The nef blog

Something is stirring in mainstream politics in the UK. That is rare enough in itself, but this trend is not very welcome: it is the return of the Blair and Mandelson Show in defence of 1990s-style economic policy – in other words, the very ideas that got us into the mess we are currently in.

A small report in the Financial Times not only suggests that Blair is considering a return to front-line politics – now that his old rival seems to be out of the way – but that he and his former colleagues are encouraging Labour to unite around the old idea of ‘growth’.

The basic mood music seems sensible enough. There is no doubt that we need to invest, though what Mandelson means by infrastructure is not clear – presumably the kind of airport investment that simply accelerates the cascade of money from poor to rich.

The idea of state lending to small business is also sensible. The problem is the weasel word ‘growth’. 

Criticising the last generation for embracing their old totem does not mean that anyone wants nothing to grow – of course we need growth in some areas and some sectors. The problem is that, once again, they have side-stepped the key issue: growth of what, growth where?

We all knew what grew most during the Blair years – the number of billionaires, while average incomes stayed flat, fuelled by constant recourse to the credit card. The flow of money grew, so did the amount of carbon in the atmosphere, so did personal debt.

We might all be a good deal more welcoming of the idea of the Return of Blair if he showed any sign that he had learned anything since he was last in frontline politics. 

Unfortunately, this is precisely the point: this is all about nostalgia for the old certainties of the 1990s. It is a route backwards to the source of our economic problems, not a way out of the forest.    

This is not a Greek crisis. It is a European crisis, in two parts. First, the financial crash of 2008 provoked a global recession of exceptional severity. Combined with bailouts for the banks, this led to sharply increased debts and deficits for most large economies – including those in the Eurozone.

As tax receipts fell and unemployment rose over 2008-9, government deficits widened. To plug the gap, governments borrowed, pushing up their debts. For countries in the Eurozone, much of this borrowing was taken from European banks. The banks were happy with this arrangement, as they assumed it was not possible for a Eurozone member to default and therefore the loans were low risk. The governments were happy, as they appeared to be getting cheap financing.

But there was a problem. For the decade of the euro’s existence, it effectively fixed exchange rates of member countries relative to each other. The option to revalue a currency inside the Eurozone was no longer available. Germany, with weak productivity growth, drove the wages and salaries of its workers downwards, with falling real average incomes for seven years. It became more competitive, relative to other euro members, as a result. Normally, this would lead to a rise in its exchange rate. But the euro itself prevented that.

Instead, German exports appeared very cheap for southern European countries. They began importing more from Germany (and northern Europe in general) than they sold. A trade gap opened: widening deficits in the south were matched by widening surpluses in the north, all inside the Eurozone. The deficits needed financing. This is the second, critical, part of the crisis. To finance the deficits, countries borrowed, exploiting Europe’s newly emboldened financial system. For Spain and Portugal this borrowing appeared as private debt, helping a finance an enormous property bubble as rising prices drove rising borrowing. For Greece, it led to high levels of public debt – Greek households saved, rather than borrowed, during the boom. But in all cases, the total amount of debt in the economy began to rise rapidly.

The financial crash, with its increased demands borrowing, ran straight into this existing imbalance. The spark for the crisis was revelation, in October 2009 by a new Pasok government, that Greece’s public debt was far larger than the previous administration had admitted.

It is not a crisis of public spending. Spain and Portugal ran consistent government surpluses, spending less than they received in taxes, until the crisis erupted – unlike Germany and France, which were continually in deficit. Greece spends less, as a share of GDP, on its public sector than do either Germany or France – although it suffers from chronic tax evasion by its wealthy.

This is a crisis of the financial system, and of the euro itself. Without resolving both sides of that unhappy pairing, it will not end.

Two years of failure

Successive attempts to solve the crisis by the major powers have graphically failed. They have followed a set pattern: alongside bailout funds, now amounting to €240bn, intended to enable the Greek state to meet its creditors’ demands, come the insistence on austerity measures of increasing severity. Overseen by the EU/ECB/IMF ‘Troika’, successive Greek governments have shovelled growing piles of cash at international creditors, while squeezing greater and greater sacrifices from the Greek people. The impact on society has been devastating. To pick just one example, Greece used to have the lowest suicide rate in Europe. Suicides have increased by 40% in the last year.

