Why Clegg could still face a leadership challenge next year

Lib Dem activists suggest that Clegg's position could still come under threat if the party finishes fourth or fifth in next year's European elections.

By any measure, Nick Clegg is having a good conference. He has won major votes on the economy, tuition fees, nuclear power, the 50p tax rate and Trident, confirming the Lib Dems' new status as a party of the "radical centre". These triumphs both reflect and reinforce Clegg's improved standing as leader. The Eastleigh by-election, which convinced the Lib Dems that they aren't facing wipeout in 2015, and the return of economic growth, which the party hopes to earn some credit for, means that talk of a leadership challenge by Vince Cable or anyone else has largely disappeared.

But speak to Lib Dems and you get the impression that Clegg's position isn't completely secure yet. One senior party activist told me that he could still face a challenge if the party performs particularly badly in next year's local and European elections, warning that "we could come fifth behind the Greens". Such a result would mean the loss of most or all of the party's nine MEPs. With a year to go until the general election, there would still be just enough time for the Lib Dems to contemplate a change of leader.

As Lord Oakeshott, one of those who would lead the revolt, noted in his pre-conference interview: "This will be much the biggest test we’ve had on a nationwide basis of our support and our appeal since the general election, so that’s why it will be crunch time. There will be no excuse when everyone has been voting, particularly in important areas like London. I think that’s when everyone will focus on things and I hope we will have a good hard look at our prospects for the election. There will still be time, but next May/June will be the last chance."

One group that hopes the Lib Dems might yet oust Clegg is the Tories. If it they are to win the next election, the Conservatives needs a Lib Dem leader who can win over Labour voters in Tory-Labour marginals. At present, after the defection of around a quarter of 2010 Lib Dem voters to Labour, the Tories stand to lose dozens of seats at the next election (Corby was an early warning) -  there are 37 Conservative-Labour marginals where the third place Lib Dem vote is more than twice the margin of victory.

The belief among the Tories is that a more centre-left figure such as Cable or Tim Farron, both of whom have signalled their availability, could prompt the party's former supporters to return home from Labour. Tim Montgomerie told me last year that "a left-wing replacement" of Clegg in 2014 was "vital to Tory hopes". Fortunately for Ed Miliband, the chances of him facing a new Lib Dem leader in 2015 have fallen further after Clegg's victories this week.

Nick Clegg on stage at the Liberal Democrat conference in Glasgow. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation