The consequences of the EU bank rescue

Hugo Radice outlines the implications of the European Central Banks' recent actions to support the European Union's banking sector.

Through the second half of 2011 there were persistent signs of financial stress in many banks right across Europe – not only in Greece, Ireland, Portugal, Spain and Italy, but in France and even Germany too. The banks were already struggling to meet the higher capital and reserve requirements that have been emanating from the Basel III international regulatory proposals, as well as to meet public expectations of a resumption in lending to help the economic recovery. But in addition, the continuing uncertainties about Eurozone sovereign debt led to a seizing-up of the interbank loan market, and the supply of term deposits and medium-term lending to banks, on a scale not seen since the 2007-8 credit crunch.

However, the unexpected and massive loan interventions by the European Central Bank in December and February appear to have completely transformed the picture. The new head of the ECB, Mario Draghi, invited all Eurozone banks to apply for unlimited loans at 1% interest and up to 3 years’ duration, and has thereby pumped over €1 trillion of liquidity into the banking system. The loans under the Long-Term Refinancing Operation (LTRO) were made available to all banks operating within the Eurozone, not just those owned and headquartered in the zone, so even UK banks have been able to borrow, albeit only within their Eurozone subsidiaries. The total amount lent was €489 billion in December, and a further €530 billion on February 29th.

This move by the ECB took most commentators by surprise. Their attention was focused firmly on the sovereign debt problems, and when Draghi took office he made it quite clear that he was not about to take up the proposals by Keynesian critics of austerity for the ECB to directly support the sovereign debt market by large-scale bond purchases, or to consider the pooling of risk by means of exchanging national sovereign debt for ‘Eurobonds’. Given the continuing failure of Europe’s political leaders to resolve the marathon Greek crisis and reassure the bond markets over the risk of contagion, it was politically impossible for Draghi to openly challenge the dominant views of Eurozone creditor countries, who were adamantly opposed to such a resolution.

So what is the significance of this new ECB policy? First, the ECB has provided significant breathing space for European banks, given their need to refinance their loan books, build up their reserves and increase net lending to help the recovery. Second, the banks have used some of their new borrowing from the ECB to buy Eurozone sovereign debt, easing the pressure on national governments. Thirdly, it has brought a political breathing space while the Eurozone’s national governments try to reach agreement on the long-term objectives of a de facto fiscal compact and a new European Stability Mechanism.

With regard to the banks themselves, in the run-up to the December loans it was increasingly clear that a major source of worry for Eurobanks was the drying-up of lending from US money-market funds – a major component in the so-called ‘shadow banking system’ in the USA. Such lending had funded a large proportion of Eurobank purchases of US asset-backed securities during the run-up to the 2007-8 credit crunch, and many of those loans were due for repayment in 2011-12. As the Eurozone debt crisis dragged on through 2011, the US funds cut back their exposure to both sovereign debt and European banks, reducing such lending from 30% of their assets to around 10%. But since December, they have begun once again to lend to European banks: this indicated their need to find profitable use for their mountains of cash, their increasing confidence that the US and global economies would avoid a double-dip recession, and their view that the Eurozone would at least muddle through the sovereign debt crisis. Nevertheless, this return to borrowing from US money market funds carries significant risks, in the view of Eurozone financial authorities, precisely because they don’t want the banks to rely on short-term borrowing. Instead, they hope that the general easing of what was shaping up to be a severe credit crunch will allow banks to raise much longer-term finance to enable them to meet the Basel III capital requirements and go on to finance a European recovery.

In relation to the sovereign debt crisis, while the cost of borrowing has fallen significantly, it is not clear how far this has been directly the result of the LTRO. Historians of the crisis will recall that in 2009, when the US Federal Reserve and the Bank of England embarked on their policies of quantitative easing (QE), the ECB instead, as The Economist put it, “offered unlimited loans to commercial banks for up to a year against a broad range of collateral”. The result was much the same as that of QE in the USA and UK: “Banks used much of the cash to buy government bonds, which drove down long-term interest rates”. What is more, the ECB has discreetly helped to manage the sovereign debt crisis in another fashion: through its role as a clearing-house for the settlement of intra-Eurozone foreign trade, a system known as Target2. By December 2011, the German Bundesbank was in credit with Target2 to the tune of €495 billion, which in practice means that Germany has lent this sum to the Eurozone trade deficit countries, especially Greece, Ireland and Portugal. By giving help in this discreet way, the ECB has in effect protected Chancellor Merkel and the Bundesbank from the wrath of German public opinion.

In any case, since December 2011, Italian and Spanish banks have bought their own governments’ debt, but it is hard to separate out this factor from the generalised support that the bond markets have shown following the accession to power of first Mario Monti and his ‘government of technocrats’ in Italy, and more recently the Partido Popular under Mariano Rajoy in Spain. Whether the bond markets will remain supportive will depend on their economic and political expectations through the rest of this year. The announcement on March 8th that Greece’s private creditors have accepted their ‘haircut’ may turn out to be another flash in the pan, if the Greek economy continues its precipitous decline under the weight of austerity.

And this brings us to the broader question of the future of the Eurozone, and indeed the EU as a whole. At present it looks as though the trumpeted December agreement on a fiscal compact will be ratified by those national governments that signed up to it, although the process could be delayed or even derailed, if the Irish government finds itself obliged to hold a referendum. At the same time, businesses, households and investment institutions are sitting on huge mountains of cash, which are not going to be spent unless and until ‘confidence’ is substantially restored. Right now, while there are continuing signs of some economic recovery in North America, Europe as a whole is at best stagnating, while China and other so-called emerging economies are experiencing a slowdown. The prospect of accelerating public spending cuts, especially across nearly all of Europe, is increasingly troubling not just Keynesian converts like Martin Wolf of the Financial Times, but also those bastions of neoliberalism, the International Monetary Fund and the Organisation for Economic Cooperation and Development.

However, we should not forget the old maxim “never waste a good crisis”. The media debate over the Eurozone has viewed the political drama of summits and compacts very largely in terms of the issue of national sovereignty and EU governance, which has dogged the entire European ‘project’ ever since 1958. But the underlying story which needs to be brought into the spotlight is the way this sovereign debt crisis is being used to accelerate the implementation of neoliberalism across the EU and beyond.

In this respect, market liberalisation and deregulation may be just as important as fiscal and monetary policy. To a considerable degree, Germany’s relative economic success since 2000 is not because of superior management, high technology and ‘patient’ bank finance, but the Hartz series of labour market reforms. These have had two particularly important consequences: first, they led to the creation of several million mostly part-time and ‘flexible’ jobs, which has reduced the headline rate of unemployment; and second, taken together with the relentless campaign of the mainstream parties (especially the SPD) and the media, the penetration of the ideology of competitiveness into the more privileged full-time workforce. This was reinforced in 2008-10 by government initiatives to support the adoption of shorter working hours, as an alternative to layoffs that would disperse job skills and demotivate the workforce.

The German ‘success story’ has now become the European equivalent of the Washington Consensus, through which neoliberalism was imposed across the less developed world in the 1980s and 1990s. In the Euro-periphery, flexible labour markets, deregulation of the professions and the privatisation of the public sector have formed the core of the ‘reform’ programmes in Spain, Italy and Portugal, as well as most notoriously Greece. Ireland already had an exemplary neoliberal political economy before the crisis, although this does not appear to have spared them any of the rigours of austerity. These programmes are presented as absolutely necessary to restore national competitiveness through reducing costs of production; it appears to have escaped most liberal commentators that if all countries pursue this strategy, they will end up on a downward spiral of reduced incomes and lower consumption, together with a system-wide redistribution of income from wages to profits.

Although having no direct role in its implementation, the ECB has nevertheless played a vital role in disseminating the ideology of market liberalisation and national competitiveness, revealed recently in Le Monde Diplomatique. Presenting itself as ‘apolitical and run by technicians’, the ECB is now busy transferring this mantra to the new governments under its de facto control in Greece and Italy. Governments elsewhere in Europe, regardless of their supposed political colour, are using the Bank as cover for their uniform policies of austerity and liberalisation. Furthermore, the resumption of neoliberal ‘business as usual’ has the support of the great majority of ‘mainstream’ economists, many of whom have now been ‘outed’ as the paid servants of private finance and big business.

But in addition, the ECB’s LTRO provides a loan period of three years, not the one year period offered in 2009. Unless the Eurozone’s plans for a fiscal compact and a larger stability fund come seriously unstuck in the meantime, this has the important consequence of providing a breathing space to implement the revamped neoliberal model more fully. Twenty years ago, the European centre-left actively pursued the alternative ‘social Europe’ model, but signally failed to convince the European public sufficiently to head off the neoliberal juggernaut. This time round, we somehow have to do better; otherwise we face not just years of austerity, but the final dissolution of the postwar welfare state in Europe.

This article first appeared in Red Pepper

The 2011 Budget and its global context

Hugo Radice picks apart Osborne's budget, and predicts difficult times ahead for the UK economy.

The massive turnout on March 26 in London provided a vital public repudiation of the ConDems’ austerity programme. But although opinion polls show that a large majority of the public say that the cuts in public spending are unfair and too fast, more than half still think they are necessary. As opposition heats up all over the country, with local opposition groups being set up and public meetings and protests taking place, it is vital that the left continues to argue against the cuts. Far from being based on ‘scientific’ economics, the cuts form a determined attempt to make the poor pay for the bankers’ blunders, and to change fundamentally the relation between the citizen and the state in Britain. And what’s more, the austerity programme may well make the chances of a general economic recovery worse rather than better.

In developing our arguments over the coming months, we need a good understanding of the likely consequences of the budget, in the context of the ConDems’ overall fiscal strategy and the global economic outlook.

The budget

In his 2011 budget, George Osborne was clearly determined to stick with ‘Plan A’, adding little to the barrage of measures already decided in the emergency budget last summer. We are now braced for the full impact of those measures, especially from local authority job cuts, reductions in a range of benefits, and the rise in national insurance contributions. The Institute for Fiscal Studies has once again shown that these cuts will bear most heavily on the poor; although the top 10% will have their incomes reduced significantly by the 50% income tax rate, for the rest of us the proportional fall in income expected over the next 5 years increases as you go down the income scale. And to this, we have to add the hidden extra costs imposed on large numbers of households by the loss of public services such as libraries, day centre provision, rural bus services, and so on.

Osborne’s only substantial change in the budget was a reduction in corporation tax. He claimed that this would encourage businesses to invest more and take on more workers, but as Keynes pointed out long ago, changes of this kind – a few percent off tax or a small reduction in the cost of borrowing – have no effect if business confidence is low and if households are cutting back on spending. And as the cuts work through and spending falls, confidence is very likely to fall.

He also tried to appease the growing public discontent over the cuts with new measures helping motorists, first-time housebuyers and jobseekers. These were fully funded by new revenues from North Sea oil, tax avoiders and the banks, so the net effect on total demand is precisely zero. But the measures were in themselves so modest that they are unlikely to lift the encircling economic gloom. Although he may have thought he would win public support by taking more tax from the North Sea oil producers, a penny less a litre is not going to cut much ice given that the price has risen by 20-25 pence since the election.

The second issue for this budget was whether Osborne could find some way to increase the chances of economic recovery, given Labour’s persistent accusations that he had no strategy for growth. He knows very well that even if the coalition succeeds in its efforts to ensure that the present parliament lasts a full five years, there is little chance of re-election if the recovery is not in full swing well before that deadline. For this reason, the main emphasis in his speech was on ‘reform’ and ‘rebalancing’. He painted a picture of an entrepreneurial economy in which manufacturing, supported by a slimmed-down and efficient public sector, becomes the new engine of growth. For this purpose, he put together a menu of measures on enterprise zones, apprenticeships, technical education and tax breaks for innovation.

