Brexit and the slide into nationalism
There is a British ‘finest hour’ reflex susceptible to appeals to glorious isolation     

by: Gideon Rachman

Sitting on the Heathrow Express last week, returning from a short trip to Berlin, I found myself composing a speech for Theresa May — to be given the day after the Brexit negotiations have broken down irretrievably.

The prime minister is seated behind her desk in Downing Street. A Union Jack is visible in the corner of the room. Mrs May tells the British people that, despite the unstinting efforts of her government, the UK and the EU have been unable to reach an agreement. She has to warn her fellow countrymen that difficult times lie ahead. There will be severe disruption to trade and travel for an extended period of time. There is likely to be a serious recession. Britain had made a democratic decision to leave the EU. But the EU has proved unwilling to accept that decision and negotiate a fair deal. Instead, it is determined to punish the UK.

Now comes the Churchillian riff. Lowering the timbre of her voice and staring straight into the camera, Mrs May says that some European politicians seem to believe that they can humiliate Britain and bend the country to their will. Clearly, they have no knowledge of the history or nature of the British people. A country that has defeated Hitler, the Kaiser, Napoleon and the Spanish Armada has no reason to fear the bureaucrats of Brussels, or the governments of Malta and Slovakia. A quick reference to Shakespeare and the ­“sceptred isle” and an appeal for national unity, and the speech would be over.

I was rather shocked to find how easy it was for me to compose a speech like that, on a short train ride. After all, I am a “Remoaner”, who voted against Brexit in the EU referendum, and I still cling to the hope that it will never happen. If I can reach effortlessly for the language of nationalism while stone-cold sober on the Heathrow Express, what could the journalists of the Daily Mail do or the backbenchers of the Tory party?

All this could be dismissed as idle ­fantasy. But the danger of a slide into nationalism and confrontation is real — on both sides of the channel. The Brexit negotiations are starting with the two sides miles (or possibly kilometres) apart. After meeting Mrs May last week, officials from Brussels briefed that the UK prime minister’s demands are “completely unreal” and that she is living in a “different galaxy”. The British, for their part, regard the EU’s demand for a €60bn divorce settlement as outrageous. The EU says that trade talks cannot begin until the Brits have agreed to pay up. But that position is also seen as unjustified and punitive in London.

Senior figures in the British ­government may eventually conclude that they have no option but to play by the EU’s rules. It is possible that, fortified by a large majority in the next election, Mrs May can find the political space to make painful concessions, and face down the resultant rage in the media and her own Conservative party. But it is more likely that what Brussels regards as indispensable, London will find impossible.

That means talks will inevitably break down — and then angry rhetoric will surge on both sides of the channel. Popular culture and the education system have produced a fairly pronounced “finest hour” reflex in most British people, which is susceptible to an appeal to glorious isolation. (It is epitomised in the David Low cartoon from 1940 of a soldier on the cliffs of Dover, captioned: “Very well, alone”). That means that if and when negotiations with the EU go badly wrong, it will be easy for nationalists in Britain to blame the French and Germans, and to make an appeal for sacrifice and national solidarity that will drown out the appeals to reason of the remaining Remainers.

And while the Europeans like to argue that their position is dictated by reason and law — and not by any desire to punish Britain — there are, of course, some on the other side of the channel who will enjoy the opportunity to humble the arrogant Brits.

I have certainly seen the occasional involuntary smile from European officials, as they explain how the reimposition of customs procedures could lead to long lines of lorries on British motorways, stacked up miles from the port of Dover. Beyond the issues that flow directly from Brexit, there is a plethora of long-buried resentments against Britain that can come tumbling out when the negotiations get nasty. Gianni Riotta, an eminent Italian journalist, already spots an “anti-UK rage in the EU upper echelon”.

The EU, which has been troubled by divisions over everything from the euro to refugees, is currently enjoying the unusual unity of purpose that Brexit has produced among the other 27 member states.

The British hope that this unity will crack, as the negotiations become more difficult. But it is just as likely that the EU will find that confrontation with Britain continues to serve as a useful rallying point for an otherwise divided organisation — and as a focus for the anger at everything else that is going wrong inside the Union.

I will keep the notes from my Heathrow Express speech. They might make interesting reading if and when Mrs May gives her own version, in a couple of years’ time.

A False Spring at the Spring Meetings?

Carmen Reinhart, Vincent Reinhart
. IMF World Bank Meetings

WASHINGTON, DC – Every spring, international bureaucrats flock to Washington, DC, as reliably as swallows to Capistrano, for the annual meetings of the International Monetary Fund and the World Bank, where they exchange information about their local economies and policy prospects. Because these officials attend multiple events over the course of the week, an echo chamber develops, from which a general perception of the state of the global economy emerges.

Policymaking around the world is then influenced by that perception.
This time round, the sense was positive. According to IMF staff, as reported in their World Economic Outlook, real GDP should expand by about 2% in advanced economies this year and next. This will pull the unemployment rate below 6%, not much different from its level before the 2008 financial crisis. Deflation or unwelcome disinflation is now seen only in the rearview mirror, as consumer price inflation settles around 2%, the goal of most major central banks.
But, as any resident of New England knows, April showers do not always bring May flowers; sometimes they bring only more and colder showers. Not to rain on officials’ parade, but we fear that they are taking too much comfort in the stabilization of economic conditions. Beneath the headline numbers, there is little evidence that underlying problems have been resolved.
It wouldn’t be the first time. The post-1945 record includes two prior “lost decades” in which economies struggling to recover from severe financial crises – including about a dozen countries in Latin America from 1982 to 1992, and Japan from 1992 to 2007 – underperformed their own trend growth and that of their peers.
As bleak as this history seems, annual real GDP growth per capita was positive in 60% and 75% of those years, respectively, in Latin America and Japan. Indeed, real GDP per capita expanded by more than 2% in at least a quarter of those years. That is, these countries glimpsed rays of sunshine through what turned out in retrospect to be a mostly solid cloud cover.
Acceleration in economic activity may stir hope in officialdom, but levels matter, too. In Europe, real growth GDP has been only barely positive, on average, since the financial crisis, and its level in 2016 was about 20% below that predicted by the trend over the ten years up to 2007. This ranks as the slowest recovery from a severe financial crisis in two centuries. And aggregation hides a multitude of problems: Greece and Italy, for example, will not regain their pre-crisis level of real GDP per capita within the World Economic Outlook’s forecast period, which stretches to 2022.
Yes, post-crisis spending headwinds are an important impediment to growth, partly owing to their persistence. But central to economic performance over this period is stagnating growth in potential output. According to the IMF, growth in the advanced economies’ real potential GDP – think of this as the underlying trend for aggregate supply – has fallen by half this century, from 2.71% in 2001 to as low as 1.28% just a few years ago. The picture is bleaker in the US, where, according to the Congressional Budget Office the amplitude of the swing is double, from about 4% to 1.5%. But all of the G7 economies share this phenomenon, because their aging populations are growing more slowly, withdrawing from the labor market, and adding little extra output per additional hour worked.
Whether productivity, or output per hour, will continue to languish is hard to predict. But data are data, and they show quite clearly that productivity growth has been languid for some time.
The growth of potential output is not just an economist’s abstraction. If, as seems to be the case, the expected path of income turns south, we will have fewer future resources to meet our needs.

To the extent that we have consumed and borrowed now in anticipation of higher income, disappointment is in store.
There certainly is scope for disappointment in advanced economies, considering that gross general government debt is hovering around 106% of nominal GDP and fiscal deficits are stretching beyond the forecast horizon. The budget math only gets harder as central banks normalize monetary policy, even if interest rates do not return completely to their pre-crisis levels. In economies with a recent record of fiscal restraint, including Australia, Canada, and New Zealand, the private sector has been borrowing hand over fist. In times of distress, private-sector mistakes often become public-sector obligations.
The machinery of representative government works best when it is used to apportion a growing economic pie. For example, when the US economy was experiencing 4% trend growth, real GDP could be expected to double in 18 years, comforting parents about their children’s economic future.
At the current trend of 1.5% growth, the period needed to double GDP stretches to 48 years, darkening the economic prospects of the grandchildren. In those circumstances, will elected officials make the hard decisions needed to get from economic stabilization to sustained recovery?
real gdp growth

Macron, Renault and the Future of French Capitalism

Presidential candidate’s approach to governance at the car maker revealed his ‘dirigiste’ touch

By Stephen Wilmot

Renault Chief Executive Carlos Ghosn, left, and France’s then Economy Minister Emmanuel Macron pictured together in September 2014. Photo: Agence France-Presse/Getty Images

French presidential favorite Emmanuel Macron has pitched himself as a political outsider intent on modernizing the economy. But his record of intervention at the country’s biggest car maker should be a gut check on exactly how far he would go to reform the French state’s role in private enterprise.

For much of 2015, Renault was engaged in a public battle with Mr. Macron, then economy minister to socialist President François Hollande. The tensions centered on the government’s shareholding, which Mr. Macron raised to almost 20%, from the 15% level agreed in a 2002 alliance with Nissan , NSANY 0.37%▲ Renault’s Japanese peer and other major shareholder.

The move came amid union and media worries that Renault was being “Nissanized.” Also at play: Mr. Macron bought the extra stock to stop Renault from getting around a law he supported giving longer-term shareholders in France double voting rights. Renault boss Carlos Ghosn thought the law would destabilize the Nissan alliance, particularly since Nissan renounced its voting rights as part of the 2002 cross-shareholding deal.

The two men announced a truce in December 2015, but tensions have resurfaced. In a submission to a January report by the Court of Auditors, which supervises French state activities, Renault said public interventions “weakened the company more than they strengthened it.” Mr. Ghosn told analysts in February that “as long as the French state remains a shareholder” Renault cannot move closer toward a formal merger with Nissan, despite ever-tighter operational links and calls for industry consolidation.

Mr. Macron was acting under Mr. Hollande’s authority in 2015. He might behave differently as boss of his own centrist party, En Marche, which he set up after quitting the cabinet last year.

The party’s manifesto includes a commitment to sell down minority state shareholdings to fund a €10 billion ($10.9 billion) investment fund focused on “the industry of the future.”

But it seems unlikely Mr. Macron will undo his Renault shares purchases. He raised the government’s stake at what turned out to be a peak. Reducing it now would expose him to accusations of mismanaging public money. A recent Court of Auditors report noted the woeful investment performance of the government’s €77 billion portfolio of listed assets: State-backed stocks fell 29% from 2010 through 2016, compared with a gain of 28% for the French stock-market index.

Analysts at Exane BNP Paribas recently identified seven companies whose government stakes might be trimmed. Renault didn’t feature. Its smaller French rival Peugeot , whose shares have doubled since a 2014 state bailout and is now taking over General Motors ’ European business, did.

Mr. Ghosn has a personal interest in seeing off the French state: It keeps voting against his pay.

Last year it cobbled together with other investors a slim majority against his remuneration package. Renault ignored the unbinding vote, prompting enough outrage for a new law that makes the vote binding.