Deborah Mabbett and Waltraud Schelkle

It’s all quiet on the Euro front at present. We would not be so reckless as to predict that this will last, but this pause gives us a chance to reflect on the lessons so far. During the crisis, we learned about the importanc e  of monetary sovereignty, a notion that had become somewhat discredited in the 1980s and 1990s. We learned that the GIPSIs suffered because they could no longer adjust their nominal exchange rate, and so were fated to experience a secular decline in competitiveness. And we also learned that a central bank should act not only as lender of last resort to the banking system but also to the government: monetary sovereignty is valuable because it means that the central bank can buy government debt by printing domestic currency.

Somewhat surprisingly, we learned this from economists such as Paul De Grauwe and Paul Krugman whose work had contributed to the discrediting of monetary sovereignty before the crisis.  Paul Krugman founded a literature on speculative currency attacks which showed that the exchange rate would not stabilise the economy in a world with free capital movement; instead, currencies were liable to overshoot the values that would produce stability. Paul De Grauwe made his name as a critic of the theory of optimal currency areas, showing that it overestimated the usefulness of the exchange rate as an adjustment mechanism. Recently, however, they have returned to the praise of monetary sovereignty. Paul Krugman applauds, for instance, that Britain stayed out of the Euro area, based on a ‘real economic framework– optimum currency area theory’ (Rationality and the Euro, New York Times 6 July 2013). Paul De Grauwe has illustrated his idea that the Euro area crisis is self-fulfilling with the comparison of Spain and the UK: Spain rather than the UK is in trouble because it has lost control over its own currency (Managing a fragile Eurozone, vox 10 May 2011).

What has happened to all the empirical and theoretical objections to the exchange rate as an adjustment mechanism? Was the prime motive for entering the monetary union, namely to escape the self-fulfilling panics of financial markets, a mere folly of Europhile elites? We looked into this in a recent paper (forthcoming in the Review of International Political Economy) where we compared the experience of Hungary and Latvia with that of Greece. All three countries were recipients of external assistance in the crisis, but Hungary and Latvia seem to be more or less out of the woods (apart from damage self-inflicted by Hungary’s nationalist government) while Greece is still in depression. We asked two main questions: did Hungary benefit from being able to devalue? And why did Latvia recover faster than Greece, despite maintaining a fixed peg to the euro?

We found that membership of the euro area did make a difference, but not in the ways that proponents of monetary sovereignty claim. Our first relevant observation is that, before the crisis, extreme financial imbalances affected countries outside as well as inside the euro area. It is not correct to claim that the euro area allowed current account imbalances to go unheeded; they were unheeded outside the common currency area too. Table 1 shows the accumulated deficits of countries grouped according to their exchange rate regimes. Greece takes the prize for the largest accumulated deficit, but only just, from Latvia and Bulgaria. It is clear that the financial markets were ready to lend regardless of Euro membership or currency regime.

Table 1: Cumulative current account imbalances, 2000-2008 (in % of GDP)

Euro members Non-Euro fixed rate Temporary deval’n Sustained deval’n
Greece

-119

Bulgaria

-103

Czech Rep

-35

Hungary

-68

Ireland

-19

Denmark

25

Sweden

61

Poland

-32

Italy

-8

Latvia

-111

UK

-19

Romania

-66

Portugal

-89

Lithuania

-75

Slovenia

-21

Spain

-58

Source: AMECO

The second observation is that both Hungary and Latvia got into trouble almost a year  before Greece. During this period when financial markets froze, it seemed to be a blessing to be inside the monetary union, protected by the supply of liquidity by the ECB. But it was a mixed blessing: Greece’s problems deepened because external investors could unwind their positions. When Hungary and Latvia sought external assistance, the lenders (led by the IMF) cajoled foreign banks into burden-sharing under the framework of the Vienna initiative, and the outflow of private capital slowed. We found that the euro area is an area of extreme capital mobility, in which the liquidity supplied to the banking system suppresses warnings of trouble to come.

Thirdly, we found little support for the proposition that a flexible exchange rate is a useful policy instrument. The existence of an exchange rate makes surprisingly little difference to the extent of real devaluation. This is not to say that it is easy or even preferable to achieve real devaluation by other means (basically, internal contraction) but it is hard to sustain the argument that only nominal devaluations succeed. Furthermore, advocates of nominal devaluation may underestimate the real costs imposed on actors in the domestic economy: a particularly salient issue in Hungary and Latvia, where many households and firms had taken out foreign currency-denominated loans.

Table 2: Real exchange rate change, 2008-2012

Euro members Non-Euro fixed rate Temporary deval’n Sustained deval’n
Greece

-10.5

Bulgaria

17.5

Czech Rep

-0.2

Hungary

-9.0

Ireland

-19.4

Denmark

-0.8

Sweden

7.9

Poland

-16.9

Italy

1.2

Latvia

-15.4

UK

4.6

Romania

-8.1

Portugal

-6.5

Lithuania

-10.3

Slovenia

2.8

Spain

-10.7

Source: DG Ecfin quarterly competitiveness report, REER based on unit labor costs (total economy)

Surely, though, there is support for a fourth proposition, that a country that has monetary sovereignty can solve its problems by borrowing from its own central bank? Well, no: we can see not because Hungary and Latvia (and innumerable other sovereign states) have had to turn to external lenders for assistance. What stops them printing money is the prospect of catastrophic currency depreciation and capital flight. The constraint that appears as a financial market crisis for members of a monetary union appears as a currency crisis for countries with their own central banks.

The choice of comparator countries does matter here. The UK has done nicely out of its monetary sovereignty, with the Bank of England now holding about £375bn in gilts – 25-30% of the debt stock, depending on how you measure it. But it has been able to do this without inducing a deep slide in sterling only because of the fortuitous fact that sterling remains a reserve currency. Sterling could have lost that status, but it was aided by the problems affecting other reserve currencies, including the dollar and the euro.  No doubt Hungary’s nationalist government would like to exercise monetary sovereignty and sell bonds cheaply to the central bank, but the Forint is not a reserve currency. To finance the government in the crisis, the IMF and EU lent funds to the Hungarian central bank, which the government debt management agency drew on to purchase debt. In turn, the central bank sterilized the increase in the domestic money supply by issuing central bank bills. The IMF was quite open about the fact that it had engineered a monetization of government debt but without expansion of the domestic money supply: government bonds held by non-residents were largely replaced by central bank bills held by domestic banks. But this could not have been done without a foreign exchange loan.

We don’t deny that there are particular problems with the monetary financing of government debt in the euro area. In Greece, the banks hold a huge share of Greek debt, and this indirect channel of financing has created a ‘diabolic loop’ whereby a sovereign debt writedown will render the banks insolvent, while bank recapitalization deepens the sovereign’s indebtedness.  The diabolic loop can be traced to euro area’s prohibition on direct monetary financing of sovereigns, combined with the easy access to ECB funds enjoyed by banks. This is a major problem in the euro monetary system, and banking union is needed to address it and break the loop.

But it is a big step to go from acknowledging this problem to singing the praises of monetary sovereignty. Our comparison of Hungary, Latvia and Greece showed not the benefits of sovereignty but that countries outside the Euro area got more constructive external assistance than those inside. Why so? We think because the world has learned how to prevent self-fulfilling currency crises, not least from the writings of De Grauwe, Krugman and many others. The IMF’s botched intervention in the 1998 Asian crisis has also helped to concentrate minds, namely that shrinking public finances is not the appropriate response to all macroeconomic instability. The lesson to be learned now for tackling the Euro crisis is not so different: cooperative institutions are required to manage interdependence within a monetary union. But there is no return to monetary sovereignty for the GIPSIs; they did not have it before they entered the Euro area and will not get it should they leave.

Read the pre-publication version of the full paper here.

 Professor Deborah Mabbett is Head of the Politics Department at Birkbeck. Professor Waltraud Schelkle is an Associate Professor in Political Economy at LSE

 

 

One of the most striking things about Cameron’s last visit to China is that he won the respect of neither liberal or conservatives. The liberals of course condemn Cameron’s downplaying of political issues. The conservatives may have approved of Cameron’s silence over China’s domestic politics, but their approval is condescending in the extreme.

Due to the special relationship between Britain and the US, the Chinese conservatives, ever suspicious of the US, simply do not believe Cameron’s friendly attitude will last. China’s leading statist newspaper Global Times , represents the hardliners within the CCP regime. It thundered that “His visit this time can hardly be the end of the conflict between China and the UK…,” The newspaper argued bluntly that “The Cameron administration should acknowledge that the UK is not a big power in the eyes of the Chinese. It is just an old European country suitable [only] for travel and study….”

A forward-looking, stable relationship between Britain and China should be built on foundations of dialogue with a broader Chinese public. The opinions of ordinary Chinese, on both domestic and foreign policies, are evolving rapidly, in spite of our undemocratic system. I believe that it is important for the British government to clearly communicate to the Chinese public their views and values in a manner which highlight the UK’s differences with the CCP regime.

Cameron’s assurances to the British press that he would raise human rights issues in private with the Chinese leaders lack credibility in the eyes of those who matter most – the Chinese public. The secret diplomacy used by the former US President Nixon and Secretary of State Kissinger during the Cold War can no long work today. True, a British leader needs to be extra careful when commenting on Chinese politics, due to the complex history of Sino-British relations (the Opium War in the 19th Century waged by the British that marked the beginning of the end of the Qing Dynasty). Many Chinese still hold the impression that Britain is an unreasonable mercantile state, and many may feel insulted if and when a British leader criticizes China. But candid criticism is still better than insincere compliments. It is no accident that the two British leaders by far the most respected in China are …. Winston Churchill and Mrs Thatcher  . Both were staunchly conservative, anti-Communist leaders. Despite their imperialist and neo-liberal credentials, they have the respect of the Chinese, including those who hate them.

Voicing the values of critical friends?

When reflecting how best to deal with China, Britain may find the examples of two other Anglophone countries worth noting.

The first is the United States. About the same time as Cameron’s visit to China, the US vice President Joseph Biden, was also visiting China to mediate the increasingly contentious territorial conflict between China and Japan. But even at such a sensitive time, Biden paid a visit to the US embassy’s visa section and delivered an outspoken speech to the Chinese citizens applying for the US visa: “Innovation can only occur when you can breathe free, challenge the government, challenge your teachers, challenge religious leaders.” It was clear from the Chinese responses that such “seditious” comments actually stimulate serious discussions and reflections, and achieve more positive effects.

Of course you may say Britain is now only a mid-size power and cannot be as critical as the US. But there is another worthy example of Australia, which is hardly a superpower. The former Prime Minister Kevin Rudd, who was also the first Western leader who speaks fluent Chinese, [7] announced the principle of ‘zhengyou’, or critical friend, in his country’s engagement with China when he visited China in 2008 as Prime Minister. This Confucian concept of ‘zhengyou’ means that solid and true friendship is built on frank and straightforward dialogues. True friends should be able to be critical, and only this type of friendship can go beyond short-termism and constitute long-lasting relationship. Real friendship should involve communicating on controversial issues. With this principle of ‘zhengyou’, Australia has been able to maintain close trading ties with China without compromising its position on political issues.

Sticking to one’s principles strikes many Chinese as a far better long-term strategy for Western governments, especially conservatives, when dealing with the Chinese Communist Party.

Aoqi Wu recently graduated from our MSc Global Politics

 

 

Lewis Whyld/PA

Originally posted on the conversation

The former culture secretary, Maria Miller, is the latest in a series of MPs to have been caught up in an expenses controversy. The issue of what parliamentarians do with their allowances has now embarrassed or damaged a great many MPs, from Gordon Brown downwards. In a few cases, as with Miller, it has led to resignations. It has also, for a few, led to prison.

Since the first revelations in the Daily Telegraph in May 2009, which saw parliament lose its speaker, there has been a continual flow of expenses-related stories. In 2011 Liberal Democrat MP David Laws resigned; in 2012 Labour MP Denis MacShane stepped down (and was later imprisoned); and in 2013, George Osborne (and many others) were exposed over their use of first-class train tickets.

In parallel, there were rows over the MPs’ pay rise and the continued existence of IPSA, the independent regulator. Scrutiny of allowances has also been seen in local government, the police and even universities. But expenses revelations don’t always end in resignation or prison. What makes each case different?

How it gets out

The first difference is how someone is found out. The chain of accountability is often complicated. Just after the scandal, David Cameron himself said:

What the Daily Telegraph did – the simple act of providing information to the public – has triggered the biggest shake-up of our political system. It is information – not a new law, not some regulation – just the provision of information that has enabled people to take on the political class, demand answers and get those answers.

Actually, finding the information can be trickier than it looks. Far from being a “simple” story of “information provision”, the expenses scandal is a great example of how difficult it can be to bring information to light.

The FOI request for a selection of MPs’ expenses was first made in 2005. It then took a four-year campaign by journalists using FOI laws, the FOI appeal system and then the courts. The information was finally released by a very old-fashioned mode of disclosure: a leak. Interestingly, according to the original Telegraph story, Miller’s expenses problems appear to have stemmed from a well-placed tip-off rather than detailed public scrutiny.

The next step, “demanding answers”, can be just as difficult. Once information is disclosed, holding the MP in question to account requires the right context and environment. The level of media interest and the “amount” of wrong done determines how any scandal unfolds, and what (if any) price the politician pays.

Who did it?

The second factor is, of course, the individual politician involved. Who the politician is, how they react, and the media and public view are all crucial. George Osborne was unlikely to suffer more than blushes over his minor train ticket kerfuffle, and was very well protected. It may even have helped that he had history of previous minor “slip-ups”. Miller’s situation was far more precarious. Her very brief first apology and apparent attempts to “influence” the press and commissioner worsened the situation. Her actions lost the support of the party; just as importantly, her position at the centre of the Leveson reforms made her unpopular (to say the least) with large swathes of the press.

Five years on from the storm of 2009, the expenses issue continues to bubble away under the surface of Westminster politics, occasionally bursting to the top unpredictably as the result of leaks, tip-offs or assiduous research and throwing up sudden squalls of varying ferocity. When controversy reappears, the exact effect depends on many things: how the information was obtained, how it is then used and who it relates to. The only certainty is that we haven’t heard the last of expenses yet.

Ben Worthy teaches on the Parliamentary Studies module at Birkbeck.

By: Duncan

 

 

 

 

 

 

By Dr Danny Rye, Department of Politics, Birkbeck University of London

On Thursday evening I attended an engaging session organised by my colleague Alex Colas of the Department of Politics at Birkbeck. The occasion was a conversation between Marxist urban theorist Andy Merrifield – discussing his new book The New Urban Question and distinguished geographer and social theorist David Harvey, author of Seventeen Contradictions and the End of Capitalism amongst many other works. The following represents my reflections on the evening. It by no means represents all that was said or discussed nor the contents of either book (which I have not yet read), but some points of interest to me and, I hope, others.

In The New Urban Question, Merrifield (following Manuel Castells) argues that cities are for capitalism essential reproductive mechanisms (quite contrary to being generative or productive, they are ‘parasitic’ and extractive, much creative energy being invested in imaginative ways of extracting wealth from things, rather than creating it). Crucial to this are collective consumption items like welfare, transport, infrastructure and so on.

However, in the last thirty or forty years the nature of this collective consumption has undergone dramatic change. Whereas in the last century, the state was primarily responsible for such goods, in modern cities much of these public goods and projects have been privatised (or as good as) through contracting services out, selling them off to the private sector, or the use of ‘public-private partnership’ vehicles like the Private Finance Initiative (PFI). As a result, he argues, a ‘middle manager’ class that has successfully mediated between the ‘rentier class’ and creditors have accumulated a great deal of power and wealth.

Under this kind of structure, he goes on, there is a kind of ‘neo-Haussmannisation’ in progress, by which (amongst other cities) London’s social and political complexion is being altered, just as Paris’ was by Georges-Eugène Haussmann’s renovations under Napoleon III in the latter half of the nineteenth century. It is ‘neo’ because the form it takes reflects the structure of ‘collective consumption’ oulined above. Thus, instead of a single ‘grand projet’ it takes many different forms including land grabs, speculative development, rising property prices (the subject of an apparent spat between Coalition Government members just this week) – one might also include benefit reforms, especially limits on housing benefit which are already driving people out of town and which has been likened to a kind of ‘social cleansing’.

As a result, he says, there are a vast number of people who are on the ‘periphery’ of the city (perhaps figuratively as well as literally), displaced by high rents and property prices, unable to find secure or reasonably paid work (who do not just include the poor and traditionally working class, but an increasing number of the middle classes too), but who are disparate, multi-variate and unorganised.

Thus, Merrifield asks, how can these modern ‘sans-culottes’ organise themselves and what will stir them into doing so? Whilst he highlighted a variety of characters that might play a part – from ‘professional organisers‘ to ‘secret agents’, from ‘great escapers’ to ‘great refusers’ – this, sadly, is a question he did not fully answer on the night. Perhaps that was a bit much to expect in a relatively short session, but there are two questions which I think need to be properly addressed if his otherwise engaging analysis is to have useful purpose: the first is the question of how people are to organise themselves. The ever-present danger is that in seeking to organise themselves, the dispossessed merely end up reproducing whatever it is they seek to replace.

David Harvey made a particularly interesting observation in this respect with which I concur: the forms of organisation that are used to oppose capitalism often reflect the structure of capitalism itself. Thus, today, traditional forms of opposition in the form of trade unions and political parties that sought to use the state apparatus have become irrelevant and been replaced by relatively flat ‘networked’ organisation with a concomitant scepticism towards the state apparatus, which precisely reflects the prevailing attitude of the modern neo-liberal ethic and structure of capitalism. There may be a complacency which assumes that the risks of oligarchy in those ‘traditional’ organisations (first highlighted by Robert Michels a century ago) have been negated by more ‘networked’ non-hierarchical organisation. That may be so, but it should not be assumed that this kind of organisation is inherently anti-capitalist. It very clearly is not.

Secondly, what here went unsaid – and often does go unsaid – is that if one believes it is possible to replace capitalism with something else and wishes to do so, then what exactly will it be replaced with? As Harvey pointed out, of crucial importance here is understanding capitalism itself. A lot of those who say they oppose capitalism, he said, do not see the need to understand it, perhaps from fear of becoming mesmerised by it. This – it seems fair to say – is a fatal error if you claim to want to replace it. If you do not understand what you are trying to replace how can you be sure that – given what I have already said about organisation – that you will not merely be replicating it in another guise? The danger, therefore, may be that in seeking to oppose and replace capitalism one succeeds merely in reproducing it.

Danny is a lecturer in Politics. Follow Danny on twitter: @dannyrye