Cycling through Croatia

...and discovering the "Balkan quagmire"

I cycle with the world economy stuck in my head. The total value of global derivatives, an insurance market for things that may or may not come to pass, is twenty times bigger than all global output. About 1 per cent of all the world's shares are owned by Norway's sovereign wealth fund. A two pence coin is made with more than two pence worth of copper. In the early 90s, the Tokyo real estate market was worth five times the world economy. The temperature has been up around forty all down the coast of Croatia, punishing heat, like riding through a hairdrier. I cycle down the last hill of a deserted stretch, into the town of Karlobag. Boats are bobbing at anchor, a quay beside deep water. Take off your shoes and shirt. Jump. And the world economy and that too too solid flesh it melts away into the cool waters of the Adriatic.

Croatia is like an escape within the escape, an EU stopgap. Next year that changes, Croatian accession comes in July 2013, a recent referendum settled any last minute jitters that the Croats might have been having. With the unfortunate arrogance that persists in some western Europeans, one journalist spoke of the referendum as a choice between progress or Croatia as "Balkan quagmire". As I ride south the heat increases and the figs ripen on the trees that line this coast, you can smell pigs roasting on spits, you break from the sun by jumping into the clear, cobalt waters of that ever-present sea. If Croatia is a quagmire... well... then quagmires are all right by me.

I rode here five years ago... it was just as perfect then, the difference now is that idiots like me went back to the UK and shot their mouth off about how beautiful Croatia was. EU or otherwise, Europe has arrived in Croatia. German and Dutch supermarkets have appeared in out-of-town retail complexes, the bank of Split has been absorbed by France's Societe Generale group, each major city has its own wireless network. Western Europeans - from Brits to Italians to Germans and Swiss - are everywhere. There are billboards at the roadsides - "In emergency - dial 112" - written in English. On this coast of road trips there must be a lot of cars, campfires and drinking sessions that go out of control with the words "what number is 999 in Croatia?" I watch tourists take photos of their meals as the plate is set down, like a prayer of grace for the digital age, uploaded to Facebook after they finish eating. A Croatian waiter tells me Croats are reserved people, intolerant of tourists... he jokes that people would only be happy if tourists arrived at the border, handed over €500... and went home.

The attitude to the EU is similarly cool. 65 per cent of Croats voted 'Yes' to membership, but only 40 per cent of people bothered to vote... a clear sign that voter apathy is not only the prevail of affluenza societies in the west. I ask everyone their thoughts... 'no opinion', 'don't care', 'doesn't concern me' . A fifteen year old girl serves me a sandwich at her family's kiosk. She tells me she is "too young for things like that", and assuming it outlives her, will now lead the rest of her life inside the EU. It's a striking contrast that up ahead waits Greece, where frustrated people still just about believe life outside the EU will be worse. Here in Croatia the people are told life inside the EU will be better... and are skeptical. Whatever the circumstances, everyday folk generally tend to doubt that change will be in their best interests. Back in Trieste I met an Italian-Croat who bemoaned that EU membership means his family will have to pay tax on the Croatian home of his deceased grandfather. He was unsure of details, but to me it sounded like the change was more likely caused by the new tax regime of Italy's Mario Monti. His feelings underlined two pertinent EU trends. People are unsure how the EU actually works, but will still blame it for making their lives worse. Croatian nationalists question the wisdom of signing over their autonomy to Brussels, when two decades ago Croats were dying to preserve their independence. Try telling a nationalist that domestic culture is more alive in a euro-toting French boulangerie or Italian cafe than on most pound sterling high streets of clone town Britain.

Not everyone agrees with the nationalists. Elder Croats with keen memories of Yugoslavia and its wars seem to take a pride in being admitted to the European club. Along the borders, Albania, Serbia and Montenegro are a long way from any meaningful chance of accession, and for many Croats there is no difficulty in choosing between association with their neighbours or Europe. Croats are not losing any sleep over which side of 7 per cent Spanish bond yields go... in the Balkans a crisis is not measured in basis points. EU leaders will be relieved that the Croats voted accordingly, Croatian accession will maintain the idea of the EU as a vision of the future worth belonging to, a political project with the longevity to outlast the market's whims. If 4 million people in the Balkans had been accepted to the EU, only to decide that French and Germans had nothing to offer them... as snubs go, it would've been pretty monumental.

The question becomes more complex if you move away from the understanding that the EU equates to progress. At a roadside near the Bosnian border I speak with an economics student from Zagreb, selling watermelons for his holiday. He points to his grandmother's field and slaps a melon... "that is where this comes from, but..." and he drills a finger on his forehead, "Balkans are crazy... we import melons from Greece! We could grow everything here... but instead we import!" For him, the EU means finance given to Croatia to grow food with western corporations who will then profit from exporting the food whilst Croatian taxpayers repay the loans. "Croatia... will be like a field for Europe... just a field."

If global finance offers little hope for Croatia, a barman suggests that at least the difficulties of life under  capitalism are helping everyone get along better. The markets will be the new strongman, holding different ethnicities together instead of a Tito. In my cycle down the coast there is one fifty mile stretch more important to me than the others. I leave the tourist road and head inland towards Benkovac. Five years ago I went that way as a wrong turning, found roadside fields marked throughout with signs warning of landmines. This year I go there out of curiosity, and though you can still see the houses that were peppered with gunfire, I find only one remaining sign post. It's been uprooted, and is rusting in the long grass. The fields have been cleared and ploughed, black vines are twisting from out of the earth, tiny bunches of grapes trickling downwards through the fullest green of leaves shot through with sunlight. I try to avoid sentimentality... and yet... it's really nice to see vines buried in earth that once held land mines.

I leave Croatia across its southern border, riding into a 48 hour stint that will take me to Greece via Montenegro, Albania and Macedonia. In informal world politics, the best way to judge relations between two countries are the roads that connect them... nobody improves passage to places nobody wants to go. As I head inland, away from the coast, the road into Montenegro is being rebuilt and resurfaced. Progress has definitely been made in the Balkans... it's a poke in the eye for Clash of Civilisations, a timely reminder for Europeans that to achieve its potential a nation has to start picking the right fights, not revisiting old ones.

Croatia. Photograph: Julian Sayarer

Julian Sayarer is cycling from London to Istanbul, he blogs at thisisnotforcharity.com, follow him on Twitter @julian_sayarer.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?