November was when the banking crisis of 2008 finally hit home. The governments of Europe have bankrupted themselves by taking on the debts of the banks. The latest move by Angela Merkel and Nicolas Sarkozy is the final nail in the coffin of the eurzone economies. It saddens be greatly to say that, but I can't see any way out for them now.
What was decided in Paris was that, in future, private investors will not incur any losses in future defaults by eurozone countries. In Greece, the banks and investment houses who had bought up Greek debt were forced to take a "haircut" of some 30-40%. This freaked bond investors and made them wary of taking on sovereign debt of any Mediterranean states - which is why Italy's borrowing costs leapt above the crucial 7%. Markozy decided that the only way to calm the markets was to give them a promise that future losses will be taken onto the state.
All very well, but the sovereign states of Europe are already effectively bankrupt, not because of public debt, but because of the 23trillion that has been lent by eurozone banks. This is the real wild card. By any reasonable standards, the eurozone countries are already insolvent. And there is no one left to come along and pay their debts for them. This is why the rating agency, Standard and Poor's (what a wonderful, Dickensian name that is) has put them all, even Germany, on notice of credit down grade. This will make it even harder for them to borrow money, and will increase debt.
But all those gloating over the misfortunes of the eurozone should remember that Britain is deep in the debt pit as well, and it is only because we have been debauching the currency and igniting inflation by Quantitative Easing that we have been left alone for the time being. There is a reckoning here too.
From Sunday Herald:
It's not all doom and gloom, Scotch whisky sales are up 23%, mainly to the so-called BRIC countries like Brazil and China. So someone's still doing well enough to celebrate with the golden stuff. Or perhaps they're just drowning their sorrows. For the success of the national drink was in stark contrast to the state of the nation as a whole in the week the message finally struck home. The financial crisis isn't over - three years after Northern Rock collapsed it has only just begun.
A few random headlines from Black November: Britain to face a double-dip recession, according to the OECD. Six years of blood, sweat and tears unveiled in the Chancellor's Autumn Statement. Incomes to fall by a record 7.3% in three years says the Institute For Fiscal Studies. Public sector net debt to rise to 78% of GDP in the same period says the Office for Budget Responsibility (OBR). The Governor of the Bank of England orders banks to slash bonuses and dividends as new financial crash looms. 'Ten days to save the European Union', says Olli Rehn, the EU commissioner for economic affairs. Two million public sector workers take to the streets over curbs to their pensions in the largest industrial action in thirty years. And Jeremy Clarkson apologises for calling for strikers to be executed in front of their families.
The corpulent Top Gear presenter's proposal was a moment of comic relief in a week of unremitting financial tragedy. As an overpaid employee of the state-owned BBC, some suggested that he should be the first up against the wall. Actually, the episode probably did more damage to his po-faced critics than to the ageing petrol head: our capacity for irony seems to be one casualty of the crisis. Almost as amusing was Jeremy Paxman's stunned silence after he asked whether the Treasury Secretary, Danny Alexander, was going to say his manifesto for the 2015 election that there will still have to be billions more cuts after it. “I'm afraid so, yes”, said Alexander. The great Paxo was lost for words at this barefaced honesty. Liberal Democrats across the country, and especially in Scotland, are wondering just how they can expect to get anyone to vote for them on such a dismal prospectus. They now sink or swim with the Tories.
Meanwhile, there was more theatre of the absurd in Europe, as the faceless suits of the EU called for calm even as they were kicking women and children out of the eurozone lifeboats.This is what the Weimar Republic must have been like, I thought. Commentators spent much of the week comparing last week's trouble with the 1920s inflation, the 1930s depression, the 1970 strikes and even the 1870s financial panic that followed German unification. But the search for historical precedents became facile, when you began to realise that this could actually be worse than any of them. Journalists like me who have been writing about this financial crisis for three years are suffering from superlative fatigue. There is no real historical parallel to the combination of factors that are contributing to this debt crisis. There was no single currency in the 1930s. In the 1970s, the West, led by America, still dominated the world economy. The long depression of the 1870s was mitigated by cheap food and raw materials from the colonies. And never, ever, in the history of the world economy has so much been owed by so many as today.
