Are the ratings agencies doing us a favour?

At every stage of this crisis, action has been forced on politicians by the markets.

James Carville, Bill Clinton's pugnacious chief of staff, once said that, if he were to be re-incarnated, he would like to come back as "the bond market because then you can threaten anyone". With Europe's capitals still reeling from the decision by Standard & Poor's to downgrade the credit rating of nine eurozone countries, he might consider reincarnation as a rating agency instead.

In the European Parliament last week, German conservative Elmar Brok accused S&P of having "declared a currency war against us" and was widely applauded. Many rightly question the legitimacy of the power wielded by the big three rating agencies -- S&P, Moody's and Fitch -- which can effectively hold countries to ransom particularly as they were responsible for awarding AAA ratings to the asset backed securities made up of sub-prime mortgage loans which caused the 2008-9 crisis. Such is the herd behaviour of financial markets that a decision to downgrade a country's rating is taken as gospel truth, with the result that a nation's borrowing costs go up, putting a further squeeze on their public finances.

S&P's bombshell was merely the latest overreaction by the markets to the sovereign debt crisis -- Spain and Cyprus suffered a two notch hit despite having, like France, a far better debt and deficit situation than the UK - but it scarcely came as a surprise. Although there was cautious optimism early in the month when Spain and Italy managed successful bond auctions with the interest rate falling to its lowest level since last summer, rumours about a mass downgrade by the ratings agency were doing the rounds before Christmas.

But while "Black Friday" moved the condition of the eurozone -- as well as the rest of the EU including the UK -- from serious to critical, the political symbolism of S&P's move was as important as its implications for Europe's economies.

This is because while it is right to question the illegitimate power of the rating agencies, and their role in creating and then deepening the current crisis, it is the failure of Europe's supine political leaders that has ceded control over economic policy from democratically elected governments to rating agencies and the bond markets. For all their protestations about US rating agencies declaring war on the euro the reality is that Brok's boss, Angela Merkel's pursuit of a masochistic and fundamentally unworkable monetary policy is, in large part, responsible for S&P's decision.

In fact -- though it pains me to say it -- the rating agencies are actually doing us a favour. At every stage of this crisis action has been forced on politicians. For example, in early 2010 Merkel and most other EU leaders promised that there would never be an EU bail-out fund. Then market pressure meant that, in May 2010, the European Financial Stability Facility was created. Then they said that there would never be a permanent bail-out fund. In spring 2011 the EU treaties were amended to set up the European Stability Mechanism. Apparently there would never be a hair-cut on Greek debt. The December EU summit offered a 50 per cent right-down of Greek debt which is now being concluded between the Greeks and bond-holders. We have gradually edged towards sensible crisis-resolution not thanks to politicians but because of the financial markets.

Moreover, before we rush to condemn the markets, we should also remember that the departure (finally) of Italy's oft-disgraced but indefatigable leader Silvio Berlusconi was brought about not by one of his many scandals but because yields on Italian debt were spiralling out of control. To misquote the Sun: It was the bond market wot done it.

We are, of course, treading on very dangerous ground when unaccountable markets or neighbouring governments are able to force out elected governments but is there some truth to the idea that the debt crisis is too important to be left to politicians?

Last October Luxembourg's Prime Minister Jean Claude-Juncker came out with the phrase that defines the political response to the crisis thus far. "We all know what to do, we just don't know how to get re-elected after we've done it," he said. It's a remark that is both infuriating, but accurate. I suspect that even Merkel and Sarkozy know that their beloved fiscal compact treaty, with its rigid budget discipline, is at best a diversion and at worst a complete waste of time. The prospect of either of them admitting this before their respective elections is extremely remote. The real solution for the euro area -- which will inevitably involve a large dose of money-printing by the ECB and common Eurobonds alongside stricter rules on budgetary discipline, and possibly the exit of several countries -- seems to be too frightening a prospect for politicians to dare mention it.

But Europe's political leaders need to decide, and quickly, if they have the balls to take the difficult and unpopular decisions that are necessary if the euro is to survive and the European economy to recover. If they choose inertia then the rating agencies and bond markets will continue to decide for them. And as for those who worry about Juncker's dictum, the demise of Berlusconi should carry a salutary warning: the markets don't care if you won the last election, if you can't govern, you're a goner.

Ben Fox is chairman of GMB Brussels and political adviser to the Socialist vice-president of economic and monetary affairs.

David Young
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The Tories are the zombie party: with an ageing, falling membership, still they stagger on to victory

One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.”

