The Apparent and Overstated Death of Europe

Much has been written about #Brexit and the impending “death of Europe” over the past few days, and much more will be written in the future. A bit of perspective is in order.

The European Union started as a nascent common market for coal and steel, and has since evolved into a supranational organisation with extensive competency in some areas and limited competency in others.

The original concept of being a free trade area has evolved. This initially applied to products. It then expanded to the “four freedoms”: freedom of movement of goods, people, services and capital.

Along the way, it was found that in order to achieve these four freedoms, there needed to be unified standards in a number of areas. This rapidly expanded into areas such as innovation, science and technology, research, education, and justice.

It deserves mention that the decision-making behind this standard-setting was voluntary. Member States are represented at several levels in the European Union. The first is the European Council, which is composed of heads of state, and its subsidiary councils, such as the European Economic and Financial Council, composed of Economics and Finance Ministers.

The second main level is the European Parliament, which today has more extensive powers over key areas of legislation.

Member States have also had several opt-out clauses and possibilities, such as Britain’s decision to opt-out of Schengen.

Why was the EU so Attractive?

There are several points why the EU was very attractive to Member States and to European citizens which have been totally overlooked in the recent Brexit debates.

Institutionalising Democratic Legitimacy and Good Governance

For weaker democracies, such as Spain, Portugal or Greece in the 1980s, or for the Central and Eastern European states that joined from 2004 and later, the European Union was seen as institutionalising democracy and good governance.

By joining the European Union, these countries felt that rather than entrusting their governance to a handful of corrupt politicians and political parties, they would benefit from wider European governance. For the most part, this has been true, particularly at that stage of development of each country applying to join. The European Union system has, whatever its many failings, acted as a brake on some of the more insalubrious tendencies of autocrats and oligarchs.

Could more have been done? Absolutely. But we should not forget that in each case, national stakeholders and voters have the primary role in the composition of their own political parties and governments, and in the operation of their own economies.

Greater Security

Another strong value of joining the European Union was the perceived benefit of external security. This was very strongly felt in countries like Greece or Cyprus, which have been confronted by Turkish aggression, or in the Baltics, which were confronted by Russian aggression.

Remember that this is a perceived benefit. Will the European Union come to the military aid of Cyprus if it is invaded by Turkey again? Doubtful. But at the same time, it is inconceivable that the same conditions of ethnic or communal violence that preceded the Turkish invasion of Cyprus in 1974 could re-occur in an EU Member State.

International Markets

A main attraction for employers and companies has been the opportunity to benefit from integrated international markets. Whatever its other failings, the EU has made tremendous progress in unifying the European market.

There are still many issues to confront, including market fragmentation due to languages and a complex national tax system, but the situation today compared with that in 1986 or 1996 is objectively far better.

International Employment and Residence

A similar attraction is the opportunities for international employment and residence open to EU citizens. It is this flexibility which enables me, an EU citizen, to be able to choose 28 countries from which to live and work in, or to travel to without a visa. The situation today is incomparably better.

International Education

A similar attraction is seen in the area of education. An EU citizen today can choose any university from 28 Member States and, if s/he is admitted, is treated in the same way as the native of that Member State. For those of us who studied in the 1980s and 1990s, the situation today is simply far better. British universities have been among the major beneficiaries of this system.

European Union Criticisms

Have there been downsides? Yes, absolutely. My main criticisms of the European Union are:

1. In order to further the Single Market (which is evolving into a single political space), a “one-size-fits-all” policy is being implemented on countries and sectors for which this policy is no longer suited. A good example is the Euro. The Euro will have a deleterious effect on several Member States, precisely because they are either not sufficiently competitive, or because of entrenched advantages (economies of scale), or because they find themselves at a different stage in the economic cycle.
2. As a free trade zone, the European economy has been liberalised, and this magnifies and multiplies the benefits open to competitive players while exacerbating the downsides felt by less competitive players. This is seen both between the EU Member States (for instance in wage competitiveness and manufacturing offshoring within the EU) as well as externally (for instance, in WTO access for China). Not enough has been done to assure competitiveness, although here too, the primacy is that of the Member States, not the European Commission. The Commission has been preaching the gospel of competitiveness and innovation since at least 1996, but most governments and political parties have not been listening.
3. In terms of the management of public funding, and particularly grants and subsidies, there is now overwhelming evidence that European Union funding has become a vector of corruption in some Member States. There is also overwhelming evidence that the Commission is not auditing enough projects, and does not have a sufficient audit procedure or resources to do this properly. Again, responsibilities here are divided: many Member States have blocked efforts to improve audit performance, precisely because of the nexus between political contributions and bribery for EU-funded public works.
4. In terms of overall budgetary priorities, the EU has invested in certain constructs such as the Common Agricultural Policy, which dramatically skew and distort domestic markets and EU operations. It is unreasonable, for instance, that agriculture, which accounts for less than 5% of EU GDP, absorbs over 40% of the EU budget each year. Again, the role of the Member States in determining these budgets and allocations is decisive.

