Pole position

Shamelessly squeezing one more post out of last week's trip to Warsaw....

Back in the dark days of the 1980s, when the martial law regime of General Jaruszelski was pitted against Lech Walesa's Soildarity movement, there was a joke doing the rounds about how Poland could solve its problems.  Supposedly, an expert committee had been set up, and had come up with two solutions: a practical solution and a miracle solution.  The practical solution: the Virgin Mary would come down from heaven and turn all of Poland's coal reserves into gold.  The miracle solution: the Poles would stop fighting among themselves and get back to work.

It wasn't fair, of course.  Even under the yoke of communism, the Poles had managed the almost superhuman task of reconstructing the major cities that had been laid waste by the Nazi occupation and the scorched-earth tactics of the fleeing Wehrmacht.  And it's still not fair.  Poland's coal is still black, yet the country is developing rapidly.  The politics may be as fractious as ever, but that hasn't stopped Poland from being one of Europe's success stories of the past decade.

Warsaw bristles with construction cranes.  The hideous Palace of Science and Culture is no longer the only skyscraper. The city's airport is spanking new.  There's a subway, with a second line on the way.  Roads that were potholed just a decade ago are now in excellent repair.  There are new hotels and restaurants everywhere.  There's a new national stadium, ready and waiting for the European nations tournament next month.  There are benches in the parks that play Chopin when you sit on them.

As with the reconstruction in the 1950s, the Poles have done most of the hard work themselves.  There has, however, been a big assist from the EU, partly in the form of hard cash, but more importantly in the opening up of markets, both for goods and for financing.  Much of the impressive development that has taken place over the last decade or so has been a direct result of Poland's admission to the EU.  And of course, it's not just Poland -- there are similar stories to be told all across eastern and southern Europe.

It's worth keeping that in mind as the Eurozone crisis enters its next phase.  The Euro may look doomed -- though that's the fault of dissimulating and deal-making politicians, rather than of the technocrats who designed it -- and the Brussels bureaucracy may be oppressive and unaccountable, but the "European project" has still done a great deal more good than harm*.  It would be very sad if a few feckless politicians and a bunch of greedy hedgies and bond vigilantes were to bring the whole thing to a screeching halt.  

* UPDATE, 9 May: Wonder of wonders, the FT agrees!  

Pity the poor immigrant

Well, that wasn't so bad after all! Flights both to and from Warsaw right on time, and when we got back to Heathrow last evening, only a minimal queue at the immigration desk for UK and other EU citizens.  We spent more time waiting for the steps to be attached to the aircraft than we did in the immigration line.  There was a much longer queue for non-EU passengers, but every desk was staffed and the line seemed to be moving quite quickly.

There are suggestions that the Home Secretary, Theresa May, is about to risk embarrassment by scrapping the more stringent passport checks that she insisted on last year, and which seem to be the direct cause of the queues.  This possibility has already fired up a few knuckle-draggers to cry foul.  One genius warned darkly on the Daily Telegraph website that when we hear the "big bangs",  which are apparently coming "very soon", we'll all regret that we relaxed the rules, just to save travellers a few minutes.  Ah yes, I thought: how tragic it was that lax passport controls at Luton railway station allowed the 7/7 bombers to pass through unimpeded on that fateful morning back in 2005.

There is, of course, one very important reason why the immigration lines at UK airports are a lot longer than they are in the rest of Europe.  The UK has steadfastly refused to join the "Schengen agreement" that allows EU citizens to pass between most countries without any passport or identity checks.  If you fly from, say, Paris to Frankfurt, you can get straight off your plane and into a taxi, while passengers arriving from London have to queue up with those from all corners of the globe, usually in a less salubrious corner of the airport,   to present their passports.  Unless the UK signs up for Schengen, it will always need a lot more passport checkers at its airports than most of its neighbours do, and if it also insists on more rigorous document checks, there will always be a risk of big queues at busy times.

There doesn't seem to be any evidence that the UK's refusal to adopt the Schengen agreement has made the country any more secure than its European neighbours.  However,  the Telegraph's "big bangs" correspondent would doubtless be vehemently opposed to adopting it now, and would no doubt be supported in that by a good proportion of the population.  Remarkably, the subject hasn't even been raised in all the recent carping about queues at Heathrow.  It would solve the problems overnight, but it would be a brave politician that would dare to suggest it.        