The euro crisis has been a useful diversion for the Chancellor, George Osborne`: he can try to blame Britain's problems on the eurocrats, even though our crisis is home grown. By rights, the Chancellor should be in the doghouse and his government on the way to political oblivion. After all, he got his numbers completely wrong. Even after his austerity budget – deeper cuts than inflicted by the Geddes Axe in 1921 – British debt is still set to rise until the next election and beyond. Everything the Labour Shadow Chancellor, Ed Balls forecast would happen, has happened: the private sector has not filled the gap left by the public sector cuts. Tax revenues have declined while benefits payments have increased with unemployment. The withdrawal of public spending has diminished aggregate demand and killed business confidence stone dead. This has all made the debt mountain even bigger.
It looks like incompetence of immense proportions. But here's the funny thing: if there were an election tomorrow, the government would probably be re-elected with an increased majority. According to the opinion polls, the voters are still behind the Coalition and believe the austerity programme is necessary. Ed Ball has not got his message across. Even though millions have been taking to the streets to protest about government cuts, David Cameron is actually more secure today than a year ago. Labour is learning the hard lesson that, in periods of great national crisis, people tend to support the government of the day.
If Ed Balls conveys an air of harried exasperation it's hardly surprising. But there is also a credibility problem with Labour's solution to the current crisis. With debt already unsustainable and rising, the idea of borrowing yet more money – as Balls suggests - simply sounds irresponsible to most voters. Surely, if the government were to launch an all out “dash for growth” along the lines of the Barber boom in 1972, there would be such a huge pile of extra debt that the international money markets would simply refuse to lend to Britain at anything like a sustainable level? The interest on current payments is already more than we spend on defence.
Keynesian economists like Paul Krugman argue that this is economically illiterate, and that it is the lack of growth, caused by cutting spending too fast, that is causing the debt pile to grow. But looking at what has happened across Europe, where countries like Italy with much less debt than Britain, have become insolvent, it seems like a pretty risky strategy to spend, spend, spend especially at a time of world economic slowdown. It's not that easy to stimulate growth when no one wants to buy your stuff. British exports have undercut our European neighbours because of the 25% fall in the value of the pound, but this competitive advantage hasn't stimulated any economic recovery.
For me, the frightening fact of the week was this: according to the financial consultants, McKinsey, Britain has the biggest debt problem in the world. If you add all our debts together – household debts, company debts, government debts, pension liabilities and bank debts – the total comes to 492% of GDP. That's higher than Japan's debt even after its “lost decade”. And British debt has actually increased since 2008, despite the deepest government cuts in living memory. Moreover, the debt is going to continue rising at least until 2016, according to Chancellor George Osborne's own numbers. The faltering of economic growth will force the government to take on another £158bn over the next three or four years. And that is assuming that European gets its act together and doesn't ignite another “Lehman moment” by allowing the eurozone to break up.
It's hard not to conclude that we are on a down escalator to financial armageddon, and that no one knows how to get off it. The debts will either have to be paid, thus impoverishing future generations, or else the debts will have to be diminished by hyper-inflation, also impoverishing future generations. Our debt is equivalent to five solid years of national economic output. No Carol Vorderman schemes for debt consolidation will get us off this hook. The Bank of England is already printing money faster than Zimbabwe's Robert Mugabe in an effort to boost inflation and spending. This of course destroys any incentive for people to save, since anyone foolish enough to do so is losing around 5% a year. No one is making any sense right now, not even central bankers. And don't be fooled by low interest rates on government debt – that's just because sterling has become a temporary safe haven from the eurozone crisis. The moment the bond vigilantes take a look at the reality of British debt is the moment we will have our own sovereign debt crisis.
Any way you look at it, British debt is simply too high and has to come down. But in a democracy it is difficult to persuade people to accept the consequences. Two million public sector workers took to the streets last week to demonstrate their anger at having to work longer and pay more into their pensions. Their sense of injustice was palpable. Why should bankers escape with their bonuses while they lose their security in old age? Inequalities of wealth are inescapable in liberal democracies, but that doesn't make them any more acceptable. The very fact of those banker bonuses piling up while everyone else is suffering an economic squeeze itself makes the deficit reduction harder to achieve because it undermines nation unity and our willingness to make personal sacrifices for the common good.
Indeed, this is the most important reason why the 1970s isn't a very good comparison with today. Then, it was the" trades union barons” who were public enemy number one; now it is greedy banksters. There was a surprising degree of public support for last week's strike, even among private sector workers who can only dream of getting an earnings-linked, inflation-protected pension. Back in the 1970s, striking workers were blamed for inflation - which peaked at 25% in 1975. . This was unfair, since the real cause was the debt crisis coupled with a quadrupling of oil prices - but that's not how it looked. . If and when Britain calls in the IMF again, as in 1976, other scapegoats will have to be found - perhaps immigrants.
