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Catastrophe averted?

The leaders of the rich countries went to Washington to save the world from sliding into deep recess

Vincent Cable

Shadow chancellor, Liberal Democrats

By the low standards of economic summitry, the G20 meeting rated quite high. There was a predictable, no doubt pre-written, communiqué, full of the usual banalities. And the meeting suffered from the absence of the world's most important politician, who hasn't yet taken up office. But, these necessary caveats aside, there were important achievements.

The first is that the meeting took place at all. The ludicrous pretence of the G8 (or G7) that the old western powers should set the global economic agenda has been punctured for good. On a purchasing power parity basis, China has the second-biggest economy in the world and India the fourth. It has been clear for some time that China is lender of last resort to the global system (by, in effect, underwriting US government paper) and the main source of global incremental demand (and commodity price inflation). The Chinese self-parody as the pupil sitting meekly at the feet of a dominant, but erring, master defies belief. It is obviously right that China, India and the other main non-G7 countries should be at the top table.

The second achievement was the clear realisation that unless governments hang together they will hang separately. Enough has been learned from interwar history for us to understand the follies of beggar-my-neighbour economics. Perhaps a warning shock was being sent across the bows of the incoming Obama administration not to reinvent the protectionist tariffs of the 1930s in a new guise, directed at China or Mexico in particular, or aiming to salvage the US auto industry through public subsidy. But this new-found concern for open markets has not yet communicated itself to EU or Indian or Chinese trade negotiators, who show no enthusiasm for lifting the block on trade liberalisation under the Doha round.

While trade policy is on the back burner, macroeconomic policy co-ordination is not. With a few exceptions - Germany notably - there is recognition of the need for aggressive monetary and fiscal policy and for large-scale intervention to recapitalise banks. These interventions can be and are being undertaken nationally. But governments acting in isolation attract critical attention from capital markets and currency speculators, as Gordon Brown is discovering. Structures like the G20 are the best safeguard against chaotic, unilateral action.

Will Hutton

Economic commentator

It was remarkable to gather so much economic and political power in one room to address a common agenda. That was the good news - along with commitments to co-ordinate fiscal expansion, to expand the lending power of the IMF and World Bank (Japan's $100bn loan to the IMF will increase the Fund's lending capacity by 40 per cent), to boost cross-border supervision, to tackle credit rating agencies, to reassess mad accounting rules and require member countries to attack the bonus culture in the financial services industry. A year ago such an agreement would have been inconceivable.

The bad news is that much of this is shutting the stable door after the horse has bolted. Four things have to be recognised: that the world has profound imbalances between high-saving, high-surplus areas in Asia and the Gulf and low-saving, structural deficit countries in the transatlantic economy (Germany excepted); that a system of floating exchange rates and private banks can no longer take the weight of recycling those savings; that unless the system is de-risked and the burden of adjustment is placed on deficit and surplus countries alike, the global system faces breakdown; and finally, that the business model used by the banks to recycle surpluses - securitisation and hedging in the $360trn global derivatives market - is broken.

In plain English, China must accept that its currency must appreciate; Britain and America, that they cannot run their economies on foreign savings; and all players that there has to be a system of semi-fixed exchange rates between the yen, the euro and the dollar.

One tough reality is that, for all their new economic weight, China, Brazil, Russia and India do not have fully convertible currencies - nor do they want to accept the discipline involved in having convertible currencies.

Ann Pettifor

Fellow, New Economics Foundation

Over the past decade, the Group of Eight leaders turned their exclusive annual meetings into jamborees. Rock concerts, protesters and celebrities added populist glitz. However, the real purpose of the meetings - international co-operation and co-ordination - was ducked. At last year's G8 Summit in Heiligendamm, Germany, George W Bush and Gordon Brown vetoed Angela Merkel's agenda item for co-operation over tighter international regulation and financial oversight of capital markets. That task, they argued then, could safely be delegated to "the invisible hand". Now that the fantastic, self-regulating machinery of free markets has proved grossly malfunctional, it is good to hear talk of enhanced co-operation and regulation.

But, in places, the joint statement issued by the 20 world leaders borders on the delusional. The phrase "We must . . . ensure . . . that a global crisis, such as this one, does not happen again" implies that they are avoiding the next war when they are still losing this one.