The Troika plans were never going to work. Austerity is self-defeating. Government spending cuts – and sharp tax rises – suck demand out of an economy. If the economy is weak – and Greece is seriously weak – it weakens further, as falling demand leads to fewer goods sold, fewer people employed, and falling wages. A vicious circle of decline sets in, just as it did when governments attempted the same course during the 1930s. The Greek economy has now shrunk by 16% in five years, while unemployment has skyrocketed. And the debt burden, far from shrinking, is ballooning as a result, having risen from 130% of GDP in late 2009, to around 160% today.

The only way to remove a debt is to repay it, or to cancel it. The bailouts do neither. They simply help maintain the flow of repayments, with interest, enabling Greece to meet its creditors’ demands. As the economy collapsed – the direct result of austerity – this mechanism has become increasingly obscene: a whole country starved by austerity, but then kept on a bailout drip for the benefit of its creditors. It should be no surprise that so many Greeks voted for anti-austerity parties. There is no reason at all for anyone in Greece to accept this miserable settlement.

Syriza, the Coalition of the Radical Left, have emerged as winners, rising to second place in the last elections and now polling around 27%, ahead of all other parties. Syriza won its support in urban, working class areas, supplanting Pasok. It has insisted on the suspension of debt payments and an end to austerity as the conditions for any future coalition government. If no coalition is formed, fresh elections will be held in mid-June.

The weeks ahead

Two years of ignominious failure by the Troika are finally grinding to a halt. The situation is complex. Subject to significant uncertainty, the pattern over the next few months looks like this. The table below shows the amount Greece is expected to pay to meet its creditors over the rest of the year.

Schedule of Greek debt payments, 2012 (million euros)

Source: Bloomberg

Major individual repayments include the €3.1bn due for the ECB on 20 August. But any single missed payment before that date would trigger a default.

It is not now possible for the Greek state to both meet those repayments, and pay its own employees. If payments are made, it must continue to receive bailout funding from the EU. The EU has, until now, insisted that receiving bailouts requires Greece to honour the Memorandum of Understanding, signed last year, that commits it to strict austerity measures. If these measures are not adhered to, funding will be cut off, forcing a default. It is possible, but not certain, that the EU is now wavering on this, with Jean-Claude Juncker, Prime Minister of Luxemburg and head of the Euro Group, hinting on Monday that some leniency may be permitted.

Once in default, there is little point Greece remaining inside the Eurozone. International banks have spent the last year ditching their Greek bonds, with official sources (like the ECB), Greek banks, and risk-addicted hedge funds being the only remaining buyers. A default will not hit banks outside of Greece too hard, and the ECB can withstand the losses. But those inside Greece will be wiped out. They will need recapitalising – stocking up with fresh funds - most likely under tight government control. Recapitalising banks in euros will not be possible without access to a ready supply of euros – and the ECB and others will not be keen to supply them. Recapitalisation in a new currency, however, is a possibility, the central bank effectively printing money to cope. A Greek banking collapse could quickly lead to a euro exit.

The most likely date for elections is the 10 or 17 June. Germany has insisted that if Greece has no government after this, it will not receive the next tranche of EU assistance, due in June. This, too, would lead rapidly to a default, and so drive Greece towards the euro door.

But a government that honours its debt commitments – if, somehow, one can be formed – would be in an extremely vulnerable state. Its dependency on further EU subventions would be terminal. Greece’s primary deficit – the difference between the state’s taxes brought in, and expenditure made, minus interest payments – is 1% of GDP. This is not huge, but still needs covering. If it is not covered, for whatever reason, the state would run out of money to pay its employees pretty shortly, perhaps by July. It may be forced to issue promissory notes – offers to pay in euros at a later date – and these, in turn, would start to take on some of the functions of money, being accepted in shops and so on. Euros would disappear from circulation, becoming too valuable to use in either exchange or entrust to Greek banks. A de facto, almost accidental euro exit would occur.

The chances of all sides negotiating their way through the next few months, and Greece remaining a euro member, are low. Although the outcome is uncertain, and dependent on political processes, even if Greece gets through the next few months and out of the election period as a euro member, the crisis will not be resolved. The public debt will overwhelm every other consideration, and, with no realistic hope of repayment and a collapsing economy, the issue of its euro membership will merely reappear.

Contagion and collapse

In theory, Greece can be contained. The EU and ECB, between them, have spent two years constructing a series of “firewalls” to block the spread of the crisis beyond its borders, with €750bn theoretically available. Its former private creditors have been ditching their holdings of Greek debt, reducing their exposure to a minimum. In theory, the crisis in Greece can be held there.

