The personal debt bubble is fit to burst

We're almost in Wongaland already, writes Carl Packman.

Back in March 2012 the Office for Budget Responsibility (OBR) at least entertained the notion that economic growth would come from places other than an increase in household debt. Exports, investment, the lot. Today it doesn't bother, the consumer will have to go this alone, even with bank lending squeezed and wages left wanting. 

Even George Osborne, during his Mais Lecture in February 2010, offered us this gem: “The overhang of private debt in our banking system and our households weigh heavy on future prosperity”. How right he was, but his response was to lead us down the “road to Wongaland”. 

Despite the optimism of low interest rates, at least until unemployment rates are sorted out, critics have pointed out that Mark Carney's calls are really just a return to days where recovery will be fuelled by consumption and rising debt – as if we need more of that. 

Sure, people are returning to the shops, no doubt spurred on by the shiny weather, which is great for the economy, but what is the real upshot? Wages are falling in real terms and household debt is 153 per cent of GDP. On average each household in the UK is bagged with nearly £8000 in unsecured debt. Is the hope that we will get into more debt the only tool in the bag for economic growth?

Of course we should remind ourselves who the real winners are. Last year PwC said that credit cards were suffering a “mid-life” crisis as borrowers were using them less and taking out unsecured loans at a much faster rate. We're being told to spend more but we cannot afford to? The winners: who else but payday lenders.

In 2009, during the economic crisis, the payday lending industry was worth £900m. A mere four years later and the industry is worth over £2bn. One well-known player in the industry, The Money Shop, had 34 staff and a turnover of £2.9m in 1998, today with 2,300 staff their income is £172.3m. 

Not long ago the economist Tim Harford tried to allay our fears and said that compared to other forms of consumer credit lending the payday lending industry was relatively small and not to be worried about. But their rapid growth from an industry worth a measly £100m in 2004 should be better noted.

The industry is small in comparison but is growing at a far more accelerated rate than its mainstream counterparts. CityWire recently estimated that more than half (52 per cent) of new consumer credit loans are being made by "other" banking institutions and non-banks including non-standard mortgage lenders and sub-prime lenders such as pawnbrokers and payday lenders. 

And so it is, more of us are relying on high cost credit from payday lenders, personal debt profiles will grow dangerously large, less money will be circulated on the high streets, consumers will be less able to shield themselves from unseen financial shocks and the whole debt cycle starts again.

As the CityWire report notes, the OBR anticipated that a credit boom would sustain an economic recovery. But that boom is being held by fringe financial institutions such as payday lenders who are expensive and suck more money out of the economy than they put in. In turn the tune of increased payday lending, rather than being the silver bullet needed for economic growth, will be its death knell. 

If the economy is allowed to continue to run like this, with Britons being some of the most indebted in the world only able to supplement decreasing real wages and the rising cost of living with high cost credit, then a personal debt bubble will eventually burst. Osbornomics needs to change direction, fast. All the warning signs are there.

Cash Loans. Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

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Who is the EU's chief Brexit negotiator Michel Barnier?

The former French foreign minister has shown signs that he will play hardball in negotiations.

The European Commission’s chief Brexit negotiator today set an October 2018 deadline for the terms of Britain’s divorce from the European Union to be agreed. Michel Barnier gave his first press conference since being appointed to head up what will be tough talks between the EU and UK.

Speaking in Brussels, he warned that UK-EU relations had entered “uncharted waters”. He used the conference to effectively shorten the time period for negotiations under Article 50 of the Lisbon Treaty, the legal process to take Britain out of the EU. The article sets out a two year period for a country to leave the bloc.

But Barnier, 65, warned that the period of actual negotiations would be shorter than two years and there would be less than 18 months to agree Brexit.  If the terms were set in October 2018, there would be five months for the European Parliament, European Council and UK Parliament to approve the deal before a March 2019 Brexit.

But who is the urbane Frenchman who was handpicked by Commission President Jean-Claude Juncker to steer the talks?

A centre-right career politician, Barnier is a member of the pan-EU European People’s Party, like Juncker and German Chancellor Angela Merkel.

A committed European and architect of closer eurozone banking integration, Barnier rose to prominence after being elected aged just 27 to the French National Assembly.  He is notorious in Brussels for his repeated references to the 1992 Winter Olympics he organised in Albertville with triple Olympic ski champion Jean-Claude Killy.

He first joined the French cabinet in 1993 as minister of the environment. In 1995, Jacques Chirac made him Secretary of State for European Affairs, teeing up a long and close relationship with Brussels.

Barnier has twice served as France’s European Commissioner, under the administrations of Romano Prodi and José Manuel BarrosoMost recently he was serving as an unpaid special advisor on European Defence Policy to Juncker until the former prime minister of Luxembourg made him Brexit boss.“I wanted an experienced politician for this difficult job,” Juncker said at the time of Barnier, who has supported moves towards an EU army.

 

Barnier and the Brits

Barnier’s appointment was controversial. Under Barroso, he was Internal Market commissioner. Responsible for financial services legislation at the height of the crisis, he clashed with the City of London.

During this period he was memorably described as a man who, in a hall of mirrors, would stop and check his reflection in every one.

Although his battles with London’s bankers were often exaggerated, the choice of Barnier was described as an “act of war” by some British journalists and was greeted with undisguised glee by Brussels europhiles.

Barnier moved to calm those fears today. At the press conference, he said, “I was 20 years old, a very long time ago, when I voted for the first time and it was in the French referendum on the accession of the UK to the EU.

“That time I campaigned for a yes vote. And I still think today that I made right choice.”

But Barnier, seen by some as aloof and arrogant, also showed a mischievous side.  It was reported during Theresa May’s first visit to Brussels as prime minister that he was demanding that all the Brexit talks be conducted in French.

While Barnier does speak English, he is far more comfortable talking in his native French. But the story, since denied, was seen as a snub to the notoriously monolingual Brits.

The long lens photo of a British Brexit strategy note that warned the EU team was “very French” may also have been on his mind as he took the podium in Brussels today.

Barnier asked, “In French or in English?” to laughter from the press.

He switched between English and French in his opening remarks but only answered questions in French, using translation to ensure he understood the questions.

Since his appointment Barnier has posted a series of tweets which could be seen as poking fun at Brexit. On a tour of Croatia to discuss the negotiations, he posed outside Zagreb’s Museum of Broken Relationships asking, “Guess where we are today?”

 

 

He also tweeted a picture of himself drinking prosecco after Boris Johnson sparked ridicule by telling an Italian economics minister his country would have to offer the UK tariff-free trade to sell the drink in Britain.

But Barnier can also be tough. He forced through laws to regulate every financial sector, 40 pieces of legislation in four years, when he was internal market commissioner, in the face of sustained opposition from industry and some governments.

He warned today, "Being a member of the EU comes with rights and benefits. Third countries [the UK] can never have the same rights and benefits since they are not subject to same obligations.”

On the possibility of Britain curbing free movement of EU citizens and keeping access to the single market, he was unequivocal.

“The single market and four freedoms are indivisible. Cherry-picking is not an option,” he said.

He stressed that his priority in the Brexit negotiations would be the interests of the remaining 27 member states of the European Union, not Britain.

“Unity is the strength of the EU and President Juncker and I are determined to preserve the unity and interest of the EU-27 in the Brexit negotiations.”

In a thinly veiled swipe at the British, again greeted with laughter in the press room, he told reporters, “It is much better to show solidarity than stand alone. I repeat, it is much better to show solidarity than stand alone”.

Referring to the iconic British poster that urged Brits to "Keep Calm and Carry On” during World War Two, he today told reporters, “We are ready. Keep calm and negotiate.”

But Barnier’s calm in the face of the unprecedented challenge to the EU posed by Brexit masks a cold determination to defend the European project at any cost.

James Crisp is the news editor at EurActiv, an online EU news service.