Philippe Legrain

“Los casi 100.000 millones que se piden a la eurozona no son una ayuda, sino un préstamo que habrá que devolver con altos tipos de interés. La factura sale a unos 23.000 euros por irlandés: los ciudadanos tendrán que pagar mucho dinero para salvar a sus bancos y por la pésima gestión del Gobierno”, advirtió a este diario Philippe Legrain.

Read the full article here

Quoted again in El País: Philippe Legrain alerta de que Irlanda “no puede (y no debería) pagar la factura de sus bancos”. “De lo contrario, hay un claro riesgo de crisis social (por los recortes y por el hecho de que muchas hipotecas superan ya el valor de los pisos) y de crisis política, por el pésimo manejo de la crisis, con el Gobierno a los pies de la banca”.

Read the full article here

This is a slightly longer version of an article that appeared in the FT.

Euro-phobes can scarcely contain their joy at the Irish crisis – proof positive, in their eyes, of the folly of the single currency. But while the euro-zone certainly needs reform, the notion that the euro is to blame for Ireland’s travails is simplistic.

Even many of the euro’s supporters now regret that in the boom years the single currency permitted huge capital flows from Germany and other surplus countries to Spain, Portugal, Greece, Ireland and other deficit countries. These imbalances, conventional wisdom has it, are unhealthy – and the EU is drafting new rules to limit them.

Yet enabling capital to flow from one member country to another without exchange-rate risk is a key advantage of the euro. If only this were possible globally, emerging economies would not feel compelled to accumulate huge reserves to protect themselves against crises – instead of being net lenders to rich countries, these fast-growing economies could be net recipients of investment funds. When integrated financial markets work well, they offer investors higher returns, businesses cheaper finance and a better allocation of capital all around.

The problem is not that savings flowed from Germany to Ireland and other economies on Europe’s periphery. It’s that they mostly funded property bubbles rather than productive investment. The blame for that lies with herd-like investors, flawed banks and foolish governments, not the euro. After all, America, Britain, Iceland and other non-euro countries all had huge property bubbles too.

Granted, joining the euro involved slashing interest rates in Ireland – and cheap borrowing helped fuel the property bubble. But at a macro level, the Irish government could have tightened fiscal policy – in effect, run large budget surpluses – to dampen the boom. At a micro level, it could have limited banks’ reckless property lending – through higher and counter-cyclical capital requirements, for instance – rather than encouraging it with tax breaks.

Ireland’s property bubble was particularly big. The value of all the houses in the country quadrupled in the ten years to June 2006 and construction swelled to an eighth of the economy. The price of a typical Dublin house shot up more than fivefold – and has since nearly halved. Such a property crash is inevitably painful. But it need not have led to a sovereign debt crisis. Ireland’s public debt was only 25% of GDP on the eve of the crisis, the lowest in the euro-zone.

The government’s fatal mistake was stepping in to guarantee not just all the depositors of Irish banks but also all their bondholders. Now the bust banks’ huge losses are dragging down the Irish state with them. Had Britain’s recession worsened, the UK government might have ended up in a similar situation.

Only cheap finance from the European Central Bank has kept those bust banks on life support, until now. Outside the euro, Ireland would doubtless have suffered Iceland’s fate: its currency would have crashed and its central bank would have run short of foreign funds to keep its banks afloat. Far from precipitating the crisis, the euro has given Ireland vital breathing space. More’s the pity that the government has failed to make good use of it.

It’s true that, outside the euro, Ireland would doubtless now enjoy a weaker currency. That could boost exports and hence growth. But in very small open economies, devaluations tend to feed through rapidly into inflation, so the competitive boost might not have been that great. In any case, Ireland has already slashed wages and prices to restore competitiveness – in effect, an internal devaluation. And if it wished to cut unit labour costs further, it could reduce its high payroll taxes and replace the revenues with higher VAT or a tax on land values.

Leaving the euro and reintroducing the punt is certainly not a solution, since Ireland would be incapable of repaying its euro-denominated debts in devalued punts. Nor, on its own, is an EU or IMF “bailout” – in fact, a loan at punitively high interest rates. That would merely postpone what is now a  solvency crisis.

Irish taxpayers should not be bled dry to pay off investors – among them, European banks and American hedge funds – who took a punt on lending to Irish banks. Those creditors should take a haircut (or lose their shirts).The way forward is a debt restructuring – a polite word for an orderly default – with the EU and/or IMF providing a bridging loan until Ireland has eliminated its budget deficit. Ironically, it is Germany’s proposal that bondholders should take a haircut in future that has brought matters to a head. It’s such a good idea that it should be implemented now.

I spent a fantastic weekend in Kilkenny, at Kilkenomics, Ireland’s first economics (and comedy) festival. Despite (and because of) the crisis, it was a sell-out. Congrats to Richard Cook and David McWilliams for putting on a superb event, hopefully the first of many.

The Irish government now appears to be in talks with the EU about a possible bailout, but politicians don’t want to lose face by accepting help.

Despite the huge housing bubble and now bust, it needn’t have come to this, as I explain in Aftershock: Reshaping the World Economy After the Crisis.

The Irish government had very small debts going in to the crisis.

Its crucial mistake was guaranteeing the creditors of its bust banks.

Now it’s bust too.

An EU/IMF bailout without restructuring the banks’/government debt is not the solution.

Irish taxpayers would be bled dry to pay off investors who took a punt on lending to Irish banks.

Those creditors should take a haircut (or lose their shirts).

The way forward is debt restructuring/default, with either the EU/IMF providing a bridging loan until Ireland has eliminated its budget deficit.

The US and others seem to believe that China’s currency is the biggest obstacle to the global recovery.

That is highly debatable, as I argued on VoxEU.

In any case, the Chinese renminbi is up 3.1% against the dollar over the past 12 months.

And since inflation is 4.4% in China and only 1.1% in the US, in real terms it is up 6.4%.

Would a faster appreciation really do more good than harm?

Economies cannot adjust painlessly overnight.

Check out my new article on VoxEU.org.

Ed West says he took time to reply to my earlier post because his “Chinese maid, Yen or Wen or whatever her name is, took ages to clean up my study” – delightful, isn’t he?

He then deliberately misinterpreted my response – or perhaps he’s just stupid? I said it was nonsense to claim that in Immigrants: Your Country Needs Them, I tried to shut down debate by calling opponents of immigration racists. I quoted at length from the book to show that this wasn’t the case. He conveniently ignored this. How can you trust anything that someone so slippery with the truth writes?

His basic argument is that large-scale immigration would transform Europe into Lebanon:

the demographic nature of their country makes it unstable; which makes long-lasting peace and prosperity, the sort we in relatively homogenous and stable countries take for granted, impossible.

This has echoes of Enoch Powell’s “rivers of blood” speech.

Perhaps West should get out more: Britain is not ethnically homogenous – and nor is it at war.

If Britain became more diverse, it would look a bit more like London – which is hardly a hellhole.

A weaker version of this argument is that diversity undermines social solidarity. But while research by the political scientist Robert Putnam suggests that in the United States increased diversity correlates with diminished feelings of trust within a community, there is no evidence that this is the case in Europe. In fact, a comprehensive study of 21 countries concludes [see footnote]:

Despite several such findings for US society, in Europe it was not confirmed that rising ethnic diversity or even the rate of influx of foreign citizens had any significant detrimental effects on social cohesion.

West says “the immigration debate is about our vision of society, not economics.” In my view, it is about both – and much else besides.

It is about the choice between a closed, stagnant and reactionary society, and an open, dynamic and progressive one. And in economic terms, it can also bring big benefits.

West claims that these are trifling, and quotes the House of Lords economic affairs committee report to substantiate his argument.

But that report ignores the main economic benefits of immigration, which I discuss at length here.

Briefly, they are three:

1. Gains from trade. Migration is a form of trade. If you go to France for an operation, it is classified as trade; if a French surgeon comes here, it is migration. If free trade is such a good thing, surely so is free migration.
2. Greater flexibility. By moving to where the jobs are, migrants make economies more flexible, allowing them to grow faster for longer without sparking inflation. If it is a good thing for people to move from Liverpool to London if their labour is in demand there, surely the same is true of people moving from Lisbon or Lithuania.
3. Faster productivity growth. As outsiders with a burning drive to succeed, newcomers tend to be more hard-working and entrepreneurial than most. Newcomers of all cultural backgrounds are twice as likely to start a new business as people born in Britain. Both individually and thanks to the increased diversity they bring, they boost innovation and improve problem-solving. Google, Yahoo!, eBay, and many others were all co-founded by immigrants who arrived in the US as children. People with diverse skills, attributes, perspectives and experiences bring something extra to the mix and by interacting with people born in Britain, this generates new ideas and businesses, and hence economic growth that makes us all richer.

Anyone who doubts the economic benefits of migration should ask themselves this: Would London be half as vibrant and successful without a constant influx of hard-working and enterprising people from around the country and around the world?

Last but not least, migration is about freedom, justice and human rights.

West takes issue with the fact that that I have called the current system of immigration controls a form of global apartheid. Yet how is it right that  one class of people – the rich and the educated – can move increasingly freely while the rest are expected to stay put?

Anyone who doesn’t think that this is deeply unjust should put themselves in the shoes of someone less fortunate than themselves. How would you feel if you weren’t able to move freely to seek a better life for yourself and your children?

That is hardly an ignoble aspiration: it is what has driven millions of Britons to settle across the world – in Australia, America, New Zealand, Spain and many other places.

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Footnote: Marc Hooge, Tim Reeskens, Dietlind Stolle, and Ann Trappers, Ethnic Diversity, Trust and Ethnocentrism and Europe: A Multilevel Analysis of 21 European Countries, paper presented at the 102^nd Annual Meeting of the American Political Science Association, Philadelphia, 31 August-3 September 2006.

MigrationWatch have posted a pitifully weak response to my criticisms of their education “report”.

1) They defend their use of cumulative figures. They say it is legitimate because the “sole objective” of the study was to calculate “pupil place requirements stemming from net migration since 1998″.

Really? If the sole aim was to calculate the impact on pupil places, they wouldn’t need to calculate cumulative costs at all.

More likely, the use of cumulative costs out of context is to generate shock headlines in tabloid newspapers, which are then reproduced by the BBC and elsewhere, to create the impression that immigrants are a huge burden on British society.

If they weren’t aiming to scare people with figures taken out of context, why didn’t their report indicate projected education spending over that period as a reference point? Why didn’t it mention the taxes and other contributions migrants make to society?

2) They defend their decision to include children with one British parent and one foreign one in their calculations. They say this approach was “implicitly endorsed by the Economic Affairs Committee of the House of Lords”.

As I’ve written loads of times, for instance here,  that report was biased and flawed – not surprisingly since it was chaired (and its conclusions spun) by John Wakeham, a former Tory cabinet minister, who used the report to advance the Conservatives’ anti-immigration position.

In this case, there is no need to go into technical details. MW’s assumption fails the common-sense test. Stop people in the street and ask them whether the deputy prime minister’s kids should be counted as part of the costs of immigration.

3) They quibble with the studies that show that migrants pay more in tax than they receive in benefits and public services.

Again, they refer to the biased and flawed Lords report.

Academic studies that try to estimate the net fiscal contribution that migrants make agree on one thing: if a country with a huge public debt admits migrant workers, native taxpayers benefit. Why? Because the newcomers help pay off the debts accumulated before they arrived. That is precisely the situation Britain is in now.

Even if one assumes that the taxes migrants pay only just cover the benefits and public services they receive, the net cost of educating migrants’ children over 10 or 25 years is not £100bn or £195bn, it is zero, nil, nada, zilch.

Does anyone want to chip in to send Andrew Green back to school?

In a typically delightful post about Sally Bercow and the MigrationWatch libel threat, Ed West of the Daily Telegraph describes me as Philippe Legrain, author of How to Turn Europe into the Lebanon in Just One Ill-thought Out Step.

Unlike Andrew Green of MigrationWatch, I don’t believe in trying to silence debate, so I’ll let this pass.

West later claims that in Immigrants: Your Country Needs Them I try to shut down debate by calling opponents of immigration racists:

Legrain… wrote in his book that “the argument that tough immigration controls are needed for ‘good race relations’ is a quasi-racist canard”.

No proof was ever given for this assertion, but then who needs evidence for thoughtcrime?

This is nonsense.

In fact, I wrote:

Let me start by saying that I don’t think that it is necessarily racist to support immigration controls. Greens may support immigration controls because they believe that an extra influx of people would put a strain on the environment. Trade unionists may worry about the impact on the jobs of their members, black and white. People may worry that immigration undermines the financial basis for traditional welfare systems, which grant free or subsidised benefits and services to people primarily on the basis of residency rather than financial contributions. The people who believe these things may or may not be racists; but it is not intrinsically racist to believe what they do.

Nor is it racist to worry that immigration might undermine social solidarity for reasons other than foreigners’ foreignness. It is not racist to point out that if immigrants happen to be a bunch of thieves and villains, they might cause all sorts of problems – it is only racist to assume that foreigners tend to be thieves and villains. It is not racist to argue that if immigrants happen to have very different tastes and characteristics that clash with those of natives, they might also undermine solidarity. If millions of white American libertarians were to pitch up in social-democratic Sweden, support for its cradle-to-grave welfare system might fall. A non-racist might also observe that immigration could undermine social solidarity if natives themselves are racist, even if he or she isn’t – although this is slippery ground because it can allow racists to support racist positions on the basis of others’ purported racism while pretending not to be racist themselves: hence the common claim by British politicians, some of them doubtless racist, that immigration controls are needed for “good race relations”.

If anyone is trying to shut down debate, it is people like Ed West and Andrew Green.

The truth is that while it is not necessarily racist to oppose immigration, many people who oppose immigration do so for racist or xenophobic reasons. To pretend otherwise is frankly disingenuous.

Another day, another twisted use of statistics by MigrationWatch.

Their shock report suggests the cost of schooling migrants’ children is astrononomical.

They do this:

1) By using cumulative figures. If you add up spending on anything over a long period of time, it looks much bigger than it really is. Using a single year’s statistics, 2009, and MW’s deeply flawed methodology, the cost of schooling the children of migrants who have arrived since 1998 is £4.6 billion, out of an education budget of £88 billion.

2) By counting children who have one parent who was born abroad as half due to migration. Since Nick Clegg has a Spanish wife, they include half the cost of educating their kids as being due to migration. Excluding that dodogy use of statistics, the cost in 2009 falls to £3.6bn.

3) By ignoring the taxes that migrants pay. Research by the Home Office, IPPR, Christian Dustmann at UCL and others show that migrants pay more in taxes than they take out in benefits and public services. Allowing for that, it is not UK-born taxpayers who are paying to educate migrants’ children, it is migrants who are subsidising the education of the children of people born in the UK.

4) There are probably lots more flaws in the stats. Those are just the ones I spotted in 5 minutes after getting back from a trip to Helsinki.

Yet again, #MigWatchFail

The notion that university students should pay for their education through a graduate tax is generally seen as a left-wing idea.

Yet it isn’t a million miles away from Milton Friedman’s suggestion that people finance investment in their human capital (ie, their studies)  by selling shares in themselves (ie, in their future income).

In the case of the graduate tax, the shareholder would be the government.

This blog post also appears on the Battle of Ideas blog on the Independent’s website. I will be speaking about mobility about the Battle of Ideas in London on Saturday 30 October. I hope to see some of you there.

Further, faster, cheaper, better – ever since the invention of the wheel, human progress can be measured by increases in the speed, affordability and ease of mobility. Before railways, cities clustered along coastlines and navigable rivers that facilitated transport and trade. Cars have given us more freedom to go where we want when we want, a wider choice of jobs to which we can commute and a bigger range of shops we can reach. Planes have opened up the mind-broadening delights of foreign travel, the enriching opportunities of global business and now the possibility of international commuting. And in the age of Ryanair and the £1,000 Tata Nano car, mobility has been democratised: what was once a privilege of the rich few is increasingly accessible to nearly everyone in rich countries and many people in poorer places too. It offers liberation from the tyranny of geography, whereby where you were born determines what you can achieve. What’s not to like?

Plenty, apparently. Start with hostility to change, season with environmentalism (both ideological and affected), add a smattering of protectionism and xenophobia, throw on a big dollop of austerity (both fashionable and state-imposed) and you have a toxic backlash against modern mobility. Thus Conservatives, who once championed driving and flying, now want to curb these forms of transport. Boris Johnson wants to turn the clock back to 1904, when 20 per cent of trips in London were made by bike. David Cameron took his summer holiday in the UK and urges others to do likewise. The Lib-Con government has axed plans for a third runway at Heathrow and won’t allow London’s other overcrowded airports to expand either. Its plans for eventually linking London and the North by fast trains could yet be halted by ‘nimbyist’ protesters and their Conservative MPs. And in this era of swingeing budget cuts, investment in transport looks set to be slashed.

Don’t expect much opposition from Labour and others on the left. Whereas Harold Wilson was all for harnessing the white heat of technology, Ed Miliband is more likely to fret about its carbon footprint. Anti-poverty campaigners decry the fact that people in China, India and other poorer countries aspire to the lifestyles that Westerners enjoy – how dare the Chinese want to drive or see the world! Hardline green George Monbiot even opposes high-speed rail, waxing lyrical about Britain’s dismally slow trains. Go slow, stay put, limit yourself to local – the eco-romantic vision of the good life would appear to be ditching the global village for a medieval one.

Don’t get me wrong: environmental costs are real. Plane noise, car pollution and traffic jams all harm people’s quality of life – and climate change could do so in future. But since mobility is hugely beneficial, the sensible way forward is not to limit it but to minimise its costs. So let’s build new runways and also develop quieter planes fuelled by algae. Let people drive where they please in new cars powered by cleaner engines or electric batteries. Cycle if you want to, but also invest in faster trains, extra Tube lines, more buses and new bridges, flyovers and tunnels to whisk people around. We don’t have to choose between growth and greenery: let’s develop new technologies and tap the limitless energy of the sun, the wind and the atom instead.

On Tuesday, two Russian-born scientists at the University of Manchester won this year’s Nobel physics prize.

The new immigration cap could have prevented them coming to Britain.

Today, they and six other Nobel laureates warn that the immigration cap threatens the UK’s position as a centre of scientific excellence.

It would “damage our ability to recruit the brightest young talent as well as distinguished scientists into our universities and industries”.

George Osborne’s decision to axe child benefit for the richest 10% is clever politics.

Does Labour want to defend welfare for the rich? At the expense of the poor?

Geert Wilders is a nasty piece of work. The far-right politician has compared the Koran to Mein Kampf and called Islam fascist.

But why, oh why, are the authorities in the Netherlands playing into his hands by putting him on trial for saying the vile things he says?

They will only succeed in making him a martyr to free speech, and boost his electoral popularity.

The right way to tackle him is by confronting his arguments, not trying to silence him.

Why the EU shouldn’t be spending nearly half its budget supporting agribusiness and landowners. Read my new e-brief for the Lisbon Council

Michael Gove points out the benefits of coalition government:

What helps is having two parties, different cultures, overlapping perspectives, coming from different positions, challenging each other.

True. Different cultures and perspectives challenging each other are also among the biggest benefits of immigration: they leads to innovation and better decision-making.

Martin Wolf writes in the FT:

Some argue that we have no right to bequeath higher debt to future generations. But why would it be wise to bequeath a smaller economy to posterity, instead?

Spain and Germany both subsidise coal mining as well as solar energy. Schizophrenia?

Why do governments make it so difficult for people to migrate temporarily?

Most don’t want to move permanently, yet in practice they are forced to choose between staying or leaving for good, as this article by a Nigerian health worker in the UK highlights