How austerity and the financial sector broke Portugal

It did everything the fiscal hawks wanted – and still had to ask for a bailout.

After many agonising weeks and months, Portugal has become the latest country to concede defeat to the financial markets and request an EU/IMF emergency loan. Despite ostensibly doing as the markets told them and passing three austerity budgets, the Portuguese continued to have their credit rating cut. The cost of borrowing is now so high that they were left with little alternative.

Portugal's tragedy is that its government did what it was told and still got punished. It slashed public spending, wages and pensions to appease the financial markets and the austerity hawks who dominate European politics. Furthermore, the need for a bailout became inevitable when the minority Socialist government was brought down by the refusal of the conservative and other minor parties to support its latest austerity budget.

Portuguese conservatives have since taken to the airwaves to decry the failure of the Socialist government, conveniently ignoring the fact that an EU/IMF bailout will impose far more stringent cuts and a high interest rate on any loan it grants. This disgracefully cowardly move by the EU Commission president José Manuel Barosso's own party deserves to bring punishment for the party by the Portuguese electorate when elections are held, presumably after the bailout is finally agreed.

With characteristic bravado, George Osborne used Portugal's misery as proof the Britain would be in similar danger if his austerity plans were not followed. The sheer dishonesty of this has already been exposed by the likes of George Eaton and Will Straw.

The strength of UK government bonds is envied the world over. While Portugal was struggling to get even six-month loans at below 5 per cent interest rates, Britain is charged around 3.4 per cent on bonds that mature every 14 years.

In fact, however, the case of Portugal shows that austerity simply is not working. On the BBC's Question Time on 7 April, the Culture Secretary, Jeremy Hunt, and the Lib Dem MP Jo Swinson trotted out the coalition line that the coalition's front-loaded spending cuts are the only way to cut the Budget deficit. This is what the markets have told Portugal, Spain, Ireland and others to do. It has not worked. On the contrary, all have suffered a series of credit rating downgrades. These countries, like Britain, are not growing and so their deficits will remain large. It is no coincidence that Britain's public-sector borrowing requirement has been revised up several times by the Office for Budgetary Responsibility.

What the Portuguese case has also shown definitively is that elected politicians, particularly in smaller countries, are now completely powerless in the face of financial capital and the credit rating agencies. If the past few years have proved anything, it is that there is one rule for big banks and another for countries. Anyone who doubts this should ask why European banks continue to be allowed access to unlimited loans at 1 per cent interest rates from the European Central Bank, while the likes of Greece, Spain, Ireland and Portugal have had their borrowing costs soar in some cases to 10 per cent.

Indeed, it is little reported by the media what big banks have done with these blank cheques. As well as using them to cover the black holes in their balance sheets caused by the sub-prime crisis, they have pumped billions into buying up short-term government debt at high interest rates. In doing so, they've made a fortune, and because of the EU's "bailout" fund, they are able to keep doing so in the knowledge that the EU will not allow any of its member states to default.

The only conclusion to be drawn is that the financial sector is too powerful and too big to fail, and has offloaded its risks on to individual countries and the EU. This is a profound threat to democracy.

Now the focus of the financial markets, scenting blood in the water, will most likely move to Spain. Unlike Greece and Ireland, Spain has sound public finances and is several years into a concerted plan to reduce government borrowing. Its systemic problem is its unemployment rate, which is the highest in the EU and has reached 40 per cent among 18-to-25-year-olds. Yet Spain is not the only country in the EU with a systemic problem. Italy has high unemployment and a huge government debt-to-GDP ratio.

The challenge for the left across Europe is to use this ammunition to win the debate on how to reduce budget deficits and show the public that we have yet to tame the financial sector.

In his New Statesman interview this week, Nick Clegg talked of how the Liberal Democrats are working to "rebalance the British economy". They are doing no such thing. In fact, the financial sector has returned to business as usual. Flush with cheap money that it has ploughed into offering small government loans at eye-watering expensive prices, it is loading enormous debts on to millions of Europeans and their children.

There are two very obvious lessons from Europe's debt crisis. One is that austerity and the obsession of deficit fetishists is not saving indebted countries. The second is that the financial sector has found a new way to make easy money and hold countries to ransom at the same time. If these lessons are not learned, and fast, Europe's debt tower will eventually collapse.

Benjamin Fox is political adviser to the Socialist and Democrat group in the European Parliament.

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.