Even more questionable is the call for continued "economic growth". In a world of finite resources on a planet with limited capacity to absorb toxic emissions, and with bushfires encircling Los Angeles, we would have hoped that world leaders had some awareness of the threat of climate change and of the limits to economic growth. But no. The gravest threat to global security - our rapacious attitude to the earth's resources - is once again whipped up with talk of "market principles, open trade and economic growth".

Jesse Norman

Senior fellow at Policy Exchange

One might have thought the G20 summit a good moment for some straight talk from the Prime Minister. Instead, the political wind machine was cranked up to full blast. The summit would be a second Bretton Woods. Gordon Brown would forge a new global consensus on co-ordinated intervention to stimulate growth (while, of course, leading reforms to prevent the banking crisis from ever recurring). Luckily virtually none of this was true, or the summit would have been a hopeless failure. With fiscal measures already widely adopted, the G20 hardly needed Brown's leadership. No surprise that he returned empty-handed.

Labour has moved from despondency to a manic desperation to remain in office. The result is that the ever-fragile concept of truth in politics has wholly been cast aside. Thus the humiliating bank nationalisation has been dressed up as an act of far-seeing economic statesmanship. And a sensible warning from the shadow chancellor that current economic policy puts sterling at risk has been condemned for breaching an irrelevant semi-convention dating from the time of fixed exchange rates.

Alex Brummer

City editor, Daily Mail

There is a golden rule of international financial meetings. The larger the "G" number, in other words the more countries involved, the less likely it is that any worthwhile or binding decisions will be taken. So while it was wholly encouraging that the G20 summit brought a number of emerging market leaders to the top table of finance, including China, Brazil and Russia, there was never any real prospect of the event becoming the new Bretton Woods.

Furthermore, the summit took place in the final days of the lame duck administration of George Bush. Once it became clear Barack Obama was going nowhere near the confab, the event became even more of an irrelevance.

European leaders may like to blame Wall Street and Anglo-Saxon capitalism for the credit crunch and the recession now spreading through the Group of Seven like wildfire, but there is no hope of concerted international action without the new White House and Federal Reserve on board.

Almost all that was agreed could have been decided before the leaders left home. The commitment to reviving the Doha trade round is pure motherhood and apple pie. The prairie populists on Capitol Hill are unlikely to be enthusiastic.

At the core of the proposals was the commitment to use fiscal measures, tax cuts and public spending to kick-start global economies. But despite Gordon Brown's enthusiastic embrace of a new Keynesian big-spending approach - as advocated by Nobel prize-winner Paul Krugman - he neatly forgot to mention that such big-spending ways were only for those countries with a "policy framework conducive to fiscal sustainability". The UK with its ballooning budget deficit, which could hit £100bn or more next year, is clearly in no such position.

It is hard to fathom in what way the G20 was "historic", as the Prime Minister claimed in the Commons. There is little original in a bunch of old ideas designed to remove risk from the financial system and control executive pay. That is what regulators should have done before the banks ploughed into the iceberg.

James Buchan

Author and financial commentator

What is the Financial Stability Forum? What is "mitigating against pro-cyclicality in regulatory policy"? What, if anything, has the G20 summit in Washington on the weekend of the 15 November achieved?

Nothing very much, is the answer to all three questions. In the twilight of a discredited US administration, and with President-elect Barack Obama absent, the meeting was never likely to achieve a great deal or generate excitement in the US. Yet the final declaration, drafted with suspicious ease by the delegations on Saturday night, has something for everybody but not enough of anything to scare the financial horses.

Nicolas Sarkozy, the French president whose idea the whole thing was, gained some support for more institutional government of trade and finance, but no super-gendarme international of the type that has been directing financial traffic in the French imagination since the 17th century. As Jean-Pierre Robin wrote in the Figaro: "Those with fantasies of supranational supervision will need to change therapist." The US, jealous of its commercial sovereignty even when it is going about without its shirt, put paid to those Gallic dreams and also gained some platitudes about free trade.

The new commercial powers, not only Brazil, Russia, India and mainland China but also rich oil producers such as Saudi Arabia, received diplomatic recognition of their deep pockets. "The world's geopolitical structure has a new dimension," the Brazilian president, Luiz Inácio Lula da Silva, said. "There is no logic to making any political and economic decisions without the G20 members - developing countries must be part of the solution to the global financial crisis."

I suspect the winner is Gordon Brown. The next meeting will be held under his presidency in London in April. The Washington ragbag of proposals to reform or tinker with the current system, such as reminding us about the Financial Stability Form and mitigating against that regrettable pro-cyclicality in regulatory policy, appeals to his technical vanity and plays to his technical strengths.

Paul Mason

Economics editor, Newsnight

There was a sense in Washington, despite the throbbing engines and bulletproof glass, of powerlessness. The communiqué was stronger on the causes of the crisis than on co-ordinated solutions. Policymakers are right to stay focused on the near-term dangers: these are country-level debt default, the rising cost of borrowing for non-financial companies, rapid job losses and - via feedback - further destabilisation of the banking system. We are moving into the phase of fiscal stimulus but there are powerful technical arguments that say without "quantitative easing" - that is, printing money to stimulate demand - it doesn't work. The same people who told me it would come to recapitalisation, that the TARP (troubled assets relief programme) would not work, are now saying: nationalise the banks and print money.

Despite the urgency of the focus on near-term dangers, what was obvious at G20 was the lack of vision as to the future growth model of capitalism. The problem was seen as a failure of regulation; the solution a pretty weak brew of re-regulation that will get diluted even more as the lobbyists begin to have influence. But the problem is more fundamental: the growth model based on high debt instead of high wages has failed and will be hard to revive.

Peter Mandelson

Secretary of State for Business

We have been caught in a global whirlwind of extraordinary force.

It has brought with it a fear that has gripped the world economy and taken hold here at home. We are seeing it every day, with fear among consumers that is depressing demand; fear among banks that is inhibiting them from lending; fear among small- and medium-sized businesses that banks are just about to cut off their credit lines. The choice facing us and governments around the world is this: do we act decisively to counter and overcome this fear, or do we become paralysed by it and fail to act?

The government has already shown its willingness to take the bolder course as the first mover in setting about stabilising the banks. What is needed now is action to stimulate the demand essential for recovery. The UK economy, like economies in the rest of the world, needs a shot of adrenalin.

The Bank of England has already made a significant cut to interest rates. This monetary stimulus now needs to be matched by a fiscal stimulus. And because this is a global crisis this is best done if the benefit of the measures taken nationally is maximised by the same measures being taken around the world. That was the message from the international conference in Washington, as governments recognised the need to take the action necessary to stimulate their economies.

People will say, "But you are resorting to borrowing in order to deliver the stimulus that's needed." My answer to that is, what is the alternative? We certainly haven't heard one from the Conservatives.

David Cameron and George Osborne, trapped by their desire to oppose everything the government does, refuse to accept the scale of the challenge the world's economies now face and the prescribed international action. Their stance appears to be, if the rest of the world disagrees with us, it is because the rest of the world is wrong. The result is incoherence and an Opposition at sixes and sevens. One minute this is "do all it takes" and the next it is - as we heard this week - leave the recession to "take its course".

Sitting on our hands watching houses repossessed and businesses go to the wall is certainly not the approach being urged on me by people I have been speaking to up and down the country. They want their government to act to stimulate demand in the economy here and now. With all due prudence, that is what we are going to do.

Diane Coyle

Author and economist

The G20 meeting confirmed a robust and rapid response (by past standards) to recession, even in the US operating under a rump free-market administration. Policymakers around the world have been shaken to see the financial system at the brink of collapse - on their watch.

Yet it is difficult to predict how severe the recession will be. Bank lending to businesses and individuals is virtually frozen. In many (but not all) areas of the economy, activity has come to a halt. The last financial boom and bust, ending in 2001, had surprisingly little impact on jobs and growth, as the financial bubble had become increasingly untethered from anything real. Today's vicious circle of evaporating liquidity is much more serious, but lower interest rates and bigger government deficits will help. The underlying trends are easier to outline. Some challenges are clearly unaltered, such as climate change and our ageing society.

The technological opportunities are still there, too, in communications, the internet and biotechnology. Globalisation will be less driven by finance in future, but it will not be unwound. It would take a generation to turn back the clock on economic linkages, and the cultural impacts are permanent. In fact, the crisis has underlined our interdependence across national borders.

What has changed is the political economy of globalisation. In the triad of efficiency, fairness and freedom which dominates political choice in democracies, fairness will take priority in the years ahead, and the drive for ever greater productivity gains will retreat. The semi-nationalisation of the banks has started to shift the boundary between public and private domains; we will have to think more carefully about how to govern private choices that have big social spillovers. The G20 did not touch on this profound question of governance.

Iain Macwhirter

Political commentator

The G20 was largely a throat-clearing session and was never going to put in place the foundations of a new international financial system. Progress on the stalled Doha trade talks is encouraging but provides no guarantee that protectionism will not raise its head in the coming economic slump.

It is inevitable that countries faced with financial collapse will try to defend their economies by any means possible. Britain is already far down the road of "beggar my neighbour" economics by the "managed" devaluation of the pound, a crude attempt to boost UK industry by lowering the prices of British exports and creating a de facto tariff wall around imports from abroad. It won't work because Britain does not make much of anything any more except debt, and the world has plenty of that already.

But the collapse of the pound will seriously damage what is left of UK financial services. No one in their right minds would put money into the UK economy now, with the property market collapsing, UK banks insolvent and government borrowing likely to reach £100bn in the next 18 months.

Gordon Brown seems to believe that sterling is like the dollar, and that people will buy our dud pounds whatever the likely losses. However, as we are discovering, sterling is not a reserve currency and unlike the US we cannot force other countries to pay our debts. The future for our battered island is likely to be hyperinflation punctuated by appeals to the International Monetary Fund for emergency aid. Forget about spending our way out of recession - the UK government simply lacks the resources to fund the huge borrowing that would be required. Something will have to give. Brown will have cause to regret being so beastly to the Icelanders.

Richard Reeves

Director of Demos

James Carville, the hardened political aide to Bill Clinton, said that if he was reincarnated he'd want to come back as the bond market: "You can intimidate anybody." Right now it seems odd to think of any financial markets threatening anybody. But it is one of the ironies of the current economic situation that the capital markets still have some serious muscle.

Western governments, faced with recession, need to throw a lot of money at their ailing financial institutions - money that can be raised only by selling Treasury debt, mostly to the capital-rich investors of the Far East. For Gordon Brown, this is likely to become a more difficult sell, as Prudence is given the push and the pound takes a nosedive. Even national exchequers invite sceptical scrutiny in this new, nervous world.

The financial crisis is at heart a loss of faith. The word credit derives from the Latin credo - "I believe". When the Titanic of the financial world - in the shape of Lehman Brothers - was allowed to sink, the bonds of trust stretching around the world were snapped. In an instant, everyone stopped believing in each other.

A number of sensible measures should be on the agenda when the G20 reconvenes next year, including legislation to ensure bonuses in financial services are paid on the basis of five-year performance; new "pro-cyclical" provisioning rules requiring finance houses to increase their store of capital in economic upturns; and tougher, independent regulation of the rating agencies whose doe-eyed assessments of banks built on a mountain of paper helped get us in this mess.

There is, however, no quick technical fix for such a dramatic loss of confidence. Trust can be lost in the blink of a market-trader's eye - but it will take years to rebuild.

TEN THINGS THEY ACHIEVED

  • 1 Created a road map aimed at stabilising the world economy and overhauling the banking system with targets for the end of March 2009
  • 2 Advocated Keynesian big-spending
    “fiscal stimulus”
  • 3 Expanded from a small club making world decisions to recognise the importance of the economies of Brazil, Russia, India and China
  • 4 Agreed to reform international finance institutions, including better transparency and supervision of credit ratings agencies
  • 5 Agreed that the Financial Stability Forum should include emerging economies
  • 6 Banks and hedge funds to hold increased levels of capital and cash
  • 7 Recommended “supervisory colleges” for all major cross-border financial institutions
  • 8 Return to the Doha round – trade ministers to meet in Geneva next month
  • 9 Instructed G20 finance ministers to draw up plans and timeline
  • 10 Agreed to meet again, in London next April

. . . AND FIVE THEY DIDN’T

  • 1 Agree a future growth model for capitalism. Instead they reconfirmed their “shared belief in market principles”
  • 2 Agree detailed plans for regulatory reforms of banking
  • 3 Establish a plan of action for achieving the already endangered Millennium Development Goals
  • 4 Set up an international supervisory body with sufficient power to control global markets
  • 5 Halt the run on sterling, which fell sharply against the euro and dollar

Alyssa McDonald

This article first appeared in the 24 November 2008 issue of the New Statesman, How to get us out of this mess

JOHN McHUGH
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The strange death of liberal politics

The world is changing in ways the British left cannot comprehend.

A lesson of the past few days is the danger of groupthink. Along with the major international institutions, the assembled might of establishment opinion – in the CBI and TUC, massed legions of economists and a partisan Bank of England – was confident that the existing order here and in Europe would be preserved by promises of unspecified reforms. Until around 2am on the morning of Friday 24 June, the bookies and currency traders followed the playbook that had been given them by the authorities and the pollsters. Then, in a succession of events of a kind that is becoming increasingly common, the script was abruptly torn up. A clear majority of voters had reached to the heart of the situation. Realising that the promises of European reform that had been made were empty, they opted for a sharp shift in direction. The consequences can ­already be observed: rapid political change in Britain and an accelerating process of unravelling in the European Union. The worldwide impact on markets and geopolitics will be long-lasting and profound.

There are sure to be concerted efforts to resist the referendum’s message. The rise of the hydra-headed monster of populism; the diabolical machinations of tabloid newspapers; conflicts of interest between baby boomers and millennials; divisions between the English provinces and Wales on the one hand and Scotland, London and Northern Ireland on the other; Jeremy Corbyn’s lukewarm support for the Remain cause; the buyer’s remorse that has supposedly set in after Remain’s defeat – these already commonplace tales will be recycled incessantly during the coming weeks and months. None of them captures the magnitude of the upheaval that has occurred. When voters inflicted the biggest shock on the establishment since Churchill was ousted in 1945 they signalled the end of an era.

Predictably, there is speculation that Brexit will not happen. If Britain can vote for Brexit, it is being argued, surely anything is possible. But those who think the vote can be overturned or ignored are telling us more about their own state of mind than developments in the real world. Like bedraggled courtiers fleeing Versailles after the French Revolution, they are unable to process the reversal that has occurred. Locked in a psychology of despair, anger and denial, they cannot help believing there will be a restoration of an order they believed was unshakeable.

As David Cameron confirmed in his speech in the Commons on 27 June, a second referendum is fantasy politics. Nor can the next prime minister – whoever he or she may be – renege on the implications of the referendum that has been held. There is much uncertainty surrounding exactly how Britain will leave the EU. Will Article 50 be triggered? Will Brussels impose punitive terms in any deal on trade? Is a “Norway-plus” solution, in which the UK remains in the single market while limiting the free movement of labour, actually feasible?

Whatever the answers to these questions, there will be no going back. The vote for Brexit demonstrates that the rules of politics have changed irreversibly. The stabilisation that seemed to have been achieved following the financial crisis was a sham. The lopsided type of capitalism that exists today is inherently unstable and cannot be democratically legitimated. The error of progressive thinkers in all the main parties was to imagine that the discontent of large sections of the population could be appeased by offering them what was at bottom a continuation of the status quo.

As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer. The interaction of a dysfunctional single currency and destructive austerity policies with the financial crisis has left most of Europe economically stagnant and parts of it blighted with unemployment on a scale unknown since the Thirties. At the same time European institutions have been paralysed by the migrant crisis. Floundering under the weight of problems it cannot solve or that it has even created, the EU has demon­strated beyond reasonable doubt that it lacks the ­capacity for effective action and is incapable of reform. As I suggested in this magazine in last year (“The neo-Georgian prime minister”, 23 October 2015), Europe’s image as a safe option has given way to the realisation that it is a failed experiment. A majority of British voters grasped this fact, which none of our establishments has yet understood.

No single leader or party is responsible for the debacle of the Remain camp. It is true that gross errors were made in the course of the campaign. Telling voters who were considering voting Leave that they were stupid, illiterate, xenophobic and racist was never going to be an effective way of persuading them to change their views. The litany of insults voiced by some leaders of the Remain campaign expressed their sentiments towards millions of ordinary people. It did not occur to these advanced minds that their contempt would be reciprocated. Increasingly callow and blundering even as they visibly aged in office, Cameron and George Osborne were particularly inept in this regard.

Cameron’s decision to gamble his future and that of the UK on the referendum was unnecessary and has proved to be counter-productive. Lacking the actively pro-EU faction that existed in John Major’s day, the Conservatives have become thoroughly Eurosceptic. While many Tory MPs believe Britain should remain in the EU, very few are enthusiastic. The effect of the campaign was to widen party divisions. Doubtless Cameron imagined he could bind these wounds and exit gracefully from power at a time of his choosing. If his bet had paid off he might have gone down as a strangely colourless politician who hung on to power for an improbably long time using the arts he learned from Tony Blair, then departed leaving no lasting legacy and was soon forgotten. But the magic failed the disciple as it had already failed “the master”. A Burkean wisdom in events has delivered Cameron from oblivion and assured his place as the most spectacular bungler in British political history.

Following Cameron’s announcement that he will continue in politics as a back-bench MP, the scramble for the Tory leadership has become intense and opaque. There have been reports suggesting that Michael Gove – currently the pivotal figure in British politics – has thrown his weight behind Boris Johnson and may be seeking to include Osborne in the new government. Osborne has ruled himself out as a contender for the leadership. Johnson’s candidacy has a powerful momentum and if the timetable set out by the Conservative 1922 Committee is followed it is possible that he will be in 10 Downing Street by 9 September. Yet Johnson’s coronation is not yet a foregone conclusion. A number of others – including Nicky Morgan, Stephen Crabb, Liam Fox and Jeremy Hunt – appear to be thinking of running, and though it is difficult to envision any of these candidates in charge in the negotiations that Brussels is insisting must soon begin, their decisions will complicate the selection process. If what is wanted is a leader who can reunify the party and the country, Theresa May – who according to a YouGov poll has a lead over Johnson among voters for all parties other than Ukip as the next prime minister – must surely be a credible contender. What is certain is that a new Tory leader and prime minister will soon be in place.

No such clarity exists regarding the Labour leadership. Clearly Jeremy Corbyn must accept responsibility for Labour’s referendum debacle. Following Hilary Benn’s departure there was a mass resignation of shadow cabinet members and, at the time of writing, the party’s MPs have backed a vote of no confidence by an overwhelming margin. As Tom Watson – in some ways the pivotal figure in Labour – is reported to have told him, Corbyn has lost his authority among MPs. Yet it remains unclear how any coup mounted by MPs could succeed if, as he has repeatedly said he will, Corbyn turns for support to party activists, now the ultimate arbiters of Labour’s fate. The new rules for party membership and leadership elections framed by Ed Miliband (which were supported by the party’s Blairites at the time) may have created an insoluble problem for Labour.

It may not have been Corbyn’s much-criticised detachment from the Remain campaign that led to the haemorrhage of Labour voters to the Leave camp. On the contrary: what sealed Labour’s fate was more likely his only meaningful intervention, when he pointed out that there could be no cap on immigration as long as Britain remained in the EU. Leading Labour figures have denied adamantly that the party’s stance on immigration is central to the collapse of its working-class base. It was a complex of issues to do with de-industrialisation, they repeat, that led to mass desertion by Labour voters. There is some force in this, but it is essentially a way of evading an inconvenient truth.

Free movement of labour between countries with vastly different wage levels, working conditions and welfare benefits is a systemic threat to the job opportunities and living standards of Labour’s core supporters. Labour cannot admit this, because that would mean the EU is structured to make social democracy impossible. This used to be understood, not only on Labour’s Bennite left but also by Keynesian centrists such as Peter Shore and, more recently, Austin Mitchell. Today the fact goes almost unnoticed, except by those who have to suffer the consequences. Figures such as Gisela Stuart, Frank Field and Kate Hoey, who recognise the clash between EU structures and social-democratic values, are a small minority in the party.

Corbyn is not alone in passing over this conflict. So do his opponents, and this is one reason why it will be extremely difficult to reverse Labour’s slide. If Yvette Cooper, Andy Burnham or David Miliband had been leader, the referendum would still have ended badly for Labour. No doubt the campaign would have been handled better. But the message would have been the same – promises of European reform that European institutions have shown to be worthless. Labour’s heartlands were already melting away. A rerun in the north and Midlands of Labour’s collapse in Scotland is now a distinct possibility. Fear of this disaster is one reason Labour is unlikely to split. With over 40 per cent of the party’s voters opting for Leave, anyone who joined a new “modernising” party would be on a fast lane to oblivion. Only a radical shift from progressive orthodoxies on immigration and the EU can save Labour from swift and terminal decline. It is doubtful whether any future leader could enforce such a shift, as it would be opposed by most Labour MPs and by activists. Yet it is plainly what millions of Labour voters want.

***

Talk of realignment on the centre ground overlooks how the ground has shifted. Tory MPs who were Remainers will know that their party will become more Eurosceptic as members who defected to Ukip return to the fold. A cross-party attempt to thwart the referendum result on the grounds that it is not binding on parliament is unlikely to gain much traction. Against a background of popular mistrust of the political class, vetoing Brexit in the Commons could only worsen the country’s divisions and create a constitutional impasse. Even so, the Conservative majority is too small to ensure that Brexit legislation will go through smoothly. Whatever the Fixed-Term Parliaments Act may say, the next Tory prime minister may decide to call an early general election, possibly later this year, when Labour will still be in chaos.

Nicola Sturgeon’s demand for a second Scottish referendum – echoed in Gerry Adams’s call for a parallel vote in Northern Ireland – shows her lagging behind events, like the rest of the establishment. Leaving the UK to rejoin the EU makes sense only on the premise that the EU remains intact. But European politics is in a state of flux, and the EU more fragile than Sturgeon realises. Popular revolt against the EU did not begin with the British referendum. A clear signal was sent out by the result of a vote in the Netherlands in April, when voters rejected closer links between the EU and Ukraine. At present, demands for referendums are being made in a growing number of countries. Also, by no means all EU member states would welcome Scotland joining them. Spain would resist setting a precedent that would be followed in Catalonia. A vote on Scottish independence in the midst of this gathering storm could easily be lost. For that very reason it is far from certain that a second referendum will be called.

The dread of contagion that grips Brussels is well founded. If Brexit-style referendums were held in Sweden, Denmark or the Czech Republic, say, it is conceivable that the EU could survive. But if a single eurozone country threatens to follow Britain’s example the result will be an existential threat to the euro. Even the prospect of this could provoke a speculative assault on the currency that would make the misfortunes of the pound trifling in comparison. Already there have been ominous tremors. Europe’s stock markets have been hit far more badly by Brexit than London’s. As George Soros has commented, Italy may be on the brink of a banking crisis that could leave the Five Star Movement – which has long been critical of the euro and won mayoral elections in Rome and Turin just the other day – in power as early as next year. Contrary to establishment warnings and expectations, it seems that the shock of Brexit will be more damaging for the EU than the UK.

That is why the response to Brexit in Brussels may be a last-ditch spurt of further integration. Some may suggest that, with Britain on the way out, the EU will become a fully fledged transnational state. Yet with so many countries harbouring powerful anti-EU movements, any sudden move to greater integration will be self-defeating. In an attempt to shore up a failing status quo, the Brussels elite may end up destroying it.

The contradictions of the world-view shared by progressive thinkers and established elites are becoming acutely evident. There is constant talk about being in a time of unprecedented change. Globalisation is connecting the world as never before; our lives are being continuously transformed by disruptive technologies; old ways of life and hierarchies in society are fast dissolving . . . these are the ruling clichés of the age. What is striking is that they are deployed to prop up a failing ancien régime. Not only in Britain and continental Europe but also in the Unite States, the human costs of a broken form of capitalism have fuelled popular revulsion – a revolt that has produced a mood of hysteria and something like blind panic among bien-pensants who pride themselves on their judicious ­rationality. Brexit will be followed by the end of Western civilisation, they foam, while a Trump presidency would be a planetary catastrophe. A paranoid style of liberalism has emerged that sees disaster and demonic evil at every turn.

