Unable to address the structural flaws in the British economy, the government is desperately supporting the status quo of City speculation. Without serious restructuring, the financial system will fail again and we are condemned to austerity politics forever more.
The British economy, early 2011: Household incomes are expected to fall for the second year running. One in five under 24-year-olds are out of work. Business investment remains flat. And growth is the weakest in the G7.
This wasn’t in the script. George Osborne had a simple tale to tell. Cutting public spending now would unleash the private sector. Pen-pushing bureaucrats, those ‘enemies of enterprise’ would be replaced by dynamic entrepreneurs. On the back of a recovery in private investment and an export boom, the whole economy would build itself anew.
It was a fairy-story when the supine, supposedly independent Office for Budget Responsibility (OBR) laid it out last June. For the OBR’s sunny predictions to make good, investment and exports would have to recover faster than out of any previous recession, post-WW2. That isn’t going to happen. We are being led into a bleak future by a gang of millionaire fantasists.
Osborne’s presumed calculation, based on this delusion, is that sharp cuts in spending now will allow giveaway tax breaks as the economy recovers, ahead of an election planned for 2015. Tackling the bloated financial sector, building new, green infrastructure, or addressing the ever-widening imbalance between London and the rest of the country need not happen. Nakedly short-term political considerations have been allowed to overwhelm the address of critical, long-term economic problems, and there are few better indicators of a directionless ruling class. Unconvincing blather from the Prime Minister downwards about the need to ‘rebalance’ the economy is failing to cover for the absence of a strategy. This weak, divided government cannot begin to address the structural flaws of British capitalism that the financial crisis revealed so starkly.
The next financial crisis
Finance is still central. If it does nothing else - and it does very little - the deal struck in March between Treasury and the four largest banks makes more explicit the agreement between government and the City of London. The banks carry on much as they did, with some token gestures towards anti-banker sentiment: a few promises to shave bonuses back a little; some offers of greater ‘transparency’. The government, in response, backs away from making any serious inroads into banks’ power. Everything is much as it always was.
This miserable compact defines the UK’s economic problem. The chances of a government with Osborne as Chancellor taking on the City were always vanishingly small. But by leaving the City as it is, all but unreformed, we are condemned to austerity politics forever more. Without serious restructuring, the UK’s financial system will fail again. It provides esoteric gambling services to the seriously wealthy, using borrowed money; and the bets they are placing will, at some not-too-distant point, turn bad.
Another bailout will then be summoned. But the last bailout almost bankrupted the whole country. It is public spending that is being cleared out of the way to make room for the next. Today’s cuts are expected to pay for tomorrow’s crisis. And that crisis will appear, as Bank of England governor, Mervyn King, candidly admitted last October.
An unreformed banking system
The ‘Independent Commission on Banking’, led by Sir John Vickers, confirmed the trend. Published last Monday, the interim report lays out the Commissioners’ thinking. Some hopes had been raised around the Commission, launched on the back of a Coalition government promise in May to investigate the financial system.
But once again the banks are off the hook. Shares in UK banks actually rose on the publication of the report - the market equivalent of a sigh of relief. Even on their own terms, the reforms will make little real difference. Rather than tackling the speculation and off-balance sheet activities that sparked the crisis, Vickers chases after retail banking - the high-street activities that most of us recognise: taking in deposits, and making loans to customers.
Chopping up a few high-street banks, as Vickers suggests, will do nothing to affect the fundamental instability of the system. It could even worsen the problem, as smaller banks can be driven through competition to take on the sort of sharp practices that bit player Northern Rock became adept at. They will also try to swagger across the markets with the big boys, but without the financial wherewithal to cope. It is a further mystery why Vickers thinks allowing banks to be ‘small enough to fail’ will in any way reassure their customers. Far more likely is that instead of a single bank run, as Northern Rock was hit by in autumn 2007, we will have runs across many banks as panicked depositors see what is going on and rush to remove their savings. Vickers leaves speculative investment bank activities essentially untouched. Banks will still be able to treat their customers’ deposits as a piggybank for their gambling activities. The status quo remains very much in place.
This hasn’t stopped banks griping about the minimal reforms Vickers offers. There have been vague threats by some to leave the UK - to which the only worthwhile reply is a cheery wave, and an offer to help pack. The financial system, with the big banks at its heart, cost the whole country £1.3 trillion when it collapsed, massively more than whatever paltry taxes they may have paid. High finance and investment banking are a colossal financial burden on the economies that host them. The only real barrier to handing out one-way plane tickets to the bankers is that you wouldn’t want to wish them on anyone else.
In reality, the banks are unlikely to go anywhere. The City of London is still too appealing a location and with a complaisant government there’s no meaningful threat on the horizon. So they will remain, wallowing in bonuses, free from interference, and secure in the knowledge that when their electronic gold turns once again to digital muck, the rest of us will foot the bill to make good the difference.
