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China capital curbs reflect buyer’s remorse over market reforms

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Banks

Carney: UK is ‘investment banker for Europe’

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Currencies

China stock market unfazed by falling renminbi

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Categorized | Economy

The left may find itself stranded politically


Posted on October 2, 2016

The UK's Labour party leader, Jeremy Corbyn©Reuters

The UK’s Labour party leader, Jeremy Corbyn

Political pundits told us that Brexit could not happen, and that Donald Trump could not win the Republican nomination. Some of them have been telling us another story: that parties of the centre-left can only win elections from the centre; in particular, that Jeremy Corbyn, the UK Labour party leader, cannot become prime minister.

Is this assertion true? Many pundits, myself included, had their formative years from the 1980s onwards. Successful centre-left parties defined their role during that period not as providing an alternative to transaction-based global capitalism, but to redistribute the spoils. Their leaders — Bill Clinton in the US, Tony Blair in the UK, Gerhard Schröder in Germany among others — were mostly centrists.

    What worked in that period, however, is not universally true. For example, government by moderate pro-establishment Social Democrats in Germany in the 1920s and 1930s failed horribly. The main parallel between today and the 1930s is the way democracies react to prolonged periods of austerity. Extremist parties gain if mainstream parties fail to offer alternatives.

    In a story that should be a warning to centre-left parties, the SPD in the Weimar Republic saw its vote share decline from 37.9 per cent in 1919 to 18.3 per cent in March 1933, the last free elections. Over that period the party became ever more centrist, ultimately supporting deflationary economic policies. It was a catastrophic decision because it drove voters to the Nazis and the Communists.

    Several social democratic and socialist parties in the EU have supported austerity policies since the financial crisis and are now paying the political price. The Democrats in the US, New Labour in the UK, and Germany’s SPD were among those most enthusiastic about deregulating financial markets. The SPD in addition endorsed the eurozone’s stability pact in the 1990s, and the constitutional balanced budget rule in Germany, which has been effective since 2011. The party’s failure to learn from its own history is breathtaking. While the SPD pays lip service to higher infrastructure investment, it cannot deliver any of this because of its commitment to a balanced budget.

    You have to go to the outer extremes of the political spectrum to find support for an investment stimulus

    I am not surprised the centre-left in Germany and in the UK are struggling to win elections. We do not know whether Mr Corbyn can succeed. What we do know is that his more moderate predecessors could not, at least not since the onset of the financial crisis. That was one of the biggest economic events of our time. It has also redefined politics.

    Where does this lead us? From an economic point of view there is nothing extreme in the argument for large investment programmes, especially after years of fiscal consolidation. Yet the only established political party that offers this choice in Europe is Mr Corbyn’s, which is promising £500bn. In Germany, only the Left party, successors to East Germany’s communists, supports big increases in investment. On the continent you have to go the outer extremes of the political spectrum to find someone to endorse an investment stimulus.

    So when an established party, like Labour, offers a shift in macroeconomic policies that have a chance of ending our post-crisis malaise, it should be taken seriously. If the ruling Conservatives mess up Brexit, which they just might, the scheduled 2020 elections could become an open race.

    In the eurozone, the choices are even more extreme. Eurozone citizens only have two paths towards more investment. The first is exit from the euro, the only legal way for a country to escape the fiscal rules that constrain investment at national level. It is the choice offered by extremist parties.

    The second option would be a eurozone-wide investment programme, centrally administered, funded by the issue of common debt securities or, more crudely, by printing money. The issues of eurobonds and debt monetisation are deemed politically unrealistic, given Germany’s opposition. So unless you opt for extremist parties, there is no real-world choice.

    What about the European Commission’s own investment programme? On closer inspection it has turned into a smoke and mirrors exercise, an underfunded macroeconomic irrelevance.

    My expectation is that politics will adjust to economic needs, as it did in the 1980s, this time in the other direction. There is a chance that it may end up like the 1930s. This is hard to foretell. What I am certain of is that the overwhelming consensus in favour of centrist libertarian economic polities is breaking down, and that will have an impact on how we come to regard leaders like Mr Corbyn.

    munchau@eurointelligence.com