The dirty little secret no politician will admit: There is no way to ‘go for growth’

Investment professionals and politicians who spurned Liz Truss’s “go for growth” strategy for the British economy are slowly waking up to an uncomfortable truth.

The former U.K. Prime Minister’s plan, which relied on unfunded tax cuts that were perceived to be inflationary, may have been the only growth plan for Europe’s economies to escape over-indebtedness and low productivity without having to turn to austerity or greater state control of the economy. Not that any of them are prepared to admit it.

Britain’s Institute of Fiscal Studies on Monday described parties’ reluctance to admit as much on Monday as “a conspiracy of silence” arguing Labour’s pledge to rule out tax hikes was a “mistake.” “We wish Labour had not made those tax locks and it will be difficult [politically] to break,” IFS director Paul Johnson said about the party currently leading the polls.

But it’s not just British politicians who are refusing to face up to reality. In France, where an impending snap parliamentary election threatens to empower extremists on both sides of the political spectrum — to the cost of President Emmanuel Macron’s centrist Renaissance party — there is a similar reluctance to admit there are only bad options on the table.

French Finance Minister Bruno Le Maire highlighted last week, after French bonds began to wobble, that anything short of centrism risks placing France under the supervision of Brussels and the International Monetary Fund.

What he failed to point out is that even supposedly sensible centrists face having to do the unthinkable in the longer run.

“They have to go to financial repression because high growth as a strategy out of over-indebtedness is not going to be funded by the bond market,” Russell Napier, an influential investment advisor who authors the Solid Ground newsletter, told POLITICO. “I think it doesn’t matter who you vote for, you end up with roughly the same thing. So the market’s not maybe saying ‘we’re very sanguine about Labour [in the U.K.].’ They’re just saying: ‘It doesn’t really matter who you vote for. We are heading toward this route.’”

Incoming financial repression

That route, in Napier’s opinion, means it’s time for financial repression: putting a lid on the free movement of capital and having the government and other technocratic institutions increasingly determine which sectors benefit from public sector funding, and even more critically, from private sector funding too.

The pathway takes Europe much closer to the dirigiste policies that dominated the continent in the post-war period and away from the market-based liberalism that investors have become used to over the past four decades.

Truss’s risky tax cuts had hoped to avoid a push towards state-guided credit rationing by unleashing the power of the private sector and the financial industry to stimulate such a high rate of growth that the accompanying inflation just wouldn’t matter — especially if the Bank of England’s interest rate policy acted in support.

But the dilemma facing France, one of the EU’s largest economies, encapsulates three further political complexities: Paris does not control its own monetary policy, its public sector spending capacity is restricted by fiscal rules created in Brussels — which it is now officially in breach of — and any move to direct private sector financing domestically could clash with the bloc’s greater efforts to create a single capital markets and banking union.

That doesn’t leave much wiggle room for any incoming French government to experiment with a “dash for growth”, either of the free-market Truss variety, or — which is more relevant for France — the free-spending government interventionist one.

Politicization of the ECB

For Macron, the stakes are abundantly clear. In a speech to the Sorbonne University in April, he said: “We must be clear on the fact that our Europe, today, is mortal. It can die. It can die, and that depends entirely on our choices. But these choices must be made now.”

But in the same speech he, too, advocated a wholesale reordering of Europe’s economic framework largely because he — like the populists on either side of him — can’t afford everything he wants.

The current economic model, he said, is no longer sustainable “because we legitimately want to have everything, but it doesn’t hold together.”

Like all of the French presidents of the last 25 years, Macron has faced this constraint on domestic policymaking by trying to co-opt the one institution that has no formal constraints on creating money out of thin air — the European Central Bank. In his Sorbonne speech, he stressed that “you cannot have a monetary policy whose sole objective is to address inflation.”

The ECB’s mandate can only be updated by changing the whole EU treaty, something for which Europe’s leaders have no appetite. But even within its current legal straitjacket, the ECB has found plenty of ways to support national governments when it can, with a sequence of tools and programs that have allowed it to buy their bonds and keep their borrowing costs below where they would naturally have been.

It’s the newest of these tools that is likely to play a key role in the next few weeks. The ECB has stopped net purchases of bonds as part of its broader policy to bring inflation down, but it has one tool — so far untested — that it can use to alleviate any market stress after the elections: the so-called Transmission Protection Instrument.

The TPI allows the ECB to buy the bonds of individual governments whose borrowing costs it considers out of step with macroeconomic fundamentals. The idea is to ensure that its single monetary policy applies reasonably equally across the whole euro area. But it creates substantial scope for the ECB to exercise financial repression on behalf of those it considers aligned with its own mission.

It implies that the ECB knows better than markets what the value of a government promise to pay is. And in not setting any ex ante limits to the scale of its interventions, it has bestowed upon itself enormous power to take on the markets if it disagrees with them strongly enough.

It’s this power that Macron may want to harness if he is still able to present a budget he can call his own after July. But by the same token, he will want to ensure that the ECB denies that support to his opponents if they emerge victorious, just as it did to Italy’s Silvio Berlusconi and Greece’s Alexis Tsipras a decade ago.

According to Napier, whether the ECB ultimately decides to use the TPI or not, the decision will have political implications, not least because it will change the parameters of what the central bank is really prepared to do save the euro, and on whose behalf.

“If you think Macron is an ally of the [European] project, then you don’t use it until after there’s some type of chaos,” Napier said.

Many things could still change between now and July 7. The far right National Rally’s Jordan Bardella, for example, has already walked back some of the party’s spendiest plans, aiming to reassure markets that conflict with the EU over its fiscal rules can be avoided.

But in an interview with the FT published on Thursday, Bardella upset the bond markets again by saying he’d campaign for a big rebate from the EU budget, only hours after his ally and mentor Marine Le Pen signaled that a National Rally government would try to wrest away Macron’s powers as commander-in-chief.

In other words, the threat of major market instability in July remains alive and well. And, as Napier put it: “If bond yields blow up in France they can blow up anywhere.”

(Additional reporting by Geoffrey Smith)

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BRICS hypocrisy on offshore reform

Andrea Binder is a Freigeist fellow and research group leader at the Otto Suhr Institute of Political Science at Freie Universität Berlin and the author of “Offshore Finance and State Power.” Ricardo Soares de Oliveira is professor of the International Politics of Africa at Oxford University and is currently writing a monograph titled “Africa Offshore.”

Of all the challenges in global governance discussed at the latest BRICS summit in Johannesburg, the role of offshore financial centers should have loomed large. Instead, the issue barely got a noncommittal half paragraph on page eight of the summit’s 26-page declaration.

In an example of breathtaking hypocrisy, BRICS countries rail against the global financial architecture but offer no collective action on offshore banking, and they also continue to be among its major users themselves.

Data leaks such as the Pandora Papers and Panama Papers have shown just how vast amounts of cash end up in jurisdictions that cater to wealthy nonresidents by offering secrecy, asset protection and tax exemption. And according to economist Gabriel Zucman $7.8 trillion — or about 8 percent of global wealth (and 40 percent of corporate profits) — are currently hidden in such tax havens.

What’s interesting is that a considerable share of this originates from BRICS and other developing countries. The U.N. Conference on Trade and Development, for instance, estimates that $88.6 billion leave Africa every year in the form of illicit capital flight, much of it ending up offshore.

The fact that this offshore world is underpinned by the interests of the rich world and also a majorly exacerbates global inequality should fire up BRICS countries.

And certainly, they are quite vocal in denouncing the role of offshore finance: In the 2020 Moscow Summit declaration, for instance, BRICS member countries reiterated their “commitment to combating illicit financial flows, money laundering and financing of terrorism and to closely cooperating within the Financial Action Task Force (FATF) and the FATF-style regional bodies […], as well as other multilateral, regional and bilateral fora.” They have also rightly called out the West for setting up these mechanisms decades ago.

In practice, however, whatever global multilateral action is currently being taken is at the level of the G7 and the Organisation for Economic Co-operation and Development — even if these ambivalent reforms are often protective of the West’s offshore interests. BRICS countries, meanwhile, do almost nothing, despite being the largest global source of capital flight, according to a 2014 report by Global Financial Integrity.

