Top Bankers - Call their Bluff

The financial rewards given to the top people in the banking and financial sector is once again in the news.  This time it was the nearly £1million bonus which RBS Chief Executive Stephen Hester will pocket for his alleged achievements over the past year.  This of course is in addition to the £1.2million that he earns as his basic salary.  This has not surprisingly generated a great deal of outrage amongst the public and a great deal of hand-wringing on the part of the government and the banking industry in general.

What this recent brouhaha shows is just how out of touch and incompetent our top bankers and our government politicians are.  It is simply incredible that bankers can even think of awarding themselves any kind of bonus when the country is in the midst of the greatest and most severe bout of austerity since goodness knows when.  Benefits are cut or frozen and wages for most workers are cut or frozen.  Yet our top bankers just have to get their hands on million pound plus bonuses.  On top of million pound plus salaries.  And we are told that “we are all in this together”.  To make matters worse some of out champions of industry on multi-million pound salaries presume to lecture the rest of us about the need to cut back on our wages and salaries!  For how much longer can they get away with this smash and grab?

In the case of the RBS, the public anger is all the greater as this bank is now effectively owned by us, the people.  Public money has been pumped into just about all UK banks and in the case of RBS it seems we, the people, own about 80% or more of the bank.  And yet the bank’s board and top management carry on as if nothing had happened.  Our ownership of RBS is via the government, which as the major, almost sole shareholder, has the right to determine how the bank should be run.  Yet it seems our nasty Coalition has done nothing, absolutely nothing to ensure that RBS is run in a way that benefits the country as a whole.  This of course would include ensuring that the pay structure and actual salaries paid, reflected the banks’s new status as a company owned by the people.

The government could quite easily benchmark the salaries at RBS to the Bank of England, our state owned central bank.  There Mervyn King, the Governor of the Bank earns £305,000 per year.  Now why on earth does the government tolerate paying Stephen Hester, who is effectively a civil servant now, almost four times that amount?  Four times what the Governor of the Bank of England earns.  Unbelievable.  Or it should be.  Now the conventional counter argument is that banking at the RBS level is a global business and you have to pay the market rate in order to attract and keep “the best”.  This argument is just so much nonsense.  In the first place, paying our astronomical salaries and bonuses did not prevent banks from almost ruining their companies and just about bankrupting the whole country.  Without public there would be no RBS and no million pound salaries, never mind bonuses.  If the current and previous lot of top managers is an example of “the best”, then we are in deep, deep trouble.  Perhaps a salary in line with the Bank of England might attract a more cautious and trustworthy management.  It is after all other people’s money - ie yours and mine - that the banks are supposed to manage.  A good dose of caution is most welcome here.

The notion that there is a global market in chief executives is also sheer nonsense.  Just look at where they come from.  They are predominantly white, male and European.  As the government effectively owns two major banks, RBS and Lloyds, it is in the wonderful position of testing the market.  Pay Bank of England type salaries to the top management in these banks and see what happens.  How many of the current managers would actually leave?  And where would they go?  Where could they go?  There cannot be that many vacancies in equivalent positions in the rest of the world.  And as many will have families, with children at school, would they want to tear everyone away to a new country.  Just to earn more than Mervyn King?  I have already posted more about this idea here.

An alternative would be to use the tax system to ensure that the public got the lion’s share of any bonuses or very high salaries.  Introduce a tax rate of 90% for all bonuses above, let’s say £20,000.  Banks can then pay out whatever bonuses they like, but we, or at least the government would get most of the money.  The same could apply to salaries.  Again to take the salary of the Governor of the Bank of England as the benchmark, any salary above, let us say £500,000, would be subject to and additional tax rate.  This tax would rise by, say 5% or 10% for every additional £100,000.  After all, if we are all in this together, then shouldn’t the very, very rich have to face some kind of austerity?

By refusing to do something about this continuing outrage of excessive pay and bonuses in the midst of public austerity, the government risks revealing itself as a bunch of incompetents.  If they can do nothing about this, then public faith in the political process is in danger of declining even more.  More is at stake here than just a million pounds or two.  We need a government that can actually exercise power over the very, very rich.  There is only so much resentment that the public can bear, before something gives.  Marina Hyde in the Guardian has an interesting article on this.

Austerity Isn’t Working

The current fad for government imposed austerity has taken quite a battering in the past few weeks.  Whether this will lead to any significant changes in policy is a moot point.  The dash for austerity was based on the rather dubious notion of “expansionary fiscal contraction.” Alas recent economic experience around the globe has shown this to be nonsense.  Fiscal contraction has turned out to mean what it says on the tin - contraction.  Fiscal contraction has inevitably led to economic contraction with all that has meant for working people.  Paul Krugman in a recent post quotes from an article on the Eurozone by Kevin O’Rourke:  “ Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.”

