The Bear’s Lair: Will Britain 2019 follow Czechoslovakia 1948?

It appears increasingly likely that the British people will be forced into a “People’s Vote” re-running the Brexit referendum of 2016. For those of us around during the Cold War the term “People’s Vote” has a familiar ring, similar to the “People’s Republics” and People’s Democracies” of Communist tyranny. This therefore begs the question: is Britain in 2019 to suffer the same fate as Czechoslovakia in 1948?

For those born after the Cold War, under the Communist systems, the word “People’s” was used to describe parliamentary systems, democracies, republics, etc. to emphasize how untainted they were by the bourgeoisie. Since those states were also wholly undemocratic, a “People’s Congress” was a Congress that did not represent the people, being elected or selected in a one-party state. Similarly, a “People’s Democratic Republic” was in fact a nomenklatura’s undemocratic republic, again a one-party state. It thus becomes immediately clear that a “People’s Vote” is something very different from a mere vote, and in no way implies a free choice for the voters.

The Czechoslovak coup d’etat of 1948 provided a vivid example of how tyrannous multinational groupings impose their will on member states that show signs of independence. In 1945 Czechoslovakia’s long-serving Communist leader Klement Gottwald had said: “the next goal is not soviets and socialism, but rather carrying out a really thorough democratic national revolution,” thus offering hope for lovers of pluralism and democracy. Then the following year, the Communists won 38% of the vote and entered a broad-based coalition government with Gottwald as prime minister.

By late 1947, the Communists had become thoroughly unpopular, their economics being as usual both authoritarian and dysfunctional, and it seemed clear that they would do badly in the next election, due in June 1948. Then in February 1948 a majority of the existing coalition Cabinet ordered the Interior Minister to stop packing the police force with Communists. The Interior Minister refused, and the non-Communist ministers thereupon resigned.

Gottwald demanded the appointment of a government dominated by Communists, threatening a general strike, and after ten days Edward Benes, Czechoslovakia’s President, fearing Soviet intervention, gave in, appointing a government of which the Communists were in full control. The elections that followed in June 1948 allowed candidates from only one party, the Communist-dominated National Front. Benes resigned, dying shortly thereafter, while the non-Communist Foreign Secretary Jan Masaryk was said to have committed suicide by throwing himself from the Foreign Office windows (from Soviet archives, we now know he was pushed).

This 1940s film noir reminiscence is not simply for atmosphere; the parallels with Britain’s current situation with respect to the EU are frightening. Like Comintern, the EU is seeking to extend and deepen its jurisdiction over the countries that have fallen into its orbit. Like Czechoslovakia in 1948, Britain is attempting to escape from this jurisdiction. As in Prague, home of Franz Kafka, things are not always as they seem and a “People’s Vote,” like an election where there is only one “National Front” party is a travesty of the real thing.

Only the defenestration has yet to occur – Boris Johnson, like Masaryk a popular, charismatic figure, seems the most likely victim even though he is no longer Foreign Secretary – maybe he could borrow the Foreign Office for the purpose? And for those who fantasize that the British people will thank them in the long run, I would point out that in 2005, nearly 60 years after the coup, Klement Gottwald was voted the “Worst Czech” of all time.

Structurally and economically, the parallels between the EU and Comintern are impressive. Both are non-market economies, with a high percentage of resources allocated by government. In the EU, there are two sources for this. First, government’s share of GDP is extraordinarily high, and has risen over the latest cycle, to 45.8% of GDP in 2017, with some countries such as France having government sectors that are even larger, at over 56% of GDP in France’s case. By definition, if half a country’s GDP is spent by government, that country is half-way to a state-controlled economy (and it must be remembered that in most Eastern Bloc countries before 1990 there were modest non-state sectors, so the state allocation of resources was significantly below 100%).

Second, since the Euro area adopted zero-interest-rate policies, productivity growth there has dropped to dismal Soviet levels (presumably Eurostat will shortly start to fudge the figures, as Comecon countries did). In the decade 2007-17, labor productivity growth in the Euro area was only 0.4% per annum, far below even the anemic European performance of previous decades. The same is true in Britain, whose annual productivity growth over the same period was only 0.2%. In both cases, the problem is that interest rates have been held artificially at zero for a decade by foolish central banks, causing massive investment in unproductive real estate, junk corporate debt and other assets that would not be bought, indeed would not exist if interest rates were not so far from their market levels.

In Britain’s case, the solution is simple. Fire Mark Carney (he is due to leave the Bank of England in January 2020 anyway) and then look across the Atlantic to President Donald Trump’s America. There, not much thanks to Trump (who has however helped with useful deregulation) productivity growth, after eight years in the doldrums, has ticked back up to its historic level of around 2% per annum. Why? Because U.S. interest rates, while still too low, have risen in the last two years and are now at least marginally above the level of inflation of around 2%. Without negative real interest rates, unproductive ziggurats will not be built and money will be redeployed towards more productive uses. If Britain can exit from the European Union and resume normal levels of real interest rates, productivity growth will return to its historic levels and the British economy will resume its historic dynamism. As an additional plus, ludicrously over-inflated London house prices will also collapse, making life easier for British millennials.

That solution does not apply to the EU, of course. For the EU’s central apparatchiks, and those of the European Central Bank, heaven forbid they should follow Trump’s America in anything, even if it produces excellent results and Trump himself opposes the new policy. Thus, the EU or at least the Eurozone part of it will be condemned to remain indefinitely with a Soviet rate of productivity growth, and Soviet-style misallocation of resources. Some countries in Eastern Europe with independent currencies, notably Poland and Hungary, may do better, but experience in the last few years has shown that their signs of policy deviation towards capitalism will be sharply slapped down by the central EU secretariat.

Economically, the similarities between the EU and Comecon are thus quite striking – both are entities whose economic performance is drastically weakened by their masters’ insistence on meddling control and their disdain for market mechanisms. Politically, the EU is also converging on its notorious predecessor. Free speech is no longer sacrosanct, or even especially valued, while the French aggression against the “Yellow Vest” protesters shows that traditional inhibitions against government violence, never very strong in France and Germany, are breaking down.

The history of many EU member states has included a number of very unpleasant authoritarian regimes; indeed Angela Merkel, effective leader of the EU for the last decade, was brought up in such a society and was a youth leader therein. Emmanuel Macron, too, is a natural authoritarian with very little regard for popular wishes when they conflict with his own. Add to that the anti-democratic nature of the central EU bureaucracy itself, and the resemblance to Comintern/Comecon is very striking indeed.

If Britain succumbs to the demands for a “People’s Vote” and remains within the EU, it will find itself trapped like 1940s Czechoslovakia in a film noir, in which its citizens’ wishes are overridden, while traditional freedoms and protections of the individual are lost. As economic policies are increasingly set from Brussels, Britain’s current modest prosperity will give way to a grey 1940s austerity, with snoek pie and clothing coupons for all.

As for the EU, with or without Britain it will continue on its authoritarian way, increasingly conforming to the drab 1940s socialist impoverished “Third Man” model. Only one thing is almost certain to differ from the Czechoslovakian precedent: if Angela Merkel wants to join Gottwald and become known as the “Worst German” she has rather stiff competition for the honor.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)