Actions have consequences

There will be a brief hiatus in blogging for the next few days as I head off to Poland for some family schmoozing.  Joy of joys, we shall be flying through Heathrow, so I'm already having palpitations at the thought of coming home to face the fearsome queues that are now a daily feature of the LHR experience, thanks to a shortage of staff at the UK Border Agency.  

Big queues at Heathrow immigration desks are nothing new. A few years ago I came into Terminal 4 in the early morning from Amsterdam. No more than a 40 minute flight, but it saw us arriving in the midst of all the overnight flights from North America, Africa and Asia.  I made it through reasonably quickly, but my Australian colleague was there for a lot longer.  How much longer? Well, I took the train to Paddington, waited for a taxi, went across town to the City, lined up for a latte at Starbucks and then went into the office.  Once at my desk, I called his mobile, and he was just reaching the front of the immigration queue!  

The difference now is that the line-ups seem to be a direct result of government cutbacks: thanks to budget reductions at the Border Agency, there are simply not enough staff to open all of the immigration desks.  You have to wonder if anyone in the government is pondering what this means.  All the rhetoric a couple of years ago was about how wasteful spending would be cut and "frontline services" protected, yet here we have a simple example of how reduced spending translates directly into degraded service -- and with the Olympics just three months away, this could scarcely be happening at a more embarrassing time for the government, or for the country.

Motoring organisations have moaned for years about how the amount spent on roads is a small fraction of the amount the government collects in license fees and fuel taxes.  Something of the same thing now seems to be happening with air travel.  The UK has the highest airline passenger fees in the world, yet the amount spent on ensuring that the experience of travelling through British airports is at least tolerable is shrinking steadily.  There are lots of good reasons why driving and flying should bear a disproportionate tax burden; however, conservatives more than other politicians should be alive to the danger of voters seeing a growing disconnect between what they pay for and what they actually get in return.        

When GDP's in a hole, start digging

It's been a tough week for those who try to forecast the economy, or at least for me specifically.  As I noted just yesterday, the UK's budget deficit for the 2011/12 fiscal year turned out to be exactly in line with the budget projection and not,  as I predicted a month or two ago,   significantly lower.  And today we learn that real GDP fell 0.2% in Q1 of this year, belying widespread expectations of a marginal increase.  It's a good thing I don't get paid to do this sort of thing any more (or perhaps I should say, this may be why I don't get paid to do this any more).

The latest fall in GDP, coming on the heels of a 0.3% fall in the final quarter of 2011, means that the UK has slipped back into the much-feared, and even more hyped, "double dip recession".  There's a reasonable summary of the data, plus analysis from Stephanie Flanders, in the BBC story here.  Ms Flanders makes the worthwhile point that even if the Q1 number had turned out to be marginally positive, it wouldn't really have changed what most people already know: the UK economy is bumping along the bottom, and it's not clear where fresh growth momentum will come from. Real GDP is now slightly below its late 2010 level, and still 4% lower than it was before the financial crisis hit.  This sort of "recovery" is simply without precedent.

So, at the risk of sounding like the tabloids, what is the government going to do about it?  Not much, it would appear.  David Cameron called the data "very, very disappointing", but said there could be no change of course.  Austerity rules, OK?  Indeed, as I noted yesterday, the Treasury has just asked government departments to identify a further 5% in spending cuts in order to ensure that deficit reduction plans don't go off course.

It's very likely that these further cuts will come from public sector investment spending, rather than current outlays.  However,  the Q1 GDP data strongly suggest that this would be wildly wrong-headed.   The main culprit in the weakness in Q1 was a 3% fall in construction spending, which cannot be unrelated to the sharp decline in public sector investment as the austerity programme bites: as I pointed out yesterday, central government investment outlays fell 40% in the fiscal year just ended.  (One specific culprit for Q1 may be the Olympic park project. All of the major construction activities there have been completed in recent months, leaving only cosmetic works to be carried out before the Games begin in July).

