Eurovision

Fade to Grey

2012-01-26T14:47:00.000-08:00

Last week, I was in Sevilla, the capital of Spain’s southern region, Andalucia, where a political earthquake is expected in March. Recent polls suggest that the conservative Popular Party will win an absolute majority in the regional elections with 45% and hand the governing Socialists, the PSOE, a massive loss in the part of the country that has always been considered their stronghold and where they have governed continuously since 1982. This is on top of the PP’s big win nationally in November.

The mood among PSOE members in the south is rather grim. One former elected official told me he thought the party could disappear. While such a fear is unwarranted – this is not a replay of the utter collapse of the governing UCD in 1983 – there are good reasons to be concerned about the state of the party.

The party is hemorrhaging members. The latest party census shows that they have fewer than 220,000 members, about a fifth of what the PP has, a very different situation from Northern Europe where social democratic parties dwarf others in size as in Sweden or are roughly equivalent to their main conservative opponents as in Germany. Half of the PSOE’s members are between 46 and 65 years old while merely about six and a half percent are under thirty, suggesting that it is neither renewing itself generationally nor appealing to young people.

And while across Europe, the governing parties seen as responsible for the economic crisis have been thrown out of office, it is interesting that in Spain at least, the distribution of votes shows that the masses of unemployed Spaniards were just as likely to vote for the PP as everyone else. Of course, maybe it's not surprising that the left, in this case the PSOE, did not get a slight bump as one would normally expect from those most affected by the crisis and cuts in social spending. This is part of the prevailing 'throw the bums out' mentality everywhere on the continent.

Still, I think the implications of the crisis are somewhat different for social democrats in Southern Europe than in the North. For the parties in the South, the road ahead, and back to power, is likely to be more difficult. The PSOE, the PS, and PASOK were formed after the democratic transitions of the late 1970s and do not have a history of being mass, class-based parties in the way, say, that the German SPD does. Especially in Spain and Greece, where they came to power quickly, they have been electoral and patronage machines with few roots in civil society. In Portugal, the PS's weak social ties are explained by slightly different factors but they nonetheless are a fact.

It is noteworthy in the Spanish data presented above that students are the one group where support for the conservative PP was well below average. Students, of course, form one of the sectors hit hardest by both the crisis and potential cuts, given a high youth unemployment rate, rising university fees and a strongly dualistic labor market. But the PSOE did not pick up their votes either; indeed, students were also less likely on average to vote for the Socialists. Their votes went disproportionately to the communists and the recently formed UPD, a sort of liberal party. This rather highlights one of the problems the left in the south may face in terms of their social base. For reasons related to patterns of party formation and organization stemming from their transitions, the left in the South has a double task. In contrast to northern European socialists who must convince their members and supporters about the viability of a left program in an age of austerity, those in the South have the added complication of figuring out who their base is.

Higher Education and the Crisis

2012-01-18T01:44:00.000-08:00

Yesterday, on the way into town from the airport in Seville, where I am giving a series of talks, my university host and I were talking about the state of higher education and the economic crisis. He was bracing for another round of pay cuts he and his colleagues fear are in the works on top of the 5-10% they took as the slowdown in the economy started.

Higher education in Southern Europe is an area ripe for reform. University systems in the region tend to be inefficient, highly politicized and bureaucratic. At the same time, the differences between the north and the south in terms of the relationship between unemployment and underemployment, and educational attainment are illuminating. A recent study by Gallup shows that at the highest levels of education, the same lower levels of unemployment characterize the citizens of both Northern and Southern Europe - about 5% - in both regions. It is at the lower levels of educational attainment (that describes a larger percentage of southern Europeans) where the big gaps exist. Here, although those with lower educational levels have higher unemployment rates in both the north and south, unemployment rates of this group are roughly twice as high in the south as the north. The report concludes that in Southern Europe “there is an oversupply of labor for low-skill jobs, and a shortage of highly skilled workers …that limits their potential growth.”

This is related to the S&P’s conclusions in its latest round of downgrading the debt of many European countries that “problems are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called ‘periphery’.” Reforming and investing in better higher education would be one way to help close the gap by raising the skill level and productivity in Southern Europe.

How likely is reform to happen? As Rahm Emanuel so famously said, ‘never waste a good crisis’ and some see in the current one a silver lining. In some ways, it may provide opportunities for reform that did not exist previously. This month, Science published an article on the state of Greek higher education. It describes the precarious state of universities in a country where few institutions are internationally competitive. The crisis has caused the reduction in salaries by 20% and budgets halved. However, it also has led to the passage of a new law restructuring the system, which is plagued by highly politicized university administrations that have always blocked reforms. While university rectors have gone to the Supreme Court to block the law, it has wide backing in Parliament and a new law governing research is expected to have an easy passage next month.

It is also possible that just as we hear that ‘more Europe’ is the solution to Europe’s financial woes, ‘more Europe’ may become part of the debate about investments in the area of higher education and research. A very recent paper by Jo Ritzen and Luc Soete for the EU think tank, Notre Europe, notes that European institutions have existed along side national ones for a while now to help promote research and that they had already begun to overshadow them before the crisis hit. The authors view the crisis as a way to further the process and move more authority to European funding institutions. One change they call for is the transfer of public funding in basic and applied research from the national research councils of the member states to the European Research Council. They view the national organization of research as inefficient and stifling of innovation.

