Socialism or barbarism for eurozone

Andrew Fisher, LEAP co-ordinator, analyses the eurozone crisis

The eurozone crisis is complex, and the cause of the crisis varies from country to country. One could glibly (albeit accurately) argue that the crisis is capitalism, but that would not give an understanding of the different processes that have led us to where we are now.

There are however several common themes for many of the key crisis countries: the failure to collect tax revenues, deregulation of the finance sector, the bursting of the construction bubble, and the dismantling of social infrastructure as a solution (more palatably referred to as ‘austerity’). The latter of course is imposed to solve the crisis, but in fact exacerbates it.

In Ireland tax revenues were deliberately slashed by government policy to cut corporation tax, in Greece and Spain tax collection infrastructure is woeful. In Spain and Ireland a construction boom eventually outstripped demand – as it did in the US – with housing prices now up to 50% on average below their peak in many cities.

However, an overarching problem that played a part in causing the crisis and has hindered any solution is the structure of the eurozone: in which fiscal policy has been made in the interests of the larger economies to the detriment of those in the periphery, and by an unaccountable (or ‘independent’ as Gordon Brown would describe it) central bank.

The same dynamic is playing out now. Greece will inevitably have to default, and should have been allowed to immediately, to save its people from wave after wave of austerity measures.

The opposition to Greek default came from the creditor nations, who fear having to bail out their banks which loaned massive sums to Greece. The French-Belgian bank Dexia has already required assistance due to the ‘haircuts’ to its Greek debts.

The fear stalking the meeting of European Finance Ministers in mid-October was a domino effect across European banks. If Greece or Ireland or Spain or Portugal, or even Italy start defaulting on their debts, then banks could fail throughout the eurozone. Those banks in turn have debts with other banks, and we could be back to 2008/09 when much of the global banking system needed assistance.

There are two things that are clear. The first is that austerity is making the situation worse. By raising unemployment, suppressing wages and slashing benefits the risk of default on personal loans and mortgages increases – further destabilising banks. Likewise suppressed consumer demand is making life difficult for retail businesses, which in turn affects manufacturing –and because of the increased risk of personal and business debt defaults, banks are far more cautious about extending credit.

The Greek trade unions – taking strike action in mid-October – were absolutely right to describe their nation’s plight as a “death spiral”. There simply is no way out.

The second clear conclusion on EU policy is that a second round of mass bailouts will be necessary. This can either be in a controlled and co-ordinated way of managed debt default that writes off bad debts through public ownership or it will be an each country for itself panic in which nations like France and Germany go for a UK style bailout while the peripheral nations – unable to borrow on the international markets – watch their financial institutions fold. This will in turn create a tide that even the larger economies of Germany and France are unable to stem.

The reality encroaching on eurozone finance ministers is that their European Financial Stability Fund has nowhere near enough funds to actually cope with the scale of the bad debts. The markets know this, hence the downgrades of eurozone nations and banks.

The promises to make good on these debts cannot be paid, so defaults will be necessary. By acting swiftly this crisis could have been contained. Instead the situation has been aggravated by austerity and mounting interest rates, especially for nations and financial institutions deemed riskier.

The economic crisis of the 1930s was only resolved through rearmament, militarisation and horrific war. This crisis requires that we take into public ownership and control the finance and credit system. Without that we face each nation scrapping for its own skin and mass social upheaval as depression bites.

The irony of this is that the eurozone was allegedly designed to prevent such beggar-thy-neighbour behaviour. In fact the inherent instability of the eurozone, with a single interest rate and restricted deficit spending combined with neoliberal deregulatory policies, has actually caused precisely that.

In the words of a truly great European leader: it’s socialism or barbarism.

• This article first appeared in the November 2011 issue of Labour Briefing and was written before the European summit concluded in the early hours of 27 October

A good reading list

I spoke at a meeting of Croydon Trades Council last Thursday on the current economic situation, and a full write-up will follow of the debate and discussion around the origins of the debt and deficit, the attack on public sector pensions, tackling unemployment through investment in capital spending projects, and what to do about the banks and the stock markets.

