Book: The Economist - 2016-01-09

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Buttonwood

Loathe thy neighbour

Politics is making international co-operation harder

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POLITICS is local but most problems are international. That is the fundamental problem for national governments caught between the twin forces of globalisation and voters’ anger.

The European refugee crisis, for example, seems to cry out for a continent-wide solution. But the tide of migrants has been so vast that national governments have been tempted to put up barriers first, and answer questions later. The latest example saw Sweden introduce checks on those travelling from Denmark, leading the latter country, in turn, to impose temporary controls on its southern border with Germany. Anti-immigration parties have been gaining in the polls; with the exception of Angela Merkel, mainstream politicians want to head off the threat.

The current system combines unchecked movement within the Schengen area (which does not include all members of the European Union) with external borders patrolled by national governments. There is no Schengen border force, but once inside, refugees can go anywhere within the Schengen countries.

In a way, this looks like the same mismatch that has plagued the euro: a single currency without a unitary fiscal and political authority. Many economists have advocated much greater integration of the euro zone in the wake of the bloc’s crisis. The European banking system would be stronger if there was a comprehensive deposit-insurance scheme; the economy would be more balanced if there were fiscal transfers from rich to poor countries. But such plans are unpopular with voters in rich countries (who perceive them as handouts) and in poor countries (who worry about the implied loss of local control that reforms would require).

All that the EU’s leaders have managed so far is to cobble together solutions (such as the Greek bail-outs) at the last minute. The impression of indecisiveness in Brussels has done nothing to make the EU more popular with voters—surging anti-immigrant parties are also Eurosceptic.

At the global level, co-operation also seems more difficult. Gone is the unity of the G20’s summit in London in 2009, when leaders agreed on a co-ordinated stimulus in response to the financial crisis. The appetite for fiscal stimulus seems to have completely disappeared.

Central banks are now heading in different directions: the Federal Reserve has just tightened monetary policy while the European Central Bank and the Bank of Japan are committed to easing. The euro zone, which has a big trade surplus, seems happy to let its currency depreciate, adding to deflationary pressures elsewhere.

Trade creates tighter links between countries, but global trade growth has been sluggish in recent years. The OECD thinks that trade grew by only 2% in volume in 2015. No longer is trade rising faster than global GDP, as it was before the crisis. In a widely expected but still depressing development, the Doha round of negotiations on a new global trade agreement has been abandoned, although the trans-Pacific deal did make it through.

International agreements require compromise, which leaves politicians vulnerable to criticism from inflexible opponents. Voters are already dissatisfied with their lot after years of sluggish gains (or declines) in living standards. When populist politicians suggest that voters’ woes are all the fault of foreigners, they find a ready audience. With the global economic pie growing more slowly, the temptation is to try and grab a bigger slice of it—at the expense of everyone else.

Furthermore, economic woes can lead to much more aggressive foreign policy. It is hard to believe that the fall in oil prices—and the effect on national budgets—has not played some part in the current turmoil in the Middle East.

In the developed world, demographic constraints (a static or shrinking workforce) may limit the scope for the kind of rapid growth needed to reduce the debt burden and make voters happier. Boosting that sluggish growth rate through domestic reforms (breaking up producer cartels, making labour markets more flexible) is very hard because such reforms arouse strong opposition from those affected.

The danger is that a vicious cycle sets in. Global problems are not tackled because governments fail to co-operate; voters get angrier and push their leaders into more nationalistic positions. And it is hard to see things changing this year, with no country likely to take the lead. America will be consumed by its presidential election, Europe by refugees and fear of terrorism, China by its adjustment to slower growth. No one is in charge.

Economist.com/blogs/buttonwood


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