Brexit – a new season is opening


As I have written many times, the Brexit soap opera is a gift that keeps on giving. While Brexit was supposedly done on 31 January 2020, it has become clear that the political class cannot ignore what is obvious even to the less informed public – Brexit has been a failure with lots of downsides and no upsides. Yes, some Brexiters keep insisting that the sunlit uplands are just around the corner (though we – or some of us - might get to this corner only in 50 years). In the meantime, the UK has suffered a permanent GDP shock, which also explains the strike wave gripping the UK – a distributional fight over a shrinking pie. The NHS is all but on its knees, with access to basic health services no longer resembling that in a European country.


The degree of corruption in the Tory government is nothing but astonishing for a country that has always prided itself on strong institutions. The former chancellor of the exchequer has seemingly tried to evade taxes (and was caught), Johnson got help from a rich donor in obtaining a loan who subsequently became BBC Chairman. The amount of money that has gone down the drain towards connected Tories in spring 2020 in the name of fighting Covid is astonishing.


To distract from the swamp of Tory corruption, more culture fights have to be started (against ‘woke’, against peaceful protests etc.) and legislative spring cleaning organised – in the form of reviewing a couple of thousand laws ‘imposed’ by the EU on the UK during almost 50 years of membership within a few months. But it is not the sovereign parliament that is supposed to do it, but ministers and civil servants – so much about taking back control! That dumping a large number of laws and rules increases uncertainty for business, depresses investment and make trade with Europe even more difficult does not matter, does it?


Given the disaster that Brexit has turned out (and as predicted by many including this economist), there are discussions of what might have gone wrong. Why is it that the UK had not held all the cards after the referendum? An obvious response is that the EU is simply bigger. However, it is also clear that the UK government made critical mistakes during the negotiation process. Theresa May lost all her cards after showing them – by insisting on “control over laws, money and borders” she all but excluded proper membership of the Single Market and Customs Union, which in turn allowed Michel Barnier and his negotiators to impress on EU member states the risk any concession to the UK in terms of access to Single Market would have in terms of undermining it. However, this basic and consequential mistake had its roots in the fact that everything that UK governments have done over the past seven years vis-à-vis the EU has been dictated by domestic political needs and not by diplomatic considerations. This obviously includes the fantastic deal of late 2019 that helped Boris Johnson win the elections before being denounced by himself and his chief negotiator David Frost.


So, as predicted many times before, Brexit is the soap operate that will keep giving, even if the UK’s political class would rather not


Gemany’s lack of leadership


The current hesitance of the German government of whether or not to deliver tanks to Ukraine (or at least allow other countries to deliver German tanks) is shameful! Whether it is based on a deeper political calculus vis-à-vis Russia or for domestic political reasons does not matter – the German government has failed in its European leadership role. It also shows an amazing ignorance about history. Yes, after World War II, there should be no war ever again started from German soil; but this war has been forced upon us and the rest of democratic Europe by Putin’s brutal aggression against Ukraine.


There are different excuses, but the most telling is what recently a German journalist said: “After World War II, never again can German tanks be used against Russia”. Never mind that Russia has been brutally attacking Ukraine, another country invaded by Germany in World War II. Another argument is pure fear – Putin will come after us if we send tanks, possibly even with nuclear weapons. A rather naïve approach – does anyone think he would stop at Ukraine if he gets his way. Almost 80 years after the end of World War II one might think that Germany has finally found its role in Europe – unifying and leading where needed. In many occasions over the past decades it has done so, but it has now all but given up any leadership role during the most immediate challenge for peace and democracy in Europe and that is not just sad and shameful, it is also dangerous.


There is a lot of discussion that a long-term approach has to look beyond the war and to future engagement with Russia – after all, an approach like the defeat and occupation of Germany in 1945 is all but impossible with Russia. And one has to avoid the Allied mistakes after World War I, pushing Germany economically and politically against the wall, facilitating the rise of Hitler. But any future engagement with Russia can only start after a complete defeat of Russia in Ukraine; anything else would simply encourage Putin (or any successor) to repeat such an invasion again in a few decades.


For the past year or so I thought that it was simply a lack of communication skills by the new chancellor; however, it seems more than that. A final argument against delivering tanks to Ukraine now is that the German public is not quite in favour yet. BUT: leadership is not waiting until opinion polls tell us that the right thing to do is finally popular; it is to do the right thing and tell people why one does it.


2020s - what a decade and it is only 2022


2022 started with lots of hope: we thought (and rightly so) that we were going through the last Covid winter here in Europe, the economy was recovering more swiftly than expected and inflation was increasing but not really considered a major problem yet.

 

The 24th of February changed everything with Putin’s aggression against Ukraine, the first time war hit Europe in its core since 1945. Everyone in Europe ended up with some embarrassment. The Germans as they had bet on cheap Russian gas and had looked for too long the other way as Putin had become more and more aggressive; the French as Macron tried to negotiate with Putin when it should have become clear that it no longer served any purpose; the UK as it had become home to lots of Russian money and political influence over the past decade or two. 

 

The biggest surprise (at least outside Ukraine) was the fierce resistance by Ukrainians and their ability to push back. Europe and the US came around to support Ukraine relatively quickly, something that certainly would not have happened under president Trump. However, the political will to support Ukraine is primarily in the democratic centre, both in Europe and the US.  The left keeps asking for a negotiated solution (as in: what share of Ukrainian population is Putin allowed to massacre). Among economists, Jeffrey Sachs decided to go all-in for the Russian side – sad to see how intelligent people get so captured.  The right wants to do a deal with Putin – Ukraine in return for cheap energy. The invasion of Ukraine by Putin and the heroic resistance by Ukrainians is thus part of the broader conflict between democracy and populism/autocracy I have written about earlier. 

 

Inflation has become a major issue across the globe, though inflation expectations still seem to indicate that the anchor has not been lost.  Central banks face a major conundrum – tighten too much and too fast and risk a recession; tighten too cautiously and risk de-anchoring of inflation expectations.  While there are many indications point to lower inflation rates in 2023, there might be additional unexpected shocks. 

 

The crypto tulipmania seems to finally deflate (on a personal level most obvious in that my non-economist son stopped asking me to invest in bitcoin 😊). You can fool some people all the time and all people some of the time but not all people all the time. Yes, there are good solutions for the use for distributed ledger technology, but cryptocurrencies do not seem to be one of them.

 

The 1920s were certainly a decade that started with a lot of hope, after World War I and the Spanish influenza. It ended with the Great Depression, though in between there were some good years. I will certainly not try my hand at predictions (where economists continuously fail), but the 2020s certainly do not seem like a happy decade so far. It rather seems to turn into the decade of the Great Volatility.