Archive for May, 2010

In a few hours on Tuesday the 11th of May, the vision of a coalition between Labour and the LibDems appeared briefly and then evaporated. There are many different version of why it could not succeed; Clegg’s personal affinity with Cameron, the speed with which John Reid and other Labour tribalists denounced it and the spurious numbers-didn’t-add- up argument rightly dismissed by Lord Ashdown. Nick Robinson, speaking later on the BBC, aptly described the Lib-Con government as a coalition of socially liberal Cameronites and economically liberal Cleggites.

In reality, what was destroyed on Tuesday was far more than a short-lived LibDem-Lab flirtation. We saw the an unwritten pact torn up between many supporters of both parties—perhaps even a majority—who had watched the last 13 years with growing dismay as Blair and Brown lined up with the US in unpopular wars, trampled on our civil liberties, pursued City-friendly policies which made Britain even less egalitarian and toadied up to the barons of the tabloid press. On Tuesday, the goal of uniting Britain’s two main centre-left parties, sustained by many common campaigns at grassroots level over many years, was shattered.

The long-term cost of this act is potentially far greater than the questionable benefit of heeding the City’s panicked cry to fill the ‘black hole’ in the budget and form a ‘strong government’, a cry used repeatedly to justify a LibDem-Conservative coalition. Firstly, the LibDems membership base will be eroded, perhaps on a scale comparable to Labour after the folly of Iraq. Clegg’s Cabinet team will share in the ire provoked by the Tories’ deep spending cuts and the ensuing rise in unemployment, all the more so as it becomes clear that the budget cannot be balanced unless we restore the growth necessary to reverse the collapse in tax receipts. Clegg’s apparently neoliberal economic instincts risk make him the the LibDem’s Tony Blair.

Secondly, the Labour Party opt-out of a progressive coalition will not, as claimed by some, give the Party a chance to ‘regroup and rebuild’ in opposition. Instead, it will fortify the spirit of ya-boo politics, facilitating an easy return to the antics of Prescott, Blunkett and other UK Labour politicians who, in the absence of any long-term political vision, thrive on gainsaying their latest ‘enemies’.

Perhaps the greatest cost of all will be the failure to secure genuine electoral reform. For many years, Britain’s FPTP (First Past The Post) electoral system has been a barrier to political change, giving disproportionate weight to the marginal constituencies of middle England and effectively ruling out any electoral platform that might rock the boat. Although we now appear to have the promise of a referendum on PR for the Commons, it will take place under circumstances dictated by PR’s fiercest opponents, the Tories. Moreover, as is now clear, many Labour veterans who opposed the recommendations of the Jenkins Commission in 1998— Jack Straw and John Prescott amongst others—have been joined by new MPs such as Ed Balls, Kate Hoey and Diane Abbott.

Critically, only the most non-proportional form of PR is on the table: AV, not AVplus (which resembles the German system).  If, as seems likely, voting reform  is opposed In a future Referendum by both the Tories and Labour tribalists and supported by a much-diminished LibDem Party, we shall not have further progress on this front for another generation.

To be sure, Britain today does not lack the issues to animate a more progressive politics—-climate change, fighting poverty, minority rights, a fairer income distribution, to name but a few. But the centre-left is no longer to be found in a single party, and in some cases it is more engaged in grass-roots movements.

A new politics is needed, a politics of coalition between the different organisation and campaigns across the spectrum of centre-left parties. An essential ingredient of such politics is a change in the voting system, a new constitutional settlement which breaks with the smug insularity of those who argue for the unique virtue of Britain’s creaking voting arrangements. Theirs is the language of Thatcher and Sons, a language which must finally be abandoned if progressive politics is to thrive again in Britain.

In truth, Greece does have an alternative. Instead of submitting to the ferocious and pro-cyclical conditionality imposed by Germany and the IMF—cutting its budget deficit by 11 percentage points over three years in return for a €120bn loan—it could follow the Argentinean example of 2001-02 and default on the bulk of its sovereign debt. This would mean abandoning the euro, introducing a ‘new drachma’ and probably devaluing by 50% or more.

Some weeks ago, I had a private exchange about this scenario with an influential economist at the Center for Economic Policy and Research in Washington. He favoured considering an Argentine-style default option; I did not. But given Ms Merkel’s politically-motivated foot-dragging, the failure of the ECB to deal with the problem at an earlier stage and the strongly pro-cyclical nature of the cuts required, I am having second thoughts.

Eight years ago, Argentina defaulted on the major part of its sovereign debt and survived quite well. Many economists predicted that Argentina’s debt default would result in currency collapse, hyperinflation and even greater economic contraction than it had endured during its 1999-2002 recession. Instead, after the 2001-02 debt default and subsequent devaluation against the dollar (from 1:1 to 3:1), GDP grew at over 8% per annum over the period 2003-2007 and annual inflation fell from over 10% per month in early 2002 to less than 10% per annum over the recovery period. By 2005, Argentina had sufficient reserves to allow President Kirschner to pay off its remaining $9.8bn loan from the IMF in full and discontinue its programme with them.

European leaders would do well to read up on the Asian, Russian and Latin American financial crises of 1997-2002. The Nobel laureate Joseph Stiglitz famously published a open letter citing his reasons for resigning from his post of Chief Economist at the World Bank. Amongst his other criticisms of the Bank and the IMF was their imposition of drastic deflationary measures on Thailand and Korea in 1997, and on Russia in 1998, mainly to protect the balance sheets of private Western banks. The conditionality imposed was paid for dearly by cuts in economic and social expenditure imposed on ordinary citizens. In Greece—however corrupts some of its politicians—much the same is happening. The average Greek is being asked by the EU-IMF to tolerate vicious cuts mainly so that German (and other EU) banks won’t have to take a ‘haircut’.

A central lesson of all this is that unless protective action is taken early, a country can rapidly be overpowered by the financial markets. Once traders start betting against a country’s bonds or its currency, the herd instinct takes over. Greece’s budget deficit is not particularly high by world standards; 13.6% versus 11% in the UK, and 12.3% in the USA, but traders perceived its sovereign debt structure as too risky and prophecies of doom became self-fulfilling.

There is a further problem, too. The spending cuts needed to meet the government’s deficit target will undermine Greek government revenues. As an economist at London-based Capital Economics put it., “The key risk to its target is that deeper recession will lead to lower tax revenues, offsetting some of the savings that the Government expects to make as a result of its fiscal tightening,” In short, even though the bailout package has been agreed, the cuts may prove counter-productive and Greek recovery is far from assured.

The ECB could have nipped this crisis in the bud several months ago, both by continuing to accept Greek government bonds as collateral and by quantitative easing. Although the ECB had used quantitative easing to bail out the EU banking system, it refused to the same for Greece. There are clear signs that contagion is spreading to Portugal, and possibly to Spain and Italy. Can the ECB really be counted upon in future to prevent the gradual unravelling of the euro?

As the French economist Jean-Pierre Fitoussi argued in a recent interview in Libération, even if the Greek crisis is successfully contained for a time by an EU-IMF package, the financial markets will hope to profit by squeezing other European countries. Meanwhile, ordinary Greeks are taking to the streets to protest against further draconian austerity measures while the EU’s political class continues to focus entirely on its narrow domestic interests?

Europeans need to recall that we are really paying for the spill-over into the real economy of the 2008 bank bailout. Most important, only a few voices have begun to question seriously whether placating the financial markets by means of drastic cuts is unavoidable. Perhaps it’s time to start thinking the unthinkable, namely, that financial markets should be our servants, not our masters.

(For an earlier version see: http://www.guardian.co.uk/commentisfree/2010/may/02/greece-default-debt-choice)