Monday, 5 January 2015

Political economy of the UK and Europe, January 2015: Doom and Gloom edition

This week I started a new job in the Department of Economics at the University of East Anglia. To celebrate, I will share my thoughts about the UK economy. As I am not a macroeconomist, these ideas are opinionated ramblings, not expert knowledge.

Florence, once at the heart of early capitalism, is now a tourist town, lying in state among its architectural heritage. Europe is making the same slow transition from a place where wealth is created to a place where it is spent. Better economic policy could slow but not stop this change, since the markets of Asia contain the majority of the world's population, including two massive polities: that is the customer base to start your business, if you want to conquer the world. Since the gains from better economic policy would be limited, we can predict that it will not be forthcoming. Europe will see some economic reform, perhaps even Thatcherite revolution in places, but not enough to clear the huge overhang of debt.

The UK is no exception to this story. It now has an economy driven by house prices, like a tropical island whose inhabitants give up fishing so as to sell their shacks to millionaires. The Conservative party's constituency is the homeowner, its policies are designed to shore up house prices, and the economic recovery to date is not based on real economic reform but on low taxes (unsustainably low given our debt) and a house price boom with the attending rise in consumption. The Labour party's constituency is the public sector: its policies may be more competent and responsible, but it is equally incapable of economic reform. Both parties have second rate leaders.

Institutions – the police, judiciary, local government and so on – need to be coordinated: this can happen either via political leadership, or by coordination through the informal networks we call the establishment. Unfortunately, we have a vacuum of political leadership, and the traditional establishment has collapsed. There are plenty of people in power, and they certainly know each other, but they have no shared values or mutual trust on which to act in concert, and they are equally untrusted by the man in the street. When institutions are not coordinated, they continue to function, but begin to work in a way that serves their own interests rather than that of the whole. This will increasingly happen here.

On the “high politics” side, the UK's decision to remain outside the Euro, while economically prudent, has cemented the Franco-German axis. I do not know whether the Eurozone will survive the next year in its current form. If it doesn't, then the UK is on the outside of a failing continent, which, like Italy in the 16th century, will be pulled apart by the surrounding larger powers (think the Cold War, but more chaotic). If it does, then the UK is on the outside of a strong regional player which will understandably make the rules to favour French and German capital, not UK financial capital. Neither is appealing, though the second is preferable.

I see I've ended up writing about politics not economics, but as politics determines economics, that's fine. Clearly this is not an optimistic view. I wish I could suggest policy solutions, but in political economy, notoriously, there is no actor to appeal to outside the system. The role of social science is sometimes just to help people understand and cope with ineluctable realities.