Whether member states would willingly cede their funds to a European agency remains to be seen. I think it is clear, however, that with the crisis in many countries, scientific research will need to rely more heavily on European funds; Greece, for example, is already almost entirely dependent on European structural funds for its research budget. So, whether we or national governments who have strongly held the view that higher education is their, not Europe’s domain, see this shift as a good or bad thing, I think there is likely to be some momentum toward more Europe and more coordination in research investments.

Politics vs. Economics

2012-01-13T15:11:00.000-08:00

This week ended with the expected, though no less demoralizing, news of more declines in credit ratings in Europe, or as Barron’s colorfully calls it, ‘Downgrade-palooza’. Both France and Austria lost their sterling AAA ratings and dropped a notch, and Italy, Portugal and Spain are expected to see their ratings drop two notches. Implications for borrowing costs aside, the economic news out of Europe highlights the intensely political nature of the ongoing debt crisis.

In France, with only about three months until the election, the news quickly turned into fodder for Sarkozy’s rivals. Finance Minister François Baroin made the announcement of the downgrade, saying it “means we must follow and amplify reforms. We must be bold. We must preserve employment. It's not good news, but it's not a catastrophe." With the exception of the Socialist candidate Hollande, who will hold a press conference on Saturday, others in the race used it as a chance to attack Sarkozy’s authority and competence.

While the downgrades made headlines, I want to point out another significant event today – the Italian bond sale. Yesterday, of course, analysts were practically giddy over the results of the sale of Spanish debt and markets and the euro rallied on the strong demand. In an auction deemed "hugely successful”, Spain sold €10 bn of 3 year bonds, more than twice its target, at a yield of just under 3.4%, down 1.8 percentage points since the beginning of December. This created the assumption of equally great things for today’s sale of similar Italian debt. But that auction was less effervescent than Spain’s. Yes, Italy did hit its target of raising €4.75 bn, but only just, and while the yield was down below 5%, markets were much less impressed because expectations had been raised by Spain’s results.

From an economic standpoint, the premium demanded from Italy doesn’t make much sense. Spain’s fundamentals are in worse shape than Italy’s yet markets are reacting much better. The reason is that the political situation is so much more stable in Spain and markets trust the Rajoy government to make good on its pledge to cut spending. See this video report of the BBC for an interesting analysis.

The political discussion on the continent is likely to heat up in the coming weeks. Mario Monti, backed by Sarkozy, had a stark warning for Angela Merkel on Wednesday. Without more help and concrete results that the public can see, there is likely to be a popular backlash in Italy against Europe. This shows that even well-respected leaders fear losing control of their domestic situation if economic prescriptions are carried out without regard to the political consequences.

POSTSCRIPT: See Art Goldhammer's French Politics blog for more analysis on the downgrades and what Europe is in store for.

We Have Lift-off

2012-01-10T23:24:00.000-08:00

At least that was the hope for yesterday’s speech by Ed Miliband, the head of the British Labour Party. It was hyped for days as his re-launch by the media, who see his poor standing in the polls and rumors in the party as evidence that his days as leader are numbered.

Many of the post-mortems on the speech are obsessing about whether it was a strong enough performance to get his leadership back on track. For what it’s worth, the consensus in the press is no, not really. That seems, though, at this point – 16 months into his leadership and three years before the next election- to somewhat miss the point: Labour is marginally ahead of the Conservatives even if Miliband’s own popularity is currently low and they should be doing better, the party does not jettison its leaders easily and it’s not clear who else in the party would gain enough support to replace him.

More to the point, this was an attempt to re-launch the Labour Party and more boldly, the politics of the Left in general. The speech buries New Labour. By focusing on the fact that the days of Labour victories during boom times are over, Miliband laid out a program (admittedly shorter on specifics than one might hope) for a new progressive politics in harsh times. He acknowledged that a Labour government in 2015 would need to make cuts but his is a rejection of the austerity sweeping Europe. He argues that the deep cuts that the Chancellor has imposed to lower the deficit (and that most of the other European countries with debt crises are doing) have not grown the economy but simply made the problem worse.

Miliband’s argued for a fairer distribution of economic rewards and a combination of higher taxes at the top as well as cuts. Some of his main points; “First, reforming our economy so we have long-term wealth creation with rewards fairly shared. Second, acting against vested interests that squeeze the living standards of families. And third, making choices that favour the hard-working majority.”

Will it work? Hard to say. Many of the points in the speech such as the emphasis on the famous ‘squeezed middle’ or attacks on crony capitalism are ones that he’s been pushing for some time but his thunder on them has been stolen as the coalition has embraced them as their own. It’s unclear whether the still strong Blair wing of the party will support what they see as attacks on business. He still needs to provide some specifics of actual policies that will lead to the job creation he envisions or how you encourage companies to ignore the short term interests of their shareholders. In this respect, it was not nearly as strong a speech as the one recently delivered by Obama in Kansas. And who wins the British election in three years time will have more to do with whether the economy is recovering at that point. But, it is the beginning of a conversation in Europe about both the limits of austerity and the old politics of the Left. For that reason, it’s worth listening to.

Is Social Democracy Dead?

2012-01-06T08:08:00.000-08:00

Although the financial crisis has caused a fair number of casualties for incumbent governments, with voters holding governing parties of whatever political stripe responsible for the crisis, these are especially hard times for social democracy. Since Lehman declared bankruptcy in 2008, social democrats have lost 19 of 24 elections in Europe, prompting a lot of speculation about whether social democracy is dead.

Reports of its death are certainly premature and some feel on the left that publics will inevitably tire of austerity and may bring them back to power in those countries experiencing tax hikes and stark cuts in services and entitlements. But there is no denying the sense of malaise with respect to the social democratic project and its identity. Where social democratic parties are blamed for the crisis and have been voted out, they’ve lost credibility as stewards of the economy, making it essential that they regain the confidence of voters by offering a convincing argument that the can indeed be trusted again with the keys to the Treasury.

But how? This clearly takes time, the articulation of a viable alternative and possibly an admission to the public that some of their policies while in power were flawed. All of these can exacerbate internal party tensions. These dynamics are playing out in several countries.

In the UK, Labour Party leader Ed Miliband is struggling both with growing internal criticism of his leadership and getting his vision for a radical rethinking of Labour politics across to the public. Yesterday, Lord Glasman, one of the leaders of Blue Labour and ally and close supporter of Miliband, published a piece in New Statesman that ignited the Twittersphere and sent conservative-leaning media into a frenzy. Glasman’s claim that Miliband, who already trails Cameron in polls, has “no strategy, no narrative and little energy” comes on top of weeks of relentless pounding by the press that the party leader is not up to the task and whispers of discontent within the party.

But in many ways, when read in context, Glasman's piece is not the act of treachery many are making it out to be, even if this loose cannon academic ought to have known how it would be portrayed. Marc Stears, also aligned with Miliband, defends Labour’s leader as having to navigate what is essentially new territory for the Left: coming up with a program in an age of austerity when the traditional toolbox of the Left is empty.

It is true that Miliband has been slow to articulate his vision for reconfiguring Britain and addressing the ‘squeezed middle’ and he may have waited too long to dispel the view that he is unelectable. And aside from any missteps by the leader, Labour may simply have to wait it out until they are no longer blamed for the crisis in Britain by voters, something that would be true no matter whom the party had selected as head.

But the next few weeks will be interesting as Miliband does try to connect with voters with his vision for a non-Blairite, non-Brownite Labour program. There are hints of that vision in various recent speeches: his focus on responsible rather than predatory capitalism, addressing the anger and hopelessness of many in the middle, but so far there have been few concrete policy formulations around these. If he is able to articulate some, he may set a tone and agenda for the European left, and in the process perhaps even save his job.

Next post, I’ll look at some of the internal leadership struggles in Spain as the Socialists there grapple with electoral defeat and a crushing economic situation.

Magyar Mayhem

2012-01-02T04:05:00.000-08:00

One of the questions prompted by the Eurocrisis, notably with respect to Greece, is whether there are mechanisms for a country that is not complying with the obligations of membership to be sent packing from EMU. Today, though, Hungary makes us wonder what might happen to a country that isn’t living up to expectations of EU membership, such as being a democracy.

Trouble has been brewing for some time. A number of constitutional changes that were passed by the Hungarian Parliament last year went into effect yesterday that have not just the opposition and human rights groups worried about their non-democratic nature but also the EU and the State Department concerned as well. The ruling party, Fidesz, led by Prime Minister Viktor Orbán, governs with a two-thirds majority (but received only 53% of the vote) and pushed through a constitution that has been called a clear departure from shared European standards for liberal democracy.

Most alarming to observers are changes to electoral rules and the independence of the judiciary, limits on the freedom of religion, and restrictions on the press. The cumulative effect of these is to ensure that Fidesz will be very hard to remove from power, even as they lose support from 40% of those who voted for them. Even if they were to be voted out of office, the bars for future changes will now be impossibly high for a government with anything but a super majority, an unlikely electoral outcome. These constitutional reforms are on top of other measures such as the law passed in the last parliamentary session of the year last week that effectively destroys the independence of the Central Bank and which caused EU and IMF officials to break off talks on an aid package for Eastern Europe’s sickest economy.

But its not just about ensuring that Fidesz has a vice grip on power; they are waging a culture war that is at odds with many contemporary European and cosmopolitan values by acts such as enshrining the definition of marriage as the union of a man and woman in the constitution or the appointment of outspokenly anti-Semitic management at one of the country’s leading theaters who have banned non-Hungarian works from the New Theater’s repertoire. Even the official name change of the country from the Republic of Hungary to simply Hungary has a somewhat ominous feel.

While the current Constitutional Court (whose sitting members will surely change with the new measures) two weeks ago unexpectedly struck down certain parts of the constitutional changes like withdrawal of official recognition of all but fourteen Churches and some aspects of the press restrictions, both the US and the EU are clearly worried.