But while the unions aren't being blamed, Labour still faces the awkward political problem of appearing to be in the pockets of the small numbers of workers, mainly in the public sector, who are still unionised. The public sector unions are Labour's principal paymasters, so it was particularly agonising to see Ed Miliband's contortions last week as he attempted to have it both ways. He did not support the strike, but he was “not prepared to condemn it”. As a fudge that is straight out of the Neil Kinnock cookbook. You either support a strike, or you don't. Ordinary voters in focus groups might have the luxury of such a contradiction, but not political parties aspiring to be the government. Everyone knows that Labour, if it were the government, would also be making public sector workers pay more for their pensions – indeed, the present reforms were the product of an inquiry by John Hutton, the former Labour cabinet minister.
This has been a bad time for Ed Miliband. His economic policies do not carry conviction and he is all over the place on strikes, which will almost certainly be repeated, Everything is going wrong for the Tories and their Liberal Democrat partners, but nothing is going right for the opposition leader in Westminster. The policies of the Right are leading to economic catastrophe, but the Left seems bereft of any answer. Why?
Well, it has a lot to do with the fact that today, unlike the 1870s 1930s or even the 1970s, there appears to be no credible alternative to liberal capitalism. In the past, workers threatened to use industrial strength to topple governments, believing that the private enterprise system was morally wrong and historically anachronistic. In the 1930s, many intellectuals believed that capitalism was on its way out, even if they were opposed to Soviet style communism. The state, it was assumed, would take over more and more of the productive economy and plan for growth, rather than leaving it to the “vagaries of the market”. This alternative economic vision was almost totally destroyed by the collapse of communism in Russia, which revealed the system to be rotten to the core, and by the apparent success of liberal capitalism during the long credit boom.
Until three years ago, people genuinely believed that capitalist crises were a thing of the past. Central banks were so adept at dealing with inflation, and the financial system had become so expert at managing credit, that permanent growth was now the rule. This was why Gordon Brown said he had “abolished boom and bust” after relaxing lending regulations on lending in the City of London. People thought that the rise in house prices was simply a measure of how productive and wealthy the free market economy had become. This has turned out to be an epic delusion. British economic growth was almost entirely fuelled by debt - nearly £300bn alone was extracted from the value of British homes through equity release in the boom. It should have been blindingly obvious that this was simply imaginary wealth, based on no economic activity and unsustainable. But the entire country persuaded itself that this bountiful supply of imaginary cash from house prices could continue indefinitely. Now the bubble has burst leaving in its wake a succession of sovereign debt problems.
It's important to remember that the euro crisis is a consequence of the banking crisis and not its cause. It's just that the debts have moved onto the public account, wrecking the unity of the eurozone, as everyone hopes that Germany will bail them out. France and Germany say they will do whatever it takes to save the single currency. But it's blindingly obvious that they don't know what that “whatever” is. A fiscal union? Maybe. Print money? Perhaps. Create a new European Central Bank with powers to dictate national budgets?. Stuffed if I know. The crisis talks between the French President Nicolas Sarkozy and the German Chancellor Angela Merkel have become so mind-numbingly tedious that you almost hope they would just go to war with each other and have done with it. (PS that's also a joke)
Actually, the Polish Foreign Minister, Radoslav Sikorski did mention the war again last week. Picking up on Chancellor Merkel's recent remark that this was the most serious crisis facing Europe since World War 11, Mr Sikorski said that: “I fear German power less than I fear German inactivity”. In other words: “you are the masters now, so act like it!” He called on Angela Merkel to tell the European Central Bank that it can print money and issue bonds. But that isn't as easy as it sounds.
Any moves to invest the ECB with such power, or to allow it to issue bonds, mean giving unelected central bankers power over the finances of member states. This needs treaty changes. And given the state that Greece is in, it seems hardly likely that the voters of Europe will be enamoured of the idea of German bankers dictating their budgets. Anyway, it would take months and years to hold referendums in all the 17 eurozone states, and Europe doesn't have that time. It has about a week, according to Olli Rehn. The clock is ticking. The endgame is now not far off, and British banks, led by the Bank of England, is preparing for the worst. Now, where is that whisky bottle...