The most recent unemployment figures for the UK confirm that austerity is not working.  Unfortunately lots more people are now not working either.  The detail behind the headline figures shows just how bad things are becoming.  The overall total of unemployed is masked by the rise in those in self-employment, in unpaid family work and on government supported schemes.  This comes to a staggering 127,000 people.  The vast majority of them are really unemployed.  The Chartered Institute of Personnel and Development reckons that the rise in self-employment is not evidence of an increase in entrepreneurship, but rather due to a growing number of “odd Jobbers”, people willing to try their hand at anything to avoid being unemployed.  Now this may be a good thing, but it is a sign of a weak economy not a strong one.  The unemployment figures also show that the number of employees working full-time fell by 140,000.  There was also a rise of 44,000 in people who were in part-time work because they could not find full-time work.  Not encouraging at all.  And there are more cuts in public services to come.

Another sign of the times was the expected downgrading of the credit worthiness of various Eurozone countries, including France, which has lost its coveted AAA rating.  However the key and most interesting aspect to this announcement by S&P was the reasons they gave for this downgrading.  They stated:  “In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues”.

Further evidence that austerity doesn’t work and is in fact self-defeating comes from an unlikely source - the IMF.  Their chief economist, Olivier Blanchard has recently commented on why 2011 has been such a bad year economically and looks at lessons for the future.  One in particular stands out and is worth quoting here:  “financial investors are schizophrenic about fiscal consolidation and growth.  They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does. Some preliminary estimates that the IMF is working on suggest that it does not take large multipliers for the joint effects of fiscal consolidation and the implied lower growth to lead in the end to an increase, not a decrease, in risk spreads on government bonds. To the extent that governments feel they have to respond to markets, they may be induced to consolidate too fast, even from the narrow point of view of debt sustainability.  I should be clear here. Substantial fiscal consolidation is needed, and debt levels must decrease. But it should be, in the words of Angela Merkel, a marathon rather than a sprint. It will take more than two decades to return to prudent levels of debt. There is a proverb that actually applies here too: “slow and steady wins the race.”  For more about this article see here.

The final coup de grâce on the failure of austerity measures comes from the latest round-up of independent economic forecasts published by the Treasury.  Their conclusions - in 2012 the UK faces lower growth, higher unemployment and a higher deficit.  You can read more about this here.

As I said at the beginning there is little prospect that our leaders will change policy direction, even in the face of such damning evidence.  I was tempted to write that we suffer from the one-eyed leading the blind, but that would be grossly unfair to one-eyed people.  Almost anyone with an open mind can see what has happened over the past three year.  No, unfortunately we suffer from being led by a group of nasty ideologues.  Wherever you look - London, Paris, Berlin or Washington - it is the same.  Governments which are predominately led by very rich and very wealthy people, preaching austerity to the rest of us.  I wonder just how much austerity the likes of Cameron, Osborne and Clegg for example have had to endure over the last two years? 

Greece and the Euro - What Next?

The drama of recent days continues unabated.  As of this Thursday afternoon it looks like there will be no Greek referendum on the EU deal, but instead the main opposition party has agreed to support the deal in Parliament.  Much relief all round, at least in Eurozone countries and in the UK government.  It is far too early to know what will in fact happen and how this will develop over the coming days and weeks.  But it is useful to step back a bit and try and figure out what is really behind all this turmoil.

In particular it would be helpful to get away from simplistic blame games.   It is all the fault of Greece shout some, while others equally loudly yell that it is the nasty EU which is punishing the poor Greeks.  It would also be good to disentangle the situation in Greece from the wider problems faced by the Euro.

In the case of Greece it is important to remember that the crisis facing that country is primarily due to the mismanagement of its public finances.  The country faces deep seated problems which previous governments have avoided.  It is to the credit of Papandreou and his current government that it is the first Greek government to face up to this reality and to begin to take measures to modernise the economy.  This is something that Greece needs to do and there is no doubt that this will involve great suffering for many Greeks.  However there is no real alternative.  In passing it is worth pointing out that devaluation (leaving the Euro and going back to the Drachma) would make no difference to this.  Unless a country takes the necessary steps to modernise its economy, devaluation makes no long term difference to a country.

The big problem for the country is that this particular challenge comes at the same time as the rest of the EU and most of the world is in the midst of a massive financial and economic crisis.  The country has also been handicapped by the neo-liberal nonsense that currently passes for economic wisdom in most of the world.  More and more austerity measures simply prolong the suffering of Greek people and postpone any recovery.

The EU and the European Central Bank (ECB) have however done nothing to help Greece.  All this talk of Greek bailouts is just nonsense.  The so-called bailouts are designed to bail out EU banks, in particular those in France, Germany and Belgium, which are most exposed to a Greek default.  The EU lends money, at exorbitant interest rates, to the Greek government, to avoid a default.  The money does not go to helping Greek people, who are suffering from cuts in wages and pensions and high unemployment.  At the same time the EU and the IMF are forcing the Greek government to introduce even more drastic austerity measures, which can only lead to less growth in the economy and thus increase the likelihood of a Greek default.

This whole approach has of course clearly failed.  The latest deal included a 50% loss for the banks.  And most observers reckon that sooner or later Greece will have to default on the remaining 50%.  It is all so depressing.  The solution to the crisis, both in Greece and in the Eurozone as a whole is pretty clear.  Greece needs to have its debt written off and have access to new funds at affordable interest rates.  The country also needs to carry out fundamental reforms to its economy and public finances.  But if this is to work this needs to happen in the context of a growing economy.  Not just in Greece, but in the whole of the EU.  Something similar needs to happen in other Eurozone countries.  Not necessarily a write-off of debt, (Greece is the worst in this respect) but in access to funds at affordable interest rates.

This is not difficult to do.  If the ECB were to act as a normal central bank, like the Bank of England or the Fed in the USA, that is to be a lender of last resort, then the core of the crisis would disappear.  The ECB has the money, it can print as many Euros as it wants.  If it announced that the ECB would buy Greek, Italian, Spanish, Portuguese and Irish government bonds at an announced interest rate, (a low one) then the markets would cease to speculate against these countries.  Not only that, the ECB would probably not need to buy that many bonds.  Once the market realised that the ECB was serious the various bondholders would return to the market.  Where else are they going to put their money - under their pillows?

At the moment some EU countries are opposed to this, especially Germany, which because of its own history is still frightened of the dangers of inflation.  However in the present economic climate inflation is not on the horizon and the real worry is the risk of a deep seated recession.  There is also the problem of creating some kind of supranational governing body for the Eurozone.  It seems the governments concerned have agreed to move towards this, but probably need to to do so quicker.

In many ways all this suffering in Greece and elsewhere is so unnecessary.  The means are there to lessen the impact of reforms and to get the economy moving again.  The lessons are there for all to see going back not just to the great depression in the twenties and thirties, but all the way back to the 1820s as Brad DeLong explains here.  For more on the need for the ECB to act as a lender of last resort see here.

It’s Osborne’s Recession

Recently we have had a seemingly never ending succession of bad news about the UK economy.  All the indicators and forecasts suggest that we are in for a very bumpy ride ahead.  If we are not in recession we are pretty close to it.  It also seems that our national debt is getting bigger not smaller.  Now all this is bad news for our nasty Coalition and the Chancellor in particular.  So he and his chums in the media have taken to blaming the crisis in the Eurozone for our troubles.  If only these fickle foreigners would get their act together then everything would be fine and dandy over here.

No matter how loudly and how often this line is repeated it remains untrue, and as near a lie as one can get.  Even the IMF, that bastion of fiscal austerity has challenged the government’s li(n)e.  According to their latest report on Europe, the reason the UK has experienced a large build up in public debt is because of the costs of the large loss of output following the crisis.  And of course this large loss of output is directly down to decisions taken by one George Osborne.  Raising VAT, freezing public sector wages, reducing welfare payments and engineering a large rise in unemployment through cuts in the public services can only have one outcome - a severe reduction in demand leading to a large loss of output.  Not quite the story of public sector profligacy the government is usually so keen to tell.

The recent forecasts for the economy are also very revealing about the true source of our economic woes.  Not only do they agree that there is likely to be substantially less growth in the economy overall - down from 2% to 1%, but the source of this anemic growth has changed.  More details here.  Forecasters now expect domestic demand to subtract 0.4% from the economy as consumers, business and government all cut back whilst they expect net trade to add 1.3%, much more than previously.  So despite the Eurozone crisis our exports are likely to hold up.  What this means of course is that our continued economic woes are all down to Osborne himself and his misguided policies.  Time to stop trying to blame someone else.

The Economy - A Double Dip Recession?

Economic news from around the world is not good and is likely to get worse during the rest of the year.  In the UK the news is particularly bad.  Recent figures show that consumer confidence continues its downward slide, unemployment is rising, export performance is faltering and the UK is bottom of the growth league table.  Despite this our nasty government, with Chancellor George Osborne in the lead, continues with its Alice in Wonderland approach to economics.  Despite the shocking figures there is to be no plan B.  Instead we are to suffer even more cuts in public spending.

Alas, this short sighted and counter productive approach is not limited to the UK.  The rest of the EU, along with much of the rest of the world, is also mired in this dash to austerity.  There is very little evidence that this approach will work and much evidence from the past that it will most likely not work.  With great damage to most of us in terms of rising unemployment, loss of services and cuts in living standards.

A major question here is what will happen if the current policies are continued and things continue to get worse for more and more people?  Already there have been significant public protests in Greece, Spain and Israel.  Could these protests spread and get worse?  On this issue I feel that there is a substantial undercurrent of deep hostility lying just below the surface of public opinion.  In particular there is wide disbelief and resentment that none of the key people who were responsible for the current ongoing crisis have suffered or been punished in any way.  Most of this bitterness is quite rightly directed primarily at the bankers whose irresponsibility and recklessness got us into this mess.

So, unless things begin to improve pretty soon, governments will come under ever increasing pressure to change policy tack.  If they refuse this could lead to greater and greater social unrest.  How far could this go?  A lot will depend on how the various political parties respond to a worsening in the situation.  At the moment it is the right of the political spectrum that is making the running and right wing parties run just about all EU countries and since last year control the House of Representatives in the USA.  Alas, it is the right that is most vociferous in calling for ever more austerity.

With the right in power and economies in difficulties, this should be a time for the left to be leading the call for an alternative economic policy.  However the main left wing parties are hamstrung in their opposition, as most of them were in power during the run-up to the crisis.  Indeed none of the left parties showed any serious opposition to the deregulatory, laissez-faire approach to finance which got us into this mess.  And just as the leading bankers have not suffered, neither have the leading politicians in these left parties.  Unless and until they comprehensively reject their past and elect new leaderships willing to consider genuine alternatives to the current austerity, they are most unlikely to regain power.  And even if they did, what real difference would it make?  We badly and urgently need a new left alternative.

