As the dust settles, the battles begin

This year’s European Parliament elections were a big deal and generated a lot of coverage across the continent. There was certainly a lot to digest. As predicted in advance, the European People’s Party (centre-right) remained the largest faction but it lost a significant number of seats (down from 221 to 177, or from 29.4% to 23.6% of the total). The representation of the centre-left S&D bloc also declined, from 187 seats to 149 (24.9% to 19.8%). This means that the two main groups that have dominated the European Parliament since direct elections were introduced in 1979 now have a combined vote share of less than 50%. The big winners were the centrist Liberal alliance (ALDE) and Greens, but also the Eurosceptics and nationalists (comprised of three separate blocs).

Whilst the swing away from the nationalist parties was not wholly directed towards the Eurosceptics, which probably did less well than they might have hoped, they nonetheless found a lot of support, taking almost a quarter of the total number of seats. Such parties topped the polling in three of the largest EU countries: Italy (where they took 58% of the votes); the UK (44%) and France (36%) whilst they also did well in Hungary, the Czech Republic and Poland (62%, 54% and 54% respectively).

We should thus be under no illusions that the electorate in a number of countries has expressed dissatisfaction with the status quo and that it will be difficult to continue along the same path that we have been following for the past forty years. No one group can dominate the European Parliament, and a number of what might in the past have been seen as strange coalitions will have to be formed. The EPP will need the support of the Greens and Liberals, but even these three blocs will not be sufficient to command a parliamentary majority without the support of at least one of the smaller groups. This highlights just how difficult things are going to get in dealing with many of the big issues which confront Europe. On the one hand it is going to be difficult to find common cause on geopolitical relationships with the likes of the US, China and Russia. Then there are economic problems such as the environment and dealing with competition issues. If Europe has struggled with these issues before, life is about to get far tougher.

The horse trading that has already begun over the numerous positions in European institutions does not fill me with confidence. Key positions, such as the President of the European Commission, are supposed to be filled via the Spitzenkandidat (or leading candidate) principle. This principle was first established following the 2014 elections in which the candidate proposed by the leading political faction was in pole position to take over as Commission President. This is how Jean-Claude Juncker got the gig in 2014 despite opposition from the British and Hungarian governments. On this basis, Manfred Weber (EPP) would be expected to be one of the front runners. But the French have decided that they don’t like the idea of Weber getting the job, with President Macron apparently in favour of someone else (though we are not quite sure who).

Having put the Spitzenkandidat principle under strain, it raises the justifiable concerns of those who see the process of appointing the EU’s top jobs as a Franco-German carve-up, which will certainly not go down well with the large number of Eurosceptics in parliament. This dispute will also have implications for other jobs which are up for grabs. If Weber fails to get the job as Commission President, it would not be a surprise if Germany put forward Jens Weidmann as the new ECB President in succession to Mario Draghi who leaves in November. That would certainly not be welcomed in southern European countries, given Weidmann’s opposition to unconventional monetary measures such as QE. The more we look at the job allocation process, the messier it becomes.

All this comes against the backdrop of further disquiet on the part of the European Commission regarding Italy’s fiscal position. The Commission today wrote a letter to the Italian government warning that “Italy is confirmed not to have made sufficient progress towards compliance with the debt criterion for 2018.” This could trigger another excessive deficit procedure against Italy, following last year’s issues which were ultimately resolved when the Italian government softened its position a little, and which might ultimately lead to financial sanctions. Bearing in mind that the Italian electorate voted on Sunday for parties with a strong anti-EU bias, this will not go down well in Rome. It also puts the various actors in this drama in a tricky position. On the one hand, it is likely to reinforce Italian resentment regarding the actions of the EC to stifle GDP growth, which has averaged just 0.4% per annum during Italy’s membership of the single currency. On the other hand, the likes of Germany are becoming increasingly intolerant of Italy’s fiscal position and it continues to push for the southern European nations to play by the rules. This fault line running through the euro zone shows signs of growing wider, rather than narrowing, as the splits between federalists and nationalists and northern Europe and southern Europe grow wider.

Then, of course, there is the issue of Brexit. At the EU level, the change in the composition of parliament might have some bearing on whether it is possible to reopen negotiations between the UK and EU as some prominent UK politicians believe. A change in the Commission President could have a similar effect, whilst the departure of Donald Tusk as European Council President will rob the UK of a staunch ally in Brussels. As for what the election results meant domestically, everyone has a view based on their prior belief. Brexiteers argue that since the Brexit Party got the largest number of seats of any party, this is a strong signal that the UK should get out of the EU as quickly as possible. Remainers argue that the total vote share accounted for by Remain-supporting parties was larger than that of the Brexit Party and that the number of votes obtained by the Brexit Party (5.2 million) was smaller than the number signing a petition calling for Brexit to be stopped (5.8 million signatures). Both arguments have some validity but as we saw in 2014, it pays not to extrapolate the European election results too far.

But however we look at it, the events of the past few days have highlighted that the EU has a lot of soul-searching to do. It does need to do more to convince the people of Europe that its direction of travel is the right one. This parliamentary session will thus prove to be the most important in recent history as the EU figures out how to proceed. It is important to get it right, for otherwise it is easy to foresee rising tensions putting further strains on the workings of the single currency and the fabric of the EU itself.

End of an error

After having been critical of Theresa May’s tenure as Prime Minister it would be stretching it to say that I am sorry to see her go, but there is always something unpleasant about seeing a leader being forced from office in the way that she was. Above all else, May is dutiful, dogged and determined – qualities we may yet come to appreciate in the event that Boris Johnson inherits her crown. This would explain why May continued to push forward with her Brexit deal in the teeth of all opposition – she genuinely believed it was her duty to deliver on something that she thought was the reason why she was elected Prime Minister.

In her resignation speech today, May gave hints at the kind of PM she could have been: It was emotional, passionate and reminiscent of the speech that she gave in Downing Street three years ago when she took on the job. She quoted the humanitarian Sir Nicholas Winterton who once told her, “Never forget that compromise is not a dirty word. Life depends on compromise.” Unfortunately during her time in office, the PM did not live up to those principles. Almost up until the last moment, she continued to treat the result of the Brexit referendum as a winner takes all event and showed little sign of listening to the near half of voters who did not share her vision of a post-EU Britain. Her first conference as party leader produced the (in)famous "citizens of nowhere" speech which did nothing to reunite the country in the wake of the Brexit referendum.  Let us also not forget that prior to her tenure in Downing Street, May was a Home Secretary who oversaw a hardening of attitudes towards immigration (remember those Go Home vans?). Empathy and compassion were not words which were used in conjunction with the PM’s character.

Still less would they ascribe the quality of flexibility. Former Labour PM Harold Wilson, who died 24 years ago today, was criticised during his time in office for being flexible in his beliefs, but he managed to keep the UK out of the Vietnam War despite the best entreaties of Lyndon Johnson, and prevented the hard left from taking over the party until long after he had retired. History now remembers him as a canny operator who dealt well with the hand he was given. The same cannot be said of Theresa May. Her doggedness proved to be her undoing as she failed to build a coalition that would have allowed parliament to accept the Withdrawal Agreement. She made the same mistake as her predecessor in pandering to the Eurosceptics by trying to offer them sufficient concessions to keep them onside, not realising that they don’t do compromise. May undermined her own position by tolerating the indiscipline of Boris Johnson, simultaneously emboldening the Brexit ultras whilst making her look weak.

The people May surrounded herself with prior to the ill-fated 2017 election, particularly her advisers Nick Timothy and Fiona Hill, had long shielded her from Conservative Party colleagues and as a result she may have been somewhat out of touch with what they were thinking. Indeed it was at their behest that May became the central figure in the 2017 election campaign, but it transpired that the more the electorate saw of her the less they were impressed. After Hill and Timothy left in the wake of the election debacle, it often seemed as though the PM was somewhat rudderless.

All in all, May will not rank as a great Prime Minister and this is someone who succeeded David Cameron – a man who will forever be associated with the failed gamble of the EU referendum. She promised to deliver Brexit and failed – a matter of intense personal regret for her. However, she may not go down as the worst PM since 1945: One study suggested that this dubious honour should be bestowed on Sir Anthony Eden who was PM between April 1955 and January 1957.

