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Preserving the status quo in a changing world

‘Everything needs to change so that everything can stay the same’. Novelists often enjoy setting beautiful paradox - none more so than Lampedusa.

That quote, taken from the Leopard, will frame some personal thoughts about the UK, Italy and EU – especially the EU - as it now largely serves as the prism through which the other two relate.

Of course, ‘The Leopard’ is a poignant tale of a great family struggling to preserve the rhythm of established life as swept by the discordant, turbulent forces of an emerging order. Within it, Lampedusa focuses on particular moments across half a century to illustrate great movement in history, in his case the Risorgimento.

Moments and Movements - points in time which define the currents of an age are often difficult to assess immediately. Sometimes we can scarcely discern them until years have passed.

In the novel, for example, Lampedusa enables his readers to understand the events of 1860 partially after two decades then fully 50 years later - once ‘the dust settled’.

The paradox of change being required to allow things to remain the same serves as a poignant metaphor for our world at this moment in time. Lives across the globe have been paused so that life can remain the same. We are separated so that we may come together again.

COVID presents unique challenges for society now, but we have already had a turbulent century. In particular, we have seen 9/11; the second Gulf War and the Great Recession of 2008. All of these events were set against a backdrop of technological development, terrorism and increasing environmental concern. The moments of our century can be set alongside those movements. Together, they suggest a world torn between opportunity and anxiety - increasingly drawn to the latter.

The events of this century have already stirred profound anxiety in many Western societies. It means that discourse dwells on risk and fear. That is understandable but risk appreciation can too easily turn to risk aversion and a paralysing inertia. The degree to which democratic societies generally become unable to act rationally, in an age defined by high anxiety and easy communication is something for another day but the way leadership can respond to moments of crisis is significant in considering the subject of this essay.

Professor Matt Goodwin has observed, the crisis we face now might even be the most significant of all. As he has pointed out, the double impact of 2008 (economic and political) is compounded by an additional anxiety now - the preservation of life itself. It might be the most significant crisis of our age but for our purposes, I will consider the Great Recession and Britain’s handling of Brexit as they are also pertinent.

So how does the opening quote work as a backdrop to consideration of the EU and Italy/UK during these anxious times?

Jean Monnet famously observed that ‘Europe will be forged in crises’. I want us to consider the accuracy of that statement generally and particularly now. Does the EU forge or bend and break in crisis? How do Italy and the UK fare at such moments? Essentially – are the UK; Italy and the EU vital or decadent?

We can assess against two ‘principled’ and three ‘practical’ assessments.

Principle:

Does the body have an implicit or explicit sense of purpose? Is there a ‘mission’ to motivate leaders?

Do those leaders have self-confidence and belief their mission is achievable?

These qualities show ambition and direction. They give momentum. Without an ambition and confidence a body tends to inertia - Lampedusa’s princely Salinas, with one exception perhaps, for example.

Then we have three practical concerns. The first two are

Does the body have legitimacy?

Does it have authority?

These day-to-day practical qualities can be reviewed alongside an exceptional one - of especial relevance during times of crisis. Can the leaders exercise influence?

‘Influence’ deserves brief elaboration and is distinct from authority. Public bodies sometimes struggle when problems do not conform to their established structures - the silos through which they operate - and the processes with which they are comfortable. That means they are sometimes sluggish in adapting to crisis.

The exercise of influence on a day-to-day basis would be excessively interfering - akin to dictatorship - but the ability to shift gear effectively, when required, might be what distinguishes great powers from simply viable ones. When people can engage in exceptional moments across silos, beyond their formal authority, in a reasonable fashion - usually to convene others or serve as a conduit for ideas - then they can have a supercharged effect.

Influence is underpinned by connections and trust. It tends to associate with leadership more than management disciplines.

So, assessing ability to influence will be a concern in this review. Of particular interest will be the Great Recession and Covid but a brief consideration of ‘day to day’ efficacy is also worthwhile.

Let’s start with the UK. State institutions and the settlements underpinning them are historic and well respected. We perceive a Parliament with centuries of tradition and an executive which draws authority from an accord with the Monarchy and usually aligns well with it. The apex of the judiciary - the Supreme Court - is a recent innovation and an ‘active’ one but the other pillars have endured the test of centuries.

When life has a regular balance, British leaders demonstrate a sense of confidence in the State itself and they tend to fulfil their purpose - maintaining security and prosperity.

How do they fare in crisis?

In 2008, British political leaders were swift to act - especially Alistair Darling, then Chancellor. Principally, they guaranteed the banks would not fail. Given the dependence of the UK economy on Financial Services that was doubly vital. Although that established a moral hazard it ensured a moment of crisis did not become a catastrophic process which would have led to systemic collapse.

It is possible to debate the cause of the crisis but we can recognise that public desire for easy credit was welcomed by many international politicians for years - Clinton, Blair, Brown and others benefitted from a false confidence those years stirred. That time also encouraged some at the sharp end of financial services in the USA and UK – to bundle debt products, especially mortgage backed securities, together unsuitably. While the wheels were turning, few dissented.

When the crisis hit an essential deal was mooted. The financial services sector would bear the burden of blame but it would be bailed-out. The leaders of that sector - my colleagues in the City of London particularly - would work to redeem the sector’s reputation. That led to a conflation of ‘banking’ for the entirety of the sector. It meant various investment and insurance workers would be subject to opprobrium of becoming ‘bankers’ in popular conversation.

It also made them subject to the policy reaction - increasingly stringent regulation - but there was a greater political imperative. Any economy requires financial services but the UK’s was heavily dependent upon its global leadership in that area for tax and treasury contributions. Failure of banks would have been nightmarish for the country.

The low interest rates which followed also reduced the natural imperative for banks to fulfil a key purpose - to lend, especially to SMEs - at precisely the moment they should have. So, whilst working to improve their image - forming CityUK for example, banks actually became less purposeful for the wider economy.

This created a vulnerability, further exacerbated by a culture of increasing compliance. In the wake of the crisis it was necessary to show that the sector was obedient and regulated. All too often the regulation was poorly assessed - and benefitted neither provider nor client.

In the wake of the crisis, the sector returned to profit and employment in the City rose - but much of that rise was in control functions like Compliance rather than in profit generative areas. FinTech was supported, in part by the wider City, with people like Sir Mark Boleat backing the creation of bodies like Innovate Finance, but that development merely mitigated what I believe was an increasing obedient sluggishness, loss of purpose and potentially even increase in political cronyism.

When Covid hit, many small businesses needed emergency capital and many banks were slow to authorise loans. Government intervention was necessary again - with the furlough scheme for employees and a small business lending guarantee scheme called CBIL (enabling banks to see the UK Government as a guarantor for their lending).

More widely, the UK government was apparently initially slow to engage effectively with the Covid crisis even as it became apparent in other countries. It did however eventually act to ensure infrastructure - building Nightingale Hospital in a matter of days for example. It also coordinated private manufacturers for the provision of key protection and ventilation equipment as well as test technology. There has also been clear daily communication with the public.

Although slips might be observable they do not seem to have undermined faith in the notion of government itself or even our current one. Slips are excusable because there is general confidence in leadership. For example, a poll in the Sunday Times on 3rd May revealed that 67% of Britons feel our Government failed to prepare adequately for Covid but, despite that, 61% think it is handling the crisis well.

So, it is possible to observe that the UK government can engage directly and indirectly in crisis.

By contrast, implementation the Brexit vote of 2016 was painful. Powerful forces attempted to define what the vote actually meant in order to delay the exit or deny it entirely.

A common theme in their post referendum concern was the ‘risk’ to the UK’s economy of disruption associated with departure from the EU. That led to institutional confusion - most evident last Autumn when the Supreme Court aligned with a ‘hung’ Parliament to overrule the Executive and Monarch on the prorogation of Parliament.

Concern about risk led to contention within the State. An innovative and new institution, the Supreme Court, overruled traditional ones, on the basis of an active interpretation of the intent of legislation - rather than actual law.

It was a disturbing moment but preceded a General election which settled matters. Also, it might have been in some senses a manufactured crisis which was addressable through the mechanisms of the State. Thus, it eventually proved them rather than broke the State. That State can now demonstrate utility once more.

David Frost, the UK’s negotiator with the EU has recently quoted Edmund Burke that once more the UK State should aspire to be:

‘‘A partnership in all science; a partnership in all art; a partnership in every virtue, and in all perfection.’’

The quote above is drawn from Frost’s speech In Brussels in February. It is worth noting that his framework was how Britain perceives the Continent. His thoughts were layered but one discernible theme was that Europe, the EU especially is moved by abstraction and principle whilst the UK drawn to utility. Is that fair?