Such measures are all too familiar from the history of economic policy over the last half century, during which manufacturing has continually declined in terms of its relative weight in economic activity. Is there any reason why these measures will work this time round? Part of the problem is undoubtedly that most of the proposals will take a good while to implement, and even longer for their effects to feed through into jobs and incomes. The creation of new enterprise zones looks helpful on the face of it, especially in those regions of the UK which will be hit hardest by the decline in public sector employment. But the enterprise zones will have to be managed by the public sector, and the main reservoirs of expertise on regeneration, the Regional Development Agencies, are even now being dismantled and their staff dispersed. On top of this, many experts on regional development have argued that enterprise zones merely shift jobs from one part of a depressed region to another, with little net increase in employment. Proposals for expanding apprenticeships and technical colleges, and to extend tax reliefs for innovation and business start-ups, have likewise been a staple of many past attempts to revive British industry, but will take time to have any effect.

The Chancellor’s theme of ‘reform’ seems to involve cutting the cost and complexity of both taxation and regulation. While no-one in their right mind would oppose such a worthy aim, history suggests that this will prove extremely difficult. The complexity of public policy reflects the complexity of modern society; the red tape that supposedly strangles local development proposals has evolved in response to the greater importance that citizens have come to place on their environment and amenities. The furore over the proposed high-speed railway through the Tory-voting Chilterns provides a case in point.

The global context

Overall, the success of the Chancellor’s 2011 budget depends in any case on matters outside his control, matters about which he remained very largely silent. The economic forecasts published on 23 March by the Office for Budget Responsibility reflect the widespread view that economic prospects for the UK look weaker than they did last summer: growth in 2011 is now expected to be 1.7% rather than 2.1%, while the forecast for 2012 is marginally reduced from 2.6% to 2.5%. This revision is based largely on concerns that higher-than-expected inflation will cut into household spending, and therefore a slower growth of output. In turn, that will also make for a worse fiscal outturn, due to lower tax revenues and higher welfare spending.

But the OBR also points to an improving outlook for the world economy as a whole in the next two years, which raises the questions of whether this optimism is justified, and whether the UK can participate fully in the global recovery.

How do our rulers currently view the world economic context? First, the concerns widely expressed earlier in the year over tensions between the USA and China seem to have abated; the interests of their political and business élites are too closely intertwined for either side to risk a serious rupture. Instead, the last three months have seen three different areas of concern for global capitalism.

First and foremost, turmoil in the Middle East has had both immediate and longer-term consequences. The loss of Libyan supplies has dramatically affected the price of oil, not so much because of the volume – Libya is a minor global exporter – but because the specific characteristics of Libyan oil and its regional delivery patterns had knock-on effects on other parts of the global oil market. The price rise in itself, alongside continuing global increases in food prices, has increased inflationary pressures, the UK being a case in point. This affects the short-term prospects for global economic growth, by forcing consumers to cut their expenditure on other goods and services. Higher inflation has also encouraged the City to increase their pressure for a rise in the Bank of England’s lending rate: the government’s Keynesian critics argue that such a rise would reduce growth prospects still more. In the longer term, for global capitalism the emergence of stable democracies may mean that at last, economic progress in the Middle East will be commensurate with their wealth of natural resources, but the picture will remain unclear for many months, if not years.

Second, the disasters in Japan have disrupted supplies in some sectors and countries, but the overall economic impact for global business is mixed. Many economists argue that it will be positive, because reconstruction will provide business opportunities for many sectors which will stimulate their growth. But there are concerns about the fiscal health of the Japanese state, which has one of the highest domestic debt levels in the world, and about the rising tide of criticism aimed at the Japanese political class over the way the crises have been handled. In addition, the global consequences of the Fukushima nuclear disaster for nuclear energy policy have already been felt on the other side of the world in the state elections on 27 March in Germany: the CDU was roundly defeated in Baden-Württemburg, and the leader of the Greens is likely to become Minister-President.

