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

Photo: Getty
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Who will win the Copeland by-election?

Labour face a tricky task in holding onto the seat. 

What’s the Copeland by-election about? That’s the question that will decide who wins it.

The Conservatives want it to be about the nuclear industry, which is the seat’s biggest employer, and Jeremy Corbyn’s long history of opposition to nuclear power.

Labour want it to be about the difficulties of the NHS in Cumbria in general and the future of West Cumberland Hospital in particular.

Who’s winning? Neither party is confident of victory but both sides think it will be close. That Theresa May has visited is a sign of the confidence in Conservative headquarters that, win or lose, Labour will not increase its majority from the six-point lead it held over the Conservatives in May 2015. (It’s always more instructive to talk about vote share rather than raw numbers, in by-elections in particular.)

But her visit may have been counterproductive. Yes, she is the most popular politician in Britain according to all the polls, but in visiting she has added fuel to the fire of Labour’s message that the Conservatives are keeping an anxious eye on the outcome.

Labour strategists feared that “the oxygen” would come out of the campaign if May used her visit to offer a guarantee about West Cumberland Hospital. Instead, she refused to answer, merely hyping up the issue further.

The party is nervous that opposition to Corbyn is going to supress turnout among their voters, but on the Conservative side, there is considerable irritation that May’s visit has made their task harder, too.

Voters know the difference between a by-election and a general election and my hunch is that people will get they can have a free hit on the health question without risking the future of the nuclear factory. That Corbyn has U-Turned on nuclear power only helps.

I said last week that if I knew what the local paper would look like between now and then I would be able to call the outcome. Today the West Cumbria News & Star leads with Downing Street’s refusal to answer questions about West Cumberland Hospital. All the signs favour Labour. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.