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

David Cameron speaks at a press conference following an EU summit in Brussels. Photograph: Getty Images.
Show Hide image

Cameron's EU concessions show that he wants to avoid an illegitimate victory

The Prime Minister is confident of winning but doesn't want the result to be open to challenge. 

Jeremy Corbyn's remarkable surge has distracted attention from what will be the biggest political event of the next 18 months: the EU referendum. But as the new political season begins, it is returning to prominence. In quick succession, two significant changes have been made to the vote, which must be held before the end of 2017 and which most expect next year.

When the Electoral Commission yesterday recommended that the question be changed from “Should the United Kingdom remain a member of the European Union?” ("Yes"/"No") to "Should the United Kingdom remain a member of the European Union or leave the European Union?" ("Leave"/"Remain"), No.10 immediately gave way. The Commission had warned that "Whilst voters understood the question in the Bill some campaigners and members of the public feel the wording is not balanced and there was a perception of bias." 

Today, the government will table amendments which reverse its previous refusal to impose a period of "purdah" during the referendum. This would have allowed government departments to continue to publish promotional material relating to the EU throughout the voting period. But after a rebellion by 27 Tory eurosceptics (only Labour's abstention prevented a defeat), ministers have agreed to impose neutrality (with some exemptions for essential business). No taxpayers' money will be spent on ads or mailshots that cast the EU in a positive light. The public accounts commitee had warned that the reverse position would "cast a shadow of doubt over the propriety" of the referendum.

Both changes, then, have one thing in common: David Cameron's desire for the result to be seen as legitimate and unquestionable. The Prime Minister is confident of winning the vote but recognises the danger that his opponents could frame this outcome as "rigged" or "stitched-up". By acceding to their demands, he has made it far harder for them to do so. More concessions are likely to follow. Cameron has yet to agree to allow Conservative ministers to campaign against EU membership (as Harold Wilson did in 1975). Most Tory MPs, however, expect him to do so. He will be mocked and derided as "weak" for doing so. But if the PM can secure a lasting settlement, one that is regarded as legitimate and definitive, it will be more than worth it. 

George Eaton is political editor of the New Statesman.