The Economic Mess - All the Fault of Welfare Spending?

There is quite a long list of people who can legitimately be held to account for the current crisis.   Most people I imagine would put bankers, particularly investment bankers and regulators high on the list.  However it seems that it is welfare spending by governments which is mostly to blame.  At least that is the consensus view of most of the mainstream media.  It is also the determined view of our present nasty Coalition in the UK.  Though of course they blame the previous New Labour government and not themselves.

A typical example of this thinking was to be found in today’s editorial in The Scotsman.  Their leader writer intoned: “The harsh reality is that across America and Europe, huge rises in government and welfare spending have been financed by resort to debt to the point where the ability of government to service and repay these debt obligations has come under question.”  The harsh reality is that this leader writer is talking a load of bunkum.  Let’s try and unpick his or her assertions a bit.

It is true that in many countries there has been a rise in government spending, but it is not true that this rise has been by historical standards huge.  As  Professor George Irvin, Research Associate at SOAS, puts it:  “For thirty years after the war, most major governments carried more debt than they do today. They serviced this easily and eventually reduced the burden because they were able to use fiscal policy to boost and maintain growth.”

What is manifestly untrue is that this rise is primarily down to welfare spending.  While welfare spending will have gone up, this is perfectly natural in an economic downturn.  This is precisely why welfare benefits were introduced in the first place.  To mitigate the damaging effects of downturns or recessions.  What usually goes along with this increase in welfare spending is a sharp downturn in the government’s income, as tax receipts decline due to the downturn.  So the reality is that there has not been a huge rise in welfare spending, but there has been a reduction in government income.

However this downturn in tax returns does not in any way explain the current high levels of government debt.  Here we need to look more closely at where this debt has come from.  And we quickly discover that most of this rising debt has come from the private sector.  Both individuals and companies.  And this private debt of course was financed by our friends in the banking sector, who were more than happy to lend out vast sums of money to all and sundry - no questions asked.  But as soon as the bubble began to burst, well these private banks immediately turned to their governments and begged or bullied them into bailing them out.  Which for some unfathomable reason they all did.  This is what has caused the issue of sovereign debt to raise its ugly head.  In a free market economy, companies, including financial companies that get into trouble are supposed to pay the price of failure.  It is known as market discipline.  And it applies to the shareholders as well.   The companies go bankrupt or get taken over by a competitor at a knockdown price.  And the shareholders lose some or all of their investment.   In extreme cases, where the company is of national importance to the economy, they get nationalized.  Now that is what has effectively happened with the banking system.  Unfortunately for the poor taxpayer, this form of nationalization was designed to protect the shareholders, by keeping the banks afloat.  And to complete the cave in, the management teams that got us into this mess were left in place.  Free to continue to pay themselves huge bonuses.

It is interesting to note that none or little of this gets much of a hearing in the media.  So, in a nutshell, the private sector gets into a critical mess and begs the government to bail out the private banks by taking on more and more debt.  The private sector then blames the government for this rising debt.  Wonderful.

Same Old Tories - Help the Rich

In the face of growing evidence that the Coalition’s economic polices are not working, the Tory party is once again displaying its true colours as the Nasty Party.  Their latest wheeze to help kick start the economy is to abolish the new 50p tax rate for high earners.  Which is further evidence of the economic illiteracy of the Tory party.

The new 50p tax rate only applies to people who earn more than £150, 000 per year.  Many of them will of course earn substantially more than that.   And how will this tax increase affect them?  How many goods and services will they collectively have to give up as a direct result of this tax hike?  I would suggest very little if anything at all.  After all these are the richest earners in the country.  They are not in general short of a bob or two.  After they have paid for their mortgage, if they have one, paid for the yacht, the holidays in the Bahamas, the private school fees etc, the residual money the have left, and often this will in itself be quite substantial, is just pocketed away.  Usually in off-shore accounts or private banks.  So the net effect of abolishing this tax would most likely simply give these people more money to invest.  It is most unlikely to result in any significant increase in spending.  Which is the only way that it could benefit the economy.


It is noticeable that one of the cheerleaders for this measure is Boris Johnson, Mayor of London and an immensely wealthy man.  Quite clearly he is more interested in feathering his own nest than helping the country.  So much for "We are all in this together" nonsense.  The Institute of Directors apparently warned that the tax will simply drive top earners abroad, while the CBI decried it as "economic vandalism".  Again little sign from these wealthy bastions of the UK economy that they have the slightest interest in the well-being of their fellow citizens.

Part of the problem is that the right in general have a false idea of how an economy grows.  They always suggest that giving more and more money to the already rich will somehow, magically, result in an increase in investment in the real economy.  But you do not need to know much about economics to realize just how daft this notion is.  Private individuals and companies invest in order to make money, not as a charity.  And they will only do so if they are pretty confident that their will be sufficient demand for whatever it is they are going to produce, be it goods or services.  With current government policies leading to a continuing reduction in demand - just why would anyone invest?  Giving the rich will not make any difference to this fact of economic life - it will just make the already rich even richer.  Which is presumably why the rich are so much in favour of this measure.

