Baroness Helen Liddell - Europe in Crisis
Baroness Liddell of Coatdyke
Speech to Labour Movement for Europe in Scotland (LMES) event – 30th August 2011
“Europe in Crisis”?
One of the best bits of advice I ever received was, when in a hole, stop digging. That is as true of economic policy as it is of gardening. It is also a paraphrase of some of the economic advice being given by the world’s leading economists against the macho mantra of austerity budgets unbalanced by aggressive programmes for growth.
Christine Lagarde, writing in the FT on August 16th, issued a stark warning to the purists, and warned that, although there are no easy answers, that did not mean that there are no options.
She said:
“Advanced economies need to restore fiscal sustainability through credible consolidation plans. Slamming on the brakes too quickly will hurt the recovery and worsen job prospects.”
This is the same Christine Lagarde who, only weeks ago ,was Finance Minister to President Nicholas Sarkozy, that gives even greater power to her advice now as Managing Director of the IMF that:
“Support for growth in the near term is vital for the credibility of any agreement on consolidation”
Only this weekend she was in the news again, warning bankers of the need to shore up liquidity and again repeating the need for growth.
She is right to highlight it, it is that growth component that has been lacking in the policy positions not just of the UK Government but our partners in the EU as well.
Politics has overtaken the economics of common sense.
On both sides of the Atlantic.
Economic turmoil has not shown the West’s political systems in the best light. Dysfunction in the USA, dithering in Europe, and a sense of unreality in a number of national capitals of EU countries, does not serve our democracies or our credibility well.
The length of time it is taking for political leaders to come to coherent solutions is not only frustrating, it is inherently dangerous.
The wrangling between political factions in the US, unconcerned about the impact such intractability has on the US economy and most others , has been met with a smugness by some European commentators, but the languid approach of our own leaders has been an object lesson in how to turn a drama into a crisis.
It is a measure of Britain’s weakness in Europe that President Sarkozy and Chancellor Merkel are in the driving seat, and it is not enough to say that the present crisis is only a Eurozone problem, the EU is our main trading partner,if Eurozone countries stumble, we fall as well.
David Cameron has, quite rightly, devoted considerable time and air miles to advancing our trading relationships with China and India, nothing wrong with that given the growth projections of both countries, yet I have to wonder if he is aware that Belgium and Luxembourg are currently more important trading partners for us than China, and therefore of more immediate importance in our quest for a return to robust economic growth.
According to the Office of National Statistics, in 2010, 2.9% of UK exports of Goods and Services , valued at £7,609 million went to China, yet the combined percentage of UK Exports to Belgium and Luxembourg was 5.1%, valued at £13,607 million. All this against the background of the combined GDP of our two European partners sitting at less than 9% of China’s GDP.
It is not an “either –or” situation, we expect our Government to be able to build trading relationships with the BRICs without losing sight of where our immediate self interest lies.
That picture of the importance of our EU trading partners crops up again and again, the conclusion is inescapable, market collapse in the EU will have immediate and catastrophic impact on British businesses and jobs.
Where is the logic of a Prime Minister and Foreign Minister actively putting themselves on the margins of Europe? They are locked in the anti Europeanism of Neanderthal Conservatism and risking Britain’s options on the altar of ideology.
Contrast that with how Britain used our role as a partner in the EU to lead the world in putting together coherent growth strategies to lead advanced economies out of the banking crisis in 2008
At the height of that crisis, it was a British Prime Minister who cajoled President Sarkozy and Chancellor Merkel into action and through that brokered a strong international response.
It was Gordon Brown who became the architect of a strengthened G20 to seek common cause between emerging and developed countries.
Now Britain is not even on the phone never mind at the table, adding to the vacuum we have seen in recent months.
In that vacuum, speculators have had a field day as the leadership of the Eurozone takes refuge in the traditional remedy of “process”. Packaged in rhetoric, the announcement of European “economic government” headed by the EU Council President has been treated with derision, and the markets have shown their despair at the lack of coherent and immediate action.
The idea that yet another EU Committee, which is what is proposed by President Sarkozy and Chancellor Merkel, will give a shot of Valium to fevered speculators in Sovereign Debt misses the point.
Markets will calm in an atmosphere of command and resolve, in the absence of that kind of leadership, we see ratings agencies and City computers , not elected leaders, determining the borrowing capabilities of countries and affecting the economic well being of their citizens.
The very single market that is the most convincing case for the EU, is imperilled by such a feeble response. At the same time, the chance to make genuine progress in improving European competitiveness is being lost.
Without rapid and focused action to improve competitiveness across the countries of the EU in the face of the challenge from emerging markets, we could face at least a generation of economic decline.
Without the stimulation of demand, our journey out of what now looks like at the very best stagnation, and at worst, double dip recession, will be longer and steeper.
But beware, whatever the solution to Europe’s economic crisis, there will be pain.
There has been fevered debate about the possible break up of the Eurozone, a debate that has ignored the cost of such a break up. That is the wrong end of the stick, attention needs to focus on what is to be done to make the Eurozone effective again.
There was always going to be a challenge to any single currency that was not aligned with coordinated fiscal policy, and that is why it was naive to assume that any crisis in an individual country could be self contained. The rules of engagement that were set out when the Euro was established required sustainable debt to GDP ratios, that this has been ignored and consolidated the many fudges all Member States colluded in with countries like Greece, Italy and Ireland among others , as part of the dash to get the great Euro plan to work, is at the root of the problem.
Now pay up time has come, that is why the European Financial Stability Fund is so important and it is why the European Central Bank should be able to loan from the Fund. But the fund needs to be properly resourced.
Germany and France have set their face against Eurobonds because of their own internal political struggles, yet the issue of Bonds, backed by the entire EU, is one short cut to stabilisation in what has become known as the Sovereign Debt crisis. Constitutional hurdles, have, as always , been cited as a reason why the idea cannot thrive, but faced with imminent collapse of a number of economies, weighed down by their debts, a way would be found.
The Eurobond debate highlights more than anything that Europe’s Leaders need to get a move on. Dithering and a lack of leadership is as much part of the crisis as the underlying problems of debt.
So what is needed? Leading economists across the world are growing more vociferous in their calls for demand stimulation. Even the rich in some countries are offering their wealth through recommending increased taxation, in Germany that call has already been acted on, in France, the richest woman, Madame Bettencourt who owns L’Oreal ,has joined with 15 other billionaires to call for higher taxes for the rich. Sarkozy is acting.
Warren Buffett is putting the hat round his fellow billionaires to stump up more as he himself puts billions into the Bank of America.
I’ve not come across any of our billionaires doing the same. Maybe the Mediterranean sunshine of Monaco is too soporific.
What the world economy needs is a stimulus to demand , and more particularly in Europe, we need a step change in competitiveness.
Germany has long complained that it is carrying the burden of the bailout, and to some extent Germany’s increased competitiveness that has allowed it to be on the positive side of the imbalances across Europe, has come about as a result of two periods of major economic renewal – post war and, 20 years ago, re-unification. Yet the most recent figures suggest Germany’s growth is imperilled – hardly surprising when, across the internal market, demand is in free fall.
It is understandable that German taxpayers find it hard to pay out money to bail out countries where paying your taxes as is regarded as only for wimps.
It is a sign that across Europe there has to be a more realistic case put of the need for reform across the board.
We have known for a long time that Europe has ignored the challenge of improving how it matches up with international competition, and many of the solutions will have to be taken by Member States alone. But Britain, under a Labour Government, was in the forefront of the campaign for improved EU competitiveness.
Here are home, we should be looking at reducing pay roll taxes across the board, not selectively; increasing incentives for new firm formation. Developing routes to allow small firms to grow and hi-tech businesses to take risk.
The Government wants a Green Investment Bank, if that is not just a sound bite to suit the Lib Dems, then it needs to be backed by serious money.
Germany has a very effective Investment Bank and some of us were talking about a UK Investment Bank as far back as the 70s. Other countries acted, we played at it. At last, has its hour come?
The ideal HQ for such Bank would be Edinburgh – but with the prospect of Scotland secceeding from the Union, the risk profile for that would be considerable, but that is a debate for another day......
Getting all businesses, not just big businesses, engaged in skills training is no luxury, it is a necessity. Not only do we need to see greater emphasis on skills, not least in the sciences and engineering starting in our schools , we need serious incentives to raise the skill levels of our young people.
Action across Europe as well as in Member States to aid the climate for the growth of small firms would be a significant driver of job creation. Not more red tape, more help.
My own pet favourite would be serious EU action on liberalisation of Energy Markets, not just to lower highly uncompetitive energy prices for businesses and households, but the next catastrophe waiting to happen is security of energy supplies.
The debate has not been helped by the panicked reaction by Germany and others about nuclear power as a result of the failure of the Fukushima reactors in Japan. Japan has nothing like the safety record of the British or French nuclear industries, and if we do not get our act together on nuclear, as well as renewables, then the lights really will go out, and that is not good for economic growth.
And if the EU is capable of the vision and step change that caused the architects of European coordination and cooperation to begin the journey towards the world’s biggest single market, then the bureaucracy needs a boot up the derriere.
The Commission has to justify its existence and that has come to mean that process often rules over common sense, Directives mean more than sensible outcomes.
I gave up a year of my life to fight for the Jammy Dodger which was under threat from a Directive on industrial jam. I ask you, is that really what Jean Monet’s vision was?
I bow to no one in my belief in the importance of the EU for the well being of the UK, I am a Scot who is proud to be British, a Brit who is proud to be European, but if the Commission, the Council and the Parliament do not abandon their Ivory Towers and engage with the real world, then the European project will be doomed.
And we on the left will have a terrible sin to answer for. Our complacency has sucked us into a failure to keep pace with the nature of the journey the European citizen has been on.
In doing some research for this speech I came across a report written by a panel of the great and the good, assembled by the Council of Europe. It was published in the late spring this year when the scale of the crisis was emerging but not yet exacerbated by the paralysis of action we have seen.
Charged to address the issue of an “identity crisis” hitting Europe, the panel concluded that we should all obey the law, politicians are advised to observe Directives and produce action plans, and the media should tell the truth.
Let’s hear it for the tooth fairy!
The paucity of thought is perhaps one of the most damning indictments of the state Europe is in. No where is that more obvious than on the Left.
The rout of parties of the Left across Europe in recent times has kicked us out of the driving seat and the very nature of the Europe that emerges at the end of this period of turmoil could be significantly different from the ideals we believe in. And we only have ourselves to blame.
As the Far Right populist Parties who are anti –immigrant and anti European, gain pace across Europe, parties of the Left are being marginalised. Part of the reason for that is the blind adherence of many to the policy tools driven by the experience of our parents and grandparents generation.
Restrictive practices, outdated labour law, protectionism, these are the policy tools of our fathers and grandfathers, not the way to craft a socially just Europe for the future.
When I was a young economics student, we were taught that the market operated on the principle of rationality, in the past decade, a new concept of economics has grown up – behavioural economics.
Behavioural economics recognises that people have choices and may not act as the market dictates. People are often affected in their actions by what others do, just look at the strong performance of luxury goods during the recession, one part of society can barely afford the roof over their head, but for others the need to carry the right label is fundamental to the sense of “self”
Self expectations influence how people behave. With parents finances buoyed by the property boom, is it any wonder that the next generation has assumed that wealth is their birthright?
And the most interesting behavioural observation of all is that people are “loss averse”-programmed to stick with what serves them best. The Greek and Spanish demonstrations are an example of that.