That there are dark forces at work in politics cannot be denied. This is palpably the case in parts of continental Europe, where far-right parties with roots in the darkest years of the 20th century have been inching their way towards government. No one with a sense of history can feel confident that liberal values are secure in Hungary, Poland or Austria. France faces a growing challenge from Marine Le Pen, and in Germany liberal freedoms can no longer be taken for granted. A country whose pre-eminent leader condones the prosecution of a comedian accused of insulting a foreign head of state – as Angela Merkel did earlier this year – cannot be relied on to protect freedom of expression. A semi-failed Islamist despotism makes an inauspicious partner for a liberal Europe.

The situation is different where liberal values are more deeply embedded. The new tolerance of anti-Semitism by sections of the left in Britain is an elite pathology: a disorder of the gibbering classes not the masses. Self-evidently Britain has some hideous flaws, but it is still a fundamentally decent country. The same is true of the US. There is much that is ugly and threatening about Donald Trump – not least his divisive attacks on Muslims. But it is the parties that have been in power for the past thirty years that have created Trump’s main constituency. His appeal is to casualties of the American economy that mainstream politicians have chosen to ignore.

For Romney-style Republicans, the anger of former artisans and much of the middle classes is the hopeless resentment of a bunch of losers – the useless 47 per cent who live off government handouts. For many liberals, the perplexity of these groups at finding they have no place in society expresses an intolerable sense of entitlement. Bernie Sanders has stood out in recognising the negative impact of immigration on workers who are already threatened by low-cost imports of manufactured goods – a break with liberal orthodoxy for which he has been duly attacked. But Sanders has conceded the Democratic nomination, and not many in America’s submerged classes are going to vote for Hillary Clinton. Whether Trump will be able to command the wider support he needs to win the presidency remains to be seen. If he does, the result might be another variation on American crony capitalism. Ending the Bush and Clinton dynasties and involving less interventionist foreign policies and a break with free trade, it would still be a major shift. But America has not always been a free-trading nation – far from it – and moving to a more historically normal stance towards the world would not turn the country into an authoritarian backwater.

Events like Brexit and the rise of Trump seem inherently improbable only if you expect the future to be like the recent past. Some such assumption underpins the polling techniques that have given such misleading forecasts. Rationalistic liberals look for errors in statistical methods to account for these failures – sampling mistakes, hidden biases, over-reliance on telephone or internet data, and the like. Yet a more fundamental explanation lies in the discontinuities of history. Politics is not like baseball – a finite series of well-defined contests whose outcomes can be used as the basis for calculations of probability. When the game changes in politics, the upshot cannot be captured in any mathematical formula.

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If Brexit has come as a great blow to many who think of themselves as progressive, it is because politics is undergoing a regime shift – several of them, in fact, at the same time – that they have not perceived. Policies of quantitative easing that prevented a global collapse have inflated the value of financial assets while failing to generate much growth. Ultra-low and negative interest rates have damaged pension funds and punished savers. Especially in the US, large numbers have dropped out of the labour market. In metropolitan centres such as London these effects may be less severe, though there, too, prosperity is patchy, inequalities are deep and an entire generation has been shut out of the housing market. Sooner or later political blowback was inevitable.

Larger and longer changes are at work. The course of events over the past decades has not followed any progressive narrative. There is no detectable movement in the direction of internationalism or liberal freedoms. The Soviet Union collapsed only to be followed by an imperial hybrid: a mix of old-fashioned tyranny and illiberal democracy that can command more popular legitimacy than many Western governments. Post-Mao China embraced turbo-charged capitalism, but the long-awaited move to political reform did not arrive and Xi Jinping is reasserting party control. The EU responded to the close of the Cold War with a project of simultaneous expansion and greater integration, a hubristic ambition that has left European institutions weaker than they have ever been. Like the financial elites shown to be so pitifully short-sighted in the early hours of Friday morning, politicians and pundits who bang on about adapting to change have been confounded by changes that they believed could not happen.

Anyone who wants to understand the present will have to throw away the old progressive playbook. Cascading events allow for possibilities that do not feature in linear theories of history. One of them is that the antiquated British state will still be standing after the EU has fallen apart.

John Gray’s latest book is “The Soul of the Marionette: a Short Enquiry into Human Freedom” (Allen Lane)

John Gray is the New Statesman’s lead book reviewer. His latest book is The Soul of the Marionette: A Short Enquiry into Human Freedom.

This article first appeared in the 30 June 2016 issue of the New Statesman, The Brexit lies