But this is not a Greek crisis. Spain, Portugal and Italy are all part of the same debt-creation mechanism, driven by the euro’s imbalances. During the euro’s boom years, Spain and Portugal ran up immense private sector debts. A property boom drove borrowing for property, which in turn drove rising prices – until at one point more than 20% of the Spanish workforce was employed in construction. Private debts ballooned. When the crash came, those debts became unpayable. Spanish banks are threatening to collapse, with the third-largest, Bankia, quietly nationalised by the government last week. Italy, meanwhile, suffers from permanently low growth and a €1.3tr public sector debt. It, too, is caught in the trap.

Any eruption in Greece could spread rapidly to these three – Spain, in particular. A run on the banks could begin, as panicked depositors believe their governments to be incapable of supporting failing banks, and begin withdrawing their cash – sparking a real bank run. Or bond market traders, believing that heavily-indebted economies will see major bank failures that governments will not be able to rescue – driving up interest rates, and forcing governments to seek bailouts. Or private investors and speculators, believing that these countries cannot support their banks, begin withdrawing capital elsewhere, provoking capital flight and the collapse of banks.

Or, indeed, some combination of all three. Interest rates for Spanish and Italian government bonds have already started rising sharply, as traders start to fear the risks of a widespread collapse. Credit ratings agency Fitch have announced they will downgrade euro members in the event of a Greek exit. The EU’s firewalls, the temporary European Financial Stability Facility and the permanent European Stability Mechanism, appear to be able to cope – on paper. In practice, they rely not on actual funds, but on promises by signatory members to pay if needed. And a promise to pay is not the same as having the cash to hand – especially if those promising to pay, like Spain, are also those requiring bailouts. Both could soon be overwhelmed by a general conflagration. The risks of a second, severe recession are significant.

Next steps

There are two main routes out of a crash. One is to try as far as possible to cling to the old ways of working. This is the Troika’s preferred route. It has not worked so far, and it will not work in the future.

The other is to impose a sharp break with a failed past. Syriza have been absolutely correct to insist on refusing to make debt repayments, and vowing to end austerity. Neither are for the benefit of ordinary Greeks, or European society in general. They are right, too, to raise the use of unorthodox financing, like forced domestic borrowing – compulsory loans, with those who can afford them as creditors, set at low rates of interest. Preventing the spread of contagion, and the containment of financial crisis, will require capital controls – restrictions on the free movement of capital, either directly or indirectly, to prevent panic spreading. Even the IMF now admits the efficacy of such measures in a crisis. The wealthy must be taxed effectively to cover costs, and banks run in the interests of society, not private profit.

What is needed, in other words, are the first steps away from a failed economic system. The movement against austerity in Europe is growing. Greece could be about to take those first steps out of the wreckage. If a new, anti-austerity government is formed there, the pressure on them to break will be immense. Our solidarity will be crucial.

The prospect of a new crime and justice bill, heralded by last week’s Queen’s speech, is likely to re-awaken debate around the coalition’s sentencing policy. While its latest proposals around community sentences are still at the consultation stage, the bill is another step in the coalition’s programme of cutting costs and increasing transparency in the justice system.

The community punishment reforms in the consultation, and those in this week’s speech, are much more cautious however, than those that Ken Clarke had in mind when he took office in 2010. The much vaunted rehabilitation revolution has crumbled under heavy fire, most of it from his own side. Tabloids and Tory back-benchers lambasted his plans as soft on crime and out-of-touch with public opinion.

One of the key attacks was made by Tory peer, former deputy party chairman and part-time citizen of Belize Lord Ashcroft. In a 2011 pamphlet entitled Crime, Punishment and the People Ashcroft argued that increased use of community sentences ‘command woefully little support’ amongst the public. A stark opinion poll outlined the public’s verdict – 81% thought that sentencing was too lenient, while only 3% thought it too harsh.

The argument, then, was clear: the British public demand tougher sentences and to ignore them was both politically inept and undemocratic. But a more sophisticated investigation of public opinion casts doubt on this analysis. Researchers from Oxford University and London’s Institute of Crime Policy Research investigated the way in which the public made their judgements about sentencing. They found that when asked to consider a range of mitigating circumstances, respondents would often consider a community sentence even for a crime which in the real world would almost always result in custody. When given the hypothetical case of a person convicted of a serious assault, 69% of respondents thought a community penalty would be appropriate if it was a first offense, 65% if the offender was caring for small children, and 64% if the offender was remorseful and apologised.

While the hangers and floggers in parliament or Fleet Street may whip up a storm about any proposal which seeks to reverse or even slow the unsustainable increase in our prison population, this research suggests that the public are more open to reform than those who claim to speak for them. The obstacle for reformers then, is not one of public sentiment but rather of bandwidth. If they can overcome the myths around crime and sentencing and engage the public in a serious debate about who really needs to be in prison, they may find more traction than they expect.

What do Streetbank, Move Your Money UK and the Big Lunch all have in common?

One thing, at least, is that they are all taking part in the Festival of Transition, coordinated by nef.

The future’s hard to predict. But one way or another our economy and society will change dramatically as we adapt to the end of cheap fossil fuels, address the threat of runaway climate change and fix our broken financial system.

All too often, the language used in connection with these challenges is that of sacrifice and impossibility. ‘We can’t afford to’. ‘It’s too difficult’. ‘We don’t want to go back to the dark ages’. But what if overcoming big challenges actually meant better lives for us all?

This is the invitation of the Festival of Transition: to explore how by embracing change, we can make something great of it.

The Festival comes in three parts: a series of debates and discussions at museums and festivals around the country asking the question ‘What if…?’; Transition Walks, where expert guides will talk groups through periods of great change; and finally, an invitation for people across the country to conduct their own real life experiments in living differently on 20^th June 2012, the ’24 hours of possibility’.

On Wednesday 20^th June, you’re invited to taste transition for yourself by doing something different for the day. It could be 24 hours of sharing in the community, 24 hours of local food, or 24 hours of swapping roles. Check out the full menu of ideas on the Festival website, customise one to work for you (or your school, or your workplace) and pledge to make it happen.

The Festival of Transition is an opportunity to re-imagine the future, to reject the narrative of sacrifice, and to start building a better world today. The first transition walk takes place along the Thames tomorrow - head over to the Festival website and get involved!

This week, nef held a conference that marked the start of an exciting new programme of work we’re running on The Wisdom of Prevention. The event, supported by the Big Lottery Fund, bought together an impressive range of speakers from a range of sectors: Lord Adair Turner, Margaret Hodge MP, Jonathon Porritt, David Robinson, and Dharmendra Kanani from the Big Lottery Fund.

So what is Prevention? To many it may be a new term, although it is used fairly widely in social policy circles. It’s about understanding why things go wrong, and tackling the underlying causes of harm. To quote from nef’s report on the subject:

For society: tackling the underlying causes of poverty, unemployment, ill-health, illiteracy and homelessness, reducing crime and social conflict, insecurity and distrust, and cutting the need for hospitals, prisons and income support.

For the environment: cutting greenhouse gas emissions and the risks of climate change, safeguarding natural resources and stopping pollution of air, land and water.

For the economy: regulating financial institutions to prevent speculation, investing in good jobs and renewable energy, taxing polluters and discouraging carbon-intensive production’

This may sound like common sense – and indeed, that was a point made by Community Link’s David Robinson, who reminded us that what makes common sense does not always become common practice. In fact, there are precious few examples of this important strategic approach being applied in any systematic way. Even in the health sector, where the idea is perhaps most developed, Margaret Hodge outlined that only 4 per cent of the total NHS spend is devoted to preventative measures, and yet many health conditions are preventable, particularly those that fall into the Long Term Conditions category, which make up about 70 per cent of health spending.

nef’s take on prevention expands the concept beyond the social sphere, and also looks at how the underlying causes of harm in the environment and economy are often highly interlinked and can be ‘’mutually reinforcing’’. Several examples in the paper showed what applying a preventative approach might look like in practice. One example was taken in insulating homes against the cold, which if done at a national scale, would boost employment and skills. Over time it would reduce the amount spent on the winter fuel allowances that cost taxpayers £3 billion a year. It would also reduce the amount of carbon used in heating homes, and reduce heating bills – benefits across the environmental, social and economic spheres.

But, as we were reminded by all the speakers, prevention faces substantial challenges in becoming anything like a mainstream approach. To name but a few, the political will needed to take the agenda forward (though one delegate did point out the strides that the Scottish Government have made in setting out a preventative framework for public services), the challenges faced in evidencing the impact of preventative approaches, and the ‘rescue’ principles which shape much philanthropic and charitable activity. Delegates put forward some searching questions during the Panel Q&A. Some of the ones which have stayed in my mind asked;

• Have we have seen a failure of politics in the lack of leadership on this agenda?
• What trade-offs we might have to be prepared to make when considering the reality of what preventing significant and global challenges, such as climate change?
• Does the language of ‘prevention’ might need to change to a more positive axis if we are to persuade people of its powerful and radical potential?
• How far can regulation and legislation get us?