I looked yesterday at how events might pan out over the next few months (here) and a more detailed look at the succession candidates can wait for another time. However, the demise of Theresa May might just herald the end of the traditional centrist Conservative Party. Across the industrialised world, the traditional political party lines are being redrawn. Voters identify less with the distinction between labour and capital, which has characterised the political landscape for many decades, than with where parties stand on particular issues, notably nationalism which finds expression in the UK in the form of Brexit.

As the Tories tack to the right and Labour to the left a huge void has opened up in the centre of British politics, which will have major implications for the course of economic policy. So far, no party has emerged to fill that void. The breakaway splinter group Change UK does not appear to have gained sufficient momentum to be that movement. Consequently, many millions of voters continue to see themselves as politically homeless. In better times, Theresa May might have been viewed more sympathetically as one who did her best under trying circumstances. But her inflexible approach to Brexit helped to widen the political gap that had been emerging for a while. As she prepares to leave office, however, it is worth reflecting that her reputation will be judged against the achievements of her successor. History may yet judge her more favourably than the commentariat does today.

The end of May

Game of Thrones, the TV series which ended its 8-year run this week, followed the fortunes of various political dynasties as they pursued their claims to the Iron Throne which would allow them to rule all the seven kingdoms of Westeros. The path to the top was brutal with various leading contenders beng executed, murdered or dying in battle. As a piece of television fiction it was compelling but it is highly improbable that such levels of brutality could be sustained in real life. That said, the behaviour of the Conservative Party increasingly resembles a GoT plot line which is unlikely to end well.

It appears that MPs believe compromise is for the weak

As regular readers of this blog will know I have been highly critical of the way in which Theresa May has conducted Brexit policy over the course of the last three years. She has tried to "own" the issue, pandering to the right-wing of her party, when in reality cross-party support was always going to be required in order to find a consensus, particularly following the needless 2017 general election which cost the Conservatives their majority. When May finally cottoned onto the need for a cross-party solution last month, her political position was so weak that the Labour Party had little incentive to cooperate in order to get the Withdrawal Agreement ratified by parliament. But the reaction this week to May’s ten-point plan to get the Withdrawal Agreement Bill through parliament said more about MPs than it did about the prime minister. Having listened to what the right-wing of her party want, what Remainers want and the issues raised by the Labour Party, the PM offered something for everyone and ended up pleasing no-one.

So it came to pass that the day before the European Parliament elections, the UK news was dominated by stories discussing how long the prime minister was likely to keep her job. As a campaign message it was the most spectacular of own goals: Not that the Tories have bothered to campaign for an election in which the PM promised the UK would not have to take part, and they could well trail a distant fourth in terms of the vote share. Yet as ineptly as May has handled Brexit – so much so that she has created space for a Nigel Farage resurrection – and as inflexible as she is on policy issues, the problem is less the prime minister than an inability of MPs to compromise. Whilst there are many good reasons for not liking the Withdrawal Agreement negotiated with the EU last November – it essentially compels the UK to be an EU rule-taker during the transition period, which runs to end-2020 – it is still the least worst outcome that the UK could have obtained.

It has now become an article of faith amongst the ultras that the only good Brexit is a hard Brexit, yet three years ago even the most ardent proponents of leaving the EU were not advocating such a policy. Somewhere along the line, the Brexiteers have convinced themselves that leaving the EU at any cost is the only goal worth pursuing and it is impossible to convince them otherwise. This is not a rational, evidence-based policy: It is faith-based zealotry. And the more the faithful proclaim their litany, the greater the pushback by their ideological opponents. Indeed, in the fly-on-the-wall documentary, Brexit: Behind Closed Doors, in which cameras followed the EU Parliament’s Brexit representative Guy Verhofstadt for two years, the former Belgian prime minister warned that the Remainers were increasingly becoming a problem due to their inability to know when to compromise.

Who really wants to take on the impossible job?

It has thus become impossible to meet in the middle and it does not matter who is the prime minister in the current environment. At the time of writing, it is reported that May is likely to announce her departure within the next 24 hours. Her successor, who is expected to be a Brexiteer, will inherit a minority government reliant on the DUP and a party divided over Brexit. If, as widely tipped, that person is Boris Johnson it is difficult to imagine any improvement in the current parliamentary impasse. Johnson is widely loathed by large numbers of Conservative MPs who do not trust him due to his duplicity during the Brexit referendum campaign and his dreadful tenure as Foreign Secretary. His advocacy of a no-deal Brexit will not win him any friends outside the coterie of backbench Tory MPs who believe such an outcome is somehow in the UK’s best interests. This is to say nothing of the fact that he is also reviled by many European leaders and he would be the last person to send to Brussels to plead for any concessions. 

However, Johnson is not guaranteed to get the top job. Although he is the favourite, we all know what happened in 2016 and Oddschecker.com is offering odds on dozens of MPs so it is a crowded field. But none of them set the pulses racing and none have the brand recognition that the Tories need. If he does beat off the challenge of MPs to go forward as one of the two candidates from which members of the Conservative Party will choose a new leader, he will probably win a majority of the 120,000 party members eligible to vote. Johnson will then have a maximum of three years before he faces the 46 million eligible to vote in a general election which will determine whether he is the Heineken candidate of old (reaching the parts other mainstream politicians cannot reach) or whether he is now Marmite Man (loathed at least as much as he is loved).

The bottom line is that Brexit has indeed upended politics in a way that even Nigel Farage did not envisage in 2016. It has certainly changed the Conservative Party and severely damaged its reputation for competence. Worse still, it has completely eroded many people’s faith in politics, the echo of which will resonate for many years.

Sometimes it pays to pass up the top job

I have often used the Alex Ferguson syndrome to describe the poisoned chalice of taking on the prime minister’s job in the current circumstances and it is a metaphor worth revisiting. Recall that following Ferguson’s departure as Manchester United manager in 2013 his replacement, David Moyes, seemed to find the job too daunting and was gone in less than a year. It was thus decided that a bigger, more well-known figure was required to fill the post and the board duly appointed the highly acclaimed Dutch manger Louis van Gaal. He lasted two years before being sacked with the board deciding that insufficient progress was being made. May reminds me of Moyes – a low profile character who is out of their depth in the top job. Johnson has many of the characteristics of van Gaal – confident and up for the fight. Yet the Manchester job proved to be van Gaal’s last in football.

The moral of this story, and indeed the same is true of Game of Thrones, is that being in the right place at the right time is important and even extraordinary people will struggle with mammoth tasks if they find themselves in the wrong place at the wrong time. Succeeding Theresa May will be like walking into the lion’s den. I suspect whoever they are they will eventually be chewed up and spat out by the complexities of Brexit.

Should British Steel be nationalised?

The recent problems encountered by British Steel, which today entered insolvency, is an echo of the case three years ago when Tata Steel announced it was to pull out of its UK operations. In the end a rescue package was agreed, based upon a reform of the company’s pension scheme which was acting as a serious drag on the profitability of steelmaking at Tata's Port Talbot facility. Faced with a similar situation at British Steel’s Scunthorpe plant, the Labour Party has called for the company’s operations to be nationalised in a bid to save the jobs of 5000 workers who are directly involved in production, and a further 20,000 who are employed in the supply chain.

The threat to the Port Talbot production facilities in 2016 was one of the first topics I tackled on this blog. Indeed, this blog is partially motivated by concerns that successive governments’ adherence to the untrammelled operation of free markets results in market failures that have wider social consequences. It is not just me who expresses such concerns. Whatever else people may not like about the Labour Party’s economic policy (and there is a lot to dislike) the electorate does like the idea of renationalising industries such as the rail network. One reason for this is that the electorate is opposed to the idea of private investors creaming off monopoly profits whilst walking away from their obligations if events do not run as planned (as happened on one of the country’s main rail routes in late 2017).

People also do not like the fact that markets fail to adequately price the non-financial costs associated with industrial restructuring. Whilst the costs associated with any job losses in Scunthorpe and other towns are of no direct concern to British Steel, they are a huge problem for the local community suggesting an unequal distribution of the costs and benefits associated with closing down the plant. However, this alone is not enough to justify nationalising the steel industry.

A much better case can be made that industries such as steel represent industries of strategic national interest where the economy has an interest in ensuring that the skillset embodied in the industry can be maintained. An example of why it may pay to retain the skillset is provided by the construction of the controversial Hinkley Point power station: The government claimed that since the UK has not built any nuclear power stations in thirty years, the skills required to build the station could not be found in the UK, forcing it to turn to a state-owned French company to supply the reactor. The steel industry is more than just about turning out metal rods – some very complex metallurgy is involved in making some of the high-spec alloys required in advanced industrial applications. The issue facing the UK is whether it wants to remain involved in this business or whether it is prepared to outsource it to foreign suppliers.

This highlights two of the concerns I expressed three years ago: First, the government’s repeated policy of non-interference in corporate actions means that the decisions which affect people’s lives will increasingly be taken outside the UK. In addition it raises the question whether countries like the UK can continue to rely on the stability of the international order to ensure that it will always be able to source its needs from foreign suppliers. If we have learned anything since 2016 it is that the global order is anything but stable, as the likes of Donald Trump continue to rip up the rule book. Indeed, steel was one of the first product groups to be hit by higher tariffs as the US introduced a 25% levy on imports. But it is China that has disrupted the global steel market, having produced more steel in the last two years than the UK has done in its entire history (see chart for data covering the last three decades). Ironically Mao Zedong’s stated aim in the 1950s was merely to boost annual Chinese steel output above that of Britain’s – things have moved on a long way since then.

Clearly the UK, nor indeed any European country, can compete with this kind of industrial muscle which suggests that if governments want to retain the industrial skills inherent in the steel industry, the state may have to play a bigger role. This does not necessarily mean that steel-making facilities should be directly taken under state control. But efforts to relieve some of the industry’s burden in the form of lower business rates or energy costs are measures that might need to be considered. Environmental issues are a further complicating factor – indeed, British Steel has already been loaned a considerable amount of money by the government to pay an EU bill for its carbon emissions. Environmentalists would say that this is not an industry that we need to save but the people of Scunthorpe may have a different view.

We also cannot ignore the fact that British Steel’s current woes have been hugely exacerbated by Brexit, and Brexit-related uncertainty is blamed for a significant drop in orders. The good people of Scunthorpe voted 2-1 in favour of Brexit so it is highly ironic that the policy they voted for looks set to impose significant harm on the local economy. Moreover, one of the reasons cited by the UK government for not providing additional finance is that it does not want to fall foul of EU state aid rules. But even if the UK were to leave the EU, it is doubtful that it would stump up to support British Steel, since the bills would start to run up very quickly if every region that suffered as a result of Brexit were to receive public support.

This leaves the steel industry between a rock and a hard place. There is a good case for state intervention to support an industry of critical national importance and there is also an environmental case for letting it go. But since the problems have been exacerbated by Brexit, with the result that British Steel’s overseas customers do not know what tariffs will apply to any steel they buy – nor indeed when the UK will leave the EU – and to the extent that this has been exacerbated by the government’s indecision, there is a stronger case for support from the public purse. Having seen at first-hand what deindustrialisation did to the part of the world where I grew up, I understand the fears of the local community – and they are right to be afraid.

Are the rich getting richer?

The English FA Cup has a long tradition extending all the way back to 1872, and no team has secured a greater winning margin in the showpiece final than Manchester City, which on Saturday beat Watford by 6-0 (though in 1903 Bury  beat Derby County by the same score). Indeed, City’s performance was superb although given the quality of footballers at their disposal this came as no real surprise. City’s position at the top of the English football tree bears no comparison to Bury's in 1903. City became the first club to win the domestic treble of trophies in the same season and as a measure of their current pre-eminence it is worth noting that although the club has existed in its current form since 1894 and won a total of 18 domestic trophies, 10 of them have come in the past 8 years.

Whilst football success is often cyclical, the key ingredient in City’s success is money – and lots of it. According to transfermarkt.co.uk, Manchester City has spent a whopping £1.35 billion on transfer fees over the last 10 years – 13% more than their nearest domestic rivals Chelsea. They have also recouped significantly less in transfer fees with the upshot that their net outlays over the past decade exceed £1 billion – 90% more than Chelsea. The club is owned by Mansour bin Zayed Al Nahyan, a member of the Abu Dhabi royal family whose personal net worth is estimated at £17 billion whilst his family fortune is reckoned to be around $1 trillion. It thus comes as no surprise that City can afford to buy the best.

Of course, clubs that spend most on transfer fees are not guaranteed to be the most successful. Neither Manchester City nor Paris St-Germain (the next largest net spender over the past decade) has ever won the Champions League. The relationship between wages and trophies won tends to be much closer (here) since it a better reflection of a players’ quality. Ironically, latest data suggest that average wages at Manchester City are around 8% lower than at their cross-town rivals Manchester United (which won nothing this season). But City’s manager Pep Guardiola, widely regarded as the best in the world, is the highest paid manager in English football earning £15.3 million per year (and a recent report suggested that the club’s hierarchy are considering raising that to £20 million if he signs a new 5-year contract).

In short, Manchester City has bought its success by purchasing the best players, paying them well and employing the world’s best coach to manage them. A similar pattern is observed across the other four major European football leagues with the club that paid the highest average wages winning the title in 2018-19.  Even more astonishing is that in all five major leagues, the club winning the championship this season also won it last season (Barcelona, Bayern Munich, Juventus, Manchester City and PSG). Last year’s champions in Austria, Scotland and Switzerland also retained their titles. For the record, in Scotland average player salaries at champions Celtic, which recently claimed its eighth successive title, were 84% higher than those at second-placed club Rangers. It appears that money doesn’t just talk – it screams loudly.

All this raises the question of whether the footballing rich are simply getting richer at the expense of their weaker competitors. There were certainly plenty of commentaries in the wake of Manchester City’s FA Cup demolition of Watford suggesting that City have ripped up any pretence at a level playing field (here, for example, or here). But to assess whether that is really the case, let us look at the evidence.

The table shows football equality indices and concentration indices in the big-5 European leagues. The equality index is defined as the number of individual clubs winning the title relative to the number of seasons contested. The higher is the index, the more equal is the competition; if a different club won the title every year the index would be unity. I use the birth of the Champions League in 1993 as the cut-off point and compare the pre-1993 and post-1993 samples. The evidence suggests small changes in England (negative) and Italy (positive) and a larger increase in Spain. But the big changes are in Germany where the dominance of Bayern, which has now won seven consecutive titles, is quite startling whilst in France it has risen sharply.

As a cross-check I created a concentration index calculated as the proportion of total league titles won by each club (again split between the pre-1993 and post-1993 samples) and the table reports the highest indices for each country (the higher the index, the more dominant is any one club in winning the league). The results show a marked increase in concentration ratios with the biggest increases in England and Germany. This is partly a sampling problem, in that the pre-1993 sample is much bigger than the post-1993 period, but the magnitude of the increase is notable. The data suggest limited evidence of increased inequality (except in Germany) but higher concentration indices, indicating a rise in the frequency with which the same teams win their domestic title. In other words, the data appear to reflect a rise in an elite group of clubs which can expect to compete for the title – generally those which also compete in the Champions League – and a widening gap to the rest. 

Given the importance of external sources of money to fund sports teams (which I will look at another time), there is a danger that broadcasters and sponsors will gravitate towards the top performing teams over the longer term. This will enable the top teams to continue paying out the most on wages and consolidate their positions. Ironically whilst this is a major concern in European football, it is less true of American football which does not even operate a system of promotion and relegation. Only seven teams have won the Super Bowl on consecutive occasions and none has managed three straight wins. Moreover, 20 different teams have won it in the last 53 seasons. In the same period only 12 clubs have won the English Premier League whereas just 7 have won Spain’s La Liga. Given the amount of money flowing into the NFL, this does not suggest that huge monetary inflows necessarily stifle competition: It is where it flows and how the authorities channel it that matters. Premier League take note.