Europe wobbles…

Italy, Spain and Cyprus all strike fear into the hearts of economists.

The Eurozone is heating up again, as the realisation dawns that previous settlements were merely uneasy hiatuses.

The immediate problem is Cyprus, which finds itself on the verge of default due to contamination from Greece. The country, a small island nation in the Mediterranean, has close historical and financial links with crisis-stricken Athens, and was forced to seek aid from the EU last year. Last month, the Wall Street Journal's Stephen Filder received confirmation in Davos from Olli Rehn, the EU's economics commissioner, a rescue program for the country will require "substantially reducing government and bank debt" — in other words, a default.

Such a default will be problematic, because Cyprus, more so than most troubled Eurozone countries to date, operates as an off-shore banker for many of the world's super-rich — particularly, in this case, Russians. The country is likely to find itself stuck between two unpalatable options: either safeguarding its banking sector from losses by imposing huge burdens on its populace, or risking a run on the banks from overseas as foreign depositors try to get their money out.

There had been hope that the country may be able to get a bailout from the EU without causing too much damage to its domestic banking operation, but over the weekend, that became less likely. The SPD, the German opposition party, pushed for the country to be forced to consolidate its banks before any bailout would be agreed. According to Reuters, Merkel needs the support of the SPD to pass any bailout through the Bundestag (and of course, the EU needs the support of Germany before any bailout can go ahead) so this objection carries real weight.

The Cypriot problem is nasty, but largely internal; the country is too small to have any real contagion effects. The same cannot be said of Italy and Spain, both of which are sources of increased uncertainty.

In Italy, Silvio's back! The former prime minister — who, if he were anyone else, would surely be the "disgraced" former prime minister — is running for office on a platform of tax cuts (€4bn of them) over austerity. His coalition is in second place right now to the centre-left grouping, but its standing is improving — and the markets appear to be getting jumpy at that fact.

Berlusconi is being hampered by the fact that he no longer controls Italian media in the way he used to, but even so, a win for him is still alarmingly possible. (Regardless of the effect of deficit-funded tax-cuts on national economies, Berlusconi is unlikely to plough a viable economic course for Italy).

And in Spain, prime minister Mariano Rajoy has been accused of running an illegal slush fund. Yesterday afternoon, Rajoy issued a not-entirely-convincing rebuttal, telling a joint press conference with Angela Merkel that:

I repeat what I said Saturday: everything that has been said about me and my colleagues in the party is untrue, except for some things that have been published by some media outlets.

Merkel, "visibly upset", was also asked about the corruption allegations, and emphasised that "what is important is the relationship between the two governments".

Whatever happens to Rajoy, Berloscuni, and even Cyprus, the flurry of attention and fear generated by what ought to be business as usual for politics (except, maybe, the Cyprus problem) demonstrates how uneasy the situation in Europe remains. While we haven't heard a huge amount about the crisis recently, as the big minds in economics get distracted by talk of robots (not that the potential problems there aren't huge either), the situation is by no means fixed. The continent remains in much the same straits as Britain, but with the added straightjacket of a unified currency and intransigent Germany dampening hope.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Show Hide image

The Autumn Statement proved it – we need a real alternative to austerity, now

Theresa May’s Tories have missed their chance to rescue the British economy.

After six wasted years of failed Conservative austerity measures, Philip Hammond had the opportunity last month in the Autumn Statement to change course and put in place the economic policies that would deliver greater prosperity, and make sure it was fairly shared.

Instead, he chose to continue with cuts to public services and in-work benefits while failing to deliver the scale of investment needed to secure future prosperity. The sense of betrayal is palpable.

The headline figures are grim. An analysis by the Institute for Fiscal Studies shows that real wages will not recover their 2008 levels even after 2020. The Tories are overseeing a lost decade in earnings that is, in the words Paul Johnson, the director of the IFS, “dreadful” and unprecedented in modern British history.

Meanwhile, the Treasury’s own analysis shows the cuts falling hardest on the poorest 30 per cent of the population. The Office for Budget Responsibility has reported that it expects a £122bn worsening in the public finances over the next five years. Of this, less than half – £59bn – is due to the Tories’ shambolic handling of Brexit. Most of the rest is thanks to their mishandling of the domestic economy.

 

Time to invest

The Tories may think that those people who are “just about managing” are an electoral demographic, but for Labour they are our friends, neighbours and the people we represent. People in all walks of life needed something better from this government, but the Autumn Statement was a betrayal of the hopes that they tried to raise beforehand.

Because the Tories cut when they should have invested, we now have a fundamentally weak economy that is unprepared for the challenges of Brexit. Low investment has meant that instead of installing new machinery, or building the new infrastructure that would support productive high-wage jobs, we have an economy that is more and more dependent on low-productivity, low-paid work. Every hour worked in the US, Germany or France produces on average a third more than an hour of work here.

Labour has different priorities. We will deliver the necessary investment in infrastructure and research funding, and back it up with an industrial strategy that can sustain well-paid, secure jobs in the industries of the future such as renewables. We will fight for Britain’s continued tariff-free access to the single market. We will reverse the tax giveaways to the mega-rich and the giant companies, instead using the money to make sure the NHS and our education system are properly funded. In 2020 we will introduce a real living wage, expected to be £10 an hour, to make sure every job pays a wage you can actually live on. And we will rebuild and transform our economy so no one and no community is left behind.

 

May’s missing alternative

This week, the Bank of England governor, Mark Carney, gave an important speech in which he hit the proverbial nail on the head. He was completely right to point out that societies need to redistribute the gains from trade and technology, and to educate and empower their citizens. We are going through a lost decade of earnings growth, as Carney highlights, and the crisis of productivity will not be solved without major government investment, backed up by an industrial strategy that can deliver growth.

Labour in government is committed to tackling the challenges of rising inequality, low wage growth, and driving up Britain’s productivity growth. But it is becoming clearer each day since Theresa May became Prime Minister that she, like her predecessor, has no credible solutions to the challenges our economy faces.

 

Crisis in Italy

The Italian people have decisively rejected the changes to their constitution proposed by Prime Minister Matteo Renzi, with nearly 60 per cent voting No. The Italian economy has not grown for close to two decades. A succession of governments has attempted to introduce free-market policies, including slashing pensions and undermining rights at work, but these have had little impact.

Renzi wanted extra powers to push through more free-market reforms, but he has now resigned after encountering opposition from across the Italian political spectrum. The absence of growth has left Italian banks with €360bn of loans that are not being repaid. Usually, these debts would be written off, but Italian banks lack the reserves to be able to absorb the losses. They need outside assistance to survive.

 

Bail in or bail out

The oldest bank in the world, Monte dei Paschi di Siena, needs €5bn before the end of the year if it is to avoid collapse. Renzi had arranged a financing deal but this is now under threat. Under new EU rules, governments are not allowed to bail out banks, like in the 2008 crisis. This is intended to protect taxpayers. Instead, bank investors are supposed to take a loss through a “bail-in”.

Unusually, however, Italian bank investors are not only big financial institutions such as insurance companies, but ordinary households. One-third of all Italian bank bonds are held by households, so a bail-in would hit them hard. And should Italy’s banks fail, the danger is that investors will pull money out of banks across Europe, causing further failures. British banks have been reducing their investments in Italy, but concerned UK regulators have asked recently for details of their exposure.

John McDonnell is the shadow chancellor


John McDonnell is Labour MP for Hayes and Harlington and has been shadow chancellor since September 2015. 

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump