the National Front, UKIP, and the  Tea Party voters feel respected by metropolitan elites?

I fear the answer in “No” in all cases

FEAR OF THE FUTURE

Fear of what may happen in the future drives people in the direction of populist solutions, and parties.

States have made health promises and pension promises that will become unaffordable, as the proportion of the population that is elderly grows. Meanwhile, many private  pension schemes are underfunded.

Another pervasive fear is that of redundancy in mid life. In such a circumstance, it is difficult to know what new skills to go for, and it is equally difficult to move to another city to find work, after a certain age.

ANTI IMMIGRANT SENTIMENT

These fears feed anti immigrant sentiment.

Immigration disturbs bucolic image some people have of their ideal national environment....forgetting that, if they actually lived in their ideal environment, they would probably find claustrophobic and boring.

There IS  also competition for low skilled jobs, and immigration DOES drive some wage rates down

But automation and labour saving devices are devaluing all forms of low skilled work anyway, and probably are more important drivers of income inequality,

INEQUALITY OF INCOMES

The growth in inequality in incomes is also a factor in the growth in support for populist parties.

Inequality is driven by many factors.

It is driven by technology . Technology replaces low skilled workers, while increasing the rewards of the higher skilled people, or insiders, who control the technology.

One should not ignore the importance of celebrity in causing inequality. Celebrity brings disproportionate increases in relative income. Celebrity footballers, and celebrity CEO’s, represent the same phenomenon. A firm’s stock price is driven partly by the reputation of its CEO and that means a well known CEO can command a higher salary package.

Inequality is also driven by access to financial leverage, and assets that can be used for leverage. Thus high financial sector incomes evoke particular concern.

These are all issues that need to be dealt with by national governments, through the tax system.

But they should not be used to justify turning away from the EU or from the benefits that globalisation has brought.

THE MEANING OF NATIONAL IDENTITY 

We are not going back to a world of Empires in which Europeans, or people of European ancestry, could make the rules of the game to suit themselves.

We can perhaps limit the pace of immigration, but we cannot stop it.

So we need updated civic education of ourselves, and of immigrants to our shores, on questions like

“What does it mean to be British?”

“Can one be British, Scottish and European all at the same time?”

“What does it mean to the Irish and European, but of African ancestry?”

” What are the values that underlie these statements?” 

RECIPROCITY

We also need to work out the practical implications of reciprocity as a principle of international relations.

Let me illustrate this by reference to debates now taking place in the UK.

If EU citizens immigrating to UK to work are to have restricted access to state benefits, how might that affect the entitlement to health service of the 2m UK citizens living in other EU countries? 

If the UK want access to an EU Single market to sell its goods and services does that means accepting  common EU standards for those goods and services....even fiddling rules on thing that seem  not to matter...unless we all recognise everyone else’s standards regardless which could be bad for consumers?

In particular, the UK wants a single EU market for services.....but services are provided by people, and these people may need to travel to another country to provide those services....which gets you back into the immigration debate 

If Britain wants a veto on certain EU laws, rather than have them decided by majority, 27 other countries will also have to get that veto too.

If , as some Conservatives propose, the UK withdraws from the European Convention on Human Rights, what effect will that have on the hard won agreement on policing in Northern Ireland, which depends on access for police complainants to the EHCR? Is the plan just to take England out of the EHCR, or to take Northern Ireland out as well?

DEMOCRACY IS THE KEY TO RESPECT

If the EU is to survive, EU citizens need a sense that they can cast a vote to change the men or women at the top in the EU, in the same way as they can change the people at the top in Dail Eireann, in Westminster, in Birmingham city council, or in their local tennis club.

It is not that citizens want to get into the details....but they do want a vote on the EU’s direction of travel

Globalisation has been taking key decisions above the level of individual states for a long time. That is nothing new. But the time has come to make it more democratic.

The International Telegraph Union dates back to 1865

The International Court in the Hague dates back to 1945

Traditionally the  rules, governing bodies like these,  were negotiated in private in the form of inter state Treaties, between diplomats, and later interpreted by judges. 

Elected people were often only involved at end of process in saying a simple YES or No to result, by ratifying the Treaty or not. 

The EU is different.

In the EU, politicians in the Commission initiate laws, and politicians in the European Parliament and the Council decide if these laws will come into effect.

In this sense, the EU is MORE democratic than virtually all other international organisations in the world....but it’s not democratic ENOUGH

I believe the direct election of the President of the European Commission by the 500 million people of the EU, not simply by the 28 heads of EU Governments, is needed. 

Only in that way will we  create a well informed democratic EU public opinion. That would be the best answer of all to the populists.

WHY EUROPE NEEDS TO GET ITS ACT TOGETHER

Gorbachev’s advisor Alexander Arbatov, said , in 1989 at the time of the collapse of the Soviet Union, to a western diplomat

“we have done you the worst of services, we have deprived you of an enemy”

Since then, the lack of perceived external threat has led to weak economic management in Europe, to an unnecessary war in Iraq,  to increasing debt,  to weakened military strength, and to the making of insincere promises that could not be fulfilled when to going got tough.

Now, that period is over. 

We now see, thanks in part to ill considered promises of eventual NATO membership to Ukraine and Georgia, that those countries have suffered pre emptive annexations of parts of their territory by force by Russia. The UN Charter and the Helsinki accords on territorial integrity of states have been binned.

In Eastern Ukraine we are now witnessing I recently heard a US general describe as “a new kind of warfare”.

Meanwhile, the growing strength of China’s navy distracts US from Europe, and European and US interests are diverging because the US is  becoming energy self sufficient, whereas Europe is not.

And productivity in Europe is lagging.

According to the OECD, EU labour productivity is  growing at 0.6% pa, while productivity in the rest of the OECD is growing at  1.2% a year.

CONCLUSION

Rather than contemplating separatism, Europeans should be thinking about our precarious position in the 21st century world, and uniting to do what we can do about it.