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Europe's looming crisis

It all started with sub-prime loans in the United States. Or did it? As the IMF is called in to bail

It was Europe’s dark secret. While American banks were lending irresponsibly to homeowners who couldn’t pay, European banks were lending to emerging countries who couldn’t pay. Europe’s sub-prime crisis has now come home as heavily-indebted nations of the eastern bloc – Hungary, Ukraine, Belarus, Bulgaria, the Baltic states – are collapsing one by one into the arms of the IMF. “Icelandisation” is the new spectre stalking Europe.

And, as with sub-prime in urban America, this latest crisis was shockingly predictable. I visited Latvia at the height of the credit bubble 18 months ago, and it was clearly an accident waiting to happen. Riga, the capital, was bristling with upmarket shopping malls and classy bars that were all quite empty. Stalin-era flats were being sold for $200,000 in a country where the average wage was less than $400 a month. Latvia has hardly any industry, no energy and few natural resources apart from trees. But such was the irrational exuberance of foreign banks like Swedbank, it was awash with credit.

According to the Bank for International Settlements, western European banks have lent more than $1.5trn to eastern Europe. Austria has loans equivalent to 80 per cent of GDP and stands to make huge losses as Hungary and Ukraine collapse.

This week, the Austrian government had to cancel an auction of government bonds because it could not be sure that investors would buy them. It is not inconceivable that Austria itself could end up needing to be rescued.

Other European countries implicated in global sub-prime include Spain, which has loaned immense sums ($316bn) to Latin American countries such as Argentina. Britain has $329bn tied up in Asia - or did until values collapsed in the Asian stock market rout. Japan's Nikkei index fell to a 26-year low this week, wiping out tens of billions of yen. The losses are now winging their way home to British pension funds and banks such as the Royal Bank of Scotland and HSBC.

Banks behaving badly, then, but what's new there? Well, the Bank of England told us this week that global losses so far from the financial crisis amount to $2.8trn. But this includes only a fraction of the likely losses from global sub- prime, which have yet to land on balance sheets.

Until last week's rout in the Asian bourses, there were still economists who believed that emerging markets would not be greatly affected by the credit crunch. But the theory that developing countries, led by China and India, have "decoupled" from the west, no longer holds water. It is clear that they have been dependent on consumer spending in America and Europe all along - and now that western consumers are staying away from the shops, no one is buying their goods. The Baltic Dry Shipping Index, which tracks the cost of hiring ships for international trade, has fallen by 79 per cent this year, itself a signal of a severe global recession.

Gordon Brown's hints that Britain might be able to spend its way out of this recession has to be considered in this light. There is no guarantee, in such a climate, that the British government would be able to borrow sufficient to pay for further bank rescues (they are sure to come), along with the cost of three million unemployed plus a programme of Keynesian infrastructure spending, however desirable that may be.

Investors are already shunning the pound because of anticipated losses from the UK property crash. Sterling has fallen 28 per cent this year, further than in the Exchange Rate Mechanism crisis of 1992, when interest rates rose to 15 per cent. We could be heading for a classic 1960s run on the pound.

The government had hoped that a devalued pound would stimulate exports and pull Britain out of recession, as happened after Black Wednesday 16 years ago, but the economic climate is different. We make few things to export now and the world is not in a buying mood anyway. And it has had quite enough of our "innovative" financial services. Thus Britain's current account deficit of 6 per cent - what used to be called loosely the balance of payments - has suddenly re-emerged as a major economic issue. Borrowing may be a good thing in a recession, but international financiers, sovereign wealth funds, hedge funds and banks may not agree.

The UK has the honour of having been the last G7 country to call in the IMF - during the 1976 sterling crisis - and while the government is not yet filling in the application forms, Britain's finances would not impress the Fund's economists. Standard IMF lending conditions are: privatisation, cuts in government spending and increased interest rates.

We are going in precisely the opposite direction, slashing interest rates, borrowing to spend and nationalising the banks.

Seen another way, this is only an indication of the extent to which the IMF is no longer fit for purpose in the Great Deleveraging. In recent years, the Fund has been an engine of Wall Street neoliberalism and financial deregulation, which leaves it ill-equipped to deal with the new international environment of deflation and banking crashes. In addition, there is a fiscal crisis facing the IMF. It has only about $250bn in reserves to throw at a rolling financial crisis that has now engulfed half the planet, from Iceland to Pakistan. Gordon Brown has called on energy-exporting nations to stump up more cash for the Fund, but there is a strong case, too, for reviewing how the IMF operates. Set up as part of the Bretton Woods financial system in 1944, the Fund was designed to cope with episodic currency crises. It is now having to deal with potential insolvencies in countries the size of Argentina as well as bailing out entire regions such as eastern Europe.

It will have to be very much better capitalised if it is going to perform this role, and it will have to abandon much of its free-market ideology.

We need a new set of interventionist institutions capable of managing financial rescues on an international scale.

Ultimately, what is needed is an international central bank with the resources to provide liquidity guarantees, recapitalise banks and regulate international financial flows. This is an immense task, and the world may not yet be ready for it. But it is not a new idea: John Maynard Keynes argued for precisely this during the Bretton Woods negotiations in 1944. He even suggested a world reserve currency "bancor". This is the kind of thinking we need today.

The alternative, if nothing is done, is international tension, even war. Consider failing Ukraine with its large Russian population and its dependency on Russia for energy supplies, right at the moment when Russian dreams of becoming an energy superpower have been dashed by the collapse of the oil price bubble. Or look at nuclear Pakistan, where the entire country is disintegrating in financial chaos. And what about China? Will all those unemployed workers - where half the toy manufacturers have gone bust - go peacefully back to the paddy fields?

When heads of the "G20" group of nations meet in Washington on 15 November for what is being called "Bretton Woods II" they will not just be dealing with a banking crisis. They will be deciding the future of civilisation.

This article first appeared in the 03 November 2008 issue of the New Statesman, Israel v Hamas

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Why Jeremy Corbyn is a new leader for the New Times

In an inspired election campaign, he confounded his detractors and showed that he was – more than any other leader – in tune with the times.

There have been two great political turning points in postwar Britain. The first was in 1945 with the election of the Attlee government. Driven by a popular wave of determination that peacetime Britain would look very different from the mass unemployment of the 1930s, and built on the foundations of the solidaristic spirit of the war, the Labour government ushered in full employment, the welfare state (including the NHS) and nationalisation of the basic industries, notably coal and the railways. It was a reforming government the like of which Britain had not previously experienced in the first half of the 20th century. The popular support enjoyed by the reforms was such that the ensuing social-democratic consensus was to last until the end of the 1970s, with Tory as well as Labour governments broadly operating within its framework.

During the 1970s, however, opposition to the social-democratic consensus grew steadily, led by the rise of the radical right, which culminated in 1979 in the election of Margaret Thatcher’s first government. In the process, the Thatcherites redefined the political debate, broadening it beyond the rather institutionalised and truncated forms that it had previously taken: they conducted a highly populist campaign that was for individualism and against collectivism; for the market and against the state; for liberty and against trade unionism; for law and order and against crime.

These ideas were dismissed by the left as just an extreme version of the same old Toryism, entirely failing to recognise their novelty and therefore the kind of threat they posed. The 1979 election, followed by Ronald Reagan’s US victory in 1980, began the neoliberal era, which remained hegemonic in Britain, and more widely in the West, for three decades. Tory and Labour governments alike operated within the terms and by the logic of neoliberalism. The only thing new about New Labour was its acquiescence in neoliberalism; even in this sense, it was not new but derivative of Thatcherism.

The financial crisis of 2007-2008 marked the beginning of the end of neoliberalism. Unlike the social-democratic consensus, which was undermined by the ideological challenge posed by Thatcherism, neoliberalism was brought to its knees not by any ideological alternative – such was the hegemonic sway of neoliberalism – but by the biggest financial crisis since 1931. This was the consequence of the fragility of a financial sector left to its own devices as a result of sweeping deregulation, and the corrupt and extreme practices that this encouraged.

The origin of the crisis lay not in the Labour government – complicit though it was in the neoliberal indulgence of the financial sector – but in the deregulation of the banking sector on both sides of the Atlantic in the 1980s. Neoliberalism limped on in the period after 2007-2008 but as real wages stagnated, recovery proved a mirage, and, with the behaviour of the bankers exposed, a deep disillusionment spread across society. During 2015-16, a populist wave of opposition to the establishment engulfed much of Europe and the United States.

Except at the extremes – Greece perhaps being the most notable example – the left was not a beneficiary: on the contrary it, too, was punished by the people in the same manner as the parties of the mainstream right were. The reason was straightforward enough. The left was tarnished with the same brush as the right: almost everywhere social-democratic parties, albeit to varying degrees, had pursued neoliberal policies. Bill Clinton and Tony Blair became – and presented themselves as – leaders of neoliberalism and as enthusiastic advocates of a strategy of hyper-globalisation, which resulted in growing inequality. In this fundamental respect these parties were more or less ­indistinguishable from the right.

***

The first signs of open revolt against New Labour – the representatives and evangelists of neoliberal ideas in the Labour Party – came in the aftermath of the 2015 ­election and the entirely unpredicted and overwhelming victory of Jeremy Corbyn in the leadership election. Something was happening. Yet much of the left, along with the media, summarily dismissed it as a revival of far-left entryism; that these were for the most part no more than a bunch of Trots. There is a powerful, often overwhelming, tendency to see new phenomena in terms of the past. The new and unfamiliar is much more difficult to understand than the old and familiar: it requires serious intellectual effort and an open and inquiring mind. The left is not alone in this syndrome. The right condemned the 2017 Labour Party manifesto as a replica of Labour’s 1983 manifesto. They couldn’t have been more wrong.

That Corbyn had been a veteran of the far left for so long lent credence to the idea that he was merely a retread of a failed past: there was nothing new about him. In a brilliant election campaign, Corbyn not only gave the lie to this but also demonstrated that he, far more than any of the other party leaders, was in tune with the times, the candidate of modernity.

Crises, great turning points, new conjunctures, new forms of consciousness are by definition incubators of the new. That is one of the great sources of their fascination. We can now see the line of linkage between the thousands of young people who gave Corbyn his overwhelming victory in the leadership election in 2015 and the millions of young people who were enthused by his general election campaign in 2017. It is no accident that it was the young rather than the middle-aged or the seniors who were in the vanguard: the young are the bearers and products of the new, they are the lightning conductors of change. Their elders, by contrast, are steeped in old ways of thinking and doing, having lived through and internalised the values and norms of neoliberalism for more than 30 years.

Yet there is another, rather more important aspect to how we identify the new, namely the way we see politics and how politics is conceived. Electoral politics is a highly institutionalised and tribal activity. There have been, as I argued earlier, two great turning points in postwar politics: the social-democratic era ushered in by the 1945 Labour government and the neoliberal era launched by the Tory government in 1979.

The average Tory MP or activist, no doubt, would interpret history primarily in terms of Tory and Labour governments; Labour MPs and activists would do similarly. But this is a superficial reading of politics based on party labels which ignores the deeper forces that shape different eras, generate crises and result in new paradigms.

Alas, most political journalists and columnists are afflicted with the same inability to distinguish the wood (an understanding of the deeper historical forces at work) from the trees (the day-to-day manoeuvring of parties and politicians). In normal times, this may not be so important, because life continues for the most part as before, but at moments of great paradigmatic change it is absolutely critical.

If the political journalists, and indeed the PLP, had understood the deeper forces and profound changes now at work, they would never have failed en masse to rise above the banal and predictable in their assessment of Corbyn. Something deep, indeed, is happening. A historical era – namely, that of neoliberalism – is in its death throes. All the old assumptions can no longer be assumed. We are in new territory: we haven’t been here before. The smart suits long preferred by New Labour wannabes are no longer a symbol of success and ambition but of alienation from, and rejection of, those who have been left behind; who, from being ignored and dismissed, are in the process of moving to the centre of the political stage.

Corbyn, you may recall, was instantly rejected and ridiculed for his sartorial style, and yet we can now see that, with a little smartening, it conveys an authenticity and affinity with the times that made his style of dress more or less immune from criticism during the general election campaign. Yet fashion is only a way to illustrate a much deeper point.

The end of neoliberalism, once so hegemonic, so commanding, is turning Britain on its head. That is why – extraordinary when you think about it – all the attempts by the right to dismiss Corbyn as a far-left extremist failed miserably, even proved counterproductive, because that was not how people saw him, not how they heard him. He was speaking a language and voicing concerns that a broad cross-section of the public could understand and identify with.

***

The reason a large majority of the PLP was opposed to Corbyn, desperate to be rid of him, was because they were still living in the neoliberal era, still slaves to its ideology, still in thrall to its logic. They knew no other way of thinking or political being. They accused Corbyn of being out of time when in fact it was most of the PLP – not to mention the likes of Mandelson and Blair – who were still imprisoned in an earlier historical era. The end of neoliberalism marks the death of New Labour. In contrast, Corbyn is aligned with the world as it is rather than as it was. What a wonderful irony.

Corbyn’s success in the general election requires us to revisit some of the assumptions that have underpinned much political commentary over the past several years. The turmoil in Labour ranks and the ridiculing of Corbyn persuaded many, including on the left, that Labour stood on the edge of the abyss and that the Tories would continue to dominate for long into the future. With Corbyn having seized the political initiative, the Tories are now cast in a new light. With Labour in the process of burying its New Labour legacy and addressing a very new conjuncture, then the end of neoliberalism poses a much more serious challenge to the Tories than it does the Labour Party.

The Cameron/Osborne leadership was still very much of a neoliberal frame of mind, not least in their emphasis on austerity. It would appear that, in the light of the new popular mood, the government will now be forced to abandon austerity. Theresa May, on taking office, talked about a return to One Nation Toryism and the need to help the worst-off, but that has never moved beyond rhetoric: now she is dead in the water.

Meanwhile, the Tories are in fast retreat over Brexit. They held a referendum over the EU for narrowly party reasons which, from a national point of view, was entirely unnecessary. As a result of the Brexit vote, the Cameron leadership was forced to resign and the Brexiteers took de facto command. But now, after the election, the Tories are in headlong retreat from anything like a “hard Brexit”. In short, they have utterly lost control of the political agenda and are being driven by events. Above all, they are frightened of another election from which Corbyn is likely to emerge as leader with a political agenda that will owe nothing to neoliberalism.

Apart from Corbyn’s extraordinary emergence as a leader who understands – and is entirely comfortable with – the imperatives of the new conjuncture and the need for a new political paradigm, the key to Labour’s transformed position in the eyes of the public was its 2017 manifesto, arguably its best and most important since 1945. You may recall that for three decades the dominant themes were marketisation, privatisation, trickle-down economics, the wastefulness and inefficiencies of the state, the incontrovertible case for hyper-globalisation, and bankers and financiers as the New Gods.

Labour’s manifesto offered a very different vision: a fairer society, bearing down on inequality, a more redistributive tax system, the centrality of the social, proper funding of public services, nationalisation of the railways and water industry, and people as the priority rather than business and the City. The title captured the spirit – For the Many Not the Few. Or, to put in another way, After Neoliberalism. The vision is not yet the answer to the latter question, but it represents the beginnings of an answer.

Ever since the late 1970s, Labour has been on the defensive, struggling to deal with a world where the right has been hegemonic. We can now begin to glimpse a different possibility, one in which the left can begin to take ownership – at least in some degree – of a new, post-neoliberal political settlement. But we should not underestimate the enormous problems that lie in wait. The relative economic prospects for the country are far worse than they have been at any time since 1945. As we saw in the Brexit vote, the forces of conservatism, nativism, racism and imperial nostalgia remain hugely powerful. Not only has the country rejected continued membership of the European Union, but, along with the rest of the West, it is far from reconciled with the new world that is in the process of being created before our very eyes, in which the developing world will be paramount and in which China will be the global leader.

Nonetheless, to be able to entertain a sense of optimism about our own country is a novel experience after 30 years of being out in the cold. No wonder so many are feeling energised again.

This article first appeared in the 15 June 2017 issue of the New Statesman, Corbyn: revenge of the rebel

Martin Jacques is the former editor of Marxism Today. 

This article first appeared in the 15 June 2017 issue of the New Statesman, Corbyn: revenge of the rebel

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