Hillary Clinton has been voicing her concerns about Hungary’s drift away from democracy for six months and just last week sent a letter to Orbán. The US Ambassador and other State Department officials have also been publicly expressing frustration and dismay with the country’s trajectory. For its part, the EU is plainly apoplectic about the changes to the Central Bank. Before the passage of the laws restructuring the bank’s authority, EU Commission head José Manuel Barroso sent Orbán a letter urging him to withdraw the bills, saying the Commission had serious doubts about whether these laws would be compatible with the EU treaty.

But aside from burying the Prime Minister in correspondence, it’s not clear what options the US and the EU have. Too much pressure and they play into the hands of Orbán who will use the interference from foreigners in his nationalist rhetoric. And, while it has in no way come to it in the case of Hungary, kicking a country out of the EU would be as hard as out of EMU, which is to say, pretty much impossible as a widely cited ECB paper has argued.

Yet for the EU, Hungary raises the question of what to do with countries that behave badly in terms of their politics rather than simply their finances. If Hungary continues down a truly non-democratic path as its critics fear, one hopes that the EU will be capable of providing some meaningful answers to that question.

Turkey 2011: Out of Europe's Shadow

2011-12-31T12:49:00.000-08:00

As 2011 draws to a close, we can be certain that it will be remembered as the year of the Eurocrisis, with all the global economic uncertainties that implies. However, one of the biggest stories of the year with implications for Europe has been somewhat drowned out by the ongoing financial mess. That is the new role of Turkey internationally.

As Joshua Walker notes in his recent GMF piece, Turkey has been the unambiguous winner of the “Arab Spring” and the “European Fall.” Its role in the Arab Spring in particular has helped strengthen Turkey’s relationship with the US, strained over Israel after the Gaza flotilla incident. Its role as a US ally in the region, seen especially in the cooperation between both countries in pressuring Assad in Syria, has shifted Ankara’s focus toward Washington and away from Brussels. David Ignatius credits in part the developing friendship between Obama and Erdogan for the productive relationship.

With the rapid growth of the Turkish economy over the past several years (though forecasted to slow in 2012) and its newfound political role in the Middle East, the Turks might be forgiven for thinking that now the EU needs Turkey more than the other way round as Prime Minister Erdogan told Spiegel earlier this year. Indeed, Turkish public opinion towards the desirability of joining the EU has fallen precipitously since 2004, according to the 2011 Transatlantic Trends survey (though it has recovered some ground this year): fewer than half (48%) think it would be a good thing. In a poll of European elites conducted this year, the same minority percentage of members of the European Parliament favored Turkish accession.

Turkey still has some ways to go before Washington considers it a truly reliable partner as Hilary Clinton mentioned in an October speech. Obstacles include its weak record on democracy and human rights as well as its strained ties with Israel. But its growing power regionally and economically point to a day when Europe may regret its disregard of its neighbor.

Buon Anno

2011-12-29T13:17:00.000-08:00

Yesterday’s sale of short-term Italian debt saw rates cut in half compared with the last auction in November. While the drop on the yield for 6-month bonds to 3.25% was welcome news (though still over a percentage point higher than comparable bills sold ten days ago in Spain) and sent the Euro and markets up slightly, it is irrelevant in the larger picture of Italy.

Today’s more important auction of 10-year notes is a better gauge of sentiment and was widely anticipated. While borrowing costs dipped to just a shade under 7%, the level considered unsustainable and at which other countries have needed bail-outs, the results were both disappointing and worrisome. The Italian Treasury faced lackluster demand and was unable to sell what it had hoped, raising about €7 bn instead of its target of €8.5 bn. Rates rose again above 7% after the auction and traders claim that the ECB is stepping into the secondary market, buying bonds to stop yields from increasing further. This continued uncertainty in the largest of the Eurozone's troubled economies sent the euro to multi-year lows against the dollar and the yen.

Mario Monti proclaimed himself relieved that yields were falling but was sharply critical of investors and to some extent his EU partners. Saying that Italy was moving in a direction “toward Brussels and far away from Greece” Monti argued that given the fundamentals of the Italian economy, there was no justification for the spread with German bonds, which has crept back up over 500 basis points.

But Monti’s, and Italy’s, problems are not likely to be over any time soon. Business confidence in Italy is falling faster than bond yields and has hit a two year low, announced the national statistics institute today. This follows on their Christmas Eve message that consumer confidence has fallen to a 16-year low, which helps explain the 13% drop in movie attendance over the holidays in Italy and the worst season for retailers in a decade.

While Monti still has not given details of the reforms he will propose early in the new year, his focus on the pension system and tackling Italy’s dual labor market by easing restrictions on hiring and firing puts him on a collision course with the trade unions. Without parliamentary support from the main opposition, the PD (Partito Democratico), which is influenced by the largest trade union, the CGIL, Monti will find it tough going to get his reforms passed. That, in turn, is likely to spook the markets and send the country’s borrowing costs to unaffordable levels.

Buon Anno? Not for Mr. Monti.

Glad Tidings?

2011-12-20T11:28:00.000-08:00

The new Spanish government got an early Christmas present in the form of a very successful treasury auction today and much lowered borrowing costs. Their hopes to sell between €3.5 and 4.5 bn in short term (3 and 6 month) debt were wildly exceeded with total sales of €5.64 bn. Even better was the sharp drop in yields with the 3 month bills down to 1.735% from 5.11% in November and 6 month debt down to 2.435% down from 5.227%.