All football clubs have “ultras” – and, increasingly, political parties do, too: although, in the case of political parties, their loudest and angriest supporters are mostly found on the internet. The SNP got there first: in the early days of email, journalists at the Scotsman used to receive bilious missives complaining about its coverage – or, on occasion, lack of coverage – of what the Scottish National Party was up to. The rest soon followed, with Ukip, the Labour Party and even the crushed Liberal Democrats now boasting a furious electronic horde.

The exception is the Conservative Party. Britain’s table-topping team might have its first majority in 18 years and is widely expected in Westminster to remain in power for another decade. But it doesn’t have any fans. The party’s conference in Manchester, like Labour’s in Brighton, will be full to bursting. But where the Labour shindig is chock-full of members, trade unionists and hangers-on from the charitable sector, the Conservative gathering is a more corporate affair: at the fringes I attended last year, lobbyists outnumbered members by four to one. At one, the journalist Peter Oborne demanded to know how many people in the room were party members. It was standing room only – but just four people put their hands up.

During Grant Shapps’s stint at Conservative headquarters, serious attempts were made to revive membership. Shapps, a figure who is underrated because of his online blunders, and his co-chair Andrew Feldman were able to reverse some of the decline, but they were running just to stand still. Some of the biggest increases in membership came in urban centres where the Tories are not in contention to win a seat.

All this made the 2015 election win the triumph of a husk. A party with a membership in long-term and perhaps irreversible decline, which in many seats had no activists at all, delivered crushing defeats to its opponents across England and Wales.

Like José Mourinho’s sides, which, he once boasted, won “without the ball”, the Conservatives won without members. In Cumbria the party had no ground campaign and two paper candidates. But letters written by the Defence Secretary, Michael Fallon, were posted to every household where someone was employed making Trident submarines, warning that their jobs would be under threat under a Labour government. This helped the Tories come close to taking out both Labour MPs, John Woodcock in Barrow and Furness and Jamie Reed in Copeland. It was no small feat: Labour has held Barrow since 1992 and has won Copeland at every election it has fought.

The Tories have become the zombies of British politics: still moving though dead from the neck down. And not only moving, but thriving. One Labour MP in Brighton spotted a baby in a red Babygro and said to me: “There’s our next [Labour] prime minister.” His Conservative counterparts also believe that their rivals are out of power for at least a decade.

Yet there are more threats to the zombie Tories than commonly believed. The European referendum will cause endless trouble for their whips over the coming years. And for all there’s a spring in the Conservative step at the moment, the party has a majority of only 12 in the Commons. Parliamentary defeats could easily become commonplace. But now that Labour has elected Jeremy Corbyn – either a more consensual or a more chaotic leader than his predecessors, depending on your perspective – division within parties will become a feature, rather than a quirk, at Westminster. There will be “splits” aplenty on both sides of the House.

The bigger threat to Tory hegemony is the spending cuts to come, and the still vulnerable state of the British economy. In the last parliament, George Osborne’s cuts fell predominantly on the poorest and those working in the public sector. They were accompanied by an extravagant outlay to affluent retirees. As my colleague Helen Lewis wrote last week, over the next five years, cuts will fall on the sharp-elbowed middle classes, not just the vulnerable. Reductions in tax credits, so popular among voters in the abstract, may prove just as toxic as the poll tax and the abolition of the 10p bottom income-tax rate – both of which were popular until they were actually implemented.

Added to that, the British economy has what the economist Stephen King calls “the Titanic problem”: a surplus of icebergs, a deficit of lifeboats. Many of the levers used by Gordon Brown and Mervyn King in the last recession are not available to David Cameron and the chief of the Bank of England, Mark Carney: debt-funded fiscal stimulus is off the table because the public finances are already in the red. Interest rates are already at rock bottom.

Yet against that grim backdrop, the Conservatives retain the two trump cards that allowed them to win in May: questions about Labour’s economic competence, and the personal allure of David Cameron. The public is still convinced that the cuts are the result of “the mess” left by Labour, however unfair that charge may be. If a second crisis strikes, it could still be the Tories who feel the benefit, if they can convince voters that the poor state of the finances is still the result of New Labour excess rather than Cameroon failure.

As for Cameron, in 2015 it was his lead over Ed Miliband as Britons’ preferred prime minister that helped the Conservatives over the line. This time, it is his withdrawal from politics which could hand the Tories a victory even if the economy tanks or cuts become widely unpopular. He could absorb the hatred for the failures and the U-turns, and then hand over to a fresher face. Nicky Morgan or a Sajid Javid, say, could yet repeat John Major’s trick in 1992, breathing life into a seemingly doomed Conservative project. For Labour, the Tory zombie remains frustratingly lively. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide