«Three reasons to be optimistic»

George Osborne, former Chancellor of the Exchequer and now editor of the «London Evening Standard», makes a case against the widespread gloom and is unhappy about Brexit.

Jan Schwalbe und Philippe Béguelin

For George Osborne, Brexit is «one of the worst decisions my country has made for a very long time». Now he argues that for Britain and Switzerland, working together to get a more permanent cooperation with the European Union was «codified in their relationship as non-members». Despite geopolitical crises, Osborne is optimistic. He welcomes the deregulation by Donald Trump and sees China as a force for stability. Osborne gave a presentation at the Fund Experts Forum of «Finanz und Wirtschaft».

Mr Osborne, after the euphoria at the beginning of the year, sentiment has deteriorated. How do you assess the international situation?
It’s very easy to be pessimistic about the world at the moment. Everyone is very gloomy, but I would give the counter-picture. There are three reasons to be optimistic. Firstly, Donald Trump is not as dangerous as he looks. Secondly, Europe is not falling apart, and thirdly, China is no threat.

At present, many people are pessimistic. What are the reasons for this?
Perhaps the most telling of all is the testimony of Mark Zuckerberg of Facebook before Congress, which is about an entirely new and disruptive force in our society. It is really breaking apart a lot of the old institutions that we have come to rely on, such as the social intermediation that we take for granted, as well as the political parties and the businesses that have been around for a while.

Why is the change caused by social media such a big problem?
There is a sense that this is all heading in the wrong direction. That it’s pulling us apart, making us more nationalist, people seeking to erect real or imaginary borders –essentially that the global glue that has held our global economy together since the post war period is becoming unstuck.

What about geopolitical tensions?
There are some immediate crises that are rather dark and gloomy. We have an escalating confrontation over the use of chemical weapons with two unpredictable regimes – something you wouldn’t have previously said about the United States. We have a trade war between the US and China with retaliatory tariffs. There is the ongoing drama of North Korea and escalating tension between Saudi Arabia and Iran.

What would you advise investors to do?
If you are in finance, it’s a mistake to completely ignore the geopolitical trends. Because eventually, the value of your actions depends on the rule of law, the ability to enforce contracts, the assumption that the institutions that are there to protect property are going to be there in the decades to come. As we can see, all that can fall apart rather quickly.

Is the setting better in Europe?
You see forces of disintegration at work, most obviously the decision that my country took to leave the European Union. A decision that would have been unthinkable even two or three years before the referendum. And then, probably underreported, there is the situation in central and Eastern Europe. Increasingly nationalist regimes, rooting themselves in a defensive and so called Christian culture, are out of step with the liberal democracies across Europe.

Is there something left to be optimistic about?
Donald Trump might be an idiot, but he is not actually as dangerous as he looks – this is the first of the three reasons to be optimistic. The United States’ role in the world is so enmeshed in our institutions – in what we assume to be global security – that no single person can pull that apart. Even if you look at everything he does and the kind of erratic ways in which the administration operates, the fact that he fires people such as his secretary of state or announces a missile strike over social media – all this. If you look through all the noise, and this is difficult to do, this is quite an orthodox republican administration.

Shouldn’t orthodox economic policy avoid trade war?
It’s absolutely classic republican orthodox policy. Trump is deregulating, which is probably one of the great unreported stories of the global economy and certainly of the American economy. There is a consistent effort across all the different agencies of the US administration to deregulate. This is having a significant effect on the productivity of the US economy, which is important for the short and medium term. It might have other effects, such as causing long-term environmental damage or making the financial system riskier. Trump is also undertaking a big tax cut that has an immediate stimulatory effect on the global economy, probably equivalent to at least 1% in global GDP, which is a large impact.

Isn’t it the wrong time in the business cycle to cut taxes after a long economic upturn?
What I would say as someone who was a politician for 20 years: There is no right time. You can’t judge legislative tax cuts in a system such as the United States according to the economic cycle. You’ve got to judge it according to the political cycle. You get it done when you can get it done. People have been trying to do this kind of corporate tax reform for 30 years. And Donald Trump has achieved this.

What is the impact of the US tax cuts on the world economy?
They are going to have a big impact on the competitiveness of the United States. That is going to put big pressure on other western economies to reduce their headline corporate tax rate. How much longer can Germany carry on with a very high corporate tax rate? So that is having an effect on the global economy, the tax cuts will accelerate the end of the economic cycle. The only thing is that the central bankers at the moment, all for different reasons, are much more dovish than some of their predecessors. The European Central bank doesn’t want to call time on this Eurozone recovery, the Federal Reserve Chair was picked because he is dovish, and the Bank of England is quite pessimistic about the impact of Brexit and will not want to pre-empt that too much.

These are therefore reasons for being optimistic?
The global economy is undergoing a synchronised expansion for the first time in at least a decade, with small exceptions such as Brazil. You’ve got a big stimulatory tax cut and productivity improvements in the largest economy, which will promote productivity improvements elsewhere.

What about the trade war?
If you actually examine it in the context of trade wars even in the last 20 years, not the last 100 years, it’s pretty small beer at the moment. The broad approach is to try to contain it, for two reasons: One is that the Chinese certainly don’t want any kind of big dislocations to global trade. You’ll get spats, you’ll get headlines of trade war. But in the US, there is an administration that seeks re-election and uses the value of the S&P 500 as a measure of how well it is doing. They are not going to do too many things that will fundamentally hit that in the short term.

How will the European Union cope?
Europe is not about to fall apart, and this is the second reason for optimism. The Brexiteers may have pulled Britain out of the European Union, but they haven’t pulled the EU apart. That’s what they wanted to achieve, they were talking to separatist groups in the Netherlands and in Scandinavia about these countries’ exit and the beginning of the end of the EU. That has not happened. Support for EU-membership in all these countries has risen since the Brexit vote. If anything, Brexit has pushed the other European countries slightly closer together. The other thing that has happened is that Emmanuel Macron has emerged on the European stage with great fanfare and has given the European project some momentum again.

Will there be more integration in the EU?
The project needs the momentum because it is facing this fundamental challenge on the eastern side of the union with the rise of the nationalist forces, for example in Hungary and Poland. The response is going to be essentially to make the Eurozone the European Union. That doesn’t mean that they are going to kick out the other countries. But the Eurozone has become the dominant project of the EU, and with Britain leaving it will essentially be the only project.

In the Eurozone there still are considerable structural differences between countries.
If you take the logic of monetary union, it will lead to much greater fiscal and economic and financial union over the coming years. Even in the last six years, we’ve seen an incredible unification. For example, now regulators in individual countries are being subjugated to the European Central Bank as a single regulator. This is something you would never have imagined possible five or six years ago. So that project is broadly good for Europe because it provides stability and it deals with problems that emerged in 2012, such as having a currency union without fiscal transfers and common financial regulation.

What happens to countries like Britain and Switzerland?
This will make life difficult for them. Brexit to me is one of the worst decisions my country has made for a very long time. It’s a really bad mistake we made. Britain’s role in the world will be somewhat diminished. But of course, Britain is a big strong economy, one of the most flexible in the world, and we will make the best of it. There essentially will be a sort of shadow arrangement with the EU, possibly for many years, where we follow the rules and regulations of the EU, we continue to pay money and we accept European citizens into the UK, but we have no formal say over those rules. To Switzerland, I suspect, that sounds very familiar.

What is the impact of Brexit on London as a financial centre?
The city of London, and in general financial services also in other cities in the UK, is one of the jewels in the crown of the British economy. It’s strong for many reasons: good regulation, good quality of life and a cluster of expertise with not just banking but insurance and legal services and accountancy and so on. Many its strengths have nothing to do with the European Union: deep capital markets, international foreign exchange markets, derivative markets. But one of the things the city of London provided was a jumping off point for businesses that wanted a headquarter in the UK and do business in the rest of the EU. I think we will lose quite a lot of that business over time.

Some banks are already moving.
Indeed, you can already see some redomiciling of international banking headquarters to Paris, Amsterdam, Frankfurt, Dublin, Brussels. We don’t yet know, how many jobs, how much real economic activity will move. It partly depends on whether European regulators behave in a sort of mercantilist fashion – if they are going to force businesses to move real economic activity, and how those businesses react to that. It’s not easy to do in a global financial system.

Do you expect EU regulators to try to make businesses move?
There are certainly many European countries making an overt bid for financial business to come out of London into their country – some more publicly than others. But we’re only seeing the start of that. If we don’t get a lasting deal with the EU on financial services, we will see many more go. And although London will probably still be the dominant financial centre in Europe, it will not be as strong as it would have been, if we’d stayed in the EU. Ultimately, international American firms will retain business in New York that they otherwise would have come to London with, rather than London losing business to Frankfurt.

Should Britain and Switzerland work together more closely?
It’s already a good relationship, and a closer working relationship might come out of this. We should have a good dialogue, because we find ourselves in having quite similar issues with the EU. And both countries have similar domestic political issues around judicial sovereignty, immigration and so on. The challenge is: how do you have strong economic links with all your neighbours, without simply just accepting the rules that they write – how to have a say and influence those rules. The EU can always threaten to pull the plug on the entire mutual cooperation agreements, the bilateral agreements. Therefore, working together to get a more permanent cooperation with the European Union is codified in the relationship between non-members.

Britain or Switzerland, who is going to have the better end in five years?
I’m not someone who thinks it’s a zero-sum game where Britain benefits when Switzerland loses out or vice versa. Generally, the rule is, if everyone does well, then all do better than they otherwise would.

Despite such issues, you remain optimistic for Europe?
All of this does not mean a big dislocation to Western European politics and to the political and economic underpinnings of the prosperity of the last 30 years. That is a reason to be optimistic. I’ve been there, when we contemplated the collapse of the Euro in 2012. The impact of that on financial markets and the real economy would have been enormous.

Apart from Trump not being too dangerous and Europe not falling apart, what is your third reason for optimism?
China, for all its power and resurgence and its demanding of a special status in the world, is not going to be the big threat that everyone fears. China is an ally in ensuring global stability and free trade and order. If you work with the Chinese government, one thing becomes clear after a relatively short period of time: They are primarily interested in stability in China, which they equate with the communist party staying in office. The Chinese do not want to take very big risks with stability, or their country or indeed the world.

In recent years, China has been expanding, at least its economic reach.
If you look at the long history of China, the Chinese do not strive to expand their empire all over the world. They built walls, not fleets to go and have colonies as western countries did. Of course, they want to deal with the countries on their borders to make sure that they essentially do what China wants them to do. But I would point out that’s not the only nation pursuing that policy.

How should the West position itself with respect to China?
Everything that China is doing at the moment seems to suggest that what it really wants is a bigger say in world affairs, rather than to upend world affairs. Instead of confronting China, it would be better to try to make them partners, to co-opt them to all these institutions such as the United Nations and the IMF, of which China is a member but not a big player – in the way it should be, given its size. Because confronting China would to require a massive political and economic effort, which I don’t think the West has the energy or the resources for. Fundamentally, China is a force for stability in the world.

How could the relationship with Russia be improved?
This is much more difficult. Russia seems to be heading in a direction where it actively seeks trouble with its neighbours. It was a Russian decision to invade Crimea, and to carry out an attempted assassination in Britain several weeks ago. Those are not decisions of a regime that wants to have good relations with its neighbours. The best thing to do is to have a very strong, robust western response, which you are seeing with sanctions and with the expulsion of diplomats. But at the same time, always have an eye to if there’s a way out of this or a dialogue that could be had or some way to improve the situation. You’ve got to try to prevent that the whole thing is becoming frozen. Just because they are being difficult doesn’t mean we shouldn’t try and find a better way of working and living with Russia – although at the moment it all looks rather pessimistic.

Do you have any plans of going back into politics any time soon?
I’m enjoying editing a newspaper – I had a long time in politics. I don’t say never. But I would want to go back if there was some real opportunity to do something that I wasn’t able to do when I was in government before.

Such as becoming Prime Minister?
Well, I mean more with regard to policies. I keep the option open, but I’m in no rush.