The reality is that we are in the middle of a long running investment strike, as companies and financial institutions hoard their money, thus keeping people idle.  See this article for details of this investment strike.  If we are to avoid any further downturns in the economy then what the government should be doing with the likes of Boris Johnson and his wealthy chums is to tax them even more.  Then use the money raised to directly invest in the economy.  Whether it is through improving our railways, schools or hospitals or maintaining good quality public services, the result will be to employ more people who, unlike the rich, will spend all, or nearly all of their income on buying other goods and services, thus keeping more people in work and in turn paying taxes.  Go on Mr Osborne - you know it makes sense!  After all - “We are all in this together - aren’t we?

For a simple explanation of the mess our nasty Coalition is making of the economy try Larry Elliott’s article in the Guardian.

Another Euro Fix?

The latest round of Eurozone crisis meetings has come and gone.  At least this time they seem to have come up with some small, but useful measures.  Renegotiation of the length of government loans and a reduction in the interest rate charged are all welcome measures.  They will not only benefit Greece, but Ireland and Portugal too.  It also seems that there are to be additional funds to help with the modernisation of Greece’s infrastructures.  All good stuff, but not really addressing any of the main issues.

The first point to emphasize yet again is that this is not really about Greece, or Ireland or Portugal.  The Greek economy only represents about 3% of the GDP of the whole Eurozone.  Germany could probably bail out Greece on its own and still have some change left.  No, the main issue is the solvency of the banking system in the EU, not just the Eurozone.  Just ask RBS!   All these measures are primarily about saving banks, especially French and German banks.  At all costs make sure that Greece does not fully default and thereby expose the whole shaky mess.

The second point is that this is not fundamentally a Euro crisis.  Sure the Euro has plenty of problems and sooner or later the Eurozone countries will have to either agree to break up or to move some way towards fiscal union.  However the fundamental issue of the collapse of the banking and financial system is not primarily a Eurozone matter.  Otherwise why is the UK economy in such a poor and fragile state?  Not to mention the economic woes of the USA.

There is clearly more to this than just saving the Euro and helping Greece.  What needs to be addressed are the twin issues of how to get some growth back in the world economy and how to deal with large trade imbalances.  Neither is primarily a Eurozone issue, though both affect the Eurozone negatively.

Take growth, as without a growing economy the various indebted countries will never to able to repay their loans, even with reduced interest rates.  Yet every country is urged, if not actually forced to implement policies which restrict growth.  Pretty stupid really!  Yet that is the reality of the austerity measures which the IMF and the EU are forcing on all countries.  Here in the UK our nasty Coalition is only too willing to go down this route, without any outside encouragement.  In the UK this is for purely ideological reasons - the Tories as usual want nothing better than to attack the welfare state.  However it is economic madness to cut government spending in a recession or an economic downturn as we have now.  It is also very difficult to do as this article makes clear.  Though based on US experience, its argument is valid for the rest of us.  As we can see only too clearly in the UK, businesses are failing on an apparently weekly basis and there is little or no investment.  Why?  Because there has been a collapse in demand.  And this collapse in demand is primarily due to the cuts in government spending.  Surprise, surprise!  If we are to have any chance of minimising this crisis and returning to growth, then demand has to rise and only the government has the wherewithal to do this.

The other issue that affects us all is trade imbalances.  This is a global phenomenon with some countries - China, Germany and Japan for example - running large and regular trade surpluses.  In the case of Germany this has specific consequences for the Eurozone.  Since all countries cannot run a trade surplus, if Germany is to continue to have a trade surplus, then other countries must of necessity run a trade deficit.  In other words they will continue to import more from Germany than they export to Germany.  Now this is a situation that is pretty much unsustainable in the long run.  In the current situation of economic downturns it becomes critical.  Which is one of the reasons that countries such as Spain, Portugal, Greece etc are in the troubles they are in.  Under the current set-up there is no way that these countries can continue to afford to buy German goods at the rate they have been doing.  The onus here is firmly on Germany as the country that benefits the most from the current situation.  Germany has a rather painful choice to make.  Three options present themselves.  The first is for Germans to start spending more.  This can come via higher wages for German workers and from higher government spending.  This should result in more imports and less exports as the costs of production in Germany rise.  Another option is for Germany to transfer lots of money to the importing countries so that they can continue to buy German goods.  Neither is likely to appeal too much to many Germans.  However the third option is probably even worse.  Countries such as Spain, Portugal, probably Italy as well, leave the Euro and return to the peseta, escudo and the lira.  These currencies would immediately devalue, while the remaining Euro or the Deutschmark (if the Euro broke up completely) would rise in value.  The net result would be that most German goods would be priced out of the market in most other countries, while there would be a boom in exports from these countries.  This would most likely lead to a rise in unemployment in Germany as German companies moved production to southern Europe.  It was precisely to avoid this scenario that Germany agreed to the Euro in the first place.  However unless steps are taken to create some kind of mechanism whereby the profits that Germany makes on its trade surplus can be returned to the importing countries the system will break down.  At great cost to Germany.

So forget about Greece, the real issue is what will Germany do.

Will Greece have to default?

The answer to this is yes and it is only a matter of when, not if.  At least that seems to be the view of most economists.  At least those not employed by the EU, the ECB or the governments of the member states.  It is easy to see why.  Partly as a result of the austerity measures that the EU and IMF wish to inflict on Greece, there is simply no way in which the Greek economy can grow sufficiently to generate the funds to repay all these loans.  Which of course makes it all the more likely that Greece will reject the proposals.  Even if they are forced to accept them, the austerity measures, it merely delays the inevitable.  At some stage in the not too distant future, Greece will have to default.  And all hell is likely to break out.

The reason for this is that if Greece defaults then some of the big French and German banks will be in deep trouble.  And the reason for this is that any kind of default or rescheduling of debts would force the banks to come clean on their losses.  It is unlikely to end there, as a Greek default would almost certainly have a domino effect and lead to similar troubles in Ireland, Portugal and possibly Spain and Italy.  To get an idea of how losses in Greece can affect banks elsewhere, please read this article by David Malone on his Golem XIV blog.

So the EU is desperate to keep Greece from defaulting, hence all the repayable loans it wants to force on the Greeks.  Getting the already impoverished Greek taxpayers to bear the whole burden is quite cute, at least if you can get away with it.  For remember, it is not in fact Greece that is getting bailed out, it is the bondholders, primarily the French and German banks who so recklessly leant the money to Greece in the first place.

However the likelihood is that by trying to stave off the inevitable, EU leaders are only making this worse in the long run.  Preventing contagion spreading to Ireland and Portugal may be impossible due to current EU policy.  Colm McCarthy, an Irish economist gives a good outline of how this failure to face up to the reality of a Greek default will make things worse, in this article for the Sunday Independent.  He also makes the interesting point that this failure stems in part because, “European political leaders are reluctant to admit to their electorates that the euro system was poorly designed from the outset, that some countries should perhaps not have been admitted at all and that there have been massive failures of bank supervision.  French banks apparently hold €56bn in Greek bonds, German banks €30bn.  Why were they allowed to acquire these huge exposures?”  It is just so much easier to blame poor feckless Greeks and gullible Irish.

So what is likely to happen?  The smart money is on some kind of break-up of  the Eurozone.  Some of the peripheral countries will be forced out or voluntarily decide to leave the eurozone.  This would come along with a default.  While this would clear these countries’ sovereign debts, it is not clear what the long term consequences would be.  The thinking behind this is that a much reduced eurozone - Germany, France, the Netherlands, Austria, Belgium - would not face the same strains and stresses of the current, wider zone.  It would however still be faced with the same basic problem.  Can a monetary union survive without a fiscal union?  This would need the creation of European Finance ministry and would allow for fiscal transfers between member states.  As is the case with the USA.  While the current climate within the EU is hostile to such a move, perhaps within a core eurozone it might be easier to sell this plan to the electorates.  Short of some kind of fiscal union the euro is likely to be doomed.  As the creation of the euro was essentially a political decision, expect politics, especial the need to maintain the Franco German axis, to play a large part in any future decisions.

In the meantime, Europe needs to prepare for the worst.  And this will alas include the UK.  Since what we face is a solvency crisis, Europe needs to expunge the rot from its banks.  This is the conclusion reached by John H Cochrane and Anil Kashyap, two professors of economics and finance at the University of Chicago Booth School of Business.  In an article for the Wall Street Journal they highlight some of the key facts in this sorry Greek tragedy.  Whatever the long term solution for the EU, some time soon, and the sooner the better, banks need to get their houses in order.  As they put it, “Banks with inadequate capital must raise it, find buyers, or reorganize.  If that means bailouts of ‘systematically important’ banks, then governments must do so, face their taxpayers, and make their regulators explain how they let this happen.”  

I like that last bit, about making regulators explain how they let all this happen.  I would go further and where possible charge them with gross dereliction of duty.  At the very least they should no longer be employed as key government advisers.

Work Longer for Less - Another Nasty from the Coalition

Another little piece of nastiness from our somewhat beleaguered government.  Today they are trying to get Parliament to agree to press ahead with raising the state pension age for women from 60 to 65 by 2018.  Then the age for everyone will rise to 66 by 2020.  Now the first part of this proposal is manifestly unfair to something around 300,000 women who will now face working up to two years longer before they can get their full state pension.  However the greatest objection should be to this notion that the state pension age needs to rise to 66 by 2018 and then almost certainly to 67 by sometime in the 2020s.

The UK is of course not alone in this and the previous government, New Labour, had also signed up to raising the state pension age.  However I have yet to find any convincing evidence that this measure is either necessary or beneficial.  There are all kinds of anomalies in the proposal.  The fact is that huge numbers of people die well before the state retirement age at the moment and that very large numbers of people only live for a very short period after reaching the age of 65.  This is particularly true for men and even more true for manual workers.  That the majority in this group are already pretty poor is quite convenient for our nasty Coalition as it was for New Labour.  After all what can the poor do - vote Labour?  Raising the retirement age will only make this inequality even worse.

The main, indeed the only justification for these proposals is that the majority of us are living longer and that the country can no longer afford to pay out such largesse.  It is all a bit rich really.  Just what then is the point of all these wonderful technological innovations and these great scientific advances if all it means is that most of us will have to work longer for a lesser pension?  It is not something that will much affect the rich.  They have never had to rely on the state pension for a dignified retirement.  It is as usual an example of the rich and the better off making it crystal clear that they are manifestly not in it with the rest of us.

I am particularly intrigued by one aspect of the assumed benefits from these changes.  Apparently at some time in the near future the government will be raising significantly more in tax from all these people who will have to keep on working a few years longer.  Now I am no expert in either economics or statistics, but if thousands of people remain in their current jobs for another year or two, surely this means that an equivalent number of people will remain unemployed for the same time.  When someone retires they are nearly always replaced by someone else.  After all the various jobs have to continue to be done.  So I fail to see the gain to the Treasury.  Someone will be employed and paying taxes and national insurance.  Whether it’s a 67 year old or a 47 year old or a 27 year cannot make much of a difference to the Treasury.  So where is the benefit?  Even worse if this does lead to an increase in unemployment there will be an inevitable increase in government spending.  So there will be even less of a benefit.  Now one can see that our nasty Coalitions plans to restrict benefits will help a little here.  But surely not by that much.

This, like most of the proposals from our nasty Coalition seems to be more ideology driven than anything else.  Punish the already weak and poor.  Protect the rich and better off.  We can afford nuclear weapons, new aircraft carriers and and ever more expensive military, which it seems is primarily used to kill innocent Muslims.  Yet we cannot, absolutely cannot afford to provide a decent retirement pension for all.

Osborne's answer to government debt - more household debt

The economic prospects for the UK and most of the EU do not look good.  There have been little, if any, signs of growth in the economy.  At this stage in the life of the government it would be reassuring to know that our triumvirate of Cameron, Osborne and Clegg had some alternative ideas of how to get us out of this mess.  However there is little evidence of this either.  Everything is focussed on reducing the government’s deficit.  All our woes are down to the last Labour government’s mismanagement by allowing all this government debt to rise and rise.  This of course is nonsense.  Without the rise in government borrowing the major banks would have collapsed bringing down the whole economy with them.  So most of the borrowing was necessary.  At some stage it should and will come down.   But in four or five years?

Such a massive contraction can only come about by reducing government spending in an abrupt and drastic way.  And such a contraction will inevitably have a knock-on effect on the growth prospects for the economy as a whole.  There are really only two ways in which the economy can grow in these circumstances.  The first is through a massive revival of exports.  The large effective devaluation of the pound relative to other countries is supposed to help this process.  However it also crucially depends on the rest of the world wanting to buy our goods and services.  While some other countries are doing quite well and there has been a slight growth in exports, there has been nothing like enough to compensate for the reductions in government spending.  Add to this the fact that key export markets such as the EU are also in the doldrums, suffering the same austerity measures as us in the UK.  The woes of the Eurozone economies are beginning to make the pound less competitive viz a viz the Euro.  So far, and we are now three years into a large devaluation of the pound there is nothing to support the view that export growth will alone revive our ailing economy.

The other way to compensate for reduced government debt is to increase personal and household debt.  And believe it or not this seems to be the Coaltion’s latest great white hope.  This is Alice in Wonderland economics.  Though that may be a tad unfair to Alice.  To get us out of the current mess, created in the main by our nasty Coalition, we all have to start spending more and more.  And this has to happen in a situation in which wages for those still in work are being frozen, benefits are being cut, while unemployment is forecast to rise.  In these circumstances the only way that private spending can rise is through individuals and households taking on more debt.  As Paul Krugman puts it - “So we have the spectacle of a government that inveighs against the evils of debt pinning all its hopes on an assumption that over-indebted households will dig their hole even deeper.”  Not an attractive proposition.  And one that is most unlikely to happen.  All the recent indicators show that household spending is not rising.  

All of which makes the prospect of a double dip recession that bit more likely.  Do our three wise men at the helm have any other ideas?  Where is Alice when you need her?

The Budget - Much Ado about Nothing?

Another budget and lots of newsprint and heated debated on the airwaves.  But has this budget made any significant difference to the economy or the short term prospects of most individuals?  I suspect not.  In a way I feel a bit sorry for our boy George, (well not really), as he has to present a budget each year, but all the key decisions were taken last year.  This was when the Coalition make their reckless and ruthless decisions on the future direction of the public finances.  And despite the fanfare this year about a budget for growth, this is clearly no such thing.  

For the overall strategy of the Coalition is much less a dash for growth than a dash to cut.  To cut just about anything and everything.  If the Chancellor was serious about growth in the economy he would not be aiming to cut the deficit in four years, nor would he be slashing back on public spending.  It is already clear that there has been even less growth than forecast and the prospects for next year are none too good either.  To cap it all government borrowing has actually gone up.  Nothing too surprising in any of this.  Before the last election just about everyone warned that a too precipitous dash to cut the deficit would not just damage the lives of individuals, but would damage the prospects for future growth in the economy.  Even the Liberal Democrats criticized the Tories for their economic policies and warned that this approach would damage the economy.

The Coalition’s decision to cut the deficit in as short a time as possible has nothing to do with economic analysis.  All the evidence shows that slashing public spending in a crisis will not, on its own, lead to growth.  The Tories are using the deficit as a red herring to cover their real aim - which is to slash public spending in overall terms and welfare spending and public services in particular.  All this is classic Tory policy - the nasty party has not changed its spots.  There is nothing surprising in any of this, the public knew what the Tories stood for and what they were proposing to do.  Which is why they were massively rejected by the electorate at the last election.  It is always important to remind ourselves that the Tories did not win the election.  If the country had wanted the Tory prescription, more of the electorate would have voted Tory.  But they didn’t. 

What is really surprising is that the LibDems have ended up supporting this nasty lot.  Especially since the LibDems campaigned strongly against the economic policies of the Tories.  So why did they decide to enter into a Coalition?  I know that some LibDems are as neoliberal in their economics as the Tories, but most of us assumed that there were enough LibDems with a Social Democratic background to resist the blandishments of office.  Oh how wrong we were.  A clear lesson from the last UK election - never trust a LibDem.  With the Tories at least you know what you will get - though it always seems to turn out even worse.

Back to the budget.  There is nothing in this year’s budget which will change the country’s economic prospects.   Taken as a whole the various budgets mean a pronounced reduction in the living standards for the majority of us.  With inflation at 5% or so, future rises in personal allowances to be limited to the CPI as opposed to the RPI, rises in VAT, cuts to public services - minor adjustments here and there make little difference to the loss of income for most of us.  Even the 1p reduction in the price of petrol is a bit of a con.  Its very minor effect is more than offset by the earlier rise in VAT.  Not to mention that the North Sea oil industry is up in arms about the rise in its tax burden - all to pay for this 1p reduction in the price of petrol.  The after effects of this imposition on the oil industry will be very interesting.  Will they carry out their thinly veiled threats to cut back in investments in the North Sea?  If so the government will look pretty silly, and all for a mere 1p reduction in the price of petrol.  Of course if they do not cut back on investment and there are no job losses, this would be a pretty good indication that there was no need to reduce corporation tax.  This minor move in the budget could prove to be the most interesting of all.

A final comment on the overall economic strategy of the Coalition. Just after the budget two of the main ratings agencies have made public their concern that the low growth forecasts for the UK mean that the government could in the future be faced with a downgrading of its AAA rating.  What would that do to the government’s borrowings?  Plan B anyone?

The Economy - It can only get worse

It looks like the economic policy of our nasty Coalition - cuts, cuts and more cuts - is finally coming up against reality.  A clutch of organizations, including the Bank of England, the Office for Budget Responsibility, the OECD and the CBI, have all revised downward their forecasts for growth in the UK economy.

It’s not hard to see why growth is going to be very hard to achieve.  For example the IMF in its October edition of World Economic Outlook, offers a fascinating insight into how spending cuts impact on the economy.   According to the IMF spending cuts of 1% of GDP can subtract as much as 2% from growth.  Now this is likely to be the case for us in the UK because the usual factors which historically have mitigated the effects of spending cuts are absent here.

Firstly in previous cases countries have aggressively cut interest rates and devalued the currency.  However that has already happened here.  With interest rates at 0.5% there is no scope for them to fall further.  Rather, all the indications are that they will rise sometime this year.  The UK has also benefitted from a approximate 20% devaluation in the exchange rate of the pound.  Further depreciation is unlike to occur in the near future, if at all.

Secondly, in all previous cases where spending cuts have been associated with economic growth this has come from a switch to exports.  However there is little likelihood of growth in external demand for UK goods and services in the near future.  Europe is, like the UK, in the middle of a period of austerity, Japan is still in the doldrums and the USA is about to start its own austerity programme in 2012.  That leaves China, India and the developing world.  Alas for us, all of the rest of the world will also be competing for what little export growth there is.  For more information about the IMF paper, please visit Duncan’s Economic Blog.

Bear in mind that our nasty Coalition is proposing spending cuts of some 6% over the next four years.  So unless something miraculous happens pretty soon we are in for a lengthy period of bad times.  Remember also that these spending cuts are only now beginning to happen.  The country as a whole has still to feel the full effects of the rise in unemployment, the wage freezes and the resultant loss of spending power for most people and families.

At this point is also worth remembering that all this talk of spending cuts and reduced economic growth means a real loss of services and lowering of living standards for most people in the country.  For all their talk of efficiency savings and protecting front line services, cuts of the order planned by the Coalition can only lead to reductions in services or the actual loss of some services.  Over the summer and autumn we will be begin to see exactly what and where these cuts will be.

It is also worth remembering that all this talk about how “We are all in this together” is just that - all talk.  Further evidence of just how nasty the Coalition is.  I still await with interest to find out just what Messrs Cameron, Osborne, Clegg et al, are going to have to give up, as a direct result of the spending cuts.  Not to mention the chief executives and directors of our banks and financial companies.  I don’t see many, if any, of them suffering much.

The only option open to the rest of us is to protest.  Loud and clear and as often as possible.  Let your MP know what you feel and let the likes of Cameron, Osborne and Clegg know as well.  Write, email, join in any local protests and campaigns.  A determined opposition can work wonders, just look at Tunisia and Egypt.