EU

Wonderful news from Hungary

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Apr 19 JDN 246150

Hungary’s recent election results were just about as good as they could possibly have been. Victor Orban was not only defeated, but crushed; Magyar’s party didn’t just win, they won a supermajority. They now have the power to implement sweeping reforms that could prevent authoritarians like Orban from ever taking power in Hungary again.

Already Magyar has suspended Hungarian state media broadcasts and released $90 billion in EU aid for Ukraine that Hungary had been holding up. These are immediate, concrete results from just his first few days in office.

I have two goals for this post:

First, I just want to celebrate.

This is a huge victory for democracy, not just in Hungary, but across Europe and indeed around the world. It brings hope in a time when we needed it most. It proves to the world that authoritarians can be toppled, and democracy can be restored—sometimes even without bloodshed.

There is a light at the end of this tunnel. We must keep pressing forward.

Second, I want to use it as a model.

I think the biggest thing that this event teaches us is that democracy and nonviolence can succeed. This is something we should already have recognized from the empirical evidence, but rarely do we see such a clear, unambiguous example of a triumphant victory by nonviolent, democratic means alone.

Hungarians protested, and lobbied, and voted, and they did so in a united voice against Orban’s tyranny. But there was very little violence—and most of what there was, was instigated by the government against peaceful protesters. (Remember, nonviolence doesn’t mean nobody gets hurt.)

And once he took power, Magyar already began the process of reform. It will no doubt be a long and difficult process, and may take years to complete. Orban and his party are defeated, but not destroyed, and they will continue to mount resistance. But Magyar did not wait. He did not try to reconcile or compromise. He immediately set out to make things better.

This is what the Democrats must do when they win the midterm elections this year. They must not be timid and careful, not taking any bold moves to avoid upsetting “moderates”. (Anyone who still thinks Trump belongs anywhere near public office at this point is not and never was a moderate. At best, they might be a low-information voter who literally doesn’t know what’s going on.) They must act swiftly and decisively to repair the damage Trump has done and fix our system so that no similar maniac can do such damage again in the future. This is exactly what Biden failed to do when he took office in 2020. (Yes, I know that Congress and the Supreme Court fought him on a lot of things. But there was definitely still more that he could have done and didn’t, and people are suffering now because of it.)

Ideally, in fact, they would impeach and remove Trump before 2028. (And if it’s not too much trouble, try him at the Hague for all the children he starved?) But if they don’t manage to do that, at the very least, they must ensure that they continue to have such a strong campaign for Congress and the President in 2028 that they take both of those branches of government—and then, they need to pack the Supreme Court in order to secure the third. This damage will not be undone until Republicans are completely removed from the seats of national power, and stay removed for at least a decade.

Of course, in order for that to happen, the Democrats are going to need to win a lot of elections. And that isn’t just on them—it’s also on us. They need to run better candidates, we need to vote for those candidates, and we need to hold those candidates accountable for taking the bold measures necessary to repair America after this disaster. They need to stop taking their own electoral victories for granted: Yes, Clinton and Biden absolutely deserved to win all three elections. But they only actually won one of them, and that is what matters. The Democratic Party should be looking long and hard at what went wrong in 2016 and 2024, and learning from those mistakes.

I’m not even saying the Democrats are perfect; they are not. (Neither is Magyar.) But we need a powerful party to defeat the Republicans and restore American democracy, and only the Democrats are currently in a position to fulfill that role. After the Republicans are totally destroyed and only a distant, unsettling memory like the Nazis, then you can start voting for the Greens or the Libertarians.

And since “Magyar” basically just means “Hungarian”, maybe we should run a Presidential candidate named something like John T. American, just in case.

What Brexit means for you, Britain, and the world

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July 6, JDN 2457576

It’s a stupid portmanteau, but it has stuck, so I guess I’ll suck it up and use the word “Brexit” to refer to the narrowly-successful referendum declaring that the United Kingdom will exit the European Union.

In this post I’ll try to answer one of the nagging questions that was the most googled question in the UK after the vote was finished: “What does it mean to leave the EU?”

First of all, let’s answer the second-most googled question: “What is the EU?”

The European Union is one of those awkward international institutions, like the UN, NATO, and the World Bank, that doesn’t really have a lot of actual power, but is meant to symbolize international unity and ultimately work toward forming a more cohesive international government. This is probably how people felt about national government maybe 500 years ago, when feudalism was the main system of government and nation-states hadn’t really established themselves yet. Oh, sure, there’s a King of England and all that; but what does he really do? The real decisions are all made by the dukes and the earls and whatnot. Likewise today, the EU and NATO don’t really do all that much; the real decisions are made by the UK and the US.

The biggest things that the EU does are all economic; it creates a unified trade zone called the single market that is meant to allow free movement of people and goods between countries in Europe with little if any barrier. The ultimate goal was actually to make it as unified as internal trade within the United States, but it never quite made it that far. More realistically, it’s like NAFTA, but more so, and with ten times as many countries (yet, oddly enough, almost exactly the same number of people). Starting in 1999, the EU also created the Euro, a unified national currency, which to this day remains one of the world’s strongest, most stable currencies—right up there with the dollar and the pound.

Wait, the pound? Yes, the pound. While the UK entered the EU, they did not enter the Eurozone, and therefore retained their own national currency rather than joining the Euro. One of the first pieces of fallout from Brexit was a sudden drop in the pound’s value as investors around the world got skittish about the UK’s ability to support its current level of trade.
There are in fact several layers of “EU-ness”, if you will, several levels of commitment to the project of the European Union. The strongest commitment is from the Inner Six, the six founding countries (Belgium, France, the Netherlands, Luxembourg, Italy, and Germany), followed by the aforementioned Eurozone, followed by the Schengen Area (which bans passport controls among citizens of member countries), followed by the EU member states as a whole, followed by candidate states (such as Turkey), which haven’t joined yet but are trying to. The UK was never all that fully committed to the EU to begin with; they aren’t even in the Schengen Area, much less the Eurozone. So by this vote, the UK is essentially saying that they’d dipped their toes in the water, and it was too cold, so they’re going home.

Despite the fear of many xenophobic English people (yes, specifically English—Scotland and Northern Ireland overwhelmingly voted against leaving the EU), the EU already had very little control over the UK. Though I suppose they will now have even less.

Countries in the Eurozone were subject to a lot more control, via the European Central Bank controlling their money supply. The strong Euro is great for countries like Germany and France… and one of the central problems facing countries like Portugal and Greece. Strong currencies aren’t always a good thing—they cause trade deficits. And Greece has so little influence over European monetary policy that it’s essentially as if they were pegged to someone else’s currency. But the UK really can’t use this argument, because they’ve stayed on the pound all along.

The real question is what’s going to happen to the UK’s participation in the single market. I can outline four possible scenarios, from best to worst:

  1. Brexit doesn’t actually happen: Parliament could use (some would say “abuse”) their remaining authority to override the referendum and keep the UK in the EU. After a brief period of uncertainty, everything returns to normal. Probably the best outcome, but fairly unlikely, and rather undemocratic. Probability: 10%
  2. The single market is renegotiated, making Brexit more bark than bite: At this point, a more likely way for the UK to stop the bleeding would be to leave the EU formally, but renegotiate all the associated treaties and trade agreements so that most of the EU rules about free trade, labor standards, environmental regulations, and so on actually remain in force. This would result in a brief recession in the UK as policies take time to be re-established and markets are overwhelmed by uncertainty, but its long-term economic trajectory would remain the same. The result would be similar to the current situation in Norway, and hey, #ScandinaviaIsBetter. Probability: 40%
  3. Brexit is fully carried out, but the UK remains whole: If UKIP attains enough of a mandate and a majority coalition in Parliament, they could really push through their full agenda of withdrawing from European trade. If this happens, the UK would withdraw from the single market and could implement any manner of tariffs, quotas, and immigration restrictions. Hundreds of thousands of Britons living in Europe and Europeans living in Britain would be displaced. Trade between the UK and EU would dry up. Krugman argues that it won’t be as bad as the most alarmist predictions, but it will still be pretty bad—and he definitely should know, since this is the sort of thing he got a Nobel for. The result would be a severe recession, with an immediate fall in UK GDP of somewhere between 2% and 4%, and a loss of long-run potential GDP between 6% and 8%. (For comparison, the Great Recession in the US was a loss of about 5% of GDP over 2 years.) The OECD has run a number of models on this, and the Bank of England is especially worried because they have little room to lower interest rates to fight such a recession. Their best bet would probably be to print an awful lot of pounds, but with the pound already devalued and so much national pride wrapped up in the historical strength of the pound, that seems unlikely. The result would therefore be a loss of about $85 billion in wealth immediately and more like $200 billion per year in the long run—for basically no reason. Sadly, this is the most likely scenario. Probability: 45%
  4. Balkanization of the UK: As I mentioned earlier, Scotland and Northern Ireland overwhelmingly voted against Brexit, and want no part of it. As a result, they have actually been making noises about leaving the UK if the UK decides to leave the EU. The First Minister of Scotland has proposed an “independence referendum” on Scotland leaving the UK in order to stay in the EU, and a grassroots movement in Northern Ireland is pushing for unification of all of Ireland in order to stay in the EU with the Republic of Ireland. This sort of national shake-up is basically unprecedented; parts of one state breaking off in order to stay in a larger international union? The closest example I can think of is West Germany and East Germany splitting to join NATO and the Eastern Bloc respectively, and I think we all know how well that went for East Germany. But really this is much more radical than that. NATO was a military alliance, not an economic union; nuclear weapons understandably make people do drastic things. Moreover, Germany hadn’t unified in the first place until Bismark in 1871, and thus was less than a century old when it split again. Scotland joined England to form the United Kingdom in 1707, three centuries ago, at a time when the United States didn’t even exist—indeed, George Washington hadn’t even been born. Scotland leaving the UK to stay with the EU would be like Texas leaving the US to stay in NAFTA—nay, more like Massachusetts doing that, because Scotland was a founding member of the UK and Texas didn’t become a state until 1845. While Scotland might actually be better off this way than if they go along with Brexit (and England of course even worse), this Balkanization would cast a dark shadow over all projects of international unification for decades to come, at a level far beyond what any mere Brexit could do. It would essentially mean declaring that all national unity is up for grabs, there is no such thing as a permanently unified state. I never thought I would see such a policy even being considered, much less passed; but I can’t be sure it won’t happen. My best hope is that Scotland can use this threat to keep the UK in the EU, or at least in the single market—but what if UKIP calls their bluff? Probability: 5%

Options 2 and 3 are the most likely, and actually there are intermediate cases between them; they could only implement immigration restrictions but not tariffs, for example, and that would lessen the economic fallout but still displace hundreds of thousands of people. They could only remove a few of the most stringent EU regulations, but still keep most of the good ones; that wouldn’t be so bad. Or they could be idiots and remove the good regulations (like environmental sustainability and freedom of movement) while keeping the more questionable ones (like the ban on capital controls).

Only time will tell, and the most important thing to keep in mind here is that trade is nonzero-sum. If and when England loses that $200 billion per year in trade, where will it go? Nowhere. It will disappear. That wealth—about enough to end world hunger—will simply never be created, because xenophobia reintroduced inefficiencies into the global market. Yes, it might not all disappear—Europe’s scramble for import sources and export markets could lead to say $50 billion per year in increased US trade, for example, because we’re the obvious substitute—but the net effect on the whole world will almost certainly be negative. The world will become poorer, and Britain will feel it the most.

Still, like most economists there is another emotion I’m feeling besides “What have they done!? This is terrible!”; there’s another part of my brain saying, “Wow, this is an amazing natural experiment in free trade!” Maybe the result will be bad enough to make people finally wake up about free trade, but not bad enough to cause catastrophic damage. If nothing else, it’ll give economists something to work on for years.