Entangled Alliances

Newcomers tuning in to the G8 meeting may have been surprised by recent events. On balance it looks like an event where things get done, everything about it oozes action and dynamism. Firstly, just who they are ought to be enough: USA, UK, Russia, France, Germany, Canada, Japan and errr Italy ( it is rich at least). Secondly, there are as the name would suggest, only 8 of them. 8 is quite small, not like the UN, a system perfectly matched to ensure gridlock if any real global policy ever had to take place. Just 8, market based democracies this ought to be packing with leadership and vision.

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photo credit: HM Treasury

Last Wednesday, amidst the worst economic crisis since the Great Depression, the British Chancellor of the Exchequer Alistair Darling stood up in the House of Commons and announced the the UK’s budget for 2009. If  the reactions of his fellow MPs are to be believed, it was a bit like watching a horror film; albeit one where the crazed axe murderer has been replaced with a boring Scotsman reading out numbers. The ranks of Labour sat in stunned silence, while the Conservatives reacted with a series of  theatrical shocked gasps that accompanied the announcement of each new gruesome piece of economic news.  Meanwhile the media, who had known most of what was in the budget days in advance, had a lot of fun being shocked all over again by the poor state of the government’s finances and the woeful growth predictions for the UK.

Thanks to the current economic maelstrom, this budget was arguably like no other in living memory. It was certainly like no other in recent living memory. The usual budget questions – “how much do I have to pay for my cigs and beer now?” and “why did my national insurance just go up?” – are out and a new set of much more, uh, exciting questions are in:  “Is Britain going to default on its debt” “now their taxes have gone up, will those rich city bastards find some new ways to avoid paying them?” and “is that the average winter temperature in Iceland, or Britain’s growth estimate for this year?”

But what exactly was in the budget, what does it mean for Britain and can we make an incredibly complicated topic really simple in order to give the Chancellor a pointless high-school style grade? Find out over the fold!

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photo credit: HM Treasury

Britain’s Chancellor of the Exchequer Alistair Darling will present the UK’s budget on Wednesday. I think it’s fair to say that in the current depression-era climate this will be a fairly difficult task for Darling, akin to playing Scrabble in Aramaic or amputating a leg with a pair of scissors. As if his problems weren’t bad enough, his challenge is compounded, as we shall see, by the fact that he’s well and truly stuck between a rock and a hard place.

On the one hand, the latest figures on growth make alarming reading.  Despite Darling’s predictions in last November’s pre-budget report of a contraction of Gross Domestic Product this year of 1%, the Bank of England now forecasts contraction of 3-4%. Given that private investment has all but seized up, this means that the case is extremely strong for a significantly large fiscal stimulus – a Keynesian style government spending spree aimed at creating thousands of new jobs and bringing the economy back to life. That’s the rock.

However, along with the latest figures on growth come equally depressing figures on government borrowing. Over the next two years the government is set to borrow around £170 billion, or around 12% of GDP.  The Institute of Fiscal Studies thinks that government debt could be a whopping 82% of GDP by 2015, or about the same amount of debt as your average teenager with a credit card. That’s the hard place. And it’s really, really hard.

So the Chancellor is caught between the need for a stimulus and the need to avoid adding to the current levels of government borrowing. Now, many economists would argue that the need for a significant stimulus is more important than the risk of growing government debt. After all, if you don’t get the economy growing again then public borrowing will increase anyway. This argument  is fairly sound, especially when you consider that when compared to other major countries Britain’s current debt level isn’t quite as scary as many like to claim (while ours is 48% of GDP, Germany’s is 65% and Japan’s is a stunning 170% of GDP, which is approaching two teenagers with a credit card).  In fairness, however, it’s worth pointing out  that Britain can’t afford to do the massive, pile-on-the-deficits stimulus package of the United States, who are able to sell endless amounts of their debt to China.

Indeed, Britain’s problem is this:  in order to sustain its borrowing levels, it needs investors to keep buying government debt. If borrowing gets too high – or to be more accurate, if it appears to investors that it might get too high, then those same investors get scared and stop buying the government’s debt, which then has the knock on effect of raising the interest rate (or yield) which has to be paid on the debt it’s already sold. So the government ends up paying more for their debt they have and unable to sell any more. Bummer.

As far as I can see, this leaves the Chancellor with three options, none of them safe and none of them pleasant:

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photo credit: thefost

It’s now been a whole week since the G20 met (an event which, if it was a Friends episode, would surely be called The One Where The Canadian Prime Minister Missed The Group Photo Because He Was In the Toilet) and yet commentators are still very much divided on the deceptively simple question: Was the summit a success? This isn’t really surprising, since the answer depends on how you define success. For example, if you were looking for a demonstration that in the midst of global recession the world’s leaders are able to get together, put aside their differences and promise to sort stuff out then the summit was very successful indeed. Alternatively, if you were looking for a solid commitment to prevent a global crisis like this from ever happening again, then you must have come away very happy with the result. And if what you were after was a bunch of vague commitments that will probably/maybe be ratified in the future but more importantly look very good in the present, then you’re probably still doing triple backflips of joy.

But if you were hoping for a substantive commitment to lifting the global economy out of recession – and doing it now, rather than later – then it’s hard not to see the G20 summit as a bit of a let-down, albeit a very glamorous and show-stopping one. It’s true that restoring growth and getting people back to work was never the sole aim of the summit- in the final communique it’s merely listed as an equal pledge amongst eight others -  but lifting the world out of recession is nevertheless the first thing you’d expect someone to say if you asked them what the summit’s main goal was. And with good reason – the current numbers coming out of America alone suggest that we might have to soon start switching out terminology from talk of global recession to the use of the dreaded “d” word (“depression” that is, though doom and devastation work quite well too).

To prove my point, let’s examine what have been touted as the main substantive achievements of the summit – the clampdown on tax havens, the new regulatory framework and the headline-grabbing sum of $1.1 trillion.

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Oslo Fjord

I know what you’re thinking. In the midst of all this talk of an economic crisis, the G20 and accompanying protests and police brutality, and Brown’s recent trip to the US (for which he received a DVD box set, not even the correct region – poor Gordon), we’ve lost sight of our priorities. The crucial question that everyone’s dying to have answered is this: how’s Norway getting on?

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18:45 BST: Well, the time has come for me to quit this epic live-blog, given that I’ll soon be entering my twelfth hour of continuous live-blogging.  I know; I know – Obama’s about to give his press conference. But I’m about to collapse; so that’s that. I hope you enjoyed the  random, disparate, often unhelpful observations from yours truly. I know I did – live-blogging’s great! There’ll be some more analysis tomorrow from Entangled Alliances, looking in more detail at the exact provisions of the groundbreaking G20 agreement: what they are, whether they’re good and whether they’ll actually change anything, as well as a look at how the G20 will benefit its main players. But for now, I’ll leave you with a fitting quote from BBC business correspondent Robert Peston:

There are no surprises in the deal announced today to reform the banking system, to prevent banks making the kind of risky loans and investments that precipitated the worst global economic crisis since the 1930s.

But it’s nonetheless a historic event that the world’s 20 most powerful economies have signed up for these reforms – because they represent the death knell for the Anglo-American doctrine that economies flourish when financial firms are left alone to do as they please.

Indeed.

18:32 BST: Buried under all the G20 news has been the potentially groundbreaking meeting between Barack Obama and Russian President Dmitry Medvedev, which resulted in an agreement to reduce the nuclear arms of both sides much further than the current agreement demands. This could be very important…

18:30 BST: A wise comment from the Guardian’s Andrew Sparrow (whose live-blog was probably better than mine but nowhere near as epic!):

I’ve been busy updating our main story, having sat through the opening of Brown’s statement. First reaction: I found myself sitting there thinking ‘David Cameron could not pull off an event like this’. That’s not because I think Cameron’s a lightweight. I don’t. It’s because the most important summit conclusions involve international finance, global trade and the inner workings of organisations like the IMF and there are probably very few prime ministers or presidents in the world who understand this stuff as well as Brown.

