Joe Biden's Elusive Soft Landing
The reluctance of voters to give the president credit for a remarkable recovery may be the biggest geopolitical risk facing the world in 2024
It turns out that one of the biggest stories of 2023 was something that didn’t happen. For much of the year it seemed implausible that the rapid rise in interest rates necessary to head off soaring inflation across the world would lead to a recession and rising unemployment. At one point in the spring, it looked as if the fight against inflation might trigger a new global financial crisis as two mid-sized US banks and Credit Suisse, the giant Swiss lender, collapsed. Geopolitical shocks added to the gloom, with a war still raging in Europe that kept oil prices high, escalating tensions with China that raised fears of new supply chain shocks, and the October 7 atrocities in Israel which led one excitable commentator to predict World War 3.
Yet the year is ending instead to the bewilderment of many economists and delight of the bond markets with what increasingly appears to be a remarkable “soft landing”, or what some have dubbed an “immaculate disinflation”. Inflation has tumbled to 3.1 per cent in the US, 2.9 per cent in the eurozone and, we learned today, to 3.9 per cent in Britain, with very little increase in unemployment. The US economy in particular has gone gangbusters, growing at an annualised rate of 5.2 per cent in the third quarter. It appears that the inflationary shock really was “transitory” as central bankers anticipated in 2021. The markets have become so convinced of big rate cuts next year that it is becoming a problem for central bankers, who fear an over-hasty loosening of financial conditions that could see inflation rise again.
Immaculate Disinflation
Of course, the markets may be getting ahead of themselves. Even if the initial shock was transitory, caused by post-Covid supply disruption as well as soaring energy prices after Russia invaded Ukraine, there is still the risk that in a tight labour market, wage demands by workers keen to recover their spending power may result in continued inflationary pressures. Productivity will certainly have to rise sharply if stronger growth is not to lead to higher inflation. Meanwhile high interest rates could leave a legacy of rising bankruptcies as households and firms come to refinance their debts. Nor is it clear that the sunnier US outlook extends to Europe. The eurozone is already on the edge of recession, while Britain, still grappling with post-Brexit supply side challenges, may face a much tougher challenge to get inflation back down.
Nonetheless, the remarkable resilience of the US economy this year raises what may be the most important question facing the world next year: why isn’t Joe Biden doing better in the polls which show him trailing Donald Trump in almost all the key swing states ahead of next November’s presidential election? Why are voters not giving him any credit for strong economic growth and impressive job creation? It is a question that is frustrating the US president himself, according to this report in the Washington Post. It says that Biden summoned a group of his closest aides in the White House shortly after pardoning the Thanksgiving Turkeys last month.
“Biden delivered some stern words for the small group assembled: His poll numbers were unacceptably low and he wanted to know what his team and his campaign were doing about it… He complained that his economic message had done little to move the ball, even as the economy was growing and unemployment was falling, according to people familiar with his comments, who spoke on the condition of anonymity to discuss a private conversation.”
I’m not sure I’ve seen a convincing explanation as to why Biden’s approval ratings are so weak, hitting a record low of 34 per cent this week. The answer appears to be bound up with concerns over immigration and the impact of high inflation on the cost of living. But whether his fortunes improve in line with what the market expects for the economy is central to what may be the central geopolitical risk facing the world next year. The more that we learn about Trump’s plans for a second term, the scarier this prospect appears. It is not just the threat to American democracy of a vengeful Trump unconstrained by the usual constitutional checks and balances. The greater risk is to global peace and stability as he pursues twin policies of protectionism and isolationism, the same disastrous formula that America pursued in the 1930s.
Trump Risk Insurance
Indeed, it is a mark of the gravity of the risk Trump poses to the American-led global order that Congress last week considered it necessary to take out an insurance policy against a US president deciding on his own authority to withdraw from Nato. As a Wall Street Journal editorial noted:
“In the annual defense policy bill that passed last week, Congress included a provision requiring a U.S. President to consult Congress before withdrawing from NATO. The bipartisan measure, sponsored by Sens. Tim Kaine (D., Va.) and Marco Rubio (R., Fla.), would require assent from two-thirds of the Senate or an act of Congress. The enforcement mechanism is withholding funds for such a withdrawal.”
That a Republican party so divided over support for Ukraine to the extent that it is holding up the passage of an urgently-needed aid package felt bound to come together to support this provision should ring alarm bells in Europe and the world. Yet as the WSJ warns, the proposed sanction of withholding funds is unlikely to be sufficient to deter a president determined to withdraw from Nato. In any case, Trump need not formally withdraw to undermine the alliance’s effectiveness. He simply need call into question America’s commitment to Article 5, which guarantees mutual defence.
Haley to the Rescue?
Nor should anyone pin their hopes on Trump stumbling ahead of the election in November such that he somehow fails to make it onto the ballot paper. Money from panicky Republican donors has poured into the campaign coffers of Nikki Haley, the former UN ambassador and South Carolina governor seen as the last best hope of defeating Trump in the primaries. It is true that past frontrunners have seen their commanding leads evaporate once the voting begins, such as Howard Dean in 2004. Polls show Haley wiping the floor with Biden in a head-to-head contest. Her supporters hope that a strong performance in New Hampshire where she has closed the gap on Trump to 15 points will give her the momentum to win the nomination.
But as Axios notes, she is 45 points behind Trump in Ohio, the first state to vote next month. And why would Republican voters turn their backs on Trump now when they have rejected every opportunity to do so since 2015? We can all hope, just as some may cling to the hope that the US courts system will find a way to bar Trump from standing, as the Colorado Supreme Court did yesterday, citing an anti-insurrection clause in the US constitution to rule him ineligible for the state primary. Good luck getting that past a federal Supreme Court with a conservative majority including three Trump appointees. The reality is that the fate of the West is more likely to hinge on a strong economy - and the willingness of American voters to credit Biden.
Poland Gives Europe Reason to Hope
If the resilience of the US economy was the biggest positive surprise of 2023, then the defeat of Poland’s right-wing populist government and the return of Donald Tusk as prime minister was surely the second. Apart from being good news for Poland itself, which finally gets a mainstream government committed to liberal democracy and the rule of law after eight years of authoritarian backsliding, the significance was twofold.
Firstly, it restores one of Europe’s largest countries to its rightful place at the heart of European Union decision-making and under the experienced leadership of a former president of the European Council at a time of intense geopolitical volatility when the continent faces unprecedented challenges. The importance of this became apparent at last week’s European Council summit, when Viktor Orban, the Hungarian prime minister, vetoed an urgently-needed €50 billion funding package for Ukraine.
Most commentators, including this Financial Times editorial, seem confident that what lies behind Orban’s intransigence is not so much support for Vladimir Putin as a fight over money: Brussels is withholding €30 billion of EU funds over rule of law concerns. Either way, Orban’s brinkmanship puts European security at risk. But whereas in the past, Orban might have been able to count on support from Poland, now he finds himself isolated. For the first time, the EU has an opportunity to use the nuclear option of Article 7 of the EU Treaties to suspend Hungary’s voting rights for its persistent breaches of the rule of law. Hopefully, it will now use it, thereby underpinning both its defence ofUkraine and its own fundamental values.
The second reason why the return of Tusk is significant is that it shows that the rise of the far right is not unstoppable. It is certainly true that it has been gaining ground in many countries, often assisted by the self-defeating attempts by centre right parties to copy its policies. Yet the reality is that 2023 was a mixed bag for the far right. Yes, it did well in the Netherlands in particular, where the VVD party led by Geert Wilders came top in the election with a quarter of the seats and is now trying to form a government. But the prospect of the far right Vox party entering a coalition with the centre right Popular Party was too much for Spanish voters, enabling Pedro Sanchez to cobble together a coalition to hold on to power. While in Greece, the impeccably centre-right Kyriakos Mitsotakis, scored a remarkable re-election victory.
Indeed, it is possible to discern a pattern whereby the best inoculation against the virus of populism is to have experienced it directly for oneself. Countries that have suffered the chaos and volatility of populists rarely vote for it a second time. True, that is not necessarily much comfort in Europe, given that the two biggest countries, Germany and France, have yet to experience populist government but have far right and far left parties riding high in the polls. But it does provide some comfort to Britain, which has endured seven years of the most inept and chaotic government in its modern history, which sadly has recently continued under Rishi Sunak. One thing that everyone can look forward to in 2024 is that this too will surely pass.
Two very good pieces. The Poles are going to root out PiS wherever it has embedded itself (dePiSisation) which Labour needs to do here. On Biden, isn’t it ironic that the states which have benefited most from IRA are still solidly Republican.