But this is just a quick post with some of the books that came up in the debate from those in attendance:

• Injustice by Danny Dorling
  
• The Spirit Level by Richard Wilkinson & Kate Pickett
  
• The State and Local Government by Peter Latham
  
• There is an Alternative by PCS
• Treasure Islands by Nicholas Shaxson

It's an impressive and excellent contemporary reading list for anyone trying to understand our current situation.

What other contemporary books have you found useful? Let us know in the comments.

Miliband offers only hot air on energy

The report by Ofgem last week showed the profit margin for energy companies has risen to £125 per customer per year. It expressed concern at the rampant profiteering by energy companies. This is important - let's remember that every winter an extra 20-30,000 pensioners die due to cold-related illnesses. With prices having risen by 10-20% this will be a life or death issue for tens of thousands this winter.

The Ofgem report did not surprise us; in March 2011 we published our report 'Restoring the Public' and noted:

The unusually cold winters in the past two years, and large margins, have led to bumper profits for energy suppliers such as British Gas, whose profits rose by 24% in 2010. The regulator Ofgem has found that energy companies increased their net profit margin per customer by 38% last November, and is currently reviewing energy prices. However the case for a windfall levy now is not in conflict with future recommended reforms to regulation.

At that time we advocated a windfall tax on these excessive profits. It's clear though that seven months later, the energy companies remain unconstrained by regulation. Ofgem deliberately does not have the teeth to prevent excessive profiteering.

In retrospect our call for a one-off windfall tax, combined with the review of regulation, underestimated the problem. Let's face it: no review of regulation under the current government is likely to constrain business to benefit consumers.

Ed Miliband writing in the Sunday Mirror, continues his 'moral capitalism' theme from his Labour Party conference speech, stating "there is nothing to stop those power companies giving up those profits".

But there is! The very reason the companies profiteer is because their purpose is to maximise profits for their shareholders. Ed's plea is as asinine as Vince Cable repeatedly imploring the banks to lend more. The lesson is companies (as they are designed to do) will act in their own interest, not the public interest (unless the two happen to coincide - rare).

If Ed Miliband wants cheaper energy prices exhortations are not enough. Neither would be his other plan: "more competition". More companies will act exactly the same as the big five already do - because they will also want to maximise profits.

The only permanent solution is public ownership. If something is 'too important to fail' as the banks and energy companies are then they have to be run in the public interest - that means control.

If Ed Miliband is going to inspire voters to return to Labour he needs something that will electrify the electorate. His current gas is just hot air.

Rafael Nadal - shut up and pay your tax

As more and more of us slip into poverty as jobs and benefits are cut, spare a thought for Rafael Nadal - the snarly but dodgy-kneed ball-chaser is also rebelling against the government's policies.

Poor Rafael lamented yesterday:

"The tax regime from the UK is complicating a lot of things ... The problem is I can lose money if I go [to Queen's] to play for one week. It is really tough what is happening today in the UK with the tax"

Nadal earned just $27.5m in 2009 (Sports Illustrated). In tennis earnings alone this year he has made $6.3m according to tennis.com

Nadal takes issue with the UK tax law which means overseas athletes are taxed on their worldwide endorsement earnings for every day they spend in Britain. What this means is that if Nadal spends three weeks of every year in the UK, then he will be taxed that proportion (i.e. 21/365ths) of his global endorsements in the UK at 50%.

So if Nadal makes $20m in global advertising deals. He will be taxed 21/365ths of that at 50%, which would be $0.57m. By arguing against this tax, Nadal is pretending that playing in the UK does nothing to boost his value to advertisers. In other words the UK market is worth nothing - which is ironic considering every other London bus currently sports a picture of him in Armani pants or jeans.

According to the Independent, the tax has already caused athletes like Usain Bolt not to compete in the country. That false start, such a shame.

If my living was running after a tennis ball - something dogs do gleefully in parks for free - while getting paid $27m per year, I might be a little more circumspect about complaining at having a tiny fraction of my enormous wealth used to fund schools, hospitals, roads, etc.

p.s. you can contact him on Twitter at @RafaelNadal

Perhaps UK Uncut could send Rafa a message when he plays at the O2 later this year?

End the rule of the 1% as economy implodes

The force of the global economic implosion, which has seen unemployment skyrocket to a 17-year high in the UK, overwhelmed its first eurozone government last night. It is unlikely to be the last.

The Slovakian parliament voted to reject a stronger European Financial Stability Fund (EFSF) and hence a second rescue package for Greece. This was despite immense political pressure from the European Central Bank, the European Commission and the International Monetary Fund, as well as the US administration.

They all warned of the systemic nature of the worsening crisis and the direst of consequences for the world capitalist economy should Greece be allowed to fail. As a result of the vote, the coalition government of Slovak Prime Minister Iveta Radicova fell after a small party in her ruling coalition refused to back the plans.

The EFSF is the capitalist powers’ main weapon in dealing with the debt crisis that threatens the European common currency, the region's banks and the global financial system. But eurozone rules require all of the 17 member states to ratify the new plan and Slovakia was the last to vote after all the others had given their agreement.

Now the international lending agencies, responsible for holding the crumbling system together, have to stitch together a new interpretation of the rules allowing the package to be put into operation, whilst they wait to see if a more compliant government will emerge in Slovakia.

Just a few short weeks remain before the Greek government will run out of money and cease to be able to pay wages or pensions for the public sector employees who make up one fifth of the country’s workforce. But the price of the new, wholly inadequate deal would see further tax rises, jobs destroyed, wages cut and – to the banks’ horror – a write-down of the money they are owed by the Greek government by as much as 50%.

As those in the race to contain or deflect the impact of the deepening crisis struggle with its European expression, insolvency practitioners in the United States and elsewhere are gearing up for a busy time ahead.
Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer. Moody's credit rating agency says the number of troubled companies rose for the third month in a row in September, an ominous sign similar to the third quarter of 2007 when the economy slid into recession and the ensuing crash engulfed the world.

And in another blow for the New Green Dealers who are promoting an eco- friendly growth-oriented capitalist solution to climate change, recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the US federal government.

This time around China cannot come to the aid of the ailing system. As is now becoming clear, its huge injection of spending on infrastructure developments to ward off the impact of the global crisis on its domestic economy, has taken its toll internally.

A Reuters special report on China noted:

Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid – or about $1.2 trillion to $1.4 trillion. In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Be warned. Any and every attempt at shoring up the defences of the capitalist system will involve an unimaginable, intolerable assault on the lives of billions of people. Almost a million young people are on the dole in Britain already, according to today’s figures.l

Saturday’s global occupation of city and town squares should become the focus for shaping a new social, economic and democratic political system founded upon the satisfaction of human needs. The 1% cannot be allowed to continue their rule over the 99%.

Gerry Gold
Economics editor
12 October 2011
reposted from
www.aworldtowin.net 

Unemployment - a price worth paying for the Tories

Unemployment figures out today show that 2.57 million people are unemployed, the highest since October 1994 - the last time the Tories were in power. But they have surpassed themselves on youth unemployment which hit a new record, in percentage and numerical terms, which is now well over 20% and 991,000.

But the picture is actually even worse than these headline figures suggest. In addition to the 2.57m unemployed are 580,000 workers in temporary jobs who want a permanent job and 1.27m workers in part-time jobs wanting full time work - meaning that there are over 4.4m people looking for more work. The number of people working part-time who want full-time work has increased by 300,000 in last two years.

The Tories are seeking to blame this on a combination of the last Labour government and the current eurozone crisis, but public sector employment is down 240,000 in past year as the Tories' deliberate policy of cutting public service jobs has taken hold - surging ahead of downwardly revised OBR predictions.

As the public sector disproportionately employs women, it is no surprise that the level of female unemployment is up 5.4% in the last year, and is now at a 23 year high.

The message is clear: unemployment is a price worth paying to implement the Tories' ideological crusade to roll back the state, under the cover of a deficit crisis.

Green New Deal would be more effective than QE2

Mervyn King is right that the UK is looking over an economic abyss (Britain in grip of 'worst ever financial crisis', 7 October), but giving greedy, tight-fisted banks a further £75bn in the hope that this time they will lend enough to business is a fantasy. Quantitative easing should instead have been used to increase economic activity and hence jobs and business opportunities. Without that, who is going to want to borrow when for many businesses the real crisis is increasingly a shortage of sales and not a shortage of capital.

The Bank of England could have started to tackle this demand deficit, had it used a substantial percentage of the £75bn to finance a green new deal to make all UK buildings energy efficient. This would have helped kickstart the economy by creating hundreds of thousands of jobs where people actually live. King admits he will probably need a QE3, but to be third-time lucky he should make it a green QE3. It could even be nicknamed plan B.

Colin Hines
Convenor, Green New Deal Group

This letter appears in today's Guardian, alongside several other good letters on tackling inequality, the effect of council service cuts and job losses, breaking up the banks or nationalising them.

In defence of Gordon Brown (well, partially)

Last Thursday night I spoke about the economic crisis at a meeting of St Albans Labour Party, which seems in good health: a good attendance and a lively debate followed my presentation. Below I've integrated the first half my speech with some of the excellent points made in discussion.

Labour did not overspend

Despite the claims of Cameron and Osborne (and that rather politically naive and economically illiterate note left by Liam Byrne) the last Labour government was not profligate, it did not over-spend. In fact, as this graph shows, Labour actually spent less as a proportion of GDP than either the governments of Thatcher and Major.

Labour stuck to Tory spending plans from 1997-99 meaning that public spending did not start increasing in real terms until 2000. The UK had also embarked on an unprecdented period of seemingly stable economic growth that would last until late 2008.

Labour also had two decades of underinvestment in public services to make up for. The proportion of GDP spent on education, health and pensions lagged far behind the rest of Europe. Too many pensioners and children were in poverty, and Labour set ambitious targets to reduce (and even eradicate) poverty among these groups.

Labour's aim then, to increase public spending, was correct. It was necessary to build new schools and hospitals and to employ more and improve the wages of dedicated public servants.

But it was not just this period of economic growth that allowed New Labour to spend more: they also hit the utilities with a windfall tax to (partially) compensate for the fact they were undersold by the Tories' cheap sell-offs. Introduced in the emergency budget in 1997 it raised £5.2bn. Brown also sold off about half the UK gold reserves in 1999, raising over £2bn.

The decision to sell-off that gold has been heavily criticised - the price of gold has shot up since - but the question is what was it spent on? At that point our public services were in desperate need of investment - and Labour had manifesto commitments to bring down hospital waiting lists and reduce class sizes. At the time it seemed the right priority, and most people would agree.

Labour reduced the debt

So Labour spent, as Brown himself would often say, prudently throughout its term in office. It also managed to reduce the national debt - as this graph shows.

When Labour came to power in 1997, the national debt was 42% of GDP. By 2002 it was below 30%. It increased very slowly between 2002 and 2008 to 36% (still lower than any year under Margaret Thatcher or John Major). Then, as the chart shows, the banking crisis hit and Labour left office in 2010 with the national debt at around 52% - lower than in Japan, the US, France or Germany.

Despite this George Osborne came to the Despatch Box for his emergency budget in June 2010 and told us Britain was on 'the brink of bankruptcy'. Where Brown had put a windfall tax on big business privateers, Osborne delivered an unprecedented cut in corporation tax and other business tax breaks, with welfare cuts.

But Labour did make massive mistakes

Having said that some criticism must be levelled at Gordon Brown and New Labour for the mistakes they did make. Their light-touch and continued deregulation of the banking sector meant that Britain was harder hit by the global financial crisis that many other countries. Our over-dependence on the finance sector and failure to have any strategy for manufacturing left us particularly exposed.

The Tories however cannot make any headway on this because they actually called for further deregulation of the banking sector, finance and mortgage markets. They too offered no industrial strategy.

Likewise Labour should also be criticised for their national accounts-fiddling approach to investment: PFI. This has dumped about £300bn of debt on public sector bodies for assets worth about £50bn. But, bad news again for the Tories, PFI was the brainchild of the Major government and Labour's only opposition to PFI came from rebellious backbench MPs like John McDonnell and Kelvin Hopkins.

Another colossal waste of money (though more pertinently of human life) was New Labour's wars in Afghanistan and Iraq, but again the only opposition was found on Labour's own benches. Likewise for the commitment to replace Trident.

Conclusion

Labour made huge economic mistakes - it relied too heavily on the finance sector and the growth of personal debt - but none of the Tories' attack lines that Labour spent too much or left Britain on the brink of bankruptcy are tenable.

The bank bailout was also a disaster - less the nationalisation of the banks and more the privatisation of public money. Intervention was needed and although botched it was better than the Tory frontbench which dithered between bailout support and letting banks fail (and along with them would have gone jobs, savings and much more of the UK banking system) - which in turn allowed Vince Cable to appear credible.

In opposition Labour needs to assess where it went wrong. The simple formula for 1997-2010 was 'if the Tories agree it's probably a mistake', as they were on banking regulation, PFI, wars and (eventually) the bank bailout.

Corporate Britain: The wages into profits miracle

Times are tough - living standards are falling, as the IFS reported last month. Average wages are rising by around 2% while inflation is over 5%. Consumers are cutting back on spending, demand on the high street is suppressed and employers are laying people off: unemployment continues to rise.

Amid all the gloomy headlines about unemployment, pay freezes, lay-offs, the eurozone crisis and the imminent need for further bank bailouts, you might have missed this virtually unreported statistical release from the Office for National Statistics.

The release demonstrates that corporate Britain is actually doing rather well: the profitability of UK companies was 12.1% for the second quarter of 2011 - up from 11.7% in 2010 and 11.3% in 2009.

In the service sector the picture is even more rosy, with companies profit rate at 15% in Q2 2011, up from 14.7% in 2010 and 14.2% in 2009.

Now of course LEAP did point out in its March 2011 report that some UK firms were engaging in rampant profiteering. We identified banks, supermarkets and energy companies - and called for a windfall tax on each sector.

So how - when times are tough, wages are falling further behind inflation, benefits are being cut and unemployment is rising - is the corporate sector managing to increase its profits?

The answer is part of the reason why we're in this crisis: because there has been a power shift from workers to corporations ('from labour to capital' if you like it in Marxist terms). As the share of the national wealth going to wages has declined so the the proportion going to corporate profits has increased. Workers are easier to sack and harder to unionise, and we have deregulated, liberalised and privatised.

Take a couple of examples where this is true in corporate Britain today:

Newsquest, a company which owns a large number of local newspapers in the UK has frozen staff pay, slashed 800 UK jobs, and last year closed its pension scheme. Times are tough? Well, not for the shareholders: their profits went up 15% (£10.8m) to £82.5m. More on Newsquest here.

Park Cake is a company you've probably never heard of, but you have probably seen their products. Its biggest customer is Marks & Spencer, for which it makes its famous Colin the Caterpillar cake and its popular chocolate ganache birthday cake. This year Park Cake directors awarded themselves a 10.6% pay increase and the Managing Director a 15% pay rise. Their workers' pay was frozen. To compound their greed, they are also exploiting their agency staff by exploiting a loophole in the new agency workers regulations. No pay rise, no rights, let them eat cake. More on Park Cake here.

In both these cases, the workforce is unionised - which is why you've now heard of them - but the law is so stacked in employers' favour that even the best unions (and the NUJ and BFAWU are two of them) are struggling to fight back.