The Level Playing Field means Higher Competition

I have been involved in the overall European project since 1992. In September of that year, I started working as an intern / researcher at Kienbaum und Partner, a German consultancy specialising in public sector restructuring. My first project was organisational restructuring and merger of the police forces of the German State of North Rhine-Westfalia. This was followed by a feasibility study to bring the UNDP and UNFPA headquarters units from New York City to Bonn, Germany. Then by a project to support the post-privatisation competitiveness of a Czech food producer. Then a project to restructure the Cyprus Tourism Organisation.

Later on, I helped restructure heavily-indebted manufacturers in the Slovak Republic; advised the Association of Cyprus Travel Agents on the impact of EU Entry; set up management structures for EU funding in Cyprus; and worked on a range of other EU-funded or related projects.

In this time, I have come to a single conclusion: The European Union is simply a legal and operating platform. As an institution dedicated towards achieving a common market and a common legal space, the EU is providing a level playing field. In some areas, it has been successful. In others, it has failed.

This level playing field amplifies the normal competitive effects in any economy or market. For instance, if Germany cars can be imported into France at zero tariff, and French consumers for whatever reason prefer German cars, then French car manufacturers have a problem.

Similarly, if Germany can export cars to Greece, and the Greek government can no longer levy a tariff on the import, then the Greek government is deprived of a revenue source and must find another.

The danger encountered for individuals, companies, or governments is when they abandon basic financial common sense and an understanding of competitiveness.

The EU is not there to pay your bills. The EU will not provide you with an education or a job. It will not protect your borders. It will not attract investors.

The EU simply provides the rules of engagement and access.

What is amazing is just how much electorates and elected leaders have lost sight of this very simple truth.

Today we compete on a global playing field. We face massive price and technological competition from China and other Asian competitors. We face massive innovation competition from the United States in software / services, and from Latin America in agricultural production.

We are also faced by the spectre of a new military arms race on the eastern border of Europe; by domestic and foreign religious terrorism; and by imploding nation states in the Middle East and North Africa.

Internally, we are beset by an aging population, by overweight and inefficient public sectors, and by the patholody of self-entitlement. Our pension systems and wider public sector governance is based on an economic and social model that existed in the 1950s, but which today no longer applies.

We have created the myth of a “social state” in many countries, where large segments of the population rest idle while a majority struggles for economic survival.

This myth of a “social state” has also morphed into the myth of a “social Europe”, where the countries that are doing better economically are supposed to pay for those that are not.

By enshrining the financial system of being a net contributor or a net beneficiary, this European financing system has ignored the idea of quality. What are the consequences when a country is badly managed, as was the case of Greece under PASOK and New Democracy?

At what point should the European and bilateral spending stop, because it is no longer an agent of positive change, but a vector of corruption and mismanagement?

Even within the European Union, the competitive struggles of the nation-state continue. Indeed, they are amplified, because competition is that much higher.

Unless voters learn this lesson and act responsibly, the only future scenario that will unfold is more economic collapses in the style of Greece, or more populism in the style of Farage or Le Pen, or more waffling in the style of Cameron or Holland.

(c) Philip Ammerman, 2016

This post was first published on Navigator Consulting Group. 

Thoughts on Brexit

It’s Friday morning, June 24th and already I’ve received several inquiries about the meaning and the impact of the #Brexit vote. Although the full referendum vote hasn’t been counted, Leave currently has a lead of over 1 million votes, and in a referendum, it’s the number of votes that count, not their distribution.

Why Brexit? 

So why Brexit? Primarily because domestic economic conditions have been so difficult, UK voters have cast a very strong protest vote. 

High Cost of Living / Changing Economic Patterns

For years, the UK middle class has been “hollowed out” by high costs of living. The two main components of this are property prices and high debt amounts (and costs) for higher education. In contrast, the number of well-paying jobs in the UK has been shrinking, particularly for less-skilled workers. In this respect, the UK is not an outlier: these are common trends that affect nearly all OECD countries.

Just as these are common trends, this also means the EU is something of a symptom, not a root cause (with some important exceptions). The number of low-income jobs is rising because in a service economy, this is an expected trend. The next stage of this trend will be to replace human workers with software and robots, so this trend is only expected to continue, exacerbating the problem.

Property

Rising property prices have created an entrenched class of very highly rewarded insiders. Property prices have risen for a number of reasons: UK cities such as London are seen as a global haven for capital, and high-end property has been booming as a result, up until the recent stamp tax. UK local authorities (municipalities) have not been authorising enough new builds, or new builds in the right location. Economic immigrants from the European Union (in particular the lower-wage new EU Member States, but even older members like France or Spain) have been bidding up the cost of rent. And, perhaps most importantly, everyone has jumped on the property bandwagon because it has been an intellectually easy proposition. UK culture is now, arguably, dominated by property anxiety and the smug selling of everyone on this bandwagon.

Zero Hour Contracts and Apprenticeships

Like Germany, the UK has introduced labour legislation that has effectively turned millions of younger and low-qualified, service workers in to wage slaves while flattering national unemployment statistics. This is the zero hour contract, a work contract in which an employer hires an employee, but is not obligated to actually provide them with any hours of work. This is great for flexibility, but terrible for skills generation and wages. And just like the German “mini-jobs” legislation, this has been a purely domestic decision that has had nothing to do with the EU.

The same exact issue is seen with UK apprenticeships. Born out of a desire to see younger people enter and upskill in the labour force, instead employers like Starbucks or McDonald’s have been using apprenticeships as a way of reducing labour costs. Again, none of this has to do with EU decisions. 

Trade

The EU has provoked at least two conditions which have exacerbated the British problem. The first is in trade. As a member of a large free trade zone, the UK economy now depends on the European Commission to monitor trade conditions and negotiate trade deals. There are a number of cases where the Commission has not reacted anywhere quickly enough to drastic cases of price dumping—notably involving multiple Chinese export sectors. Steel and building materials come to mind. The reaction in these cases must be swift: on an order of 1-2 months. The European Commission is simply not fit for this. Even here, however, I note that Member States have a responsibility to bring trade matters to the Commission, and the British Government has been quite remiss on this in the past.

Immigration

The second point is immigration (and emigration). Yes, there have been numerous EU immigrants to the UK: over 3 million. These have bid up the price of rent and have created downward pressures on labour prices. Most restaurants, hotels, retail outlets and other service industries in the UK today depend entirely on hosts of Polish, Lithuania, Bulgarian and Romanian workers, just as in the past they depended on other immigrants. This has created a new labour supply that has been, for the most part, extremely reliable and disciplined, and extremely useful for British employers. However, the number of non-EU immigrants to the UK is actually higher: over 5 million. And many of the latter carry cultural or social traditions which make integration and assimilation much more difficult.

Another point regarding population is that many British have actually retired and relocated within the European Union. These numbers do not show up adequately in the statistics: just over 1 million British have relocated within the EU. But this is because a large majority of British expats are retirees, and have continued their registration in the UK so that pension payments and National Health System access remain undisturbed. They actually live full time in areas such as Paphos, Cyprus, or the Spanish Mediterranean coastline.

Declining British Influence

A final point about the EU is that for at least 10 years, Britain has ignored the vital role of placing UK citizens in high-ranking positions within European organisations, starting with the European Commission. As such, Britain’s influence within the EU has been declining, while Germany’s has been increasing.

All these points have focussed domestic voter rage against the political system. The genius of politicians like Nigel Farage has been to define an external enemy (the European Union) as a focal point for that rage. This is a very old political method that has been an entrenched in politics since the time of the Roman Republic, if not longer.

Referendum Issues and Causality

So what brought about these referendum results? First of all, this referendum is a protest vote. But it is a protest not so much about the European Union, as about the dismal conditions of the British economy and society. Any referendum inevitably becomes about domestic political issues, and the UK Referendum is no exception.

Let’s look at some of the causalities expressed or implied.

Will British wages rise if 3 million EU workers are expelled from the UK?

Yes, but only if British prices rise as well. In the short term expelling 3 million mostly low-cost EU workers will bid up the price of labour, resulting in a wage increase. This wage increase will require hotels, pubs, insurance claims processors, building companies and many other firms to raise the prices they charge British consumers.

Over the medium term, however, this will accelerate the replacement of low-cost / low-productivity workers with software or automation. Over time in a developed economy, there is very little chance wages in low-cost, low-productivity professions will rise. It is more likely that job positions will be replaced.

Will British property prices fall if 3 million EU workers are expelled?

Yes. But that fall in prices will have an extreme impact on property demand, and therefore property prices. The trillions of pounds invested in the British mortgage system will be affected as a result. And the financial returns and capitalisation of everything from banks to pension funds will also be hit. The UK has created a financial monster from its property system. A correction is needed, but a correction has to be sustainable.

Will the UK “regain control” over its government if it leaves the EU?

Yes. However, I note that in most cases, the UK has agreed to every EU decision made over the past 30 years. You only have to examine British voting in the European Council or the European Parliament to understand this.

The main problems within the UK are not the result of EU decisions, but domestic British considerations and decisions.

There is nothing that shows to me that the quality of British politicians, and their decision-making process, is any better than the EU process. Micro- and domestic-considerations dominate, interpreted through an electoral prism.

A typical example here was the decision to allow UK universities to charge up to £ 9000 for tuition, together with the corollary decision that 50% of young adults should have a university education. These decisions have had nothing to do with EU policy, and have created tremendous distortions in the educational system, consumer spending and debt markets at a result.

Will the UK economy experience a resurgence from being able to strike free trade deals with other countries?

Doubtful. The UK already benefits from being part of the EU because the EU negotiates as a single trade bloc. This means that trade rivals such as China have to negotiate better terms.

Does anyone really believe that the UK will be able to negotiate a better deal with China alone? I don’t. At least, I remember what happened the last time the UK tried a major negotiation with China. Hong Kong is still suffering over it.

The UK will only be able to improve its trade position through two potential policy options:

1. Protectionism: The UK would have to implement trade barriers against a large range of products and services in order to shelter domestic industries. This would result in a wholesale and retail price rise in most sectors.
2. Productivity, Innovation and Export-Led Growth: The UK would have to really align public policy and sectoral orientation on productivity, innovation, and export-led growth.

I note that this second option has actually been EU policy for years, and that the UK has failed miserably at it in most sectors. Indeed, many British success stories today are actually due to immigrant managers or foreign companies buying and turning around British icons.

Leaving the EU will enable the UK to manage itself better

Doubtful. Does anyone really believe that Nigel Farage would be a better manager than Jean-Claude Juncker? I don’t.

This is not to say that I believe JC Juncker is a great manager: far from it. What I am saying is that the quality of elected public sector managers in nearly every country I work in is abysmal, because the political process no longer serves the goal of having competent national management. Instead, it serves either special interests, or a mix of demagoguery and populism, and I am not sure whether one is the handmaiden of the other, or whether one is the outcome of the other.

Whether we look at the United States or the UK or France or Greece, a common issue is the inability of elected insiders to respond to the fundamental challenges affecting society and the economy. Whether this is an inability due to lack of competence, or an inability due to lack of actual desire, is open to debate.

At the end of the day, the only thing that is going to save the average OECD countries is a mix of very hard work, continual innovation, strong foresight and forecasting skills, and honest and competent leadership.

Contrast that with what we have:

• Special interests dominate the electoral process
• We elect lawyers with no real business experience or track record of success
• Politics is the one profession where lying is not only permissible, it is necessary
• The political process occurs on a timeline which is totally unrelated to economic or social needs
• There are no consequences of failure
• The press consistently misrepresents nearly every major issue.

What is more dominant in the average daily engagement of a British citizen today? Facebook, or David Cameron? I believe the answer is Facebook. And I am not singling out British citizens: I believe this is the same for nearly every EU or OECD citizen.

Future post to deal with the next steps in the process. For now, it’s urgently time to get back to work.

© Philip Ammerman, 2016

This post was originally published on Navigator Consulting Group.