Starting with Greece this weekend, we could be at the beginning of a series of political earthquakes in Europe. One of these earthquakes might well occur in Britain, even though we have a political system designed to favour the status quo. What I’d like to do here is to discuss the UK outlook, bearing in mind that this has to be set in a broader European context.
Where the UK is concerned, an earthquake is desirable, primarily because our system of governance has become deeply faulted. As I shall explain, this has damaged not just our government but also our economy (which, by the way, is nowhere near as strong as we are led to believe).
First, though, let me deal with the Eurozone (EZ), because at least the problem here is a very simple one. The single currency doesn’t work, and indeed cannot work. This structural absurdity will continue to blight the politics and the economies of the EZ countries until one of two solutions is adopted. These two solutions are the “forwards” and “backwards” options – “forward”, that is, to full political integration, or “backward” to the unwinding of the Euro and the reintroduction of national currencies. One or other simply must happen, even it is hard to see either happening anytime soon.
Since the Euro was introduced, the competitiveness of the EZ countries has diverged. If we in Britain, with our own currency, were to suffer a loss of competitiveness, we would devalue, making imports more expensive and our exports more attractive to foreigners. (Incidentally, I think a big devaluation of Sterling is likely, but more of that another time).
Countries like Greece and Spain, however, cannot devalue in this conventional way. Instead, the only way in which their competitiveness can be restored is through an alternative, unconventional process of internal devaluation. Since Greece (for instance) no longer has a drachma to devalue, the only way she can restore competitiveness is to drive down local costs, which means cutting real wages, thereby reducing the effective international prices of Greek goods and services. Put as succinctly as possible, austerity has been imposed upon Greeks (and others) as the only form of devaluation available.
Despite what Harold Wilson famously and fatuously said about “the pound in your pocket”, conventional devaluation is painful – but internal devaluation is very much worse. Small wonder that Greeks despair of their established political parties.
If statistics are anything to go by, Britain is second only to Greece in the “political earthquake stakes” – Greece seems to be the only European country in which existing parties are held in greater disregard than they are in Britain. As things stand, Labour and the Conservatives will struggle to get 50% of the vote, and even the inclusion of the Liberal Democrats might not push the three parties’ combined vote much over this level.
A widespread public perception seems to be that all three are pretty much the same, despite differences of policy, emphasis and rhetoric. Fundamentally this view is surely right, as Labour, the Conservatives and the Liberal Democrats are different factions within the establishment, and the real divide in Britain is between those who accept the establishment and the increasing number of those who reject it.
Whilst I dislike historical metaphors, this situation is not too dissimilar to England in the seventeenth century. The English civil war had nothing to do either with democracy or with the common people, but was a falling out over religion, influence and wealth within the governing elite. After the execution (or, as I see it, the assassination) of Charles I in 1649, the Parliamentarians held power without effective opposition.
To be sure, there were many contesting factions within the Commonwealth, but their differences had little or no relevance to ordinary people as the Puritan fanatics set out to ban everything from theatres and pubs to country dancing whilst treating the public to a withering diet of political correctness, seventeen-century-style. No wonder there was widespread relief when the monarchy was restored.
Whilst it would not do to push the metaphor too far, the situation in Britain today has distinct echoes of the Commonwealth era. Major ideological differences within the governing elite ended as effectively in Britain in 1997 as they did in England in 1649.
As they showed with their concerted effort to buy off Scots voters at the last minute, all of the major parties have far more in common than they differ over. Beyond a shared taste for moralising – the modern equivalent of Puritanism – the main point of unity between the established parties is their acceptance of corporatism in preference either to socialism or to free market capitalism.
This is reflected in the conduct of the economy, where corporatism seems ever more influential in driving economic policy. Like any ideology, corporatism leads to a frequent rejection of common sense in favour of preferences which suit the ideology. Instead of strengthening competition within the private sector, where greater competition would improve both output and living standards, successive governments have preferred instead to introduce corporatist quasi-markets into the public sector. The reality, of course, is that, whilst many activities are best left to a competitive (not corporatist) private sector, others (such as the provision of healthcare, and arguably of housing too) can better de delivered by the state. In other words, a mixed economy is best.
Against this, of course, the established parties would point out that the British economy is out-growing its competitors, and that unemployment has fallen sharply. Though true, both need to be qualified. Unemployment has indeed fallen, but at the price of a general lowering of real wages to the point where the tax take still cannot meet the costs of the corporatist state.
Economic growth, meanwhile, remains something of a statistical phenomenon. GDP may have risen by a nominal £80bn last year, but the State alone is borrowing more than that (around £90bn), even before we include increases in mortgage and consumer debt.
More seriously, our current account imbalance has crashed to an annualised £100bn, which means that an unsustainable 6% of GDP now comes courtesy of foreign lenders and trade creditors (see chart).
Successive current account deficits have been bridged by asset sales and borrowing from overseas, to the point where we have built-in a major (and increasing) net outflow of dividends and interest. Meanwhile, the State continues to spend more than the economy can afford.
When looking ahead to the election, of course, we need to bear in mind that our “first past the post” system biases the process in favour of the established parties. This said, the likeliest outcome seems to be that an electorate which cannot oust the established parties might visit upon them instead a chaotic imbalance, as the next best thing to outright rejection.
Bring on the earthquake.