Thirdly, the management of the sovereign debt of weaker Eurozone economies continue to be a source of uncertainty for global financial markets. The fall of the Socialist government in Portugal was the direct result of the conservative opposition’s refusal to endorse a cuts programme of Osborne proportions. The opposition instead advocate a bail-out by the EU and IMF, presumably on the grounds that Portugal’s politicians can then blame the cuts on external forces. But no-one questions the role of bond market speculators. They have developed the habit, ever since the first doubts surfaced about Greece’s financial health in late 2009, of picking on targets for their favourite practice of ‘short-selling’.

How does this work? First, they place bets that the market price of a country’s bonds will fall; then they spread rumours of impending default, hopefully leading the ratings agencies to downgrade the bonds; then the price falls and they snap up the bonds on the cheap; and finally, an external intervention restores market confidence, the bond prices rise again, and they walk off with the profits.

Despite these three potential hits to global business prospects, there is little sign that bodies such as the International Monetary Fund and the Organisation for Economic Cooperation and Development are revising downwards their optimistic forecasts of global growth. They expect the BRIC (Brazil, Russia, India and China) and other ‘emerging’ economies to continue their very rapid growth in the next 4-5 years, and the ConDems clearly hope that some of this growth will take the form of increased demand for British goods and services: hence, for example, the current high-level trade promotion trip to Mexico led by Nick Clegg.

But even if the global growth forecasts turn out to be correct, there must be concern about how UK-based businesses will fare in competing in these markets. In 2010, the economies which import from the UK increased their total imports by 10.7%, but UK exports only grew by 5.8%, so our share of those markets declined. Indeed, the OBR in its Economic and Fiscal Outlook says that

“relatively little of the recent strength in nominal spending has translated into domestic household wages or corporate profits. The majority of last year’s increase in spending was accounted for by higher spending on imports and higher taxes, generating income flows for overseas companies and the government rather than UK households or firms.” (p.51)

In other words, growth in exports did not feed into growth in domestic output and incomes, because of tax rises and higher imports! Nevertheless, the OBR still forecasts that for the next three years, we will increase our share of overseas markets. Likewise, business investment is expected to grow by an average of nearly 9% per year from 2011 to 2015, more than offsetting a steady decline in government investment.

If UK exports and business investment both meet these targets, which are very ambitious by historical standards, then George Osborne’s Plan A will certainly be judged a success - in terms of conventional economic measures of performance, and ignoring the devastating effects of the cuts on households and communities. Otherwise, he will be hard put to restore the coalition’s popularity in time for the next election.

This article first appeared in Red Pepper

Bad news and more bad news?

Hugo Radice on the UK's latest GDP figures, and how they relate to the global economic context.

On the face of it, the fall in UK national output (GDP) reported on Tuesday just adds to the mounting bad news for everyone, not least Chancellor George Osborne. Fears about a ‘double-dip’ recession, which would officially arrive if a further decline takes place in the first quarter of 2011, now look considerably more likely. Not surprisingly, most Red Pepper readers will now be concentrating their energies on the fight against the cuts. But for us as much as for employers and the Tory government, it’s important to keep a close eye on current developments in the economy. So what exactly does all the bad news add up to?

First of all, we live in a world in which the financial markets pretty much dictate the government’s policies, or at least their room for manoeuvre. Osborne’s attempt to blame the fall in GDP on the bad weather seemed to cut no ice in the City. There, the pundits and the speculators mostly concluded that the recovery had now stalled, and that the Bank of England would therefore delay the long-expected increase in its official lending rate of 0.5%.

Looking back on the growth recorded for July-September 2010, it now seems all too clear that the sudden boost to construction activity in that period owed more to a rush to complete current contracts before the spending cuts hit local authorities and government departments alike; so the sharp fall in the last quarter was as much a case of back to normal as the result of the big freeze.

In any case, last week’s unemployment figures made grim reading, back above 2½ million, with a particularly big rise in youth unemployment - and this well before the public sector cuts start hitting home in April. What is more a host of recent attitude surveys, among households as well as businesses, have suggested growing pessimism about our economic prospects and therefore a reluctance to make any big spending commitments. Add in the unexpected attack on the coalition’s lack of a growth strategy from the outgoing CBI chief Richard Lambert, and Osborne surely couldn’t maintain for much longer that shiny smile and confident air.

But although there obviously is a Plan B somewhere on his desk – to slow down the spending cuts and encourage the Bank of England to pump more cash into the banking system – the Chancellor is terrified that a change of direction would be seen by his masters (that’s the financial markets, remember, not us) as a sign of ‘weakness’.

Osborne himself has cited the International Monetary Fund’s latest update to its World Economic Outlook, issued on January 25, in support of his policies. The IMF, he said, approved of a robust approach to restoring the public finances. Well, yes, but only up to a point. The IMF update didn’t actually discuss the UK as such, and they qualified their approval of spending cuts by putting them in a wider context:

“A host of measures are needed in different countries to reduce vulnerabilities and rebalance growth in order to strengthen and sustain global growth in the years to come. In the advanced economies, the most pressing needs are to alleviate financial stress in the euro area and to push forward with needed repairs and reforms of the financial system as well as with medium-term fiscal consolidation. Such growth-enhancing policies would help address persistently high unemployment, a key challenge for these economies.” (Update, p.7)

Now the Eurozone governments have, with a lot of delays and haggling, begun to sort out the debt problems afflicting their ‘periphery’ (that is, Greece, Ireland, Portugal and Spain). They have created a Financial Stability Facility which has just successfully issued the first zone-wide Euro bond. The Chinese government in particular is keen on this development, because they want to diversify their own bond purchases away from the USA. But the markets, which as always in an uncertain recovery are particularly prone to rumours, fads and panics, are still worrying away at this issue. Oddly enough this is good news for Osborne, since problems in the Eurozone make British government bonds more attractive to investors.

However, there are two other global issues which we need to keep an eye on. The first is the one raised by the IMF, namely ‘reforms’ of the financial system. Last week (22 January) the chair of the Independent (sic) Banking Commission, Sir John Vickers, gave a lecture on the progress that the Commission is making on this. Given the often-stated views of the Governor of the Bank of England – and most academic commentators – it was hardly surprising that he highlighted the need to segregate the risky activities of ‘investment’ banking (issuing and trading financial assets of all kinds) from the activities of ‘commercial’ banking (dealing with payments and routine borrowing by households and firms).

The British Bankers’ Association spokesperson, Angela Knight, immediately announced that if new regulations were brought in that were too tough on the banks, they would up sticks and relocate abroad. Short of revolution (not a bad idea?) the way to head off this threat is to make sure that pretty much the same regulations are brought in everywhere, and especially in the USA, UK and the Eurozone. In the more than two years since the collapse of Lehman Brothers, progress on this has been painfully slow. In the USA, legislation was finally passed in July 2010 (the Dodd-Frank Act), but implementation is still being delayed, making because the banking lobby made sure that the proposals were incredibly cumbersome and riddled with contradictions. In the Eurozone, progress is also slow, partly because so many banks are massive holders of those dodgy Irish, Greek, Portuguese and Spanish government debt; so any financial squeeze on the banks threatens efforts to calm down the bond markets.

The second big issue is the tensions between China and the USA. Basically, for years there has been a dollar merry-go-round:

• ..... the US runs a big trade deficit with China, paying for the imports in dollars;
• the Chinese government then lends the dollars back to the US – mostly through buying US government bonds;
• the US government uses this money to keep taxes low, leaving households and businesses with more money to spend;
• and they spend it on Chinese imports.....

For years, US pundits have pointed out the irony of the richest and most powerful country in the world becoming financially dependent on what remains one of the poorer countries. But the vast majority of US citizens either don’t pay any attention to international affairs at all, or they just blithely assume that what Uncle Sam wants, he is entitled to get.

However, Chinese President Hu’s state visit to Washington last week brought the issue forcefully to a head. Treasury Secretary Geithner yet again called for an increase in the dollar exchange rate of the renminbi, to try to correct the trade imbalance. But the global context has changed dramatically since 2007. While the USA, as well as other major rich economies, have suffered sharp recessions and then slow jobless recoveries, China and other so-called emerging economies like India, Brazil and Russia took a smaller hit from the financial crisis, and rebounded quickly. Even Africa has in recent years experienced much faster growth than the rich countries.

This is a truly world-shaking shift. Back in the 1970s, the newly-confident post-colonial states of the Third World proposed, in the UN and other fora, a New International Economic Order. The idea was to place their development agenda at the heart of the international economic and financial order, using the leverage of their control over the supply of oil and other raw materials. At first the rich states tried to ignore these demands, so when oil prices were indeed raised sharply, they were plunged into inflation and stagnation. But from 1979, led by the UK and the USA, they took their revenge.

New economic policies of ruthless financial stringency plunged the Third World into a massive debt crisis and the ‘lost decade’ of the 1980s. Neoliberalism was unleashed across the globe, forcing debtor states to adopt policies that favoured capital (including foreign capital) over labour and private profit over state initiatives. And after the collapse of the Soviet bloc and the USSR in 1979-81, this leaner, meaner sort of capitalism became the universal norm.

The great irony is that the success of this strategy – from a capitalist point of view, that is – turned out to create formidable competitors. The Chinese and other new capitalist powers are rapidly increasing their share, not only of world consumer markets, but also of available raw materials. New Chinese, Indian and Brazilian transnationals are displacing the tired old US, Japanese and European firms. China has in recent years outstripped the World Bank as a source of so-called ‘development aid’ to Africa (as always, the ‘aid’ comes straight back to the donor in the form of orders for their goods).

In these circumstances, the power structures of global capitalism have become more and more outdated. The role of the dollar; the permanent seats on the UN security council; the inter-state bureaucracies in Geneva and New York; the voting systems in the IMF; these and countless other practices are being called into question.

For the American people, it is especially hard: that famous ‘city on a hill’ is bankrupt and crumbling, unable to be a beacon for anything except xenophobia and lax gun law. With the Tea Party Republicans on the rise, threatening everything from bombing Iran to hanging Julian Assange, there are plenty of reasons to be fearful.

Fortunately, help is at hand. For the great irony is that America’s real rulers – the corporate rich – have invested massively in the new capitalism of the East and the South. Knowing full well that the newly-confident ruling classes of those regions fully share their own ideology and objectives, they will ensure that the new American nationalism remains a matter of rhetoric alone. The dollar-go-round will not be abruptly halted.

How does all this impact upon working people in Britain? Well, it makes the outlook a bit better for exports and unemployment. But under the government’s present policies, Mervyn King told us on 25th January what to expect: declining living standards for years to come. As he said, such a long period of decline hasn’t been seen in Britain since the 1920s. As he must surely know, but didn’t say, this strikes at the heart of the political love affair of the so-called middle classes with consumerism and free-market individualism, a key element in the post-1945 political settlement.

What can the left do about it? Well, obviously fight every redundancy and every pay cut. But also, please, this time round, recognise that workers all over the world are in exactly the same situation. We are being urged to accept pay cuts so that we remain ‘competitive’, that is, put workers abroad out of a job instead. And they in turn are being told just the same thing by their own rulers. Time for an old, old slogan: workers of the world unite!