In Germany, business and consumer confidence also rose in surveys out today, to the surprise of analysts. Good news from Spain and Germany sent markets and the Euro up today.

However, there is not a wholesale shift of markets to optimism. In terms of countries on the brink, Spain is pulling away from some of its neighbors. The spreads on Spanish and Italian debt hit a record this past week with a premium to hold Italian debt. And Agios Vassilis is unlikely to bring much cheer in his bag to the Greeks this holiday season: today’s auction of Greek 3 month T-bills saw rates rise to 4.68%, almost three times higher than Spanish borrowing costs and up 5 basis points from the November auction.

Relatively greater confidence in Spain exists because it has a government and political situation that seem more under control and with the ability to carry out proposed reforms. It helps that the new government was elected; while technocratic governments in Italy and Greece may have been the only option, they do not have the same legitimacy as Rajoy who won a decisive victory a few weeks ago. Unlike Monti and Papademos, he is not faced with opposition parties jockeying for power as they look to new elections or, so far, rising threats of strikes and demonstrations. He will need to maintain that confidence.

While Spain might look to be in better shape right now than other Southern European states, the New Year will bring huge challenges: the property market continues to take its toll on Spain’s economy and price declines are accelerating. Even more ominous, and to some extent a bit ignored in the day to day and week to week focus of the Eurozone crisis, Spain (like Italy) will need to roll over a mountain of debt in 2012, almost €120 bn, which is twice what they owed in 2011 and much more than what comes due in 2013. Unless they can secure manageable interest rates, the fears of the last several months will seem pale in comparison.

The Pain in Spain

2011-12-19T12:01:00.000-08:00

Today Mariano Rajoy, Spain’s newly elected President, gave his first speech in his new role before Parliament and laid out his plans to deal with the crisis. Like Monti, his counterpart in Italy, Rajoy’s proposed cuts fall at the lower end of estimates these countries were assumed to need. In the case of Spain, that amounted to a deficit reduction of somewhere between €15 and €30 billion in cuts and taxes. There is extensive coverage in El País of Rajoy’s plan, which offers €16.5 billion in cuts to the Administration and other measures.

Some of the highlights of Rajoy’s plan include:

· Linking pensions to the consumer price index, the only increase in the proposal

· Freezing public sector employment except for the armed and security forces and basic public services

· Reform of regulatory bodies

· Eliminate early retirements to bring the real age of retirement into line with the official age and not repeal the law raising the retirement age to 67 (that the PP had opposed while in opposition)

· Shifting public holidays to the nearest Monday to avoid the ‘bridge’ holidays where any holiday now typically turns into stretch of days off to the closest weekend

But the biggest change is the Administrative cuts that he views as a fundamental restructuring of the State. Without elaborating the mechanics or specifics of cuts, this reform promises what all current plans in Europe intend to do to deal with the crisis, whether they come from parties in power or the opposition.

There is a focus on eliminating waste, reducing costs and improving services but without real proposals, that is the sort of meaningless rhetoric that often characterizes these debates and that the markets punish because they mask the lack of resolve. The devil is in the details and presumably over the next few months, the specifics will become clearer but there is little evidence that efficiency gains will be sufficient to tackle the deficit. There are fewer proposed tax increases than the new Italian Prime Minister offered in his budget that is to be voted on in Rome later this week. Rajoy has proposed however, similar to the Italian plan, a tax cut for firms that hire young workers and women in order to tackle the high unemployment among those groups.

For its part, the main opposition party the PSOE has been relatively supportive while at the same time underscoring both doubts and concern for the concretization of the plan. The lack of new taxes raises questions for the Socialists about where the money to pay for this plan will come from and they are insistent that the welfare state in Spain must be defended and not dismantled.

For everyone, the lack of specificity ought to make us wonder whether, when the details finally do become clear, the pain in Spain will be considerably higher than this first speech suggests.

An Unremarkable Election

2011-12-17T12:40:00.000-08:00

Thursday's by-election in the West London parliamentary district of Feltham and Heston to fill a safe seat left vacant by the death of its occupant would normally have been unremarkable. However, because this was the first electoral test in the UK after Cameron's rejection of changes to the EU treaty, interest was high in the run-up to the vote, at least among pundits if not the people.

The seat in this working class constituency near Heathrow has been traditionally Labour and they were expected to hold it. Thus speculation centered around the meaning of the margins: would the Tories’ post Brussels bump in popularity that puts them ahead of Labour for the first time this year have an impact in this contest? Could the Lib Dems manage a showing that suggested their death spiral is proceeding at something less than terminal velocity?

Further complicating the picture is the position of Labour Party leader, Ed Miliband. His own popularity ratings have fallen sharply from the highpoint he achieved with his strong stance on the phone hacking scandal; the past week has been a particularly difficult one for him with reports of party militants’ dissatisfaction with his leadership. So, normally a relatively safe Labour seat during an economic downturn under a Conservative government ought to mean a no-brainer win for the left. But much of the commentariat saw the potential for a slide if not loss for Labour by interpreting this as a referendum on Miliband’s performance.

