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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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Does the working class need to ask for its Labour Party back?

The more working class voters there were in a constituency in 2017, the more it tended to swing to the Tories.

When Theresa May called the general election nearly two months ago, all the evidence – opinion polls and local election results especially – pointed to the expectation that the Labour Party would be crushed, with many of its MPs losing their seats.

The assumption was that Labour under Jeremy Corbyn would be unable to win over Conservative voters, because he was too left-wing to appeal to those close to the political centre ground.

Some commentators, myself included, took this a little further, arguing that Corbyn was left-wing in a way that would alienate the very people he claimed to speak for, ie working class people, while appealing primarily to virtue-signalling middle class romantics like Corbyn himself, who have no more interest than he does in the business of parliament but love a good rally or social media spat.

The local elections that took place in May appeared to confirm the above expectation and analysis, with hundreds of Labour councillors losing their seats. However, opinion polls began to shift, and while different polling companies’ methodologies led to different estimates of support for the two main parties, all showed Labour on the rise – with YouGov predicting two days before the election that the Conservatives would win a mere 305 out of 650 seats, while Labour would win 266.

Despite a miserable campaign in support of a depressing manifesto, enlivened only by the promised revival of an anachronistic bloodsport beloved of the rural elite – indeed, a campaign so bad that political historian Glen O’Hara joked about having ‘watched and wondered whether Mrs May was a Corbynite sleeper agent’ – the Conservatives actually did slightly better than this prediction, winning their highest share of the vote since 1983 and coming to hold 317 seats to the Labour Party’s 262.

This left them only 55 seats ahead of their historic rival: a gap only very slightly wider than the 48-seat lead that they had after the 2010 general election, when David Cameron defeated the supposedly very unpopular Gordon Brown. The 2017 result would have been impossible without the activists who have stuck with the Labour Party regardless of their feelings about the leader, some of whom are now publicly expressing shame at the part they played in what is widely seen as Corbyn’s triumph.

Does the Labour Party’s unexpectedly narrow defeat refute the diagnosis of Corbynism as a middle class politics that alienates the party’s traditionally working class base, but doesn’t really care? Constituency-by-constituency analysis of the 2017 results by Paula Surridge, of the University of Bristol, suggests that it does not.

The Leave vote

We should perhaps begin with a pattern that was already apparent on election night. Parts of the country that voted strongly to quit the European Union appeared to show a swing away from Labour towards the Conservative Party, while areas that voted strongly for Remain appeared to show a swing in the opposite direction.* 

Surridge’s analysis confirms that this was indeed a trend: the higher the estimated Leave vote, the more the Labour vote share fell between 2010 and 2017, and the more the Conservative vote share rose during the same period. Blue dots represent actual constituencies; the red line represents the trend.

On the face of it, this is baffling. Both the Labour Party and the Conservative Party are officially committed to leaving the EU, and Jeremy Corbyn famously used a three-line whip to force his MPs to support the Tory Brexit bill in February.

The anti-Brexit parties were the Liberal Democrats, the Scottish National Party, and the Greens. There was therefore no sense in which a vote for Labour could have been a vote against leaving the EU. Why, then, should a constituency’s support or opposition to Brexit have made any difference?

This brings us to the paradox that the Labour MP John Mann has called the ‘Bolsover question’: why the second-largest Labour-to-Conservative swing in the country should have occurred in the constituency of Dennis Skinner.

Skinner is not only – as Mann observed – one of Jeremy Corbyn’s staunchest supporters in the Commons, but also  – although Mann did not draw attention to this fact  – one of the Labour Party’s staunchest advocates of Brexit. Why should a constituency that voted for Brexit by 29,730 votes to 12,242 have swung so heavily against a strongly pro-Brexit candidate for a pro-Brexit party?

Here’s a thought: maybe constituencies swung away from Corbyn’s Labour Party for the same sorts of reasons that they voted Leave, and swung towards it for the same sorts of reasons that they voted Remain? Or to put it another way: what if Corbynism appeals to the kinds of people to whom EU membership seems advantageous, and repels the kinds of people to whom it seems an encumbrance, regardless of the fact that Corbyn – as a disciple of Tony Benn  – is resolutely anti-EU?

Let’s take a look at some of the other things that Surridge found.

Educational level

Exit polling after last year’s EU referendum found that the more educated a person was, the more likely they were to have voted Remain. While some Remainers might like to dismiss this as ignorance on the part of Leavers, it can also be interpreted as an expression of anger at being left behind in Britain’s ever-more highly globalised economy.

So we should take note of Surridge’s finding that the higher the percentage of university degree holders in a constituency, the more it would tend to swing towards Labour from 2010 to 2017, and the lower the percentage of degree holders, the more it would tend to swing towards the Conservatives.

Ethnicity

While a bare majority of white voters opted for Leave last year, large majorities of black and Asian voters chose Remain. The reasons for this are complex – but it is notable that Surridge finds that the lower the percentage of white British voters in a constituency, the more it would tend to swing towards Labour, and the higher the percentage of white British voters, the more it would tend to swing towards the Conservatives.

While it is certainly good news for Labour that it is winning votes in more diverse communities, it should think carefully about why this is not happening in less ethnically diverse parts of the country – particularly as these are often economically struggling areas unattractive to immigrants.

Class

Now the biggest question of all. The Labour Party was set up to provide parliamentary representation for working class people, and the far left trumpeted Corbyn’s leadership as a triumph for "working class politics". But opinion polls showed something very different: under Corbyn, working class support for Labour rapidly fell to its lowest point ever.

Moreover, by-election results in the strongly working class constituencies of Stoke-on-Trent Central and Copeland showed swings from Labour to the Conservatives, as indeed they had during the Labour Party’s last flirtation with Bennism in 1983. Did the general election see working class voters change their minds and flock back to Corbyn’s "socialist" party?

My goodness. Surridge’s analysis shows that the more working class voters there are in a constituency, the more it tended to swing Conservative, and the fewer there are, the more it tended to swing Labour. To put some figures on that, she found that for every 10 per cent more working class voters in a constituency, there tended to have been a fall of about 3 per cent in the Labour vote and a rise of about 5 per cent in the Tory vote between 2010 and 2017.

Think about that for a moment. This is Corbyn bringing the party back to its "working class, socialist roots"?

Correlations, 2010-2017 and 2015-2017

I sense an objection: these figures show the swing from 2010 to 2017, and Corbyn’s only been in charge since 2015. Maybe it’s all Ed Miliband’s fault?

Apparently not. Surridge calculated the correlations between all the above variables and the change in the Conservative and Labour vote, both for the period of 2010-2017, and for the period of 2015-2017. And here they are:

While it is true that many correlations are weaker for the period 2015-2017 than for 2010-2017, the positive correlations remain positive and the negative correlations remain negative.

In other words, working class voters, voters not educated to college level, and voters in ethnically homogeneous areas love Corbyn’s Labour Party even less than they loved Miliband’s. Meanwhile middle class voters, those educated to college level or higher, and voters in ethnically diverse areas love it even more.

It should also be noted that the positive correlation between the percentage of working class voters and the change in the Conservative vote, and the negative correlation between the percentage of voters with degrees and the change in the Conservative vote, are both stronger for the period 2015-2017 than they are for 2010-2017, indicating a rapid growth of support for the Conservative Party among the very social groups that Labour traditionally represented.

This should worry Labour politicians with ambitions to be in government, because there is simply no way that a Labour leader can become prime minister without persuading Conservative voters in Tory seats to switch to Labour. Corbyn may have put together an unexpectedly large anti-Tory coalition of voters, but it’s largely concentrated in areas that already vote Labour – and traditional Labour voters are being driven faster than ever into the Tories’ arms.

The triumph of the "socialism fan"

In recent decades, Labour has become the party of anti-racism. It can be proud of the fact that its vote share has risen in ethnically diverse constituencies – although it seems to me that the racism many Labour supporters (and in some cases, activists and even politicians) have shown towards the Jewish community ought to be treated with rather more alarm than it apparently is.

But whatever the positives in this mixed achievement, it should be hard indeed for the party to find cause for celebration in the fact that the Conservatives are so rapidly becoming the party of the "left behind".

In the post-New Labour era – and even more so under Corbyn than under Miliband – Labour has become a party of highly educated middle class people, "socialism fans" especially. I said it before the election, and it remains the case today.

Indeed, the Labour leadership’s understanding of this point seems the most likely explanation for their manifesto pledge to end student fees (a policy that would benefit only higher-earning graduates, since people who do not go to university do not incur student fees, and people who do but end up in lower-paying jobs don’t have to repay their loans) while maintaining the Conservative "benefit cap", which negatively affects low earners, disabled people and the unemployed.

To what extent Labour’s new middle class voters will continue to back the party in the future seems unclear. After all, Corbyn can’t really do anything about their student fees, since he is not prime minister, and while he could do something about Brexit (since Labour, the anti-Brexit parties, and pro-EU Tories such as Ken Clarke now collectively hold a majority of seats in the Commons), he’s promised not to (good Bennite that he is).

Then again, he might publicly change his lifelong position on Europe just as he has publicly changed his lifelong positions on terrorism, nuclear weapons and Nato. He wouldn’t be the first leader to decide that Paris was worth a mass.

Fair play to him, though. In losing the election by only slightly more seats than Gordon Brown, he won the anticipated leadership contest in advance. So if the working class asks for its Labour Party back, he can confidently tell it to get lost.


* Canterbury is a notable exception here, having narrowly voted Leave in 2016 but swung to Labour in 2017. A very small city with two well-known universities, it hosts a very big student population during term time (when the general election took place), a large proportion of whom would typically have been expected to be resident elsewhere during the holidays when the EU referendum took place.

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