Behavioural economics poses a challenge to all policy makers but especially those on the Left. We have to acknowledge that our citizens have been led to believe that prosperity is their birth right , and they are not going to change their ways if it reduces their standard of living. The common good is great, so long as it doesn’t make me poorer.
In a Europe where in some countries, almost 50% of young people are out of work, opportunity is denied if rigid labour laws are allowed to protect the parents but deny youth a future. This failure to use this generation to build strong personal and national economies, will create an even more dramatic crisis for the future as demography will mean that these young men and women will have to shoulder the burden of the longevity of their parent’s generation.
The policy options of the past will not meet the challenge of the times we live in.
The European Left must embrace economic reform. We need flexible labour markets deregulation of some of the restrictive business laws in some countries that act to limit economic growth, a boost to competitiveness through taxation systems reformed to encourage small business.
Small business is not the enemy of social justice, it can be the handmaiden, creating jobs and wealth, but too often successful businesses in some European states are strangled at birth by self serving bureaucracy - or restrictive banking practices.
The Left has always been nervous of concepts like competiveness, but there is now no choice but to address the need for making both the labour force and the business environment world beaters. China, India, and a raft of other emerging nations, are not going to stand back to allow the sedate pace of European business to trundle on regardless.
The challenge underpinning all of this is that deficits do have to be dealt with but when consumption is weak and austerity means that the gap cannot be filled by the State, the hell for leather deficit reduction plans of George Osborn and others do not make economic sense. And just about every world renowned economist is making that point.
Christine Lagarde again:
“What is needed is a dual focus on medium term consolidation and short term support for jobs and growth”
Lagarde acknowledges the two are mutually reinforcing.
The failure so far to address that reality is making the situation worse.
John Maynard Keynes was the greatest exponent of investment at a time of recession, and there are opportunities around for investment to restore growth without blowing the public finances.
Many major corporations are awash with cash, yet not investing . Instability in markets coupled with weak consumption holds them back.
Stimulation is needed but not with the blunt instrument of Quantitative Easing.
Why are the leading nations of Europe and the world not fired up with desire to get the WTO trade talks to the heart of our international priorities?
If the phrase “Doha round “ is too discredited, then rename it ,but get trade deals moving. The changed economic realities should make it obvious to the obstructionists that it is not in their best interests to contribute to a deepening economic gloom.
The boost to demand of opening up markets, and taking ourselves out of the comfort zone we have built around ourselves as advanced nations, is the way to generate sustainable economic growth for the future.
These too are uncomfortable issues for the Left, we talk about international aid , we talk about our responsibilities to ensure a secure and successful future for our children and the most vulnerable, yet our failure to adapt our ideology to the needs of today limits our ability to deliver, and too often the voters have sensed that and given their verdict.
Those of us committed to the Centre Left Parties in Europe need a new forum to allow us to bring forward 21st Century forward looking solutions to the challenges we face, it is the bit of “process” we need to engage in.
The Socialist International is too big, Progressive Governance is excellent but again is multinational and top down, the fora that exist around the European Council and the Parliament, are too narrow in their focus. We, the foot soldiers, we need to take charge of the debate on the ground, we need to learn from those who have been successful and be honest about why we have lost.
There is a need for a new grouping of the Social Democratic left in the Europe, the structures we already have internationally have their purpose, but the nature of the crisis we now face demands more radical thinking than huge international organisations can provide. By their very nature, multinational confederations have to be broad in their debate to be inclusive, can provide.
We need to challenge our preconceived ideas, and leaven debate with our experience of life as it is for the vast majority of our citizens. We need to learn from our allies, what has worked for them and share what has worked and what has failed for us.
We have sister parties in the wider EEA who can teach us a lot. Surely I am not the only one, who , when the shock of the terrible tragedy in Norway abated, could only wonder at the power of a Party so close to our own to maintain the loyalty and engagement of so many young people year after year?
The Left has become set in our ways and the voters have overtaken us, it is time for us to wise up.
The journey will be painful but the alternative for the principles of social justice , equality and fairness that we believe in will be much worse.
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