This article first appeared on the Red Pepper website

Whatever happens, the buck will stop with the Chancellor

Hugo Radice

WHEN the post-election dust settled and George Osborne moved in to the Treasury, one of his first acts was to set up the Office for Budget Responsibility (OBR).

This latest addition to the roster of economic policy institutions had been trailed in February. Osborne claimed that the Treasury had provided first Gordon Brown, and then Alistair Darling, with whatever forecasts they wanted that would support their political decisions. From now on, the Treasury's forecasts would be vetted by an independent body; as a result, the Chancellor's public credibility
would be restored.

Trailed as an innovation on a par with Gordon Brown's 1997 decision to set up an independent Monetary Policy Committee at the Bank of England, the OBR looked like a potentially useful body. Two months on, however, Osborne's plan seemed in tatters.

First of all, after a Treasury leak raised serious questions about the employment forecasts presented in the coalition's Emergency Budget, the OBR rushed out some fresh figures conveniently in time for David Cameron to head off the critics during Prime Minister's Question Time. Shortly after, it was announced that the OBR's first chief, former top Treasury adviser Sir Alan Budd, was going to resign after only three months in post. It also turned out that for all its vaunted independence, the OBR had set up shop within the Treasury, a few doors down from the Chancellor.

Was this another political fiasco, on top of the abrupt departure of David Laws, the Chief Secretary to the Treasury? Had the unexpectedly self-confident Mr Osborne shot himself in the foot? Well, not really. It turned out that Mr Budd had all along only intended to head the OBR for three months in order to get it established. As for the physical location of the OBR, one might as well argue that the Chancellor's residence at 11 Downing Street meant that the Prime Minister could easily keep him on a tight leash: try telling that to Tony Blair.

However, the establishment of the OBR does raise some important issues about how economic policy is made in a democracy. Back in 1944, the Polish economist Michal Kalecki famously predicted that as government spending became more and more important, governments would be tempted to engineer a boom towards the end of their term of office, in order to get re-elected. Once back in power, they would then slam on the brakes and restore the fiscal balance, only to start spending again as the next election loomed.

He called this "the political trade cycle". The post-war experience of stop-go economics in Britain seemed to bear out his prediction.

To avoid this political manipulation, a fiscal authority independent of the government of the day might seem to be a good idea, but it would make ministerial government completely pointless. Fair enough in a dictatorship, but it is hard to see how such a move would be acceptable to the political élite, let alone a democratically-inclined public.

Given this, Osborne's OBR is an attempt to shore up the Chancellor's credibility by at least ensuring that the taxation and spending commitments are based on rock-solid forecasts of where the economy is going. And here we come to the real problem: rock-solid forecasts do not and cannot exist in a market economy. As we know only too well from the credit crunch and the downturn which followed, the behaviour of financiers, businessmen and other economic actors – even politicians – is fundamentally unpredictable: they are human beings after all, not machines. This means that economic forecasts depend heavily on what we might call educated guesswork.

So what about the OBR's forecasts? They expect economic growth of 1.2 per cent this year and 2.6 per cent to 2.8 per cent thereafter, despite falling public spending, notably a halving of public investment in areas like roads and schools. A rapid and sustained private sector recovery will, they say, reduce the number of unemployed people claiming benefits, from 1.6 million last year to 1.2 million by 2014. Such a recovery in private sector activity has never been seen before after a major economic downturn.

But in addition, the OBR expects that the profits of the financial sector will grow at nearly 9 per cent this year and 6 per cent a year thereafter, giving a big boost to tax receipts. It is very hard to see how this can be reconciled with the need to rein in the City's more speculative activities, as well as building up the financial reserves of the banks in order to avoid a repeat of the credit crisis.

The real story about the OBR, therefore, is not its independence, but whether its forecasts turn out to be accurate. In any case, however things turn out, the buck will always stop with the Chancellor.

• This article first appeared in the Yorkshire Post
• For more by Hugo Radice, see his University of Leeds webpage