If we briefly turn to Italy, I started thinking about this offering just over a week ago - 75 years to the day from Italian liberation at the end WW2 and that reminded me of two things.

The youth of the Italian Republic means there are people alive in Italy older than the system. Shallow political roots can be fragile unless the State delivers - unless it demonstrates utility.

As the Italian state is burdened by debt – 134 percent of GDP - and bound within the Euro, unable to devalue as it did in 1992, such ability to prove utility, for example by revaluation is severely impeded.

As is evident, the constraint of the Euro is profound. It also serves as the spark to internal crises - resignations of Prime Ministers and creation of fragile coalitions. Under the Euro Italy’s politicians are not in control of the levers they need to ensure utility and thus protect the wider relatively youthful political firmament.

In practical terms, Italian leaders principally need to influence partner states in the EU and the leaders of the ECB - not an easy exercise at any moment. As was seen with Coronabond negotiations, it is almost impossible during a crisis - ECB approval might be denied by the German Supreme Court and then contention follows. This leaves Italian leaders bound to communicate high ambitions and undependable outcomes to an electorate which might perceive significant loss for little gain.

That might not be profoundly problematic if EU and ECB leaders are generally susceptible to the influence of Italian leaders, or indeed any national ones, but are they?

Turning back to the Liberation moment, moving beyond Italy, the ashes of WW2 prompted creation if the European Coal and Steel Community. As that developed, through Treaties - principally Rome, Maastricht and Lisbon – to become the EU, the creation myth has been burnished.

The creation myth, is noble – preservation of peace - is immensely laudable. it is perhaps the greatest dream of Europe. It has ensured that the EU has long been assured of principle and passes those tests comfortably. How does it fare against practical consideration?

The body has moved outwards geographically and in competence from an economic to a political entity. It has gone from aligning commercial interest to commanding the peoples of Europe through Regulations directly and Directives. It attempts to exercise direct and indirect control - authority more than influence.

It is possible to criticise foreign policy and military achievement. For example, EU leaders might tend to take upon themselves the achievements of NATO rather too easily. However, such hubris could be the subject of a seminar and is not the focus of this offering.

In other dealings with foreign powers, it has reached agreements - particularly on trade which protect the interests of every member state but perhaps in doing so do not achieve maximal benefit – they might be protective ‘comfort blankets’. It means that it tends to strike deals slowly which achieve less than maximum benefit.

So, it might be that the EU has become a political construct struggling to preserve a region, social model at odds with a global economic reality. Again, risk aversion is evident. As suggested earlier, excess of that tends to inertia. With the EU it might also have led to an attempt to control the uncontrollable.

GDPR for example, suggests a desire to control and command internatipnally in order to protect the peoples of Europe from risk. That is questionable - perhaps elsewhere though.

In terms of prosperity - it fares quite badly. Yes, German output is magnificent and France remains reasonably prosperous, However, since the ERM started, in ’loose form‘ in 1979, the EU has unsettled the economies of European States - pegging them to the German currency initially and then making the Eurozone essentially a proxy Deutschmarkzone. Such rigidity created problems decades ago.

In 1992, Italy had to temporarily exit the ERM, in order to devalue the Lira, and of course the UK left permanently as it could clearly not align sufficiently.

Some States, such as Greece, were allowed or encouraged to bend the data to meet criteria for accession to the currency zone and the struggle to remain within it. This partial flexibility against supposed rigour is ultimately unhelpful for the project. If selection is driven by expediency and aspiration then ‘achievement’ will not be genuine or sustainable. It creates tensions rather than aligns interests.

So, the ERM and Euro were intended to align the interest of member States but might well be driving them apart. Although that is widely recognised, EU policy makers seem unable to address the related issues effectively. Even in direct competence they are struggling on key matters.

If they struggle with the immediate matters might the EU nonetheless be an effective ‘influencer’? Is it capable of guiding partners and does it work well in the crises Monnet supposed would forge it?

One issue it faces is access to capital going forward. Will a desire to punish the UK and take business from London lead to error or will pragmatism prevail?

As the UK leaves the EU, instead of looking upon London’s market as a neighbouring oasis which can tend the fields of Europe, policy makers in France and bankers in Frankfurt might be hoping to export their regulation and to use the moment to draw together the long planned Capital Markets Union.

The CMU is a sensible ambition but, as ever with the EU, the key question is how will it be achievable? How might they create one? London has history, capital, expertise, dependable contract based legal structures, language and time zone positioning, as well as cultural draws for international workers. Paris and Frankfurt have attractive qualities but they do not yet rival.

Absent a natural market, it might be that EU leaders hope creating regulatory structures will be enough. An instinct to control and command might be counterproductive.

Sir John Cunliffe recently remarked on this - comparing a philosophical and Bonapartist approach with the naturally apparent pools of capital and capability in London. He said ‘one cannot regulate deep capital markets into being and certainly not global ones’. EU policy makers need to heed that advice.

If those at the centre and some in the key states which shape the EU politically wish to punish the UK and draw business from the City, to make trading more difficult in London in order to elevate their own positions they risk the prosperity of millions on the Continent and in the UK. It would be a lose-lose. Without a well-developed global capital market on the continent, where will they turn?

The UK’s Brexit negotiator, David Frost was referenced earlier. That turns us to the Trade agreement. For years, EU negotiators tried to exploit the divisions in the UK noted earlier. They did so successfully. They set political control above economic interaction. The UK was weak and conceded that imperative. Now, politically the UK is more united and resolute and the Covid crisis could act as a stimulus to a light and free trade-based deal.

However, understandably, more time might be needed to negotiate a long term trade relationship. Maybe the answer lies in GATT 24 5 (a) and (b)? Under these a free trade arrangement might be allowed to continue and a timetable to detail that. A few years will allow all to move through Covid, engage with the new rhythm and assess. For the meantime, UK can trade with valued partners like Italy. The exchange of products and services, that natural and noble ambition of the founders of Europe can be realised. If EU leaders have the courage to do so. After all, we have existing corridors of trade which just need to be maintained rather than created. Those channels enable trade now. Britain benefits from buying Italian engineering, and fresh produce. We should value the links forged around the Milan Bourse and we hope that Italians will still receive investment advice in London, without additional barriers being created. Nonetheless, one area in which the ‘Single Market’ was largely an aspiration is Financial Services. If barriers - tariff and non tariff - are established the ‘hit’ to London might not be as bad as envisaged by speculators. After all, they misread job losses from the Brexit vote and might now be underestimating the ability of a strong natural market to adapt.

Will the EU be pragmatic? Can it be so? Only time will tell.

To summarise, the EU attempts to exercise direct authority where it only has derived capability and should instead influence. It is, therefore, of questionable utility in enabling the States of the EU - and wider Europe - to act well in day-to-day engagement.

It struggles even more profoundly in crisis - the crucible which Monnet felt would forge the Union. Since 2008, it has served to massage debt issues for the peoples of Europe but, in doing so - constrained their Governments from acting in the natural interest of their people. It has merely avoided immediate catastrophe by sewing the seeds of a bigger one in future.

During the Covid crisis the EU attempted support. However, financial and other packages were drawn together through tortuous processes - key national decision makers were distracted. The proposals have been flawed and the results minimal. Individual states have helped each other - Germany treating overseas patients for example - but largely without the guidance of leaders in Brussels. What the EU touched has tended to canker.

That infectious incapability, exacerbated by the grandeur of the dream, means that the EU is actually a danger to the stated aim of sustaining peace and security across the continent. If it seeks to assume the power of a State then we need to ask ‘when has any state come into being without bloodshed?’

We do not need dwell on the solider dying in Prince Salina’s palace to know the Risorgimento was won by strife or to know much about Bismarck to prove that creating States is a bloody business. Why should we trust the EU to be more capable of doing this bloodlessly than the greats who came before?

If the EU’s ambition of ‘ever closer union’ is less than statehood - merely alignment of other powers then we need to ask another question. Why it has thus far not acted effectively, especially in times of crisis, to balance centripetal and centrifugal forces within EU states? Why have the peripheral, however significant, suffered while the central prosper?

This traces back to our opening. The EU might be the greatest dream possible but its achievement is less evident than aspiration. It needs reform - either to a lighter touch or a more rigid enterprise. Given experience, the former might be most realistic.

Specifically, it might need to learn how to influence gently rather than attempt control of members and external partners through diktat. It needs to limit ambition in order to achieve ambition. It needs to do less in order to do more. It needs to change so that everything can remain the same.

Mark Wheatley

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Italia Atlantica - Settimanale di politica estera - Rivista Specialistica - Reg. nr. 55/2019 Trib. Roma​

Direttore Editoriale avv. Giuseppe Pezzulli | Redazione: Via Archimede 8 Roma​