Looking ahead to 2017

Well, no one can accuse 2016 of being boring.  I managed to get the big calls right – I predicted back in November 2015 that Trump would become president, and thought that Britain would vote to leave the EU (in both cases, reluctant urbanites were up against an enthusiastic (and angry) countryside, and the countryside won).  But when your predictions align with your preferences you probably can’t claim too much credit!

Europe

Looking ahead to some of the political events of 2017, it’s harder to have a sense of the likely outcome.  Proportional representation systems like Italy’s are designed to prevent meaningful change, so the effect of the recent constitutional referendum on Italian politics (which tends to be all froth and no substance) is likely to be limited.  France’s presidential elections pose a greater chance of political disruption.  Although it’s hard to imagine the National Front actually winning the election, as with Trump and Brexit there is once again the potential for the left and right flanks to unite against a technocratic centre.  If you took the National Front and its racist history out of the equation, which would you naturally expect France to choose: an anti-immigration socialist or a son of Thatcher?  In the privacy of the voting booth, what are the chances France goes for the former?

The election of Le Pen would put the EU under severe strain, although it has shown a remarkable ability for self-preservation thus far. Most likely the EU and the Eurozone will rock along in 2017 as they have done, although with increasing restrictions on freedom of movement in response to growing concerns (and electrical successes of anti-immigration parties) in France, Germany and the Netherlands.

Brexit

Restrictions on freedom of movement would simultaneously strengthen Britain’s negotiating position vis-a-vis the EU (by providing a precedent for limiting immigration from EU states) while undermining one of the principal arguments for Brexit (at least in the minds of many pro-Remain politicians). Of course Brexit isn’t just about immigration, but about regaining control over trade, legislation and the interpretation of laws, and restoring to the British public the right to chuck out their leaders (an essential principle of Anglo-American democracy, but largely impossible under Continental proportional systems).

But articulating these principles and, even more importantly, setting out a vision of Britain’s post-Brexit future requires visionary leadership, something which unfortunately Europe as a whole currently lacks.  While some have praised Theresa May for copying John Howard’s competent and measured leadership style, which worked very well for commodity-rich Australia in weathering the dot-com bust and the wars in Iraq and Afghanistan, measured competence and electoral triangulation are not what Britain or the EU needs now.  As the rise of Le Pen (and Farage and Trump) shows, when politicians are not trusted to address voters’ concerns, they will be replaced with alternatives (some of which may not be particularly palatable).

Happily for May, she faces no challengers.  But she and the country will find it increasingly hard going over the course of 2017 in the absence of clear leadership.  The Supreme Court will find that Brexit requires an Act of Parliament, although I would be surprised if it goes so far as to specify the content of such an Act.  This will necessitate the suspension of all other parliamentary business and the possible invocation of the Parliament Acts (to stop the Lords from blocking) if May is to meet her self-imposed March deadline for starting the process of leaving the EU.

But triggering Article 50 is only the beginning of May’s difficulties. It is likely that Brexit will one way or another end up before the European Court of Justice (possibly through a referral from the proceedings currently before the Irish High Court), to which the correct response, as to Brussel’s demands that Britain pay a £50 billion exit charge, is for May to tell Brussels and the ECJ to get stuffed. But is she willing to take a clearer position than “Brexit means Brexit”?

One of the unexpected benefits of Brexit has been a resolution of the Scottish question.  So long as Britain remained in the EU, Scotland could imagine being an independent country within a larger superstate, with the UK rendered superfluous.  But it is much less attractive to be merely one of nearly 200 small countries in the world; it is no wonder, then, that support for Scottish independence (and the SNP) seems to be ebbing away.  More importantly, Brexit has seemed to remind the Scots that they are part of the UK, and encouraged them to think about their shared future with England, Wales and Northern Ireland.  Far from being the wedge which drove Scotland away from the rest of Britain, Brexit properly managed could see Scotland cemented to the rest of the Union for generations.

