Mr Brown's bankers

The increasingly close relationship between banks and government pleases no one. But neither side ca

When the normally elusive, patrician John Varley, ­Barclays’ chief executive, turned up on Channel 4 News a week ago, to extol the virtues of what is known in the trade as “quantitative easing” (steps to make credit easier or printing money), it was clear that something was up.

Among Britain's coterie of high-street bankers, Barclays has done all in its power to avoid being ensnared in the various rescue plans for British banking concocted in Downing Street. It would rather put its faith in the Gulf ­potentates - who pumped £7.3bn into the bank in November - than take the taxpayer's shilling from Gordon Brown and Alistair Darling.

Barclays figured that when it comes to dealing with new Labour, there are always political strings attached. The Gulf statelets of Qatar and Abu Dhabi may charge more for their money, but they don't tell you how to run your business.

As the financial crisis worsens, threatening to turn Britain's recession into depression, the fates of British banking and government have become ever more entwined. Bankers have the privilege of being on the luncheon invitations list of the Prime Minister and the Chancellor of the Exchequer. But they can also expect to have their evenings and weekends interrupted, at a moment's notice, when the government summons them to action, as it did last weekend.

As one irritated banker told me last week: "Valuable senior executive time is being spent talking to government when we just want to get on with the business of lending again." In ­particular, there has been acute irritation at the way the Business Secretary, Lord Mandelson, trapped them into a plan (largely unformed) to lend a further £10bn to small and medium-sized businesses when several of the banks already had made commitments in this area.

Bankers see this as political grandstanding by Mandelson, who is determined that no Tory idea for dealing with the crisis goes unanswered. When the Conservatives proposed a scheme for National Insurance rebates to companies willing to take on unemployed workers, Mandelson replied with a £2,500 per head promise to every firm which saved a long-term jobless person. His small-business bailout plan was a direct response to a similar £50bn proposal by the Tories.

“Of course the government should interfere on a daily basis. Otherwise it would be a dereliction of duty”

All of this may be excellent politics, and Labour has shown an uncanny ability to bring respected City figures into its orbit to combat the credit crunch. Mervyn Davies, chairman of Standard Chartered, has been parachuted in as trade minister. Paul Myners is lording it over the banks from his perch as City minister. And the financial guru Sir Philip Hampton was tempted into the government’s net first as chairman of UK Financial Investments (the holding company for the UK’s shareholdings in the nationalised and part-nationalised banks) and more recently as chair of the very sick Royal Bank of Scotland (RBS).

Stephen Hester, brought in from British Land to rebuild confidence in RBS, has been a constant visitor to the Treasury since taking over at RBS's Edinburgh folie de grandeur headquarters in ­November. Last Sunday he turned up, curiously dressed in a shooting jacket and blue jeans. He joked: "Well, if I was going to be shot, I thought I might as well be wearing a shooting jacket."

As intimate as this increasingly cosy relationship between the bankers and government has become, the more troubled it is proving. There is already the feeling that the bankers taking the peerages and the privileges of office have become "quislings" of the financial sector, jumping to do the government's business when they would be better working from within the privately owned parts of the industry.

In the US, when bankers do join government they face the detailed scrutiny of their public and personal affairs from the Senate before confirmation. In Britain, they simply have to say yes to being "milord" for the rest of their lives.

Yet despite the glittering jobs for those brought into the government, in one way or another, there is surprisingly little respect for them in Whitehall. Dealing with the bankers is regarded as a necessary nuisance. Their arrogance is scoffed at behind closed doors and some have even been awarded disparaging nicknames. When it poured £37bn of new capital into the banks in November, new Labour vowed to deal with the bankers at "arm's length". A new institution, UK Financial Investments, headed by John Kingman, the senior Treasury official who masterminded the auction and then the nationalisation of Northern Rock, was placed in charge.

But, in my conversations with senior bankers, it has become increasingly clear that this relationship has become testy. Banks outside the government's clutches, such as the mighty HSBC (which makes most of its money overseas) and Barclays, have become irritated by government efforts to bounce them into ever more initiatives with which they do not want to be ­involved. This is not that surprising, given the lengths to which they have gone to avoid direct involvement with Whitehall. What is more intriguing is that those banks where the government has the whip hand - Lloyds Banking Group (the agglomeration of Lloyds TSB and HBOS) and the deeply damaged RBS - are also finding the new relationship with Whitehall stressful, time-consuming and difficult.

Lloyds TSB chairman Sir Victor Blank, who is close to the Prime Minister, enthusiastically embraced the idea of a takeover of HBOS, when first approached. It has been clear from the start, however, that Lloyds was unhappy with the restrictions the government planned to impose on dividend payments and bonuses to the workforce. Now it has crossed swords with Whitehall over plans it had to swap high-cost preference shares (which cost 12 per cent to service) for more ordinary shares, which would increase the decision-making power of government over the bank. In the end only RBS - keen to save £600m a year in interest - agreed to the changed terms.

Blank and the Lloyds TSB chief executive, Eric Daniels, should not be surprised by the long reach of Whitehall. As Dr Andrew Hilton, director of the City think tank the Centre for the Study of Financial Innovation, noted: "Of course the government should be interfering on a day-by-day basis. Otherwise it would be a dereliction of duty."

A senior banker at one of the bailed-out banks sees things very differently now after almost three months on the Whitehall leash.

"The government is flip-flopping from day to day. This is the politics of recession. There is very little joined-up thinking." This banker believes that Labour has been driving the process too hard, as it did last weekend when it put the final pieces in place for a new £419bn rescue plan (in addition to the £500bn already in place). In his view it would have been better if the Bank of England, like the Federal Reserve, America's central bank, had taken a leading role.

Clearly, in its first run at the problems of the banking system, the Treasury and Downing Street have made a number of serious errors, which they are now repairing. The decision taken in February 2008 to encourage Northern Rock, the first bank to be nationalised, to run down its mortgage book was plainly a daft error. It resulted in a decrease in the capacity of the mortgage lenders to continue to make loans, just as the housing market was going into its most serious nosedive in its history. Similarly, the Treasury’s decision to charge the partly nationalised banks 12 per cent for preference shares (against much lower figures

in the US and Europe) was a ghastly mistake because it encouraged banks to accumulate capital rather than lend.

Yet for all that, it is more comfortable for banks to be inside the government tent than outside. Barclays, for all its bravado, is regarded in Whitehall as something of a pariah.

Banks around the world have been coming clean on the bad debts they hold on their balance sheets. Among those acknowledging the mistakes of the past and seeking to clean them up have been New York's Citigroup and the mighty Bank of America and Deutsche Bank of Germany.

There is a belief among governments around confidence can never be restored to the banking market. John Varley sees things differently. Barclays maintains that it is still profitable (and will report profits of £5bn-£6bn shortly) and that its toxic debt is of better quality than those of other banks so it doesn't need to mark down its value in the balance sheet. This runs counter, however, to Gordon Brown's determination that toxic debt is fully disclosed. It was a battle that Barclays, armed with its Arab money, looked set to win despite the discomfort of being seen as a renegade by the government.

But in the end, if Barclays' shares continue to slide (as has been the case recently) it may have no choice - despite a spirited show of independence - but to seek some form of Treasury assistance. Then it may find that there is no such thing as independent action once the cold hand of government is sitting on your shoulder.

Alex Brummer is City editor of the Daily Mail

Banking business

Sir Fred Goodwin

Former Chief executive of RBS for period during which it accrued losses of £28bn, the biggest loss in British history. Sir Fred's pay for the year 2007 amounted to £4.2 million. He left with a pension pot of more than £8 million.

Sir Victor Blank

As chairman of Lloyds was involved in talks with government over merger with HBOS. Government owns 43 per cent. Lloyds celebrated £17 bn government bailout with £20,000 party at Gleneagles. Blank earns £600,000; Chief executive Eric Daniels earns £2.9m. As Lloyds shares slumped 48 per cent, Blank told BBC "We have been able to fund ourselves pretty effectively."

John Varley

Chief Executive, Barclays, which has no government stake at present. Varley, 52, was finance director of Barclays 2000-03. In 2007, despite having no accounting qualifications became member of Gordon Brown's High Level Group on City Competitiveness. Salary in 2007: £2.4m

Mervyn Davies

As Chairman of Standard Chartered was parachuted in as Trade Minister. Aged 52, he already chaired Gordon Brown's Business Council for Britain, set up in 2007. Will become a life peer. Awarded CBE in 2002 for services to the financial sector and the community in Hong Kong.

This article first appeared in the 26 January 2009 issue of the New Statesman, Nixon went to China... Will Obama go to Iran?

Show Hide image

The Catalan cauldron

The prospect of the break-up of Spain poses yet another challenge to Europe.

As Britain prepares to mark the centenary of the bloodiest battle in the First World War, the Somme, in July, Spain is bracing itself for an even more traumatic anniversary. In July 2016 it will be 80 years since the start of a civil war that tore the country apart and continues to divide it today. In the four decades since the return of democracy in the mid-1970s, Spaniards slowly inched towards rejecting the extreme violence of the Francoist right (and elements of the opposing left) as well as acceptance of various federal arrangements to accommodate the national sentiments of the Basques and Catalans, whose aspirations Franco had so brutally suppressed. In recent years, however, this consensus has been called fundamentally into question, with severe potential consequences not only for the unity of Spain, but the cohesion of the European Union.

On 27 October 2015, after the Catalan elections, the new parliament in Barcelona passed a declaration requesting the start of a formal secession process from Spain, to be in place in 18 months. The immediate reaction of Spain’s prime minister, Mariano Rajoy, was to announce that the state was entitled “to use any available judicial and political mechanism contained in the constitution and in the laws to defend the sovereignty of the Spanish people and of the general interest of Spain”. The preamble to the constitution proclaims the Spanish nation’s desire to “protect all Spaniards and the peoples of Spain in exercising their ­human rights, their cultures and traditions, languages and institutions”. Probably the most disputed articles are 2 and 8, which state, respectively, that “the constitution is based upon the indissoluble unity of the Spanish nation, common and indivisible patria of all Spaniards” and that “the army’s mission is to guarantee the sovereignty and independence of Spain, to defend its territorial integrity and the constitutional set-up”. Rajoy’s implication was clear: the unity of the country would be maintained, if necessary by military means.

It was Madrid, however, that broke with the federal consensus some years ago and thus boosted secessionist sentiment in Catalonia. José María Aznar’s government (1996-2004) failed to respond to demands for greater autonomy for Catalonia, at a time when secession was not even mentioned. This led to an increasing awareness among Catalans that the federal transfer system within Spain left them with an annual deficit of 8 per cent of Catalonia’s GDP because of the financial arrangements established by the Spanish state, an issue aggravated by the effect of the global financial crisis. Catalan nationalism thus became a matter of not only the heart, but also the pocket. Even more important was the Spanish legal challenge to the Statute of Autonomy of Catalonia 2006 and its subsequent dilution, after it had been sanctioned by the Catalan parliament, and by both the Spanish congress of deputies and the senate, not to mention the Catalan people in a legally binding referendum.

According to the Spanish high court of justice, some of the statute’s content did not comply with the Spanish constitution. This outraged many Catalans, who could not understand how the newly approved statute – after following all the procedures and modifications requested by Spain’s political institutions and constitution – could still be challenged. Four years later, the Spanish high court finally delivered its verdict on 28 June 2010. It removed vital points from the Statute of Autonomy 2006 and declared them non-constitutional. All this led to a revival of Catalan nationalism, culminating in a symbolic, non-binding referendum in November 2014, which was boycotted by opponents and produced a majority of 80 per cent in favour of independence.

The roots of this antagonism go deep, to the civil war that broke out on 17-18 July 1936 when some sectors of the army rebelled against the legitimate government of the Second Republic. The rebels rejected democracy, the party system, separation between church and state, and the autonomy of Catalonia, the Basque Country and Galicia. Their primary objective was to re-establish “order” by eliminating all vestiges of communism and anarchism, then quite strong in some parts of Spain.

High on the list of General Franco’s targets was Catalan nationalism, which had been growing since the late 19th century. The industrialisation of Catalonia and the Basque Country left the most economically developed parts of the Spanish state politically subject to the less prosperous Castile. By the end of the 19th century and influenced by German Romanticism, la Renaixença – a movement for national and cultural renaissance – prompted demands for Catalan autonomy, first in the form of regionalism
and later in demands for a federal state.

Catalan nationalism did not emerge as a unified phenomenon. Diverse political ideologies and cultural influences gave rise to various types of nationalism, from the conservative nationalism of Jaime Balmes to the federalism of Francesc Pi i Margall, to the Catholic nationalism of Bishop Torres i Bages and the Catalan Marxism of Andreu Nin, among others. Catalonia enjoyed some autonomy under the administrative government of the Mancomunitat or “commonwealth” from 1913 onwards. This was halted by the 1923 coup d’état of the dictator Miguel Primo de Rivera. Autonomy was granted again during the Second Spanish Republic from 1931-39 – but abolished by Francisco Franco’s decree of 5 April 1938.

Franco’s victory led to the suppression of Catalan political institutions, the banning of the Catalan language and proscription of all the symbolic elements of Catalan identity, from the national flag (the Senyera) to the national anthem (“Els Segadors”). In February 1939, the institutions of the autonomous Generalitat went into exile in France. In 1940 the Gestapo arrested the president of the Generalitat, Lluís Companys, and handed him over to Spanish officials. He was interrogated and tortured in Madrid, then sent to Barcelona, where he was court-martialled and executed at Montjuïc Castle on 15 October 1940. The most important representatives of the democratic parties banned by the regime went into exile, or were imprisoned or executed. The authoritarian state designed by Franco crushed dissent and used brute power to suppress the historical nations included within its territory. The regime’s aim was to annihilate the Catalans and the Basques as nations.


After almost 40 years of Franco’s dictatorship, Catalonia recovered its government, the Generalitat, in 1977 – before the drafting of the Spanish constitution in 1978 – and sanctioned a new statute of autonomy in 1979. The 2006 statute was expected, at the time, to update and expand Catalans’ aspiration for further devolution within Spain: never secession.

At present, a renewed nostalgia and enthusiasm for Francoism can be found among some sections of the Spanish right. One of the main challenges of the newly democratic government from the mid-1970s onwards was to get rid of the symbols of Francoism that had divided Spaniards between “winners” and “losers” in the civil war. It was only in 2007 that the then prime minister, José Luis Rodríguez Zapatero, guided the Law of Historic Memory through parliament with the aim of removing hundreds of Fascist symbols reminiscent of the Franco era from public buildings. It also sought to make reparations to victims of the civil war and the ensuing dictatorship.

There still exist hundreds of other references to the Fascist regime, however, with streets, colleges and roads named after Franco and his generals. The most controversial of these is the Valle de los Caídos (“Valley of the Fallen”), near Madrid, commissioned by Franco as his final resting place. It supposedly honours the civil war dead, but is primarily a monument to the general and his regime, housing the graves of Franco and José Antonio Primo de Rivera, the founder of the fascist Falange political party. Roughly 450,000 people visit it every year, and while most of them are foreign tourists, groups of Falangists and supporters of the old regime who come to pay tribute to the dictator have frequented it. Nostalgics for Francoism, though still a small minority within modern Spain, are becoming vociferous. They find common ground with far-right-wing conservatism, particularly in their shared aversion to federalism.

On 3 August last year Artur Mas, the then president of Catalonia, called an extraordinary parliamentary election after all attempts to negotiate and agree on a legally binding referendum with the Spanish government failed. Supporters of independence immediately announced that the forthcoming Catalan elections would be regarded as a plebiscite on independence.

On a turnout of more than three-quarters of the electorate, supporters of outright independence gained 48 per cent of the vote, while those backing a unitary state secured 39 per cent. On 9 November 2015 the Catalan parliament formally declared the start of the process leading to building an independent Catalan state in the form of a republic. It also proclaimed the beginning of a participative, open, integrating and active citizens’ constituent process to lay the foundations for a future Catalan constitution. The Catalan government vowed to move forward with its secession process. Immediately, the Spanish Constitutional Court suspended the Catalan law setting out a path to independence and warned that defiance could lead to criminal charges.

Worse still for Madrid, secessionism is gaining strength not only in Catalonia but also in the Basque Country, whose premier, Iñigo Urkullu, demands a “legal consultation” on the northern region’s future in Spain. He supports a new statute for the Basque Country and defends its status as a nation in the EU. Similarly to Catalonia, the Basque Country has a distinct language and culture, and benefits from the so-called concierto económico, an advantageous financial deal with the Spanish state.


The Spanish government’s refusal to engage constructively with Catalan nationalism contrasts markedly with London’s more relaxed and ultimately more successful response to Scottish nationalist aspirations. The “Edinburgh Agreement” between the British Prime Minister and the then first minister of Scotland to allow a binding referendum on Scottish independence stands in sharp contrast to the Spanish government’s outright opposition to a similar vote in Catalonia. Basques and Catalans find deaf ears regarding further devolution and binding referendums on self-determination. This highlights the distance between various conceptions of democracy that coexist inside the European Union, rooted in the diverse political cultures of nations with varying historical backgrounds.

All this matters, not only to Spain but to the EU, because it is part of a broad trend across the continent. In mainland Europe, demands for self-determination are running strong in Flanders as well as parts of Spain. In turn, tensions between Italy and Austria over control of South Tyrol (Trentino Alto Adige, to the Italians) remain high, as do demands advanced by the South Tyrol­ean secessionist movement. Bavarian regionalism is critical of the present German (and European) political order. Further to that, modern Venetian nationalism and its long-standing demands for independence have prompted a renewal of Venetian as a language taught in schools and spoken by almost four million people.

Matters are now coming to a head. Catalonia and Spain are in flux following two inconclusive elections. In January, after a prolonged stand-off, the sitting Catalan president, Artur Mas, made way for a fellow nationalist, Carles Puigdemont. He was the first to take the oath of office without making the traditional oath of loyalty to the Spanish constitution and the king. Felipe VI, in turn, did not congratulate Puigdemont.

The new president has announced that he plans to draw up a constitution, to be voted on in a referendum “to constitute the Catalan Republic” at the end of an 18-month consultation process. Puigdemont’s strategy envisages not a dramatic unilateral declaration
of independence, but a more gradual process of disconnection in constant dialogue with the Spanish government and Catalan political parties. Let no one be deceived by this “softly-softly” approach: it is designed to culminate, in a year and a half, perhaps sooner, in a vote on establishing a separate, sovereign state of Catalonia.

Meanwhile, Spanish politics are in flux. The elections to the Cortes on 20 December 2015 resulted in a victory for Conservatism, but also the most fragmented Spanish parliament ever and, as yet, no government. Almost the only thing the Spanish parties can agree on is opposition to Catalan independence, yet even here there are divisions over whether more autonomy should be granted and what response to make to unilateral moves by the Catalans.

The stakes are high for both sides. By pressing too hard, too early, Catalan nationalists may provoke Madrid. This would be a mistake. Strategy is important and recent events in Catalonia will weaken the Catalans’ democratic, peaceful and legitimate desire to hold a referendum on independence. Likewise, a heavy-handed response from Madrid will not only destroy the residual bonds between centre and periphery in Spain, but put the central government in the dock internationally. A confrontation will also cut across the only possible solution to this and all other national conflicts within the eurozone, which is full continental political union. Full union would render the separation of Catalonia from Spain as irrelevant to the functioning of the EU, and the inhabitants of both areas, as the separation of West Virginia from Virginia proper in the United States today.

In a nightmare scenario, radicalisation and unrest could emerge in Catalonia, with division between Catalans and memories of the Spanish Civil War coming to the fore. In this context, it might become very difficult to prevent violence.

This is the last thing that Brussels wants to hear as it grapples with the euro crisis, Russian territorial revisionism, Islamist terror, the migrant question and the prospect of Brexit. A meltdown in Catalonia will create dilemmas for Europe, starting from problems with Schengen, and raise questions about continued membership of the EU. It will also work against Catalans’ expectations of receiving EU support in their quest for independence, as turmoil in Europe will prompt nation states to close ranks. The EU will not be expected to intervene, because this scenario would – at least initially – be defined as an “internal affair of Spain”. Conflict between Barcelona and Madrid would shatter one of Europe’s biggest member states.

In that event, the peninsula will become the hottest point in an emerging “arc of crisis” across the southern flank of the EU, stretching from Portugal across Spain, an Italy struggling along with everything else to cope with the flow of migrants, the troubled Balkans, to Greece, which is perpetually perturbed. This highlights yet another flaw in the EU. It has no institutional framework for dealing with Catalan demands to become a nation within the Union, or those of other populations. Merely insisting on Spanish state sovereignty will not make the problem go away for Brussels, or for Europe as a whole. This is a potential matter of life and death not only for Spaniards and Catalans, but perhaps for the EU itself.

Brendan Simms is the director of the Forum on Geopolitics at the University of Cambridge and president of the Project for Democratic Union Montserrat Guibernau is a visiting scholar in the Department of Politics and International Studies at Cambridge and a member of the Forum on Geopolitics

This article first appeared in the 21 April 2016 issue of the New Statesman, Shakespeare 400 years Iater