BRICS say Greek bailout too soft on the banks

By Michael Burke

The rapid growth of the so-called BRIC economies (Brazil, Russia, India and China) is providing a global benefit in terms of economic growth. But their increasing weight in the world economy will also provide a growing benefit specifically to all the European economies, and most especially the majority of citizens in the most crisis-hit countries.

The latest example of this arises in relation to the Greek crisis. Because of their more rapid growth the BRIC economies subscription of the funds for the IMF are growing. Their weight in the IMF is growing as a result, where previously the interests of the US have always held sway. It is clear from a report in the Financial Times on July27th that representatives of the BRICs are unhappy with the term of the latest bailout involving Greece. The complaint is twofold - that the austerity measures imposed on Greece are too harsh and the level of losses imposed on the banks is too small.

According to the FT, ‘Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small.

“Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”’

Mr Batista also went on to argue that, while there were suspicions about bias towards European bondholders (EU banks), Christine Lagarde the new IMF MD and former French Finance Minister had the perfect opportunity to dispel such suspicions (by taking a tougher line on bank losses).

Further, the FT reports, ‘Arvind Virmani, the Indian executive director on the board, said the plan dealt with short-term cashflows but left Greece with a large and precarious sovereign debt stock, threatening further defaults.

“I am not convinced [the plan] addresses the basic problem of liquidity versus solvency,” he said, adding the fund had dodged the question for more than a year.’ The clear implication is that Greece requires further debt write-offs if it is to become solvent.

Both men also argued that the size of the IMF loan would be unacceptably large and would not have been made available to a developing country. The obvious implication is that either European taxpayers or bondholders should make a greater contribution- and it was clear that their preference is for the banks to take greater losses.

According to the latest official documents, the debt-reduction for Greece will be €26.1bn, less than 12% of total debt outstanding of €350bn. Clearly, this is a welcome first step but wholly insufficient to bring about solvency. Once all forms of ‘credit enhancement’ (very expensive insurance) on the debt being restructured are paid for, the total estimated debt reduction is actually smaller than the €28bn projected level of Greek privatisation receipts.

As the BRIC representatives say, the cuts are too harsh and the losses for bondholders too small. Politically, as well as economically, the rise of the BRICs is a major benefit. Progressive forces in Europe (including Britain) and elsewhere should increasingly look to them. Not only is it possible to learn from their rapid growth, but it is also very valuable to have them as allies in the interests of the overwhelming majority of the population of Europe, and against the interests of the bankers.

The stats show the Tories make you worse off and less safe

By Michael Burke

A small but growing number of commentators have analysed the way Tory policies make the average person worse off. New data released on police numbers and crime also show the way Tory cuts are making you less safe.

Even the Tories admit that the recession, which their cuts policies are deepening, will raise the threat of crime. In particular crime is increased by the cuts in welfare benefits – which is what the Tories are concentrating on.

The Times reported (£) on June 29th on the opinion of senior police officers on this coming increase in crime:

“It won’t be an even, upward progress, there will be a ragged line with different patterns in different areas and some crime types shooting up, while others remain level,” one said.

Chief constables and criminologists say that there is usually a gap between the worst of the financial crisis and the impact of austerity on the public before the effects are reflected in crime patterns.

They believe that crime will rise more dramatically as sections of the public feel the impact of public spending cuts, unemployment and, perhaps most significantly, cuts in benefit payments.

As The Times reported (£), some crimes are already going up:

Kenneth Clarke, the justice secretary, told the Commons last week that burglary was one of the crimes that is “rising at the moment”, adding: “It is going up rather alarmingly compared with a year ago.”

Ministers are nervous that rises in property crime herald the long awaited recession crime wave that will worsen if unemployment increases substantially and people have less cash in their pockets…

“There are indications that crime is about to turn. The reason it has not gone up yet is because unemployment has not risen that much,” one minister admitted.

Yet confronted with this rising threat of crime the Tories are actually cutting police numbers. The report (pdf) published by Her Majesty’s Inspectorate of Constabulary (HMIC) on July 21st confirmed there will be 16,200 fewer police officers in the UK as a result of the Tory led government’s cuts.

London – the Tory Mayor makes you less well-off and less safe

This increase in various types of crime is already feeding through into London. After the Tory Mayor of London has made Londoners worse off through his unnecessarily large above-inflation fare increases, the Conservative-led government and the Tory Mayor are additionally making Londoners less safe.

As The Times reported (£):

Burglaries, robberies and muggings are on the rise for the first time in years as fears grow among ministers that the economic downturn is driving up crime.

Figures from Britain’s biggest police force provide the first indication that years of falling crime are coming to an end. The Metropolitan Police has reported big increases in robbery, burglary and motor vehicle crime in the past 12 months…

Robbery, including muggings, pick-pocketing, burglary, shoplifting, theft of bicycles and interfering with motor vehicles increased, the Metropolitan Police report says. Figures show that there were more than one thousand more burglaries last month compared with May last year.

Robberies in the capital jumped by 15 per cent from 3,257 in May last year to 3,749 this May; house burglaries rose by 18.5 per cent from 4,410 to 5,228; and thefts of and from vehicles by 6 per cent to 9,299.

Yet despite this trend the Tory Mayor is pressing ahead with cuts in in police numbers. In the last year police numbers in London were already cut by 926. By 2014 there will be 3,111 fewer Metropolitan Police staff including 1,907 fewer officers, 820 less PCSOs, and 324 less police staff.

Tories – talk and not action on crime

These trends show clearly the picture which always exists: the Tories, whether as the UK government or as the Mayor of London talk a great deal about crime but take actions which increase it – both by deepening the recession and by cutting police numbers.

As Ken Livingstone said about the situation in London:

“Boris Johnson’s cuts mean on average every London borough will lose over 50 police officers. These cuts risk undermining the work which the police and local communities are doing to make our streets safer.

“The Conservative Mayor’s cuts will mean some of the most experienced and able officers losing their jobs, including 300 of the 600 sergeants who manage local police teams.”

The story is the same across Britain and in London: the Tory-led government and the Tory Mayor make you less well-off and less safe.

* * *

This article originally appeared on Left Foot Forward.

British Economic Stagnation

By Michael Burke

The British economy continues to stagnate. Just over one year after the Tory-led Coalition announced its first Budget the British economy is virtually still in the water. In the preliminary estimate of GDP in the 2^nd quarter growth was just 0.2%. In the three quarters since the Comprehensive Spending Review (CSR) this figure constitutes the sum total of economic growth, i.e. just 0.2% - with the previous 6 months having registered no growth at all.

Tory supporters are sufficiently concerned to have begun he discuss the need for a growth strategy, although the remedies offered are likely to exacerbate the situation, as will be discussed below.

As SEB has previously shown , before the Tory-led government’s policies began to take effect there had been an economic recovery. For comparison, in the three quarters preceding the CSR the economy had grown at a moderate rate of 2.1%. This is in sharp contrast to current performance which now reflects the effects of cuts to public spending and their wider impact on the economy.

In the three quarters since the CSR, the economy has expanded by just £660mn, compared to £26.7bn in the preceding 9 months. No wonder most households and businesses feel poorer and gloomier.

It is possible that the situation may get worse. Economies only respond to policy changes after a certain time lag. In both the phases of recovery and in the subsequent stagnation the economy as whole responded two quarters after significant changes in government spending. Although there was an ‘emergency budget’ in June 2010 and VAT was increased in January 2011, most of the cuts did not take place until the beginning of the Financial Year in April 2011. The depressing effect of those cuts is therefore only beginning to be felt and is likely to increase throughout the rest of this year.

Despite the fact that the recovery began at the end of 2009 GDP output is still 3.9% below its peak level. Other European economies such as Germany and Sweden have already recovered all the output lost in the recession, by taking precisely the opposite course. Growth was stimulated via a series of measures - most effectively by increased government spending. The consequence is their public sector deficits are falling, while in Britain the official forecasts for the deficit are being revised upwards. The reason for this is simply that tax revenues in Britain continue to disappoint as growth remains elusive.

In the Great Depression of the 1930s it took exactly 4 years for the previous level of output to be restored. The 2nd quarter of this year was the beginning of the 4^th year since the recession. It seems extremely unlikely that the economy will grow by close to 4% by the 1^st quarter of 2012. This depression will not be as severe as the Great Depression, but it seems likely to be even longer.

The stagnation of the economy and the damage this is doing to Tory popularity has sparked a debate about the need for growth. Predictably, it ignores that fact that the recovery was fostered by increased government spending, including investment and is being throttled by government spending cuts. Instead, the focus is on tax cuts for corporations and the rich, an end to all carbon reduction policies, a reduction in the minimum wage, abolishing employment laws, privatisation and so on.

This is a recipe for more of the same and, as in other countries, the effect of this huge transfer of incomes from poor to rich would be to depress economic activity even further as well increasing the public sector deficit.

Few of these ideas are likely to find much support outside Tory circles. But one which has is the idea of a corporate tax cut to boost investment. This call ignores two important facts. First, the government is already cutting corporate tax rates from 28% to 23%, yet the private sector’s investment strike continues and accounts for 80% of total lost output. Secondly, the non-financial corporate sector is already sitting on a cash mountain, which is simply financing dividend payments, enormous executive pay and takeovers- that is, everything but investment.

The call for lower corporate taxes obscures a central truth about the current crisis. In any normally functioning market economy the household sector is a net saver, that is it retains a portion of its income and does not consume it immediately. The savings are mainly held in banks. The corporate sector is a normally a net borrower for investment, and borrows from the banks. The government can either be a saver (budget surplus) or borrower (budget deficit). This depends on its own tax and spending policies, but also on what happens in the rest of the economy.

In the chart below, the level of lending or borrowing for these 3 main sectors is shown. Borrowing is a negative number and lending positive. Other important sectors (especially financial corporations and the rest of the world) have been disregarded for the sake of clarity.

Figure 1

What the chart shows is the British non-financial corporate sector has not been performing its designated role over a prolonged period. It has been a net saver. Disregarding the sectors not shown, in general the sum of these three sectors must balance to zero. Saving by one sector must have another sector its borrowing counterpart.

The saving of the corporate sector had two effects. In the first instance corporate savings (achieved through lack of investment and low wages) obliged the household sector to become a net borrower to finance consumption. It also obliged the government to increase its borrowing as the lack of investment depressed taxation revenues. When, at the beginning of 1998, the household sector took fright and returned rapidly to its traditional role of net saver, the government was obliged to sharply increase its own borrowing and the public sector deficit ballooned.

The primary cause of both the unsustainable nature of the prior business expansion and the subsequent recession was the failure of the corporate sector to borrow to invest. Rather than cut their taxes and increase this saving, the whole thrust of policy should be designed to oblige the corporate sector to borrow for investment.

A progressive government policy would be to encourage business investment by increasing the government’s own investment. If necessary, a radical government would simply seize these corporate savings and use them for investment purposes on its own account. But in no case should there be a reduction in the incomes of the household sector via wage cuts and public spending cuts. This only diminishes its ability either to spend or save, and does not create business investment.

The electoral myths of 'blue Labour'

By John Ross

Recent reports are that the current ‘blue Labour’ is coming apart - with former leading supporters stating they no longer wish to be associated with the project following Maurice Glasman’s widely criticised interview with the Daily Telegraph on immigration. But it is also important to understand that the entire basis of the factual claims by blue Labour were inaccurate.

The name ‘blue Labour’ summarises its analysis. It claims that the politics represented by the colour ‘blue’, that is the Conservative Party, are deeply attractive to those who can or did support Labour. As one analysis by a blue Labour leader put it: ‘Appealing to Lib Dems is all well and good. But we have to start to reach out to the millions of working class former Labour voters who left us for the Tories.’

Unfortunately there is no factual basis for a claim that the fundamental reason for Labour’s decline in support is the attractiveness of the Conservative Party and values it represents. Indeed the facts show the reverse.

There are naturally short term swings at elections, but Labour’s entire strategic net loss of votes over the period since it last came close to enjoying majority support in the electorate, a decline from 47.9% in 1966 to 29.9% in 2010, has been to the Liberal Democrats and other parties – chiefly Scottish and Welsh nationalists. None of this net loss of votes was to the Conservative Party.

Labour

To show clearly the factual trends of Labour support Figure 1 charts the Labour percentage of the vote at all general elections up to 2010.

As can be seen the trend is clear. There are, naturally, many short term fluctuations, but Labour’s support rose until the early 1950s, the absolute peak being reached at 48.8% in 1951. Support remained at a high level until the mid-1960s – with 47.9% of the vote being secured in 1966. After 1966, again of course with short term fluctuations, Labour’s vote fell from its previous level.

Figure 1

It therefore may be accurately said that from 1966 the social/political coalition which had made Labour a force commanding the support of almost half the total electorate progressively came apart. The key strategic issue therefore is where did Labour’s votes go?

To show what happened to Labour’s former support Figure 2 shows the change in the party’s share of the vote after 1966. As may be seen in that period:

• Labour’s vote fell by 18.9% .
• Liberal/Liberal Democrat votes rose by 14.6%.
• Support for parties other than the three major ones rose by 10.2% - this being chiefly the SNP and Plaid Cymru.
• The Tory vote, far from rising as it would have if it had attracted electors from Labour, fell by 5.9%

Therefore none of Labour’s net decline in support went to the Conservatives. The facts show, in short, that far from being attractive to Labour votes, the Conservative Party and Conservative values were deeply unattractive. The whole of the loss of Labour votes was to the Liberals/Liberal Democrats and ‘other’ parties – chiefly Scottish and Welsh nationalists.

Figure 2

The Conservative vote

Taking as a starting point for comparison 1966, a peak of Labour’s popularity, furthermore understates the decline of Tory support. Strategically the Conservative vote, naturally with short term fluctuations, has been declining for a prolonged period – as is clear from Figure 3. The post-war Conservative peak was in 1955, at 49.6% and Tory overall support, again inevitably with short term fluctuations, has been declining since.

Figure 3

The Tories failure to win an overall majority at the last general election was therefore not a ‘surprise’. Every Conservative victory since 1955 has seen the Tory vote fall to a lower percentage of the vote than the previous one.

The Conservative Party secured 49.6% of the vote in 1955, 49.4% in 1959, 46.4% in 1970, 43.9% in 1979, 42.4% in 1983, 42.2% in 1987, 41.9% in 1992, and 36.0% in 2010. The average decline of the Tory vote per year between victories is 0.3%.

The Liberal Democrats

Given Tory support was not rising but falling throughout this period the main parties receiving rising support were the Liberal Democrats – as shown in Figure 4, and ‘others’ – chiefly Scottish and Welsh nationalists, as shown in Figure 5

Between 1966 and 2010 support for the Liberals/Liberal Democrats rose by 14.6%. Support for other parties rose by 10.2%

Figure 4

Figure 5

Conclusion

The facts on the erosion of Labour’s former support are therefore clear.

• Strategically the Tory party has not shown itself attractive to Labour voters. None of the strategic net loss of support of Labour has gone to the Tories. On the contrary the Tory it is a party whose vote is in long term decline.

• The strategic loss of Labour support has been to the Liberal Democrats and Scottish and Welsh nationalists.

Posed in terms of values the conclusion of this is equally clear. Conservative values have not shown themselves attractive to former Labour supporters at all – on the contrary they have shown themselves unattractive. It is Liberal, Democrat and Scottish and Welsh nationalist values that have shown themselves attractive to Labour voters. Therefore, far from moving closer to Tory values, what Labour has to do is to be more attractive to those who have shared the values of Liberal Democrats and Scottish and Welsh nationalists.

Appendix – Percentage of the Vote at General Elections 1931-2010

The vote at general elections is set out in Table 1 below.

Table 1

The Job Losses at Bombardier

By Michael Burke

It is widely expected that Bombardier’s failure to win the government contract for new Thameslink rolling stock will lead directly to the loss of approximately 1,400 jobs. This will indirectly cause other job losses in the area around the Derby works as well as in related industries. It will also negatively impact government finances.

The contract has been won instead by Siemens. The fact that Siemens is a German company has inevitably led to expressions of chauvinism on the British press, with the Daily Mail in particular focusing on the company’s national base and the Daily Telegraph campaigning that this is an issue of ‘British jobs for British workers.’ .

It is no such thing. It is instead a product of chronic private under-investment, the absence of any policies to promote production or jobs, declining government investment, the effects of privatisation and the dominance of the City in all aspects of policy. In short, it is a product of Thatcherism and New Labour’s refusal to reverse it.

Decline

The knee-jerk response by large sections of British society to any loss of jobs to overseas competitors is to claim that they are being undercut on pay. But investment (and the jobs it creates) does not flow to the lowest paying producer. In Europe, Bulgaria’s average rates of pay are one-seventh those of Germany yet Germany receives more than 500 times Bulgaria’s level of Foreign Direct Investment (FDI). In fact Britain is the biggest recipient of FDI in the world, belying any notion that ‘British jobs’ are lost through the process of international investment ..

In fact it is the failure of British capital to use that vast inflow productively which is the cause of Britain’s relative economic decline and the consequent destruction of jobs. In one sense, Bombardier is simply the latest example of this trend.

Bombardier

An interesting report by the Guardian’s economics leader writer Aditya Chakrobatty highlights how run-down the Bombardier factory and surrounding industrial park were, even before the latest set-back . This is symptomatic of chronic under-investment. A very valuable academic report highlights the reason for this^1[i]. Even compared to the Bombardier operation in Germany, let alone the successful bidder at Siemens, the rate of investment in the British operation was less than 40% of its German counterpart. Further, the proportion of value added consumed by interest payments was three times greater in the British operation.

Government tendering policy compounded these weaknesses. Although the contract remains secret, it is clear that the firms bidding for the work were not simply in the train-building business. The contract stipulated a PFI-style financing arrangement involving maintenance and leasing for 30 years in which, crucially, the bidder would have to arrange the financing for the acquisition of the rolling stock. For a firm already burdened with triple the interest burden, this was an impossible stipulation which added an estimated £700mn in costs to Bombardier’s bid.

This model of PFI-style financing has proved disastrous in all areas, most especially in large-scale transport projects. It is a function of the earlier privatisation of the rail industry including British Rail Engineering Limited, which had produced rolling-stock. The Bombardier plant in Derby is a vestige of that privatisation, having had 5 different owners in the intervening period. It is claimed that PFI deals lower government borrowing and lowers its need to invest. In fact, it inefficiently increases the overall costs of investment and thereby reduces the level of investment itself. Private PFI consortia have features similar to monopolies, and lead to price gouging of the state. In addition, private borrowing costs are always higher than those of government, leading to further costs, which are again borne by the state.

The sole beneficiaries of this adherence to PFI financing are the private consortia members and their financial backers. Since even under the most favourable terms many of these consortia still manage to go bust , the most consistent beneficiary of PFI financing are simply their financial backers among the major banks, who achieve a return irrespective of the failure or otherwise of the project..

Campaign

On July 23^rd unions operating in the Derby works have called a demonstration to campaign against the job losses. They are right to do so. But there can be no concession to the reactionary dead-end of ‘British jobs for British workers’.

German labour costs in the rail equipment sector are almost exactly the same as those in Britain adjusted for the exchange rate, €46,382 compared to £44,081. Siemens won the contract because the various owners of Bombardier did not invest in the company, compounded by government policies which represent the interests of the banks.

The campaign should be directed against the government- a demand to publish the contract to expose how loaded it was, for increased government investment in rail and for an end to PFI-style financing, which benefits the bankers, not the workers.

Notes

1. Knowing what to do? How not to build trains, CRESC Research Report, Manchester Business school.