The IMF, currently in somewhat contrite mood, has identified the problem. It claims the financial system globally is now more secure than it was four years ago, when the crisis began. This is to be hoped for, given the stupefying public sums that have been thrown at it - estimated, by the IMF themselves, to total £7.1tr, or about 20 per cent of the world’s entire output for a year.
They note, however, that attempting to contain the crisis in finance merely shifted the problem elsewhere. The crisis of finance has become a crisis of the state, as governments took on the banks’ bad debts and collapsed assets, pumping the system full of public money. That crisis of sovereign debt, most acute in Europe where Portugal became the latest euro economy needing EU assistance, is real. It reflects a real inability on the part of the established capitalist economies to make good on the inflated promises of the credit-fuelled boom years. And credit is never made out of nothing. It represents a future claim on earnings - a promise to pay in the future. By bailing out the banks, public authorities turned private finance’s inability to pay for its own debts into another set of promises to pay creditors, this time enforced by the state itself.
The correct response to this would be to demand that the financial system carry the burden of the public debt: taxing them as necessary, cancelling the debt where possible. Public spending should be used to help build a new, green economy, providing sustainable jobs. Instead, many governments across the globe have turned to austerity measures - cutting their spending, and ramping up taxes for ordinary people.
It is in Europe where this turn has been most pronounced. After a brief period of international support for a debased ‘Keynesianism’ - increased government spending - around the time of the April 2009 G20 meeting, the EU has lurched decisively towards austerity. The most recent manifestation of this is the attempt, currently rumbling through the Union’s assorted structures, to tighten up the ill-named Stability and Growth Pact (SGP). This is the pact that was intended to provide a secure fiscal footing for monetary union back 1999, by clamping all the member states of the euro into a neoliberal straitjacket that set tight limits on the amount they could spend, and the budget deficits they could rack up. The intention was to make the euro a world currency - one held in reserve by other governments. For this it had to also be a strong currency - not one whose credibility on the markets would be continually undermined by high-spending governments.
The SGP was never truly honoured, least of all by the major European powers now bullying austerity into their smaller neighbours. But it indicated the direction of travel, and current moves are simply further steps down the same line. It is a process driven by the German ruling class in particular, against the rest of European society. But the EU’s other major powers - the UK, though outside the Euro, certainly included - are pushing in the same direction.
They have one over-riding fear. European sovereign debt is, in the main, held by European banks - including the UK. A default would seriously damage bank balance sheets, sparking a further financial crisis. The crisis of sovereign debt, and the crisis of the financial system intertwine. By bailing out states, European powers hope to avoid the collapse of finance. By also demanding austerity from crippled economies, they hope to maintain bank balance sheets. That is why Cameron’s government has so readily signed up to Portuguese and (especially) Irish bailouts.
Austerity is a social catastrophe in slow motion. Aside from the extraordinary assault on the living standards for ordinary people - the Greeks expected to work for 14 years longer; unemployment in Ireland stands at 15 per cent - the effects on the European economy are dramatic, and predictable.
The logic is clear. Cuts in public spending reduce demand in the economy. Less demand means shrinking markets for firms. They start reducing their own spending and make redundancies. A vicious circle is created. For an economy in recession, or just recovering, the effects are still the worse. Ireland has provided a test case: by diligently sticking to the austerity programme after bailing out its bloated financial system, and making huge cuts in spending, the government has dragged the whole economy further down. The recession has worsened. And the relative burden of debt, as a result, has risen. Austerity is counterproductive for the domestic economy.
However, an economy that can export might be able to sustain itself. This is what Germany is now doing inside the eurozone. Because relative exchange rates between member countries were fixed when the euro was launched in 1999, the German economy has enjoyed a persistently undervalued relative exchange rate. Other euro economies, particularly those in the south, have been persistently overvalued. German exports were cheap for southern countries to buy, and so Germany exported, running up a current account surplus. This surplus was then recycled back to the southern economies through the European financial system as cheap loans - loans that were then used to buy more German products. German surpluses and southern deficits rose in parallel.
The whole unbalanced system was shattered by the financial crisis, which forced colossal new debts on economies: both from the bank bailouts, and as a sharp recession reduced taxes and forced up unemployment. Austerity now is an attempt to deal with the consequences of that financial disaster. It does nothing, however, to address the underlying imbalance: if anything, it is liable to worsen. The Greek economy, first euro member to receive the dubious benefits of an EU/IMF handout back in May 2010, shows the future: austerity has devastated the economy and is driving living standards back decades. A Greek default - cancellation of all or part of the debt - is creeping closer, precisely the situation the bailout was intended to avoid.
But this is not a process that has benefited German workers, either, who have seen their social protections removed and real wages stagnate despite the apparent prosperity. A solution for the whole of European society would insist, first, on inflation across the continent: let German real wages rise, and increase public spending everywhere. Tax the rich to stabilise public finances. And clamp down on finance through nationalisation under democratic control. Economies with excessive debt burdens arising from the financial crisis could reschedule and default on those debts as needed.
But this would require the political will to take on the rule of finance. It would mean addressing the fundamental weaknesses of the existing monetary system - including the euro itself, with its sado-monetarist European Central Bank and permanent imbalances continent-wide. It is not a solution ruling classes across Europe will adopt unless dragged to it, kicking and screaming if necessary.
The shifting balance of economic power
Yet elsewhere there are signs of real recovery. China, now the world’s second-largest economy continues to boom, growing by 9.7 per cent over the last year. Brazil and India are growing rapidly. The financial crisis has confirmed that the balance of economic power is shifting away from the heartlands of capitalism. It is, as the economic historian Fernand Braudel once wrote of earlier financial turmoil, the ‘twilight of hegemony’. The financial crisis, and subsequent sharp recession, revealed the shallowness of the US economy: it is an efficient mechanism for the transfer of wealth from the majority to a tiny super-elite, with the incomes of the top 0.01 per cent rising 400 per cent over the last three decades as the bottom 90 per cent flat-lined. But its apparent dynamism over the last fifteen years has depended on a succession of bubbles that burst in succession: first the dotcom boom, and then the great property bubble that collapsed with the sub-prime crisis of 2006-7.
This shallowness has deep consequences. Capitalism needs a structure to govern itself, with an economic authority able to provide a modicum of stability and organisation to a global economy. For decades in the West, that task has fallen to the US - most overtly through the IMF/World Bank combination, guardians since at least the early 1980s of neoliberal orthodoxy. As the US declines in economic importance, those institutions are now being opened up to potential challenge, whether through the Chiang Mai Initiative in Asia, or the Banco del Sur for South America. Both offer means for economies to start to organise their trade and financial relationships quite separately from Washington. Sovereign wealth funds, great pots of unregulated, state-controlled finances, place enormous material resources in the hands of ruling classes outside of the heartland. We are at the very early days of a movement to a new structure of global capitalism.
This transition is not a smooth process. Great economic changes impose political challenges on local ruling classes, as rulers across the Middle East and North Africa are discovering. And the course of capitalist development is always uneven and uncontrolled: so a property bubble in China may now be bursting, with house prices in Beijing falling 27 per cent in the last month; Brazil’s high public debt has drawn warnings from the IMF; urbanisation in India is streaking ahead of the archaic infrastructure of its cities. Smaller economies find themselves in a middle income trap - able to industrialise rapidly out of a dependence on agricultural production, but with further progress seemingly blocked. The examples can be multiplied.
The general direction of travel is, however, clear. The uncertainties are over the destination. New institutions may be appearing but the US retains its absolute economic power. This sets the frame for current debates within the emerging economies: to seek closer engagement with existing structures, subverting the IMF from within as some smaller G20 economies have favoured; or to push away from Washington, as Brazil has partially attempted.
At the centre of the financial crisis was the staggering, decade-long imbalance of trade between the US and the rest of the world - most particularly Asia. Year in and year out, the US imported more than it exported, running colossal deficits, while emerging economies ran equally massive surpluses with the US. These surpluses were then efficiently recycled by the booming financial system back into cheap credit, from which the US could continue to fuel its consumption. Across the Pacific, surpluses in the booming economies of its western rim were matched by deficits on its eastern edge. The breakdown of the financial system over 2007-9 brought this imbalance into sharp relief, with subsequent tensions between the US and China becoming most apparent over China’s allegedly undervalued currency.
This is the background to austerity Britain. It is an elderly capitalist power, incapable of shaking off its addiction to financial highs even at the cost of crippling itself; and it faces a world economy subject to more uncertainty now than it has been for decades. The only strategy its own ruling class has is to desperately support the status quo of the City and speculation, and hope for an economic miracle that will never quite arrive. It is slow, grinding disaster for all in society outside the ranks of very richest.
But it does not have to go unchallenged, and slowly the challenge is being mounted. The student protests, the TUC demonstration, and a flurry of local demonstrations and strikes have shown the way. The most immediate task for the opposition is to create the movement that the 26 March demonstration opened the possibility of: a mass, popular campaign against the cuts, drawing in the great sweep of society affected and with organised labour at its heart. The unions, though numerically large, remain weak and often inactive, with strike days lost remaining at record lows. And their preponderance in the public sector, with private sector unionisation much lower, is a crippling structural problem. A mass movement can help overcome those weaknesses, bolstering confidence and winning the wider, political arguments over opposition to the cuts that unions themselves may be unable to confront. The Coalition of Resistance is at present best-placed to provide the kind of broad umbrella of support, with a national focus, that an effective anti-cuts movement will need.
But an effective challenge to the cuts would, of necessity, pose far bigger questions. British capitalism is old, and weak. Growth and productivity are low. It has a stark choice: it can afford to maintain the City of London, or it can afford a welfare state. This government of millionaires has chosen the City. A new movement must force the choice the other way: for a serious wealth tax, and controls on the movement of capital; for investment in green jobs and public services. Above all, the argument must be won to challenge not just the cuts, but the rule of finance and capital.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).