And this lack of multilateral action perfectly aligns with the way individual BRICS countries have engaged with the offshore world thus far.

Brazil currently stands as the world’s second largest borrower from offshore financial markets. India long accepted a double-taxation agreement with Mauritius, which enabled significant foreign direct investment and tax avoidance by the wealthy until 2016. The country also created of an offshore financial center in Gujarat. Meanwhile, Russia’s hydrocarbons are traded through opaque offshore jurisdictions, and its elites have notoriously thrived in such systems. Then, there’s perhaps the most significant — and counterintuitive — stakeholder in the offshore world, which is China. Its state-owned enterprises are major users of jurisdictions like the British Virgin Islands, where they register secretive subsidiaries.

In short, BRICS countries are just as implicated in the offshore world as the Western economies they lambast. The reality is that their governments and political elites both benefit from and need the offshore financial world — and there are four reasons for this:

First, these countries engage in institutional arbitrage by accessing more efficient institutions — and, sometimes, institutions that don’t exist domestically, like credible contracts or a non-political judiciary — offshore.

They also seek access to cheaper and less constrained financing in offshore money markets, where they get access to the U.S. dollar and international investors that are unavailable onshore.

Heavily hit by sanctions — as in the case of Russia since 2022 — the offshore world is also a lifeline for BRICS countries, allowing for the circumvention of punitive measures.

And finally, BRICS elites frequently use such facilities for their own personal purposes, including hiding illicit money and assets.

Thus, closing these discretionary offshore avenues may well have implications for their personal survival — or the survival of their regimes.

This is why multilateral action from BRICS members remains rhetorical at best. And unilaterally, they either do nothing, or selectively implement anti-offshore measures as political tools of regime consolidation and to punish rivals. While continuing to criticize the West, they also voice few qualms regarding the thriving offshore roles of Hong Kong, the United Arab Emirates or Singapore.

The latest summit declaration’s vague language of “international cooperation” and “mutual legal assistance” simply highlighted all this once more, and it even eschewed the previous declaration’s references to the FATF or anything smacking of coordination with the West.

And while de-dollarization was again bandied about, BRICS countries remain keen on access to offshore dollars. Moreover, several of the bloc’s newly admitted states have deeply problematic records when it comes to money laundering and illicit financial flows. This is especially true of the UAE — an aggressively growing offshore financial center with dense layers of secrecy, and which the FATF placed on its “grey list” due to “strategic deficiencies” in its efforts to counter money laundering.

Given all this, what are the chances of BRICS-initiated reform in this area? Realistically, the only reason they would take action is because they care about their own regime stability. Though offshore mechanisms may seem like useful short-term levers, their long-term impact is likely to have troubling consequences for their economies. In time, offshore finance supercharges inequality and begets financial instability, which can lead to the toppling of regimes. Brazil experienced this first-hand in the 1982 financial crisis, which had a significant offshore component.

Of course, Russia’s dependence on offshore financial facilities to circumvent sanctions means it can be written off as reformer. But one would hope that some of the others might belatedly come to see an enlightened self-interest in going beyond their rhetoric.

For now, however, even this seems highly unlikely as, in the immediate future, the availability of offshore services continues to come in handy, while their negative impact on domestic inequality remain largely hidden from public view.

Besides, fighting domestic inequality isn’t really a major concern for many of these governments anyway.



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A plan for competitive, green and resilient industries

We, Renew Europe, want our Union to fulfil its promise of prosperity and opportunities for our fellow Europeans. We have championed initiatives to make our continent freer, fairer and greener, but much more remains to be done.

We are convinced that Europe has what it takes to become the global industrial leader, especially in green and digital technologies. Yet it is faced with higher energy prices and lower levels of investment, which creates a double risk of internal and external fragmentation.

The Russian aggression against Ukraine has shown us that our European way of life cannot be taken for granted. While we stand unwaveringly at the side of our Ukrainian friends and commit to the rebuilding of their homeland, we also need to protect our freedom and prosperity.

That is why Europe needs an urgent and ambitious plan for a competitive, productive and innovative industry ‘made in Europe’. Our proposals below would translate into many more jobs, a faster green transition and increased geopolitical influence.

We must improve the conditions for companies, big and small, to innovate, to grow and to thrive globally.

1. Reforms to kick start the European economy: A European Clean Tech, Competitiveness and Innovation Act

While the EU can be proud of its single market, we must improve the conditions for companies, big and small, to innovate, to grow and to thrive globally.

  • In addition to the acceleration of the deployment of sustainable energy, we call on the Commission to propose a European Clean Tech, Competitiveness and Innovation Act, which would:
  • While the EU can be proud of its single market, we must improve the conditions for companies, big and small, to innovate, to grow and to thrive globally.
  • In addition to the acceleration of the deployment of sustainable energy, we call on the Commission to propose a European Clean Tech, Competitiveness and Innovation Act, which would:
  • Cut red tape and administrative burden, focusing on delivering solutions to our companies, particularly for SMEs and startups.
  • Adapt state aid rules for companies producing clean technologies and energies.
  • Introduce fast-track permitting for clean and renewable energies and for industrial projects of general European interest.
  • Streamline the process for important Projects of Common European Interest, with adequate administrative resources.
  • Guarantee EU-wide access to affordable energy for our industries.
  • Strengthen the existing instruments for a just transition of carbon-intensive industries, as they are key to fighting climate change.
  • Facilitate private financing by completing the Capital Markets Union to allow our SMEs and startups to scale up.
  • Set the right conditions to increase Europe’s global share of research and development spending and reach our own target at 3 percent of our GDP.
  • Build up the European Innovation Council to develop breakthrough technologies.
  • Deliver a highly skilled workforce for our industry.
  • Deepen the single market by fully enforcing existing legislation and further harmonization of standards in the EU as well as with third countries.

We need to reduce more rapidly our economic dependencies from third countries, which make our companies and our economies vulnerable.

2. Investments supporting our industry to thrive: A European Sovereignty Fund and Reform Act

While the EU addresses, with unity, all the consequences of the war in Ukraine, we need to reduce more rapidly our economic dependencies from third countries, which make our companies and our economies vulnerable.

In addition to the new framework for raw materials, we call on the Commission to:

  • Create a European Sovereignty Fund, by revising the MFF and mobilizing private investments, to increase European strategic investments across the Union, such as the production on our soil of critical inputs, technologies and goods, which are key to the green and digital transitions.
  • Carry out a sovereignty test to screen European legislation and funds, both existing and upcoming, to demonstrate that they neither harm the EU’s capacity to act autonomously, nor create new dependencies.
  • Modernize the Stability and Growth Pact to incentivize structural reforms and national investments with real added value for our open strategic autonomy, in areas like infrastructure, resources and technologies.

While the EU has to resist protectionist measures, we will always want to promote an open economy with fair competition.

3. Initiatives creating a global level playing field:

A New Generation of Partnerships in the World Act

While the EU has to resist protectionist measures, we will always want to promote an open economy with fair competition.

  • In addition to all the existing reforms made during this mandate, notably on public procurement and foreign subsidies, we call on the Commission to:
  • Make full use of the EU’s economic and political power regarding current trade partners to ensure we get the most for our industry exports and imports, while promoting our values and standards, not least human rights and the Green Deal.
  • Promote new economic partnerships with democratic countries so we can face climate change and all the consequences of the Russian aggression together.
  • Ensure the diversification of supply chains to Europe, particularly regarding critical technologies and raw materials, based on a detailed assessment of current dependencies and alternative sources.
  • Use all our trade policy instruments to promote our prosperity and preserve the single market from distortions from third countries.
  • Take recourse to dispute settlement mechanisms available at WTO level whenever necessary to promote rules-based trade.
  • Adopt a plan to increase our continent’s attractiveness for business projects.
  • Create a truly European screening of the most sensitive foreign investments.
  • We, Renew Europe, believe that taken together these initiatives will foster the development of a competitive and innovative European industry fit for the 21st century. It will pave the way for a better future for Europeans that is more prosperous and more sustainable.



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