Eurozone soap opera reveals a damaged relationship with markets

Democracies need to get some self-respect.

We’re all familiar with the story. Girl meets glamorous guy with flashy car and nice teeth who promises her the world. He screws around, and when she gets angry, he threatens to leave. But by now our girl is so dependent on the guy she’s desperate for him to stay. Sobbing, she throws herself at his feet and promises she’ll do better.

This soap opera can help us understand what’s playing out in the eurozone.

States fell in love with markets, and they let us down. Financial deals we depended on turned out to be phonies. When we talk about introducing extra regulation to prevent this happening again, financial institutions threaten to leave our borders and seek pleasure elsewhere.

Like the girl, democracies are now the ones offering to change. At the centre of the emerging eurozone plan is a call for fiscal integration, whereby states promise to abide by strict spending limits in return for bailout funds. But the underlying causes of under-regulation and overconcentration of market power remain unsolved. Our relationship with the City still suffers from an imbalance of power and we’re still at risk.

We need to be more honest about what triggered the current European crisis. Apart from Greece, the problem was not unsustainable levels of public spending. It was banks handing out risky loans and stockpiling bad debts. Spain is a classic example. The country ran a balanced budget until 2008, when it was forced to pile horrific property debts onto the public balance sheet to bail out irresponsible lenders. As this fantastic BBC graph shows  (see total debt graph), this is a common pattern for most countries.

I don’t want to abdicate responsibility. We all took on those loans from the banks when we shouldn’t. We all enjoyed that party in a bubble and lived a false dream when we should have kept a tighter eye on reality. Britain should have been in surplus from 2004-2008. The girl in our story should have been brave enough to see the writing on the wall. We should have taken action earlier.

But we are where we are. All we can do is change our behaviour now. It’s understandable that Merkel wants fiscal rules on states to make sure they don’t blow German money. But without addressing the banks too, you’re setting up a terrible incentive problem. Everyone knows if the girl gets back with the guy without punishing him for cheating, he’s going to do it again. In fact now he knows he can get away with it, he’s more likely to.

Sadly in the middle of the crisis, no country feels strong enough to limit financial services, whether it improves stability or not. In a desperate attempt to grow, governments are happy for banks to throw money at anything. Any bubble is better than stagnation. We don’t have the self-esteem or self-confidence to challenge our irresponsible partner and build a better relationship.

Although there is some talk of banking union, this is more about sharing bad debts than introducing stronger lending conditions. Although some like former F&C chairman Robert Jenkins says this may change, at the moment the assumption that “liquidity is free and will and will be freely available” continues to hold.

Britain is one of the greatest sufferers of self-delusion. Osborne is massively opposed to the transaction tax – the one small move Europe might be prepared to take to challenge the City – and he used his recent Mansion House speech to announce that the state will be underwriting risky loans. He’s pulled back on the already watered down proposals of the Vickers Commission, reducing the required amount of back up deposits to three per cent when columnists like Martin Wolf at the FT are calling for ten per cent.

You don’t have to be an agony aunt to figure out what comes next. Without a change in this poisonous relationship, we’re setting ourselves up for another fall. Our girl needs to rediscover her self-respect. Get it wrong, and it will hurt. But get it right, and democracies and markets have a chance to build a new, more honest and productive future together.

Democracies and markets could still find a more stable future together. Photograph: Getty Images

Rowenna Davis is Labour PPC for Southampton Itchen and a councillor for Peckham

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How the shadow cabinet forced Jeremy Corbyn not to change Labour policy on Syria air strikes

Frontbenchers made it clear that they "would not leave the room" until the leader backed down. 

Jeremy Corbyn had been forced to back down once before the start of today's shadow cabinet meeting on Syria, offering Labour MPs a free vote on air strikes against Isis. By the end of the two-hour gathering, he had backed down twice.

At the start of the meeting, Corbyn's office briefed the Guardian that while a free would be held, party policy would be changed to oppose military action - an attempt to claim partial victory. But shadow cabinet members, led by Andy Burnham, argued that this was "unacceptable" and an attempt to divide MPs from members. Burnham, who is not persuaded by the case for air strikes, warned that colleagues who voted against the party's proposed position would become targets for abuse, undermining the principle of a free vote.

Jon Ashworth, the shadow minister without portfolio and NEC member, said that Labour's policy remained the motion passed by this year's conference, which was open to competing interpretations (though most believe the tests it set for military action have been met). Party policy could not be changed without going through a similarly formal process, he argued. In advance of the meeting, Labour released a poll of members (based on an "initial sample" of 1,900) showing that 75 per cent opposed intervention. 

When Corbyn's team suggested that the issue be resolved after the meeting, those present made it clear that they "would not leave the room" until the Labour leader had backed down. By the end, only Corbyn ally Diane Abbott argued that party policy should be changed to oppose military action. John McDonnell, who has long argued for a free vote, took a more "conciliatory" approach, I'm told. It was when Hilary Benn said that he would be prepared to speak from the backbenches in the Syria debate, in order to avoid opposing party policy, that Corbyn realised he would have to give way. The Labour leader and the shadow foreign secretary will now advocate opposing positions from the frontbench when MPs meet, with Corbyn opening and Benn closing. 

The meeting had begun with members, including some who reject military action, complaining about the "discorteous" and "deplorable" manner in which the issue had been handled. As I reported last week, there was outrage when Corbyn wrote to MPs opposing air strikes without first informing the shadow cabinet (I'm told that my account of that meeting was also raised). There was anger today when, at 2:07pm, seven minutes after the meeting began, some members received an update on their phones from the Guardian revealing that a free vote would be held but that party policy would be changed to oppose military action. This "farcical moment", in the words of one present (Corbyn is said to have been unaware of the briefing), only hardened shadow cabinet members' resolve to force their leader to back down - and he did. 

In a statement released following the meeting, a Corbyn spokesperson confirmed that a free vote would be held but made no reference to party policy: 

"Today's Shadow Cabinet agreed to back Jeremy Corbyn's recommendation of a free vote on the Government's proposal to authorise UK bombing in Syria.   

"The Shadow Cabinet decided to support the call for David Cameron to step back from the rush to war and hold a full two day debate in the House of Commons on such a crucial national decision.  

"Shadow Cabinet members agreed to call David Cameron to account on the unanswered questions raised by his case for bombing: including how it would accelerate a negotiated settlement of the Syrian civil war; what ground troops would take territory evacuated by ISIS; military co-ordination and strategy; the refugee crisis and the imperative to cut-off of supplies to ISIS."

George Eaton is political editor of the New Statesman.