Of course this squeeze cannot go on forever - if wages continue to be squeezed and unemployment continue to rise then people will cut back on buying things like newspapers and caterpillar cakes. As Nouriel Roubini said, capitalism might eat itself.

The solution to this crisis is therefore to restore trade union rights, raise not cut (as Osborne is doing) taxes on big business, uprate the national minimum wage and invest to create jobs. Trade unions are saying it. They're right. Labour should say it too.

Dismantling the government’s ideological economic argument

Mehdi Hasan is a prolific tweeter, blogger and writer, and the senior political editor of the New Statesman. Earlier this year he also found time to write a
biography of Ed Miliband.

The Debt Delusion would be of great use to Ed Miliband since Hasan has assembled an array of arguments that dismantles the government’s economic agenda far more effectively than the official opposition has so far managed.

The short book takes aim at 10 myths perpetuated by the coalition about the debt and the deficit – and what remedies are most effective to reduce the debt, close the deficit and get the economy growing again.

One of the most alluring arguments deployed by the prime minister and the chancellor has been their equating of the national debt with a credit card, accusing Labour of
“maxing out the nation’s credit card”. But, as Hasan points out:

"Governments can increase their revenues by raising taxes; households cannot. Governments can print money and issue currency; households cannot."

As well as arming activists with some useful conceptual arguments, the book also puts
its case with some indisputable facts and statistics: like how there are only two cases out of 15 studied by the International Monetary Fund when cuts preceded economic growth.

There is also an interesting international comparison demonstrating that in 2009 the
UK took less as a proportion in tax than Denmark, Sweden, Italy, Belgium, France, Luxembourg and Germany – and yet George Osborne’s first move as chancellor was to cut business taxes.

The conclusion is straightforward: the government’s economic policy “is part of a
political and ideological project to roll back the frontiers of the state”. As Hasan says: “The debt is just a distraction.”

For activists it is a useful complement to our own union’s pamphlet ‘There is an Alternative’ – see pcs.org.uk/alternative – which has helped change the terms of the debate and won praise from other unions.

• Download The Debt Delusion, published by Vintage Books.
• This review first appeared in the October issue of PCS Activate

There is an Alternative ... but a few less cuts a bit slower is not it

The UK does not have a debt crisis. Our debt is only around 60% of the annual value of the UK economy, or GDP. The UK’s debt was over 100% of GDP for every year between 1918 and 1963. The UK has £9 trillion of wealth, while our total debt is about £850 million. It’s like panicking about owing someone 95p when you have £10 in your pocket.

There is a problem that we are spending more than we are receiving in revenue. This is the deficit. No one denies there is a deficit. How to close the deficit is where we disagree.

The Tory and Lib Dem coalition says there must be savage cuts to public services and jobs. This is the same strategy that has failed in Greece and Ireland.

It’s like the medieval quacks who used to keep cutting away the infected parts of the body – and then they wondered why the patient died. The medical profession has learned to treat the problem not just to hack away. Some economists and politicians need to learn the same lesson too.

Labour has to offer an alternative to the failed policies of this Cabinet of millionaires. That alternative cannot be based on the demands of the City but on the demands of people: for jobs, decent pay, fair pensions and good public services.

Our economy has to shift away from its dangerous over-reliance on a deregulated and risky finance sector. We need state-controlled banks that act and invest in the public interest – not investing in what produces the highest returns for an already super-rich elite, but what benefits our communities.

Did we nationalise the banks in the 2008/09 bailouts or did we just privatise public money? If we allow the same bankers to run our banks and our economy again, how can we reduce inequality, how can we get investment in jobs, and how can we stop the tax avoidance schemes that deprive us of the revenue to invest in decent public services and welfare for all.

The LRC supports the ‘One Million Climate Jobs Now’ pamphlet: a costed programme to create jobs and invest in industry that can also transform our economy to environmental sustainability.

Above all we need an economy that operates in the public interest. If the mass people’s party is not in favour of this it has lost its way.

This text was prepared for the LRC's bulletin for Labour Party conference 2011.