18:20 BST: Lest I be judged  by my comments below to have been a bit too harsh on the protests, I want to stress that I have great respect for most of them. I say most of them, because the anarchists were just so annoying. Proper anarchism is really cool. It’s an extremely sophisticated ideology . These guys, however, were just pathetic. Bad anarchists!  The majority of protests, however, made some good points.The fact remains, though, that they surely made no difference on the summit at all. If you want to get something changed, you focus on it like a laser and you don’t go off message. But the protests were never on message to begin with – from homelessness to climate change to ending the war to the death of capitalism; only a minority were  actually focused on the topics of the summit! The question becomes then – did they really want to influence the summit? Or did they just want to get their message out there in a sort of vague picture of defiance?  In their defence, however, you could respond that they never stood a chance anyway: governments don’t respond to the people anymore. No-one listened to Iraq protests, for example and they were very focused. So it’s an interesting debate. But I do think that they could have maybe stood a chance at getting some traction if they focused on one message and, you know, stuck to it.

18:13 BST: Here’s the full text of the communique, courtesy of the Guardian. There’s tonnes of details here…

18:10 BST: Oh and I forgot to add that hedge funds and other non-banking institutions will come under the aegis of this new Financial Stability board. Since the mysterious financing of hedge funds helped to exacerbate the mess, this is also good news; but again it all depends on how strong the regulation is…

18:05 BST: The headlines are focusing on the issues of tax havens and that $1 trillion figure, but there’s tonnes of other stuff that’s just as interesting. For example, there’s going to be a new Financial Stability Board that will work with the IMF to monitor the risk of banking transactions and impose limits on things like capital reserves and leverage requirements (not to mention executive bonuses.) This is absolutely crucial in getting the banks back on track and preventing such a crisis happening again, since it was an inherent failure in the banks’s ability to evaluate “systemic risk” that made the crisis so bad. This is pretty complicated and I’ll come back to this another time, but suffice to say it’s a good move – that is, as long as this new regulatory body actually has proper regulatory oversight.

17:54 BST: A timely article over at Foreign Policy discussing whether protests ever work. I agree with its basic conclusion: protests have to be unified and targeted; and focused on changing the system not overthrowing it. The G20 protests were none of these things and so I’m afraid that they’ve had absolutely no effect whatsoever.

17:46 BST: Did Sarkozy and Merkel get their victory? Or was there never any “victory” to begin with? Everyone was in agreement over the basic regulatory provisions. and had been for weeks. The real controversy-  over the possibility of national stimulus packages – was won by Merkel and Sarkozy weeks ago, and so it was no surprise to see no such provisions today. However, Sarkozy must be feeling pleased that the language on tax havens was quite fierce. In the big picture, it’s not really much of an issue, but he’ll make a big deal of it, which is fair enough…

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Check out this FT articleby Richard Milne in the FT’s “Future of Capitalism segment: Nordic model is ‘future of capitalism’

photo credit: Today is a good day

“The world should consider adopting the Nordic approach to capitalism and learn from the region’s response to its financial and economic crisis in the 1990s in the attempt to stave off recession, according to the chairman of two of Europe’s biggest companies.

Jorma Ollila, chairman of Nokia, the mobile phone maker, and oil major Royal Dutch Shell, said the Nordic style of capitalism was characterised by openness to globalisation balanced by strong government programmes to protect people from its excesses and an egalitarian education system.”

I’m a huge fan of the nordic model for Government, economics and to some extent even society.  The Scandinavian economies and even their welfare system have proved remakrably resilient in recent years, despite being targets for right-wing attacks (particulalrly in the US) and bizarrely O’Reilly feels Sweden is a nightmare communist state.

They’ve shown that globalisation need not be a negative as long as the state acts as a levelling tool, of course such engineering would be far harder in more economically diverse countries such as the UK and France, but in principles the direction is a positive one.

In 1996, Stryker McGuire launched the age of “Cool Britannia” with an ode to the city’s burgeoning chic in Newsweek magazine:

Right now, London is a hip compromise between the nonstop newness of Los Angeles and the aspic-pre-served beauty of Paris, sharpened to a New York edge. In short, this is the coolest city on the planet.

photo credit: *spud*

Thirteen years later, Stryker is back with an altogether more despondent vision.  Looking back over the Blair-Brown era, he casts back to the millennial optimism of the 1997 Labour victory and London’s world leadership in fashion, the arts and architecture.  The contrast, and it’s a stark one, is with a modern-day London heading into deep recession – the symbols of its former glory now insistent reminders of its current predicament:

Glitzy restaurants and cutting-edge fashion that used to be signs of welcome creativity reek of excess in a time of belt-tightening. Heavily mortgaged homes that looked like brilliant retirement nest eggs when property prices were soaring year after year now just look like basket cases. Construction sites and street works that once raised expectations of things to come now seem like major inconveniences. 

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photo credit: vaviolino

Remember the old Chinese curse “may you live in interesting times”? It’s worth keeping in mind as we head towards April and the meeting of the 20 richest nations in the world: London’s G20 summit is going to be very interesting indeed.  As Mark Bailey reported in his recent post “G20 Preview: Gordon and Goliath”, Gordon Brown and Barack Obama are both calling for a global fiscal stimulus. The likes of France and Germany, however, are rejecting talk of more stimulus, choosing to focus solely on bank regulation – specifically the regulation of hedge funds and tax havens.

Now I like a good campaign against hedge funds and tax havens as much as the next man, yet it must be said that Gordon is completely right to demand that global stimulus packages be pursued at the same time as international bank regulation. As far as Europe is concerned, a large influx of government public spending would work  particularly well, as thanks to the free trade policies of the European Union any stimulus one country puts in place will immediately benefit their neighbours. This, however, is what concerns the likes of France and Germany: the fear that heavy national spending will simply leak out and end up as international spending.This particularly irks Germany who are already gritting their teeth at the prospect of having to bail out the troubled states of Eastern Europe (who, it turns out, are just rubbish at that capitalism malarkey).

But what the likes of Sarkozy and Merkel are forgetting is that with more and more Europeans losing their jobs, governments are facing lower tax revenues and higher welfare costs. The higher cost of paying benefits is particularly onerous on European governments, as unlike America the welfare systems of Europe are commendably generous (Britain excepted). Large stimulus packages, therefore, are essential to get people back to work and kick start Europe’s economy.

However, though Gordon Brown’s logic is sound his pan-European ambitions are leaving a bitter taste in the mouth – well, in my mouth anyway – because, despite his calls for a global stimulus, Britain has hardly had one worth the name. Indeed, so far the only “stimulus” we’ve had is last November’s £20 billion scheme, the majority of which went on a much derided cut in VAT. Let’s compare this with other countries, shall we?

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photo credit: srqpix

Last month Britain was swept up in a maelstrom of rage after it was revealed that Fred Goodwin, the chief executive of the Royal Bank of Scotland, was due to receive a generous pension to the tune of a staggering £703,000 a year. The problem? The Royal Bank of Scotland is now 70% owned by the British taxpayer. Cue outrage from all sides: while the tabloids and broadsheets alike foamed at the mouth, government ministers went a bit mental and promised to suspend the rule of law. The controversy over Goodwin’s pension wasn’t just a matter of one man’s greed, however; it was a focal point for the public feeling of  helplessness, disbelief and disgust brought on by the realisation that the mighty, all-knowing financial powers we entrusted with our money are actually just a load of out-of-their-depth greedy idiots who’ve gone and squandered the lot.

Well, now the United States is having their “Goodwin” moment – and who knows where the chips will fall?

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