Anti-government protestors in Ukraine. (Photo:Getty)
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Western weakness and indecision has fanned the flames in Ukraine

The West's politicians have emboldened Vladimir Putin with their mistakes and indecision. They need to send a signal he can't ignore.

Western leaders are trying their best to sound tough as they wait to find out if Russia sticks to the Minsk agreement and halts its land grab in eastern Ukraine. President Obama has threatened a “strong reaction” if the ceasefire is breached. Chancellor Merkel says Europe is ready to impose new sanctions. The debate about arming Ukraine rumbles on in Washington. Yet this hardly amounts to a turning point. We have already been through 12 months of ‘red line’ ultimatums, incremental sanctions and penny-packet support for Ukraine. The West is no closer to forcing Vladimir Putin to think again than it was a year ago when he seized Crimea.


This makes a nonsense of the idea, skilfully encouraged by the Kremlin, that its intervention was provoked by Western efforts to lure Ukraine into its camp. The real story of EU and US policy towards Ukraine over the last decade has been one of lethargy and indifference. The much-cited 2008 NATO declaration that Ukraine “will join” was a sop designed to make up for the fact that it had just been denied a Membership Action Plan. The EU Association Agreement that Putin induced President Yanukovych to abandon, triggering the Ukrainian leader’s downfall, was offered as an alternative to membership because the EU had become too weary and self-absorbed to contemplate further enlargement.


A West that really wanted to integrate Ukraine would have seized the opportunity offered by the 2004 Orange Revolution to embrace its Euro-Atlantic aspirations and help it to complete its democratic transition. Instead its leaders were told to go away and turn their country into a fully-fledged democracy without the political guidance and financial support given to other former communist countries as part of the EU accession process. Their failure is widely lamented. But the bigger failure – of Western responsibility – is barely acknowledged.


Western disinterest consigned Ukraine to a state of geopolitical limbo, encouraging Putin to believe that he could claw it back into Russia’s sphere of influence by force. The full implications of this only became apparent after the shooting started and policy makers in Europe and America suddenly realised the scale of his irredentist ambitions. They may not have been willing to say yes to Ukraine’s desire to join Western institutions, but they couldn’t acquiesce in the armed partition of Europe and the return of empire without abandoning the principles on which the post-Cold War security order had been built. This was a war about something far bigger than the future of Ukraine.


Every time the West has fluffed its policy towards Ukraine with half-measures and empty words, the bill for repairing the damage has risen.

The cost of failing to support democratic change with the incentive of EU accession was to drive despairing Ukrainians back into the arms of Viktor Yanukovych. The unwillingness of the EU to match its proposed Association Agreement with a package of financial support for Ukraine allowed Putin to scupper it with a $15bn bribe. Now the West is forced to provide £40bn in loans and guarantees to rescue Ukraine’s economy from the resulting chaos.


The bill will go on rising as long as the West prevaricates, and with potentially more serious consequences. Some see the conflict as a vindication of NATO’s decision to keep Ukraine at arms length; imagine if we had accepted a treaty commitment to defend its border with Russia. Well, we may not have to imagine much longer if success in Ukraine emboldens Putin to try something similar in the Baltic States where we do have a NATO commitment. To behave as if our own security in not at stake in Donetsk and Luhansk is recklessly complacent.


The West should be doing far more to support Ukraine, if for no other reason than self-interest. The immediate priority should be to help its economy. If Russian guns have fallen silent for now, it is partly because Putin’s goal of destabilising Ukraine is currently being achieved by economic means. Some financial aid has already been provided, but there is a risk that Western strategy is repeating the mistakes of the EU’s efforts to deal with the Eurozone crisis of always being a day late and a dollar short. The latest IMF package is already being overtaken as the economic outlook continues to worsen, and Ukraine has seen little enough of the money that has been promised as it is. George Soros is right to argue that a willingness to support Ukraine financially is a key test of Western resolve. Sufficient funds should be provided to get Ukraine’s economy off life support and into recovery.


Another crucial area is energy where Russian leverage has frequently been used to undermine Ukraine’s sovereignty. The government in Kiev has set a target of becoming independent of Russian gas supply by 2017, a goal that could be achieved this year if the EU enforced its own competition rules and forced Gazprom to release unused pipeline capacity in Slovakia to facilitate the reverse flow of gas to Ukraine. Instead, the European Commission brokered a deal last October that forced Ukraine to buy overpriced Russian gas and pay $3bn of disputed debt. This has rewarded Russia and pushed Ukraine to the edge of bankruptcy, increasing the cost of the Western bailout. EU policy should be changed to one of supporting Ukraine’s energy independence in the shortest achievable timescale.


It is also time that the West resolved to bolster Ukraine’s defence with modern military equipment. The UK, along with the US and Russia, gave a solemn commitment to support Ukraine’s territorial integrity when the country gave up its stockpile of Soviet nuclear missiles in 1994. If we are not prepared to make good that commitment with our own forces, the very least we should be prepared to do is to help the Ukrainian armed forces to do it for themselves. The current policy of allowing aggression to succeed in the name of peace is as dishonourable now as it was in the Balkans twenty years ago.


In the face of criticism that his Ukraine policy is failing, President Obama insists that he is playing the long game. But what he likes to call “strategic patience” looks to Putin much more like strategic indecision. He draws even more strength from the EU’s weak and hesitant approach. Western policy will keep failing and the cost will keep rising until European and American leaders send a signal of intent that Russia can’t ignore.

 

David Clark was Robin Cook’s special adviser at the Foreign Office 1997-2001.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?