If you didn’t make the conference, you can catch up on it with the full audio on our website, download the full report here, or wait until the short film of the event is produced, which will be up on the nef website by the end of the month.

We’ll be continuing this work on prevention with an expert seminar in the Autumn, and are looking at opportunities to develop a practical programme of work. Please get in touch with Julia.slay@neweconomics.org if you are interested in being part of this.

So Andrew Moss (Aviva) joins Sly Bailey (Trinity Mirror) and David Brennan (AstraZeneca) on the CEO naughty step after shareholder revolts over their pay packets and poor corporate performance. Bob Diamond on the other hand manages to escape sanction and can carry on playing despite a chorus of criticism. Suddenly there is talk of a ‘Shareholder Spring’. What does this all mean?

Before we get carried away, we need to analyse what these corporate decapitations mean for the broader agenda of what David Cameron has dubbed ‘ethical capitalism’ and Ed Milliband ‘responsible capitalism’.

First, let’s deal with shareholder activism. Owners asserting better governance over under-performing and overpaid executives is no bad thing. Let’s welcome it. After all, we can be both pro-enterprise and anti-greed. Executive pay is certainly out of control, as FTSE100 bosses pocketed yet another pay rise last year – 11% in the face of a 6.6% fall in share prices. Meanwhile average wages only rose 1.1%, meaning yet another cut in real take-home pay.

But we must also be careful what we wish for. It would be a tragedy if we boosted the power of shareholders only to see those executives that focus on long-term socially responsible wealth creation being ousted by financial speculators hungry for a short-term share price boost. How will we know that shareholders will be any more likely to deliver us ethical or responsible capitalism than corporate executives?

Perhaps what is needed here is for shares to be held for a minimum of 6 months (or maybe more) before voting rights vest. The point would be to distinguish long-term shareholders who take an active interest in corporate strategy and performance from the short term speculators betting on daily movements share prices. However, this will still not solve the problem of disinterested and remote overseas shareholders failing to exert active management of their holdings when it comes to voting. Furthermore, as pleasing as it is to see shareholders standing up to executive excess, they are only standing up for their own narrow interests, after all.

This leads to a broader set of questions. Who will stand up for the ordinary employees? Who will represent the interests of citizens and taxpayers? What about customers and suppliers, particularly in industries where decades of lax competition policy has allowed large powerful companies to dominate certain markets and act as quasi-monopolists?

In the case of employees, we have a double interest in seeing them receiving a fair share of the proceeds. First is the question of simple fairness. Wages have fallen relentlessly under the pressure of globalisation and labour market ‘reforms’ from around 60% as a share of national income in the 1960’s to 53% today. Conversely, the proportion of income that accrues as profits has soared. This has fuelled inequality and does not truly represent the relative contributions to wealth creation.

Neither has it lead to an investment fuelled growth nirvana, as the neo-liberal promised. Instead, a serious and structural economic problem has developed. As Henry Ford observed, success rests on your workers being able to afford your products.

British workers cannot currently afford our products because their real wages are being viciously squeezed. At the same time Government revenue has been decimated in the wake of the financial crash and the consequent recession and plummeting tax revenues. Meanwhile cash piles up on corporate balance sheets because companies feel the economic outlook is too insecure for them to invest.

Paying managers less, and shareholders more, will not cure any of these problems. Quite simply, workers and citizens (taxpayers) need a bigger slice of the corporate pie not just on the grounds of social justice, but also on the grounds of economic pragmatism.

Luckily, there are policies that can start to move towards a more responsible and inclusive capitalism.

• Supervisory boards that include stakeholder representatives would help to even up the bargaining, particularly over executive pay. 
• Enforcing disclosure of the pay ratio between senior management and median pay would help to measure whether we really are all in this together. We support moving to a maximum ratio of 20 in the medium term.
• Country-by country financial reporting would help governments to counter the constant ‘relocation blackmail’ of footloose global corporations, and make sure that they pay proper dues to the citizens of the countries where they earn their profits.

Let's hope a Shareholder Spring leads to Stakeholder Summer.