Despite the overloaded expectations, Thursday’s election was in fact unremarkable. Labour, as expected, retained the seat and captured 54% of the vote; this was a swing away from the Tories of 8.6%. Certainly, this was a good way to end Miliband’s bad week – even a very narrow win would have increased the grumbling within the party – and this gives him some much needed breathing room. But it was hardly the ‘verdict on the government’s failed economic plan’ he claimed. For one thing, at just under 29%, the turnout was the lowest for a by-election in more than a decade and the swing away from the Tories in a by-election was the lowest since the coalition came to power. For another, victorious Seema Malhotra was an appealing local candidate who followed an unpopular predecessor, the deceased Alan Keen, who had been caught up in the Parliamentary expenses scandal.

For the Lib Dems, their result was face-saving only in the sense that they placed third. With 88 votes more, they avoided the ignominy of coming in behind Ukip, the right-wing, anti-Europe UK Independence Party. Still, the drop from 14% in the last election to just 6% for the Liberal Democrats may be a sign of their general unraveling.

So, Thursday will have brought a sigh of relief for Miliband and Clegg and maybe even Cameron but no clear indications of dramatic shifts for the Tories and Labour or that the particular issues dogging the parties are going away.

Winter of Discontent

2011-12-15T01:45:00.000-08:00

One of the constant background murmurs in the Eurocrisis discussions has been the issue of how long countries subjected to austerity measures would actually be able to stick with a regime of cuts and other deeply unpopular policies. That uncertainty is part of the argument of the Germans and the ECB against the latter buying the debt of countries like Spain and Italy. The fear is that governments will lose their resolve to institute reforms in the face of domestic public opinion, if they know the ECB will buy their debt instead of going to the market where rates could be punishing and unsustainable.

There are two problems with this argument. The first is it’s not working: the markets are not responding as hoped for to austerity plans. In Italy, despite Monti’s proposed €30 billion in cuts and taxes, rates at Wednesday’s auction of Italian 5 year bonds hit a new high of 6.47% which is closing in on unsustainable. And the secondary market for 10 year bonds exceeded the magic 7% figure, that which triggered bailouts for Greece and Ireland.

Second, and not unrelated, popular pressure against austerity is starting. In Italy, the leader of the largest trade union warned of a ‘social explosion’ as a week of protests and strikes begins while the rightwing Northern League disrupted Parliament in a show of obstructionism. On Tuesday, French trade unions led some (small) protests across the country in reaction to the government’s austerity package. The courts are also being used to halt some austerity measures. The Guardian reports that the regional government of Catalonia is suing the newly elected Rajoy government for the return of ¾ of a billion euros in tax refunds that Madrid is withholding as part of its austerity plan.

Right now, there continues to be public support for the newly elected or installed governments to institute the austerity packages that are viewed as the only means of averting financial disaster. However, as the impact of the cuts is felt and if the hoped-for reduction in borrowing costs does not materialize making it harder for growth to resume, Europe, or at least parts of it, may be headed for a winter of discontent.

Winners and Losers

2011-12-12T22:23:00.000-08:00

The ink is drying on last week's proposed EU treaty amendments meant to help contain the Eurozone crisis by tightening up restrictions on deficits and subjecting EU member states to greater scrutiny of their budgets. Although it is too soon to tell what effect the changes, if passed, will have, some winners and losers are emerging from the process.

Two clear winners are Germany and Poland. In the case of Germany, it was able to push through its views on austerity and Angela Merkel, in particular, has strengthened her hand. Poland has also come out of the meetings with an enhanced standing as it firmly threw its lot with a more integrated Europe.

In Britain, in contrast, there seem to be all kinds of losers. Foremost is the drumbeat of opinion that says that in failing to sign the new treaty, David Cameron has marginalized the UK. While public opinion in Britain supports his actions, as do the Eurosceptics in the Conservative Party, his coalition partners the Liberal Democrats, the most pro-European of all the parties, have suffered a blow. Nick Clegg has attacked the vote and Cameron's actions threaten the coalition. In the end, it's not even clear that the ostensible reason for Cameron's vote - to protect the City's interests - will accomplish that; many people, including those in the City, argue that to be left out of decision making regarding financial regulations will harm the British financial sector.

Still, the biggest loser may be the credibility of the Europeans to sort out their financial mess. The sharp drop in world markets on Monday and a return to rising rates on Italian bonds suggests that the decisions of last week have done little to reassure the world that the Europeans have finally put their house in order.

The Berlin Consensus

2011-12-08T14:38:00.000-08:00

The finger-wagging Washington Consensus of the 1990s that prescribed market based reforms for crisis-ridden developing countries has been replaced in Europe by what we might call the Berlin Consensus that calls for austerity in the Eurozone countries in crisis. Regardless of the outcome of the Brussels Summit taking place today and tomorrow for the fate of the Euro (and you can vote on what you think the likelihood of the breakup of the currency is at CES’s Facebook page), austerity measures will be the order of the day.

Governments in Ireland, Greece, Spain and Italy are slashing budgets, subsidies and social programs in order to try to bring deficits in line. The pain this will cause in terms of lower wages, higher unemployment and disrupted lives was made remarkably human by the Italian Welfare Minister, Elsa Fornero, who broke down in tears while announcing the austerity plans.

Yet in the slash and burn environment as countries race against the clock to assure markets that they are serious about getting spending under control, there is the danger that too little in these measure will focus on getting the country growing again or that untargeted cuts will destroy existing foundations for future growth. The Guardian’s analysis of Monti’s budget in Italy, which cuts €30 billion, suggests that there is little that will stimulate growth. Broadbrush cuts to higher education in Ireland, especially in science, threaten to undermine the high-tech infrastructure that has been crucial in attracting investment and skilled talent to the country for the past two decades, reports the Irish Times.

The human costs for long-term stagnation are also staggering. El Pais reported today that Spain, at 31% has the highest percentage of overqualified labor in the EU, that is, people with university degrees who are employed in jobs that don’t require one. Ireland is second with 29%. This inevitably leads to brain drain – indeed, highly skilled workers in the Iberian peninsula have been fleeing to emerging markets in their former colonies in Latin America and Africa where salaries and prospects are better. With youth unemployment rates near 50% in Spain and Greece and over 30% in Ireland, Italy and Portugal, the likelihood that these countries lose their best talent pool or that a lost generation is never really able to make up for the lost wages and experience (see the NBER paper on the long-term effects of graduating in a recession) is high.

Without a better consensus on what kinds of austerity measures are necessary and what kinds of policies will set the stage for increased productivity and employment in the countries currently in crisis the Euro project is not viable. All kinds of austerity plans will inevitably be painful but the point is not pain in and of itself; they need to be ones that decrease the imbalances in competitiveness of the northern and southern economies. Otherwise, the Berlin Consensus, like the Washington Consensus that came before it, is doomed to fail.

Melancholia

2011-12-06T10:15:00.000-08:00

Yesterday, as I was listening to Guido Goldman's talk on Germany and the Euro Crisis at the Center for European Studies, I was struck by the similarities between the way debt crisis is playing out this week and Lars von Trier's brilliant film, Melancholia.

In the film, an exoplanet is on a potential collision course with Earth. The next crucial days will tell whether it destroys the planet or simply keeps people in a state of deep anxiety and a rising sense of panic. Early on, despite the growing blip on the horizon, most of the characters are unaware of or ignore the danger and party in some vague Northern Europe land at the lush, candle-lit manor of a hedge fund manager.

Here on real Earth, there is a deepening sense that an exocurrency threatens to crash in Europe and destroy the global economy yet the northern Europeans don’t get the danger. Goldman pointed out, in a sentiment that was clearly shared in the room, that this week is crucial for the fate of the Euro. All eyes will be on the Brussels summit on Thursday and Friday to see whether the leaders of Europe are able to agree on measures to resolve problems of the Eurozone in a way that calms the markets.

But the main thrust of Goldman’s presentation was why Germany is having such a hard time doing what everyone wants it to. His argument was nuanced but boiled down to this: it's because many Germans do not see a crisis, after all their economy is not in bad shape, and have been ignorant of what real failure would mean not just for the rest of Europe but for Germany itself. Thus, while the SPD is actually supportive of what Merkel now, belatedly, wants to do, she hasn’t had the support of her own party and coalition partners to act. For Germany to act, there has to be a real crisis.

Let us hope that the politicians have not waited so long that it becomes impossible to shift the trajectory of the Euro off the path of disaster and destruction.

Making a List, Checking it Twice

2011-12-05T06:05:00.000-08:00

Perhaps you overslept the 4:00 am sales on Black Friday or your friends and family do not understand the thrill of a waffle iron. To help you with the yearly chore of finding the perfect present, here are some books on Europe published this year that you might want to add to your holiday gift list.

Aerotropolis: The Way We’ll Live Next by John D. Kasarda and Greg Lindsay. Not strictly or even mostly a book about Europe, this book describes the airport city as an important engine of economic growth in the 21^st Century. Though Schiphol in the Netherlands is a early model of this kind of city, the book describes yet another way Europe may be overtaken by Asia. Whether we’d actually want to live in these potentially dystopic hubs is another question.

Boomerang: Travels in the New Third World by Michael Lewis. This is perfect for anyone on your list who wants to understand the insanity that led to the sovereign debt crisis and be entertained at the same time.

The Family Meal: Home Cooking with Ferran Adria by Ferran Adria. Ok, this is not technically a book about Europe but it offers a way to bring some of the ideas of the most influential chef of the last decade, Spain’s Ferran Adria, to your kitchen. While these recipes are not the fantastically hallucinatory creations he developed for El Bulli, the upside is you don’t need a particle accelerator to make them.

Liberty’s Exiles by Maya Jasanoff. In a season of revolutions across the globe, we are accustomed to seeing the fate of the winners and losers play out on CNN. This study rescues the story of an earlier group of those on the wrong side of history: the loyalists of the American Revolution and their diaspora throughout the British Empire.

Linguistic Justice for Europe and for the World by Philippe van Parijs. Just as a common currency in Europe reduced transactions costs and made the flow of goods easier, a lingua franca would reduce the costs of cross-border communication and facilitate understanding. At the same time, it would create injustices and this leading political philosopher lays out some ways in which those might be mitigated.

Nomad by Ayaan Hirsi Ali. The unrelenting criticism of Islam will grate on some but it’s beautifully written and the description of a tolerant, multicultural Holland that we now see slipping away is compelling. Also, her discussion of money, particularly the extension of credit to immigrants, is an element of the credit crisis rarely viewed.

Power Shifts East

2011-12-03T08:11:00.000-08:00

Among the many calls for ‘more Europe’ and greater integration to effectively tackle the problems of the Euro, last Monday's blunt speech in Berlin by Radek Sikorski, Poland's outspoken Foreign Minister, merits perhaps the most attention. If life outside the Eurozone might seem rosier to some within the struggling member states, Sikorski made it clear that the future of Poland, one of the EU’s most dynamic and fastest growing economies, lies within it. Rather than wanting to flee the currency union, Poland is on track to adopt the Euro within four years because there is no other way, for them or any other country in Europe.

To the stunned silence of his German audience, Sikorsky rebuked the Germans for failing to acknowledge the facts: that they actually gain more than anyone from the union, that they’ve enjoyed lower borrowing rates than they otherwise would have, and that having broken the terms of the GSP themselves, they are not the hapless victims of other countries’ profligacy. Because a breakup of the Eurozone would be ‘a crisis of apocalyptic proportions’ for Germany, Europe and its neighbors, he demanded that Germany take the lead in fixing it because they are the only ones capable of doing it.

Urging Germany to deploy greater power is a strong sentiment coming from a Pole (and Sikorski’s willingness to pool Poland’s sovereignty sent the opposition at home in Warsaw into a lather), but he also made it clear that the future of the EU lies with Poland. This speech puts Europe on notice that Polish support for a stronger, more integrated union comes at a price: a bigger role for Poland more in line with its size and increasing economic power.

This is not the first time Sikorski has made this point about Poland’s new role in the world; in other speeches, he has signaled that partnership, not subservience, would characterize Poland’s support for US military actions or suggested that it is Poland, with a recent history of successful democratic transition, not the major powers with a record of failed attempts at democracy export, that could tell the countries of the Arab spring a thing or two about the road to a thriving democracy. But if the analysis of Edward Lucas of The Economist is right, this speech marks a critical turning point in the politics of Europe.

20-N was not the Worst Election Ever for the PSOE

2011-12-01T12:09:00.000-08:00

PSOE

Contrary to the breathless headlines on virtually every story covering last week's Spanish elections, it was not the Spanish Socialists' worst election ever. True, they lost 4 million votes, 59 seats, the election and handed the conservative PP an absolute majority for the first time in history. But this was an election the PSOE expected to lose. No governing party would have survived having to make the cuts that the debt crisis forced them to; let's not forget this was the 5th European government to fall victim to the crisis. And it's not over: the outgoing Zapatero government cut €10 billion but to meet the target deficit of 4.4% of GDP next year, the new Rajoy team will need to find up to €30 billion in cuts and taxes that will be wildly unpopular. This is not a bad time to go into opposition.

Still, the party faces challenges on its road back. They need leadership badly and the party will be electing a head in February; Rubalcaba, the party's sacrificial lamb of a candidate, can't be blamed for the election but he is too associated with the government blamed for the crisis. Others come with baggage: Carmé Chacon, former defense Minister, said recently "Let's see if anyone dares say that a Catalan woman cannot lead the Socialist Party," but the disqualifying word in that sentence may be 'Catalan'. Other regional leaders like Tomas Gomez or Jose Antonio Griñán are not doing well electorally on their home turf. The best candidate by far, Patxi Lopez of the Basque Country, has made it clear he's not interested in the job.

Equally though, they need a credible program. Both the PSOE and the PP virtually ignored the indignados movement but one not need embrace the youthful protesters to understand that the lack of faith in the future resonates with both the young and the middle class. Providing a response to that, once the immediate turmoil with the euro and the bond markets is past, will be the key to future electoral success . The PSOE, and this is true of much of the European left, is going to have to come up with a credible take on managing and encouraging growth in what is likely to be a prolonged period of stagnation. They cannot over-promise in terms of spending or social programs, tempting though that is for a party trying to get elected, but need to offer a plan of both cuts and sensible expenditures like long term investment in infrastructure, targeted education investment, reforming the dual labor market and pension system in ways that will eventually create jobs.

To do that, they are probably going to need to rethink their relationship with the trade unions and push for reforms to the collective bargaining structure and severance payments that helps those with jobs covered by agreements, but do not allow a substantial reduction in the unemployment rate or create conditions for external investment. This is not an easy thing to do, of course, especially for a party on the center-left. But these kinds of electoral defeats are precisely the time when parties have an opportunity to regroup.

So what was the PSOE's worst election? 1979. They had expected to win and were thrown into chaos when they did not. What followed was a reconfiguration of the party, a purge of much of the left, a move toward the center and a platform that allowed them to come to power in 1982. Clearly the challenges they face now are different, as are the policy prescriptions to move the country forward. But this election does not mean that the PSOE need be consigned to a period of long-term opposition if they take advantage of what the defeat offers them.