Was Northern Rock the worst of it?

IPPR chief economist Howard Reed ponders our economic prospects f

The economic prospects for the UK and other countries in the developed world look bleaker now than they did twelve months ago. For some time there has been wide consensus that the global economy was in an unsustainable financial bubble characterised by inflated house prices and high levels of consumer and corporate debt, but no-one knew when the bubble would burst.

In retrospect the wave of US ‘sub-prime’ lending defaults which gathered pace in Summer 2007 looks like the bursting point. The sub-prime crisis has precipated a global credit crunch, as the ready availability of credit and debt which characterised the decade so far has been replaced pretty much overnight by an extreme reluctance among financial institutions to lend at anything below punitive rates. The Northern Rock crisis which emerged in the summer is a direct consequence of that changed financial climate.

But was the Northern Rock crisis the worst that’s going to happen to the UK in this business cycle, or are there even tougher times ahead?

Six months ago recession in the UK and US was being mentioned as an outside possibility, but now it looks much more likely. Since the summer, each successive release of business forecasts and economic data on employment and output growth from the US has been more pessimistic. And now, increasingly, UK data is following suit – for example, recently released Christmas sales figures from several leading retailers were well below market expectations.

We are now at the stage where Goldman Sachs and Morgan Stanley (for example) believe a US recession is the most likely outcome in 2008, even though central banks in the US and Europe have lowered interest rates and injected extra funds into the system in an attempt to loosen credit markets.

Given the interconnection between US sub-prime lenders and UK and European banks stems from the widespread repackaging and reselling of debt, if the sub-prime crisis blows a big hole in the US economy it is very likely to take Europe – including the UK - down too.

If the UK economy does go into recession this year, the effects are likely to resemble the most recent recession of 1990-92 more than the slump of the early 1980s, because circumstances were more similar in the early 1990s – a bubble had developed in housing and asset markets in the UK, US and Japan which burst in 1990, leading to a substantial fall in property prices.

By contrast, the early 1980s recession was precipitated by the oil price rise of 1979, but its longevity and severity were more a consequence of a huge shake-out in UK industry and a structural shift away from manufacturing and towards services – particularly financial services and the City.

It does not look like we are poised for big structural shifts in the economy this time round and London’s status as a world financial centre should survive any recession. But the UK’s reliance on the financial services sector makes it particularly vulnerable to the credit crunch in the short term.

Fortunately however, inflationary pressures are much weaker at present than they were in the early 1990s or early 1980s, so we are unlikely to see interest rates at the exceptionally high levels that we saw back then – which should assist economic recovery.

Another point of difference from the early 1990s is that the US economy is being hit hardest by the current slowdown.

Previously the resilence of the US economy has been a valuable catalyst for revival from global economic crises, but this time around, the US looks in much worse shape with high ‘twin deficits’ in the personal and government sectors.

Thus, global economic recovery will be more reliant than ever before on a strong growth performance by China, India and other industrialising powerhouses. In the medium term this is likely to lead to a change in the balance of global economic power, with the end of US hegemony and greater uncertainty over the direction of global economic policy than we have known for the past fifteen years.

In the longer run, shortages of water, oil and other natural resources, and the climate effects of spiralling greenhouse gas emissions, are a greater threat to long-term economic growth than any short-term financial imbalances.

Howard Reed is Chief Economist at the Institute for Public Policy Research

JON BERKELEY
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The empire strikes back

How the Brexit vote has reopened deep wounds of empire and belonging, and challenged the future of the United Kingdom.

Joseph Chamberlain, it has been widely remarked, serves as an inspiration for Theresa May’s premiership. The great municipal reformer and champion of imperial protectionism bestrode the politics of late-Victorian and Edwardian Britain. He was a social reformer, a keen ­unionist and an advocate for the industrial as well as the national interest – all values espoused by the Prime Minister.

Less noticed, however, is that May’s excavation of Chamberlain’s legacy is a symptom of two larger historical dynamics that have been exposed by the vote for Brexit. The first is the reopening on the British body politic of deep wounds of race, citizenship and belonging, issues that home rule for Ireland, and then the end of empire, followed by immigration from the former colonies, made central to British politics during the 20th century. Over the course of the century, the imperial subjects of the queen-empress became British and Irish nationals, citizens of the Commonwealth and finally citizens of a multicultural country in the European Union. The long arc of this history has left scars that do not appear to have healed fully.

The second dynamic is the renewal of patterns of disagreement over free trade and social reform that shaped profound divisions roughly a century ago. Specifically, the rivalry was between a vision of Britain as the free-trade “world island”, supported by the City of London and most of the country’s governing elite, and the protectionist project, or “imperial preference”, articulated by Chamberlain, which sought to bind together the British empire in a new imperial tariff union, laying the foundations for industrial renewal, social progress and national security. The roots of these commitments lay in his career as a self-made businessman and reforming mayor of Birmingham. A leading Liberal politician, Chamberlain broke with his own party over home rule for Ireland and, with a small group of Liberal Unionists, joined Lord Salisbury’s Conservative government of 1895, becoming colonial secretary. He subsequently resigned in 1903 to campaign on the question of imperial preference.

The fault lines in contemporary political economy that Brexit has starkly exposed mimic those first staked out in the early part of the 20th century, which lie at the heart of Chamberlain’s career: industry v finance, London v the nations and regions, intervention v free trade. This time, however, these divides are refracted through the politics of Britain’s relationship with Europe, producing new economic interests and political ­alliances. What’s more, the City now serves the European economy, not just Britain and her former colonies.

Chamberlain is the junction between these two critical dynamics, where race and political economy interweave, because of his advocacy of “Greater Britain” – the late-Victorian idea that the white settler colonies of Canada, Australia, New Zealand and South Africa should be joined with the mother country, in ties of “kith-and-kin” solidarity, or more ambitiously in a new imperial federation. Greater Britain owed much to the Anglo-Saxonism of Victorian historians and politicians, and was as much a Liberal as a Conservative idea. Greater Britain was a new way of imagining the English race – a ten-million-strong, worldwide realm dispersed across the “white” colonies. It was a global commonwealth, but emphatically not one composed of rootless cosmopolitans. Deep ties, fostered by trade and migration, held what the historian James Belich calls “the Anglo-world” together. It helped equip the English with an account of their place in the world that would survive at least until the 1956 Suez crisis, and it was plundered again by latter-day Eurosceptics as they developed a vision of the UK as an integral part, not of the EU, but of an “Anglosphere”, the liberal, free-market, parliamentary democracies of the English-speaking world.

Greater Britain carried deep contradictions within itself, however. Because it was associated with notions of racial membership and, more specifically, with Protestantism, it could not readily accommodate divisions within the UK itself. The political realignment triggered by Chamberlain’s split with Gladstone over Irish home rule, which set one of the most enduring and intractable political divides of the era, was symptomatic of this. For Chamberlain, Irish home rule would have entailed Protestant Ireland being dominated by people of “another race and religion”. Unless there could be “home rule all round” and a new imperial parliament, he preferred an alliance with “English gentlemen” in the Tory party to deals with Charles Stewart Parnell, the leader of Ireland’s constitutional nationalists.

The failure of Chamberlain’s kith-and-kin federalism, and the long struggle of nationalist Ireland to leave the UK, left a bitter legacy in the form of partition and a border that threatens once again, after Brexit, to disrupt British politics. But it also left less visible marks. On Ireland becoming a republic, its citizens retained rights to travel, settle and vote in the UK. The Ireland Act 1949 that followed hard on the Irish Free State’s exit from the Commonwealth defined Irish citizens as “non-foreign”.

A common travel area between the two countries was maintained, and when immigration legislation restricted rights to enter and reside in the UK in the 1960s and 1970s, Irish citizens were almost wholly exempted. By the early 1970s, nearly a million Irish people had taken up their rights to work and settle in the UK – more than all of those who had come to Britain from the Caribbean and south Asia combined. Even after the Republic of Ireland followed the UK into the European common market, its citizens retained rights that were stronger than those given to other European nationals.

In 1998, the Good Friday Agreement went a step further. It recognised the birthright of all the people of Northern Ireland to hold both British and Irish citizenship. Common EU citizenship north and south of the border made this relatively straightforward. But under a “hard Brexit”, Britain may be asked to treat Irish citizens just like other EU citizens. And so, unless it can secure a bilateral deal with the Republic of Ireland, the UK will be forced to reinvent or annul the common travel area, reintroducing border and customs controls and unstitching this important aspect of its post-imperial, 20th-century settlement. Will Ireland and its people remain “non-foreign”, or is the past now another country?

 

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Today’s equivalent of 19th-century Irish nationalism is Scottish national sentiment. Like Gladstone and his successors, Theresa May is faced with the question of how to accommodate the distinct, and politically powerful, aspirations of a constituent nation of the United Kingdom within the unsteady framework associated with the coexistence of parliamentary sovereignty and ongoing devolution. Scotland’s independence referendum bestowed a sovereign power on its people that cannot be set aside in the Brexit negotiations. The demand for a “flexible Brexit” that would allow Scotland to stay in the European single market is also, in practice, a demand for a federal settlement in the UK: a constitutional recognition that Scotland wants a different relationship to the EU from that of England and Wales.

If this is not couched in explicitly federal terms, it takes the unitary nature of the UK to its outer limits. Hard Brexit is, by contrast, a settlement defined in the old Conservative-Unionist terms.

Unionism and federalism both failed as projects in Ireland. Chamberlain and the Conservative Unionists preferred suppression to accommodation, a stance that ended in a war that their heirs ultimately lost.

Similarly, the federal solution of Irish home rule never made it off the parchment of the parliamentary legislation on which it was drafted. The federalist tradition is weak in British politics for various reasons, one of which is the disproportionate size of England within the kingdom. Yet devising a more federal arrangement may now be the only means of holding the UK together. May’s unionism – symbolised by her visit to Edinburgh to meet Scotland’s First Minister, Nicola Sturgeon, in the first days of her premiership – will be enormously tested by a hard Brexit that cannot accommodate Scottish claims for retention of single-market status or something close to it. Separation, difficult as this may be for the Scottish National Party to secure, may follow.

The idea of Greater Britain also left behind it a complex and contentious politics of citizenship. As colonial secretary at the end for 19th century, Chamberlain faced demands for political equality of the subjects of the crown in the empire; Indians, in particular, were discriminated against in the white settler colonies. He strongly resisted colour codes or bars against any of the queen’s subjects but allowed the settler colonies to adopt educational qualifications for their immigration laws that laid the foundation for the racial discrimination of “White Australia”, as well as Canadian immigration and settlement policies, and later, of course, the apartheid regime in South Africa.

Nonetheless, these inequalities were not formally written into imperial citizenship. The British subject was a national of the empire, which was held together by a common code of citizenship. That unity started to unravel as the colonies became independent. Specifically, a trigger point was reached when, in 1946, the Canadian government legislated to create a new national status, separate and distinct from the common code of imperial citizenship hitherto embodied in the status of the British subject.

The Attlee government responded with the watershed British Nationality Act 1948. This created a new form of citizenship for the UK and the colonies under its direct rule, while conferring the status of British subject or Commonwealth citizen on the peoples of the former countries of empire that had become independent. It was this that has made the act so controversial: as the historian Andrew Roberts has argued, it “gave over 800 million Commonwealth citizens the perfectly legal right to reside in the United Kingdom”.

This criticism of the act echoed through the postwar decades as immigration into the UK from its former empire increased. Yet it is historically misplaced. The right to move to the UK without immigration control had always existed for British subjects; the new law merely codified it. (Indeed, the Empire Windrush, which brought British subjects from the Caribbean to London in June 1948, docked at Tilbury even before the act had received royal assent.)

At the time, ironically, it was for precisely opposite reasons that Conservative critics attacked the legislation. They argued that it splintered the subjects of empire and denied them their rights: “. . . we deprecate any tendency to differentiate between different types of British subjects in the United Kingdom . . . We must maintain our great metropolitan tradition of hospitality to everyone from every part of our empire,” argued Sir David Maxwell Fyfe, the Tory shadow minister of labour and future home secretary.

As the empire withered away in the postwar period, some Conservatives started to change their minds. Enoch Powell, once a staunch imperialist, came to believe that the idea of the Commonwealth as a political community jeopardised the unity of allegiance to the crown, and so was a sham. The citizens of the Commonwealth truly were “citizens of nowhere”, as Theresa May recently put it. As Powell said of the 1948 act: “It recognised a citizenship to which no nation of even the most shadowy and vestigial character corresponded; and conversely, it still continued not to recognise the nationhood of the United Kingdom.”

Once the British empire was finished, its core Anglo-Saxon populace needed to come back, he believed, to find their national mission again, to what he viewed as their English home – in reality, the unitary state of the UK – rather than pretend that something of imperialism still survived. On England’s soil, they would remake a genuine political community, under the sovereignty of the Crown-in-Parliament. If Greater Britain could not exist as an imperial political community, and the Commonwealth was a fiction, then the kith and kin had to live among themselves, in the nation’s homeland.

Contemporary politicians no longer fuse “race” and citizenship in this way, even if in recent years racist discourses have found their way back into mainstream politics in advanced democracies, Britain included. However, the legacies of exclusivist accounts of nationality persist, and not merely on the populist right. British politics today is dominated by claims about an irreconcilable division between the attitudes and national sentiments of the white working classes, on the one hand, and the cosmopolitanism of metropolitan liberals, on the other.

But thinking and speaking across this artificial divide is imperative in both political and civic terms. Many Remainers have the same uncertainties over identity and political community as commentators have identified with those who supported Brexit; and the forms of patriotism exhibited across the UK are not necessarily incompatible with wider commitments and plural identities. Above all, it is vital to challenge the assumption that a regressive “whiteness” defines the content of political Englishness.

 

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Brexit thus forces us once again to confront questions about our citizenship, and the question of who is included in the nation. In an ironic twist of fate, however, it will deprive the least cosmopolitan of us, who do not live in Northern Ireland, or claim Irish descent, or hold existing citizenship of another EU country, of the European citizenship we have hitherto enjoyed. Conversely it also leaves a question mark over the status of EU nationals who live and work in the UK but do not hold British nationality. The government’s failure to give guarantees to these EU nationals that they will be allowed to remain in the UK has become a matter of deep controversy, on both sides of the Brexit divide.

As only England and Wales voted for it, Brexit has also exposed the emergence once again of distinct identities in the constituent nations of the UK. Although Scottish nationalism has been the most politically powerful expression of this trend, Englishness has been growing in salience as a cultural and, increasingly, as a political identity, and an insistent English dimension has become a feature of British politics. Although talk of a mass English nationalism is misplaced – it can scarcely be claimed that nationalism alone explains the complex mix of anxiety and anger, hostility to large-scale immigration and desire for greater self-government that motivated English voters who favoured Brexit – it is clear that identity and belonging now shape and configure political arguments and culture in England.

Yet, with a handful of notable exceptions, the rise in political Englishness is being given expression only on the right, by Eurosceptics and nationalists. The left is significantly inhibited by the dearth of serious attempts to reimagine England and ­different English futures, whether culturally or democratically.

It is not just the deep politics of the Union and its different peoples that Brexit has revived. The divisions over Britain’s economy that were opened up and positioned during the Edwardian era have also returned to the centre of political debate. Though as yet this is more apparent in her rhetoric than in her practice, Theresa May seems drawn to the project of reviving the Chamberlainite economic and social agendas: using Brexit to underpin arguments for an industrial strategy, a soft economic nationalism and social reform for the “just about managing” classes. She has created a new department responsible for industrial strategy and advocated places for workers on company boards (before watering down this commitment) as well as increased scrutiny of foreign takeovers of British firms. Housing policy is to be refocused away from subsidising home ownership and directed towards building homes and supporting private renters. Fiscal policy has been relaxed, with increased infrastructure investment promised. The coalition that delivered Brexit – made up of struggling working-class voters and middle-class older voters (or the “excluded and the insulated”, as the Tory peer David Willetts puts it) – is seen as the ballast for a new Conservative hegemony.

Presentationally, May’s vision of Brexit Britain’s political economy is more Chamberlainite than Thatcherite, a shift that has been obscured in Brexit-related debates about migration and tariff-free access to the European single market. Her economic utterances are edged with a national, if not nationalist, framing and an economic interventionism more commonly associated with the Heseltinian, pro-European wing of her party. In a calculated move replete with symbolism, she launched her economic prospectus for the Tory leadership in Birmingham, advertising her commitment to the regions and their industries, rather than the City of London and the financial interest.

It is therefore possible that May’s project might turn into an attempt to decouple Conservative Euroscepticism from Thatcherism, creating a new fusion with Tory “One Nation” economic and social traditions. It is this realignment that has left the Chancellor, Philip Hammond, often exposed in recent months, since the Treasury is institutionally hostile both to economic interventionism and to withdrawal from the single market. Hence his recent threat to the European Union that if Britain cannot secure a decent Brexit deal, it will need to become a deregulated, low-tax, Dubai-style “world island” to remain competitive. He cannot envisage another route to economic prosperity outside the European Union.

It also leaves those on the Thatcherite right somewhat uncertain about May. For while she has sanctioned a hard Brexit, in crucial respects she appears to demur from their political economy, hence the discontent over the government’s deal to secure Nissan’s investment in Sunderland. As her Lancaster House speech made clear, she envisages Brexit in terms of economically illiberal goals, such as the restriction of immigration, which she believes can be combined with the achievement of the new free trade deals that are totemic for her party’s Eurosceptics.

In practice, the Prime Minister’s willingness to endorse Hammond’s negotiating bluster about corporate tax cuts and deregulation shows that she is anything but secure in her Chamberlainite orientation towards industrial strategy and social reform. Her policy positions are shot through with the strategic tension between an offshore, “global Britain” tax haven and her rhetoric of a “shared society”, which will be difficult to resolve. May has embraced hard (she prefers “clean”) Brexit, but a transformation of the axes of conservative politics will only take place if she combines Euroscepticism with a return to pre-Thatcherite economic and social traditions. This would make her party into an even more potent political force. The recent shift of the Ukip vote into the Tory bloc and the notable weakening of Labour’s working-class support suggest what might now be possible. This is the domestic politics of Chamberlain’s social imperialism shorn of empire and tariff – only this time with better electoral prospects.

 

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There are some big pieces of 20th-century political history missing from this jigsaw, however. In the 1930s, Chamberlain’s son Neville succeeded where his father had failed in introducing a modest version of tariff reform, and trade within the empire rebounded. Britain abandoned the gold standard in 1931 and cheap money revived the national economy. The collectivism of the wartime command economy and the postwar Keynesian settlement followed. New forms of economic strategy, industrial policy and social reform were pioneered, and the Treasury beliefs in limited state intervention, “sound money” and free trade that had defined the first decades of the 20th century were defeated.

This era was brought to an end by the election of Margaret Thatcher in 1979. Her government smashed the industrial pillars and the class compromises that had underpinned the postwar world. The ensuing “New Labour” governments inherited a transformed political economy and, in turn, sought to fuse liberal with collectivist strands in a new settlement for the post-industrial economy. What many now view as the end of the neoliberal consensus is, therefore, better seen as the revival of patterns of thinking that pre-date Thatcherism. This tells us much about the persistent and deep problems of Britain’s open economic model and the continuing, unresolved conflict between finance and parts of industry, as well as London and the regions.

Brexit brings these tensions back to the surface of British politics, because it requires the construction of a completely new national economic and political settlement – one that will be thrashed out between the social classes, the leading sectors of the economy, and the nations and regions of the United Kingdom.

Few peacetime prime ministers have confronted the scale and kinds of challenge that Brexit will throw up: holding together the UK, revitalising our industrial base, delivering shared prosperity to working people and renegotiating Britain’s place in Europe and the wider world. This is the most formidable list of challenges. Lesser ones, we should recall, defeated Joe Chamberlain.

Michael Kenny is the inaugural director of the Mile End Institute policy centre, based at Queen Mary University of London

Nick Pearce is professor of public policy at the University of Bath

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era