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The question is – who is going to pay Europe’s debts, not how do we generate enough to pay?

Felix Martin's "Real Money" column.

Both the financial and the political elite of Europe were shocked by the result of the general election in Italy. To the financial markets, the hung parliament that emerged was an unpleasant reminder that the eurozone’s financial crisis remains unresolved. On trading desks in Frankfurt and London, the talk was once again of the euro as a fundamentally flawed project.

The eurozone’s political elite were no less alarmed. To conservative opinion in Germany, it was a disappointing victory for the forces of moral degeneracy in the ongoing struggle between Teutonic prudence and Latin profligacy. “A race is taking place in Europe between those backing austerity and reform policies on one side and populists on the other”, as one leading German business paper put it.

But exactly what kind of crisis are the financial markets afraid of? And is the conservative vision of the dilemma it presents to the European electorate accurate?

The answer to the first question is not as simple as it might seem. Bare economic statistics hardly suggest the eurozone is a basket case. Unlike the US and the UK, the region runs an external surplus – it exports more to the rest of the world than it imports from it. On the fiscal front, while the US is battling to reduce its deficit from 8.7 per cent of gross domestic product (GDP) and the UK is only a little better off, the gap between eurozone public revenues and spending is much more manageable at a mere 3.3 per cent. And when it comes to debt, there is simply no comparison. Most developed economies can only dream of the eurozone’s 76 per cent ratio of public debt to GDP.

The problem is that this aggregate picture is only half the story: it conceals vast discrepancies between the eurozone’s constituent states. In the honeymoon years following the euro’s introduction, southern Europe gorged on cheap credit while Germany underwent painful reforms. The result was a chronic divergence of competitiveness that was accommodated before 2008 by the accumulation of debt both within and between eurozone countries. So although the region as a whole remained financially quite well balanced, some of its members – notably on the southern periphery – ended up as big net debtors, while others – most notably Germany – became huge net creditors.

As is the way with debt, this all seemed sustainable, until suddenly it didn’t. Starting in May 2010, private lenders repented of their folly and fled the financing of overindebted governments at home and abroad. First Greece, then Ireland and then Portugal were forced to turn to the International Monetary Fund and the European Commission to meet their funding needs. And when, in the middle of last year, the private capital markets began to lose faith in the euro itself, the European Central Bank was forced to announce that it stood ready to bail out any member state to a potentially unlimited degree.

The legacy of financial obligations heaped up in the good times is a problem not just for the cohesion of the eurozone but of its individual member states as well. Italy is the prime example.

There is much to envy about Italy’s economy. Its external and fiscal accounts show only modest deficits. Indeed, if interest payments are factored out, the Italian government runs a surplus – a distant prospect for the Anglo-Saxon economies. But Italy nevertheless has a problem in the scale of the financial obligations that have been contracted over time between constituent parts of its society. Its government sector is dizzyingly indebted – to the tune of 120 per cent of GDP. Its household sector, meanwhile, is a huge net creditor, with a net worth of more than four times this amount – a significant part of which is held in the form of its own government’s bonds.

These debts make Italy’s situation, and the eurozone’s, fragile – not so much for economic but for political reasons. In both cases, there is more than enough wealth to pay the debts that have been run up. The contentious question is whose share of that wealth is going to be commandeered to do so. So the markets are quite right to be spooked by an Italian election in which parties pledged to abandon Mario Monti’s carefully crafted austerity plans won an absolute majority of the popular vote. They recognise that what is at issue in Italy, and in the eurozone as a whole, is not whether there are the means to bake a cake as large as was promised – the aggregate numbers for the region as a whole indicate that European cake-baking is in relatively rude health – but who gets to eat how much of it. And they scent that Italians who voted for Beppe Grillo and Silvio Berlusconi are not content with the current answer.

Conservative opinion insists that the only credible way out of Europe’s debt crisis is for governments to drive through structural reforms to increase productivity and so generate more to go round in the future. Those who suggests otherwise are, as another German newspaper put it this past week, “radical forces and populists, with irresponsible promises and no regard for consequences”.

The truth is the opposite. Structural reform and higher growth would be welcome. Yet Italy’s dilemma, like the eurozone’s, is not over productivity so much as the distribution of wealth. The question is not how the eurozone can generate enough wealth to pay its debts: taken as a whole, it already does. It is who should pay and how much.

Last month’s Italian election showed that the electorate does not think Monti’s orthodox answer to that question is fair. Politicians who come up with workable alternatives should not be reviled as irresponsible populists with no regard for consequences. They should be hailed as the only hope there is. As Keynes wrote in 1923, “The absolutists of contract . . . are the real parents of revolution.”

Felix Martin is a macroeconomist and bond investor

Macroeconomist, bond trader and author of Money

This article first appeared in the 11 March 2013 issue of the New Statesman, The audacity of popes

Photo: Getty Images
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.