Turbulence ahead

The global credit crunch has hardly begun to bite: much worse is to come. Alex Brummer predicts that

There is a view at the Treasury that the government can ride out the global credit crunch in 2008 just as it navigated its way through the 1997-98 emerging markets crisis and the dotcom meltdown of 2001-2002, when its optimism prevailed over gloom-mongers in the City.

This time, I believe, things will be different. If the sub-prime crisis were the only problem that Alistair Darling had to confront, Britain might possibly muddle its way through the mess. However, the malaise is more broadly based. The public finances, which underpinned economic stability during Labour's decade in power, have become unhinged.

Globally, the twin threats of surging oil and food prices have rekindled the inflation threat. And after a long period in abeyance, the so-called global imbalances - the huge trade deficits of the Anglo-Saxon economies with Asia and the Gulf states - are unwinding. This threatens turbulence on the currency markets to match that in the wholesale money markets, where banks lend to each other.

There is also a political dimension. Throughout most of Labour's period in office, the Treasury, commanded by Gordon Brown, had a clear ride. Tony Blair only rarely entered the economic debate. That is no longer the case. The current Chancellor claims supremacy, but too often in recent months he has been second-guessed by No 10, where many of the Treasury's previous brightest stars now rule. This tension was visible last year when the first that No 11 knew of a retreat on capital gains tax reforms was from a leak to the Financial Times from next door.

Clearly, the impact of the credit crunch is far from over. Five months after the crisis began, the losses in the global banking system have still to be fully felt. So far an estimated $100bn of the $300bn of toxic sub-prime debt has been written down by banks across the world. There could be worse to come in the early months of 2008 as accounts are finalised.

The Bank of England's quarterly credit survey already shows a tightening of lending conditions. The housing bubble has started to deflate, with headline prices falling by 1.7 per cent in the last three months of 2007. Further sizeable declines in house prices can be expected, bringing increased job in security and reduced consumer spending. Job cuts have already begun in the financial services, and the construction sector is expected to follow. Businesses have begun to scale back investment plans as cash becomes ever tighter.

There are two well-established ways of dealing with slowdowns of the kind being seen in the credit markets. The classical monetary answer is to cut interest rates, a process the Bank of England started in December, when it reduced the base rate by a quarter-point to 5.5 per cent. The second, Keynesian approach is to expand the government sector.

Hands are tied

Both these paths face serious blockages. Most commentators expect interest rates to be cut dramatically in 2008 as the Bank's Monetary Policy Committee acts to head off recession. But will it do so at the risk of inflation? I doubt it. Yet the Bank has little control over external shocks such as the rise in global energy prices, triggered most recently by the assassination of Benazir Bhutto in Pakistan and tensions with Turkey in northern Iraq. Such events limit the capacity to deliver the kind of speedy rate cuts needed to head off a severe slowdown.

Similarly, the government has painted itself into a corner on the public finances. Tax revenues are sinking as a result of Britain's strong dependence on the damaged financial sector. Spending from April onwards will be severely constrained by the promise to hold public sector growth to 1.7 per cent (with the exception of health) and Darling told me, before the holiday break, that he is ready to say "no" to spending ministers. This comes against a background of rapidly rising borrowing. The budget deficit in the first eight months of the present fiscal year climbed to £36.2bn; the annual total is certain to exceed the £38bn borrowed in 2006-2007. So, unless the Chancellor is prepared to dispense with the fiscal rules that his predecessor put in place, he will be weaponless in the battle to avoid recession.

The last and remaining threat to stability this year is the pound. In the run-up to Christmas, Britons were celebrating sterling's surge against the dollar and the excitement of shopping trips to New York. But the UK's trade with the rest of the world is now deeply in the red and the pound, like the greenback to which it is so closely linked, is in retreat. As the global imbalances unwind it is quite possible that the Brown government could face the first sterling crisis since Britain was driven out of the Exchange Rate Mechanism in 1992.

All of this promises to test the mettle of policymakers in 2008. This would be a challenge for any confident, successful government, let alone one that has suffered so many batterings in the year it has just left behind.

Alex Brummer is City editor of the Daily Mail

This article first appeared in the 07 January 2008 issue of the New Statesman, Pakistan plot

Jeremy Corbyn. Photo: Getty
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Lexit: the EU is a neoliberal project, so let's do something different when we leave it

Brexit affords the British left a historic opportunity for a decisive break with EU market liberalism.

The Brexit vote to leave the European Union has many parents, but "Lexit" – the argument for exiting the EU from the left – remains an orphan. A third of Labour voters backed Leave, but they did so without any significant leadership from the Labour Party. Left-of-centre votes proved decisive in determining the outcome of a referendum that was otherwise framed, shaped, and presented almost exclusively by the right. A proper left discussion of the issues has been, if not entirely absent, then decidedly marginal – part of a more general malaise when it comes to developing left alternatives that has begun to be corrected only recently, under Jeremy Corbyn and John McDonnell.

Ceding Brexit to the right was very nearly the most serious strategic mistake by the British left since the ‘70s. Under successive leaders Labour became so incorporated into the ideology of Europeanism as to preclude any clear-eyed critical analysis of the actually existing EU as a regulatory and trade regime pursuing deep economic integration. The same political journey that carried Labour into its technocratic embrace of the EU also resulted in the abandonment of any form of distinctive economics separate from the orthodoxies of market liberalism.

It’s been astounding to witness so many left-wingers, in meltdown over Brexit, resort to parroting liberal economics. Thus we hear that factor mobility isn’t about labour arbitrage, that public services aren’t under pressure, that we must prioritise foreign direct investment and trade. It’s little wonder Labour became so detached from its base. Such claims do not match the lived experience of ordinary people in regions of the country devastated by deindustrialisation and disinvestment.

Nor should concerns about wage stagnation and bargaining power be met with finger-wagging accusations of racism, as if the manner in which capitalism pits workers against each other hasn’t long been understood. Instead, we should be offering real solutions – including a willingness to rethink capital mobility and trade. This places us in direct conflict with the constitutionalised neoliberalism of the EU.

Only the political savvy of the leadership has enabled Labour to recover from its disastrous positioning post-referendum. Incredibly, what seemed an unbeatable electoral bloc around Theresa May has been deftly prized apart in the course of an extraordinary General Election campaign. To consolidate the political project they have initiated, Corbyn and McDonnell must now follow through with a truly radical economic programme. The place to look for inspiration is precisely the range of instruments and policy options discouraged or outright forbidden by the EU.

A neoliberal project

The fact that right-wing arguments for Leave predominated during the referendum says far more about today’s left than it does about the European Union. There has been a great deal of myth-making concerning the latter –much of it funded, directly or indirectly, by the EU itself.

From its inception, the EU has been a top-down project driven by political and administrative elites, "a protected sphere", in the judgment of the late Peter Mair, "in which policy-making can evade the constraints imposed by representative democracy". To complain about the EU’s "democratic deficit" is to have misunderstood its purpose. The main thrust of European economic policy has been to extend and deepen the market through liberalisation, privatisation, and flexiblisation, subordinating employment and social protection to goals of low inflation, debt reduction, and increased competitiveness.

Prospects for Keynesian reflationary policies, or even for pan-European economic planning – never great – soon gave way to more Hayekian conceptions. Hayek’s original insight, in The Economic Conditions of Interstate Federalism, was that free movement of capital, goods, and labour – a "single market" – among a federation of nations would severely and necessarily restrict the economic policy space available to individual members. Pro-European socialists, whose aim had been to acquire new supranational options for the regulation of capital, found themselves surrendering the tools they already possessed at home. The national road to socialism, or even to social democracy, was closed.

The direction of travel has been singular and unrelenting. To take one example, workers’ rights – a supposed EU strength – are steadily being eroded, as can be seen in landmark judgments by the European Court of Justice (ECJ) in the Viking and Laval cases, among others. In both instances, workers attempting to strike in protest at plans to replace workers from one EU country with lower-wage workers from another, were told their right to strike could not infringe upon the "four freedoms" – free movement of capital, labour, goods, and services – established by the treaties.

More broadly, on trade, financial regulation, state aid, government purchasing, public service delivery, and more, any attempt to create a different kind of economy from inside the EU has largely been forestalled by competition policy or single market regulation.

A new political economy

Given that the UK will soon be escaping the EU, what opportunities might this afford? Three policy directions immediately stand out: public ownership, industrial strategy, and procurement. In each case, EU regulation previously stood in the way of promising left strategies. In each case, the political and economic returns from bold departures from neoliberal orthodoxy after Brexit could be substantial.

While not banned outright by EU law, public ownership is severely discouraged and disadvantaged by it. ECJ interpretation of Article 106 of the Treaty on the Functioning of the European Union (TFEU) has steadily eroded public ownership options. "The ECJ", argues law professor Danny Nicol, "appears to have constructed a one-way street in favour of private-sector provision: nationalised services are prima facie suspect and must be analysed for their necessity". Sure enough, the EU has been a significant driver of privatisation, functioning like a ratchet. It’s much easier for a member state to pursue the liberalisation of sectors than to secure their (re)nationalisation. Article 59 (TFEU) specifically allows the European Council and Parliament to liberalise services. Since the ‘80s, there have been single market programmes in energy, transport, postal services, telecommunications, education, and health.

Britain has long been an extreme outlier on privatisation, responsible for 40 per cent of the total assets privatised across the OECD between 1980 and 1996. Today, however, increasing inequality, poverty, environmental degradation and the general sense of an impoverished public sphere are leading to growing calls for renewed public ownership (albeit in new, more democratic forms). Soon to be free of EU constraints, it’s time to explore an expanded and fundamentally reimagined UK public sector.

Next, Britain’s industrial production has been virtually flat since the late 1990s, with a yawning trade deficit in industrial goods. Any serious industrial strategy to address the structural weaknesses of UK manufacturing will rely on "state aid" – the nurturing of a next generation of companies through grants, interest and tax relief, guarantees, government holdings, and the provision of goods and services on a preferential basis.

Article 107 TFEU allows for state aid only if it is compatible with the internal market and does not distort competition, laying out the specific circumstances in which it could be lawful. Whether or not state aid meets these criteria is at the sole discretion of the Commission – and courts in member states are obligated to enforce the commission’s decisions. The Commission has adopted an approach that considers, among other things, the existence of market failure, the effectiveness of other options, and the impact on the market and competition, thereby allowing state aid only in exceptional circumstances.

For many parts of the UK, the challenges of industrial decline remain starkly present – entire communities are thrown on the scrap heap, with all the associated capital and carbon costs and wasted lives. It’s high time the left returned to the possibilities inherent in a proactive industrial strategy. A true community-sustaining industrial strategy would consist of the deliberate direction of capital to sectors, localities, and regions, so as to balance out market trends and prevent communities from falling into decay, while also ensuring the investment in research and development necessary to maintain a highly productive economy. Policy, in this vision, would function to re-deploy infrastructure, production facilities, and workers left unemployed because of a shutdown or increased automation.

In some cases, this might mean assistance to workers or localities to buy up facilities and keep them running under worker or community ownership. In other cases it might involve re-training workers for new skills and re-fitting facilities. A regional approach might help launch new enterprises that would eventually be spun off as worker or local community-owned firms, supporting the development of strong and vibrant network economies, perhaps on the basis of a Green New Deal. All of this will be possible post-Brexit, under a Corbyn government.

Lastly, there is procurement. Under EU law, explicitly linking public procurement to local entities or social needs is difficult. The ECJ has ruled that, even if there is no specific legislation, procurement activity must "comply with the fundamental rules of the Treaty, in particular the principle of non-discrimination on grounds of nationality". This means that all procurement contracts must be open to all bidders across the EU, and public authorities must advertise contracts widely in other EU countries. In 2004, the European Parliament and Council issued two directives establishing the criteria governing such contracts: "lowest price only" and "most economically advantageous tender".

Unleashed from EU constraints, there are major opportunities for targeting large-scale public procurement to rebuild and transform communities, cities, and regions. The vision behind the celebrated Preston Model of community wealth building – inspired by the work of our own organisation, The Democracy Collaborative, in Cleveland, Ohio – leverages public procurement and the stabilising power of place-based anchor institutions (governments, hospitals, universities) to support rooted, participatory, democratic local economies built around multipliers. In this way, public funds can be made to do "double duty"; anchoring jobs and building community wealth, reversing long-term economic decline. This suggests the viability of a very different economic approach and potential for a winning political coalition, building support for a new socialist economics from the ground up.

With the prospect of a Corbyn government now tantalisingly close, it’s imperative that Labour reconciles its policy objectives in the Brexit negotiations with its plans for a radical economic transformation and redistribution of power and wealth. Only by pursuing strategies capable of re-establishing broad control over the national economy can Labour hope to manage the coming period of pain and dislocation following Brexit. Based on new institutions and approaches and the centrality of ownership and control, democracy, and participation, we should be busy assembling the tools and strategies that will allow departure from the EU to open up new political-economic horizons in Britain and bring about the profound transformation the country so desperately wants and needs.

Joe Guinan is executive director of the Next System Project at The Democracy Collaborative. Thomas M. Hanna is research director at The Democracy Collaborative.

This is an extract from a longer essay which appears in the inaugural edition of the IPPR Progressive Review.



This article first appeared in the 07 January 2008 issue of the New Statesman, Pakistan plot