The accuracy of the ONS data on construction has been called into question in the past, and indeed this latest surprise fall in GDP has led some analysts to question the reliability of the national accounts data more generally.  Still, even if the data are not precisely correct --and they're not -- it's surely important to acknowledge Stephanie Flanders's point: we all know the economy is just bumping along, going nowhere.

As I've said here more than once,  it was recognised long before Keynes came along that recessionary times were an ideal opportunity to carry out big projects.  Or to put it another way, when the economy's in a hole, start digging!  Think Dave and George are listening?      

UK fiscal data: nothing to like

The ONS released public sector revenue, spending and borrowing data for March, and for the 2011/12 fiscal year, earlier today.  The official release predictably focuses on the fact that borrowing for the full year, at just under £126 billion, was in line with budget targets, but if you look even a little way behind the headline, there's very little to like in the underlying data, regardless of where you sit on the political spectrum.

Even that headline number itself is a bit of a disappointment. A couple of months ago, the year-to-date deficit was tracking so far below the target that a few commentators, your humble blogger not excepted, ventured to suggest that the full-year figure would be as much as £10 billion below budget.  However, the shortfalls ballooned in February and March, which could be a very ominous development if it means -- and it probably does -- that signs of slower GDP growth in recent months are taking a toll on the public finances.

Looking at the revenue and spending data, a couple of things stand out.  First, most of the burden of cutting the deficit is still being borne by taxpayers.  Central government revenues rose 4% for the full fiscal year;  public spending, supposedly subject to a vicious squeeze, also posted a 2.0% INCREASE!   Net social benefits, cut to the bone and beyond if the pleadings of special interest groups are to be believed, actually rose by 4.9%.  Interest payments on the debt also rose, somewhat surprising in light of the Bank of England's strenuous attempts to keep borrowing costs down.  The only category of spending to decline was, alas,  net investment, which fell 40% (!) year-on-year, and is now 60% (!!) down from its all-time peak, set just a couple of years ago.

Even before these numbers appeared, the Government had announced that the Treasury was putting pressure on spending departments to find another 5% in expenditure cuts.  It's all to likely that the bulk of these will again come from investment spending, which is the last thing the economy needs,  from either a long-term or short-term viewpoint.

Tomorrow sees the release of Q1 GDP data, which are expected to show that the economy eked out at best a marginal gain for the quarter.  But even if the feared "double dip" has been avoided, most commentators are likely to revise their forecasts for the full year downwards yet again, citing the economy's lack of momentum, the renewed problems in the Eurozone, and one-off factors like the Queen's jubilee. Taken together, the fiscal and GDP data are likely to make Labour's Ed Balls think Christmas has come really early for him this year.  He's likely to do a clog dance all over the Government, and it would be hard to deny him that right.      

Spring hopes eternal

How's the "Arab Spring" looking to you right now?  Let's go through a quick checklist:

* Tunisia, where it all kicked off in early 2011: peaceful now, but in dire economic straits because the tourists, the lifeblood of the economy, have continued to stay away.

* Egypt: also in economic difficulties because of a lack of tourists.  There are growing suspicions among Egyptians that not much has really changed, as a large number of candidates for the upcoming Presidential elections have been disqualified on the flimsiest of pretexts.

* Libya: off the front pages, but the militias that brought down Col.Gadhaffi are still in place, and there are sporadic reports of revenge killings and torture.  Still, the oil came back on stream faster than expected, so that's OK, right?

* Syria: civil war in all but name.  It became apparent in the early days of the uprising that the opposition was so splintered that it would be nearly impossible to reach a political solution, even if the Assad regime were to make meaningful concessions.  It's hard to see how the underlying issues can be resolved, even assuming that the UN-brokered ceasefire holds.

It's a depressing list.  In none of these countries (Libya possibly excepted)  have things panned out as the locals wanted, or as their supporters and well-wishers around the world hoped.  It's still early days, of course, but few would wager that any of these countries will be functioning, pluralistic democracies five or ten years hence.

Which brings us to Bahrain.  I visited the country a dozen years ago, during a business trip around the Gulf.  One of the clients I met was a UK expat who had lived there for almost twenty years.  In all that time, he had never once popped across the King Fahad Causeway to take a peek at Saudi Arabia.  Bahrain was just too congenial.  And it was clear at the time that many Saudis agreed.  Right at the Bahrain end of the Causeway was (and is) a large shopping mall, full of fleshly temptations (and a Marks and Spencer store!), sited there to cash in on all the young Saudis who streamed across each weekend for a little relaxation. This is the largely pro-Western and liberal country now being excoriated in the world's media for its allegedly repressive regime.