Trump’s Foreign Policy

Bold leadership is not lacking on the other side of the pond.  Trump has shown himself adept at directing the domestic political landscape and has now begun to turn towards the international stage.  Early signs are promising: his handling of China, emboldened under Obama (think of their provocations in the South China Sea, or forcing Obama to leave off the back of Air Force One), has been pitch-perfect so far, reminding the Chinese leadership that the US will pursue its own interests while avoiding getting into silly tit-for-tat diplomatic disputes (failing to rise to China’s petty theft of the Navy surveillance drone).

Russia is a trickier question: there have been so many Russian resets it’s hard to keep track. But it makes no sense to pick fights with one of the two nations capable of destroying the planet, particularly since the US and Russia do not have any fundamentally opposing strategic interests.  Putin is a corrupt autocrat, but we manage to have good relations with many countries that are significantly less palatable that Putin’s Russia (would you rather be a woman in Russia or Saudi Arabia?).  The bellicosity of first Clinton and now Obama towards Putin has been extremely concerning, and we should all hope that Trump will be able to ease these tensions (without, of course, compromising the US’s strategic interests).

Middle East

Thanks to Obama’s diplomatic incompetence, the US has been excluded from negotiations to end the Syrian civil war.  Once Assad has consolidated his power over the more populous regions of Syria, which should happen over the coming months, the focus will return to ISIS.  Assuming Trump is able to at least begin by having good relations with Russia, expect to see Russia, Turkey and Syria work together to physically isolate ISIS in the north and west of its territory, while Iraq and the Kurds (with covert US support) create a cordon sanitaire around the south and east.  As the noose is gradually tightened, with the aid of drone patrols and other surveillance technologies (which will later be used to secure the southern border of the US), women and children will be allowed to leave while the men will be left to fight for fewer and fewer resources.  Aleppo foreshadowed the end of ISIS – expect it to be utterly horrifying and brutally effective.

The real tinderbox in the Middle East is, as always, not ISIS but Israel. Obama’s petulant parting shot at his nemesis Netanyahu, which has the effect of declaring Jewish ownership of Jerusalem’s Jewish Quarter to be illegal, removes the constructive ambiguity which has been at the heart of the US’s position on Israel and Palestine for decades, and forces both Netanyahu and Trump to take a hard line. Netanyahu has already ramped up settlement activity in response, while Republicans in Congress have called for a complete stop to US funding of the UN (which accounts for over 20% of its budget).

One of the themes of 2016 has been the fundamental weakness of international institutions.  Just as the EU’s increasing control eventually became too much for the British public to bear, Obama’s resolution could be the beginning of the end of the UN. At the end of the day, if the US withholds funding and withdraws its ambassador, no one in the real world will pay any attention to resolutions passed by the rump Security Counsel.  While the UN has been and has the potential to be a force for good in the world, 2017 could turn out to be a pivotal year for Turtle Bay.

Terrorism

Terrorism will continue to be a fact of life in much of the world, including Europe. There are a number of reasons to be optimistic in the medium term, however. Terrorism thrives by giving a sense of purpose (and, in ISIS, opportunities for sex) to young male losers.  With the destruction of ISIS, acts of terrorism will become associated with the worst defeat since the end of the Third Punic War – not cool.  The increase in lone wolf attacks also paradoxically makes being a terrorist less attractive, since the terrorists who perpetrate these attacks are not typically the most inspiring of role models – when ISIS sends its lone wolf attackers, it’s not sending its best.  It’s cool to be a martyred freedom fighter and terrorist mastermind; it’s less cool to the pool of potential recruits to be grouped with a bunch of social rejects.

Trump’s election presents an opportunity to break the link between terrorism and religion.  Because no one can accuse Trump of being soft on the ‘Islamic’ element of terrorism (in persuasion terms, because he ‘paced’ the public with his vow to bar Muslims from entering the US), he has a great opportunity to move the discussion on terrorism away from Islam per se towards its specific political content (thug rule; what Nassim Taleb calls Salafascism), in the same way that 40 years ago we were able to distinguish between Catholicism and the IRA.  For both ISIS and Al Qaeda (as for the IRA), the political element is parasitic on the religious – Islam gives metaphysical justification to the desired political aims.  That’s not to say the religious element is unimportant, but the problem from a messaging perspective with lumping together terrorists with all Muslims is that you force the vast majority of Muslims who have no interest in terrorism to identify with the extremists (it’s the same reason why it’s so dangerous to equate Brexit or Trump supporters with racists – by forcing a sizeable proportion of the population to identify with the David Dukes of the world, you end up creating racists out of people who weren’t racist before).

The way to stop terrorism is to deprive it of its metaphysical justification and make it deeply uncool – we have started to see moves in this direction and hopefully in 2017 Trump can begin using his considerable powers of persuasion in this direction.

Economy

Turning to the economy, consider the following chart, which I’ve created with data from the World Bank:

 

The green and red lines show growth as a percentage of GDP in the US and the UK, respectively, while the purple and blue lines show the same but with net borrowing deducted (neither country has had a trade surplus in the last 30 years), providing a shorthand way of visualising the amount economic growth which is self-generated (where the red and green lines are positive but the blue and purple lines are below zero, economic growth is effectively an artefact of foreign investment).

What is interesting is how much more accurately the blue and purple lines reflect popular sentiment about the economy. The US did not have a single positive year of ‘real’ growth from 2000 to 2014 (and the value for 2014 was a measly 0.1%).  The UK did better in the first years of the new millennium, but now appears mired in negative territory (despite the official statistics showing growth in GDP since 2010). No wonder voters want a change from the policies of the last 16 years.

Of course GDP is an imperfect measurement and, significantly, does not include activities which have an economic benefit but which do not have a market price (such as free blog posts like this one).  Even so, what the chart above suggests that is that the US economy has been contracting steadily in ‘real’ terms for the past two decades (and the UK economy for the past 8 years), and that foreign investment during that time (as reflected in GDP growth during that period) has not been applied to produce gains in the real economy.  These conclusions tie up with observations about the concentration of returns in the top 1% and increases in the amount of cash being held (but not invested) by corporations and investment funds.

The fact that companies and investment funds are sitting on piles of cash which they do not think they can profitably invest is deeply worrying, as it suggests a fundamental lack of economic opportunities (as does the proliferation of asset bubbles such as the current stock market rally and the apparently inexorable rise of British property values – people have to put the money somewhere).  Investments in infrastructure and culls of rent-seeking regulations may help to spur innovation, and should be part of both Trump’s economic programme and May’s plans for Brexit. But such reforms take time to have an impact and are notoriously difficult to implement effectively (look at the relatively muted impact of Obama’s huge stimulus package).  They also face significant longer-term headwinds in the form of population decline and the rise of artificial intelligence.

Summary

In short, don’t expect 2017 to be significantly better than 2016, although there should be fewer political shocks. Western economies will continue to contract in ‘real’ terms, putting more pressure on already stretched political institutions and giving rise to increased support for anti-globalist policies.  The Brexit process will begin, although without clear leadership it is likely to be a matter of muddling through. Anti-EU parties will continue to gain strength in Europe but Le Pen will fall just short of winning the French presidency and the EU’s day of reckoning will again be postponed.  The US and Russia will work together to defeat ISIS while terrorist attacks will be seen increasingly as acts of stupidity committed by horny losers rather than glorious freedom fighters.  Trump will deport illegal aliens with criminal records, strengthen border security (using technology tested in the battle with ISIS) and then offer a path to citizenship for illegal aliens remaining in the US (he’s paced the immigration hawks and so has the flexibility to lead them to a more moderate solution).

All that said, I remain an optimist.  We visited Dover Castle on Friday, where only 75 years ago the British Army dug out three extensive levels of underground tunnels in preparation for a German invasion of Britain.  As challenging as many of the issues we face today may be, walking through those tunnels puts our current problems, and talk Donald Trump being the next Hitler, into perspective.  Contrary to the views of many, I believe that the vote to leave the EU and the election of Trump are shining examples of the strength of democracy and our democratic institutions.  In a year where a majority of the public felt a need for dramatic change (I include Bernie supporters and reluctant Remainers in that category), we have got dramatic change.  Whether that change will be for good or ill remains to be seen, and depends to a great extent on whether our leaders seize the opportunities presented by their electoral mandates.  But continuing down the wrong path is guaranteed to lead to the wrong outcome.

Here’s hoping that 2017 will be a year of opportunity and reconciliation, and full of blessings for you and your families.  Happy New Year!

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