The self-styled "great powers" have been trying to shape the course of events in the Middle East ever since the "Great Game" and the Sykes-Picot Agreement.  However,  outsiders' dealings in the region are still beset by ignorance of what the place is actually like.  As a result,  it's hard to know, in any given situation,  who  will wind up supporting whom against whom.  In Bahrain, the ruling family are Sunni Muslims, but a large proportion of the population are Shiites, and it's the latter who are involved in the current unrest.  Without downplaying their legitimate grievances, it's hard not to wonder how large a role neighbouring Iran, the leading Shiite nation in the region, may be playing in the unrest, or what influence it might have in the future.

It's all very well for Hillary Clinton and William Hague and the like to express support for democracy and human rights in Bahrain and elsewhere in the region, but realistically, that's not what's on offer.  And even if it were, the US and the UK might not be happy with the outcome, as the electoral success of Islamist parties in Egypt, Gaza and elsewhere has clearly shown.   Instead of criticising the Russians and Chinese for their unwillingness to support UN "action" in the region,  maybe we should ask ourselves if they're smarter than the rest of us.          

  

The man who could be King?

Sir Mervyn "no mates" King still has over a year left of his term in office as Governor of the Bank of England, but speculation over who will replace him has been running wild for months. Most of the candidates are entirely predictable.  They include the Bank's Deputy Governor Paul Tucker and former civil service boss Sir Gus O'Donnell, whose acronymic nickname, GOD, seems especially appropriate.  Today, however, a new name has emerged straight out of left field: Mark Carney, current Governor of the Bank of Canada, and also head of the global Financial Stability Board set up in the wake of the financial crisis.  The story has been widely covered on both sides of the Atlantic.  Here, for example, is a partly tongue-in-cheek take on it from the Globe and Mail in Toronto.

Sir Mervyn will be a tough act to follow, for the worst possible reason:  unfairly or not, he's now widely seen as having messed up most aspects of the job. Under his leadership, the Bank is accused of having been excessively lax in monitoring the health of the financial system prior to the financial crisis.  The fact that the government had taken much of the responsibility for regulation away from the Bank years before the crisis is not seen as offering much mitigation, as the Bank was still clearly the dominant player.

Since the crisis, the Bank is seen as much too lax in tolerating above-target inflation as it attempts to get the economy growing again.  Just this morning, Deputy Governor Tucker admitted that inflation could stay above 3% at least for the rest of 2012, a forecast that directly contradicts assurances made by Gov. King only weeks ago.  Complaints that stubborn inflation and rock bottom interest rates are punishing senior citizens are now a staple of radio phone-in shows.

If Mark Carney really is being sounded out as a candidate, there are two possible interpretations.  One is that the government is so dissatisfied with the Bank's track record in recent years that it wants to see a wholesale change of direction and management.  This would certainly exclude Paul Tucker from consideration as the next Governor, though it would not seem to rule out GOD, or some of the other non-Bank candidates.

The other interpretation is that the government wants to send a signal that it intends to take financial stability much more seriously.  With no disrespect to either Canada or to Mark Carney, it's hard to see that experience in running monetary policy in Canada can count for too much on Threadneedle Street.  The Bank of Canada may no longer be regarded as "the eleventh Federal Reserve District", but there's no denying that it has a lot less room to manoeuvre, and that its actions have far fewer global consequences,  than is the case for the Bank of England.

On the financial stability front, however, there may be a lot more to learn from Canada.  The Canadian banking system is one of the most stable in the world, and needed very little government help to weather the global financial crisis.  Much of the credit for this goes to decisions taken long before Mark Carney's time in office, notably the government's decision back in 1998 to disallow proposed mergers involving four of Canada's "Big Five" banks.  Still,  Canada's record of keeping a tight rein in its domestic banks may well be a key factor commending Mark Carney to the UK government.  If that's the case, the City of London is likely to be aghast. Let the lobbying begin!