Thinking the unthinkable

The name Terry Smith probably doesn’t mean anything to you, despite the fact that he is one of the biggest fans of David Cameron’s decision to walk away from a new European Union treaty designed to control member states’ budgets.

Smith’s company Tullett Prebon is one of the largest of the small number of inter-dealer money brokers in the world, acting as an intermediary between investment and commercial banks. As the global financial system grew in importance and influence, companies such as his developed into key nerve centres, becoming sensitive to every change in its fortunes, and making a packet at every turn.

The financial services industry makes up about 10% of the UK’s country’s gross domestic product and accounts for 11% of its total tax receipts. Financial services employ more than 1 million people in the UK. The industry wields enormous power throughout the world from its London base, and Tullett Prebon plays a key role.

Smith famously pooh-poohed those who claimed Britain had cut itself adrift from the rest of Europe and was marooned in mid-Atlantic following Cameron’s veto. He compared Britain's isolation from the EU to "someone who refused to join the Titanic before it sailed" as "there is nothing that guarantees that the euro will survive at all".

His analysis is widely echoed. New York University professor Nouriel – Dr Doom – Roubini, agree. "With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun,” the man who predicted the 2008 crash wrote in a recent assessment.

Back to Mr Smith because he tells it how it really is. He speaks with brutish confidence derived from success, having made a pile of money playing the markets. He says that Cameron shouldn’t try pushing for growth because he can’t have any effect on it.

And he’s right. Capitalism is following its own logic. Capital’s need for investment funds to support growth created the insane deregulated excesses of a globalising financial system which blew up in 2007/8. Subsequent “unconventional” measures of credit creation led to the debt tsunami now engulfing the world.

You can read about it in Tullett Prebon’s recent research paper cheeringly called “Thinking the unthinkable, might there be no way out for Britain? Project Armageddon – the final report”.

The report explains in detail the mammoth size of Britain’s total debts which, it says, are “unsupportable” without “sustained economic growth”, of which there is no prospect because the economy is not “aligned” to achieve it. The Coalition’s spending cuts are ridiculed as somewhat inadequate, while its policies will have no impact on growth.

His views are borne out by today’s UK unemployment figures, showing a rise of 128,000 in the three months to October to 2.64 million, the highest level since 1994. Youth unemployment rose to 1.027 million, the highest since records began in 1992, beating the previous record set only last month.

“Courtesy of massive and unsustainable public borrowing, the British public has been shielded thus far from the pain of recession. This exercise in damage limitation was necessarily-time limited.” Much deeper spending cuts and further sharp falls in living standards is what Tullet Prebon have in mind as the basis for a “return to growth”.

But Britain’s crisis wasn’t the result of “fiscal and economic mismanagement” by Blair and Brown, as the report would have it.. The phenomenal growth of the finance sector – and the UK’s dependence on it – was the essential lever needed to sustain corporate profits for as along as was possible. Every country in the world has become subsumed by debt mountains that were the result.

Neither Smith nor anyone else has any confidence that the weak agreement by 25 or so European countries will result in decisive action to reduce their sovereign debts, which has wrecked the euro.

Jean-Michel Six, Chief economist at credit rating agency Standard and Poor’s, attack dog for the capital markets, said on Monday: "There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term."

With European governments in disarray, include the ConDem coalition, Six could be accused of whistling in the dark. As the Tullett Prebon report indicates, “what comes next is going to be unpleasant”. Stopping capitalism going down that road will revolve around a struggle for power over the economy in which people’s assemblies will have to play a decisive role.

Gerry Gold
Economics editor

The 'national interest' con trick

If there’s one phrase that’s dominated parliament, the airwaves and the media over the veto used by David Cameron to block a new European Union, it is the “national interest”. It’s an Orwellian phrase, designed to obscure rather than reveal the truth.

In the House of Commons yesterday, the debate on the prime minister’s Brussels veto was whether it was in the “national interest” or not.

Cameron claimed: "I went to Brussels with one objective – to protect Britain's national interest. And that is what I did."

Ed Miliband, leader of the Labour Party, responded: “Faced with a choice between the national interest and his party interest, he has chosen the party interest.”

Using a phrase often enough does not necessarily mean that it accurately describes what’s going on. Especially when it’s deployed by a political class not exactly known for telling the truth.

Some self-evident, basic facts first. Presently, we live within a capitalist economic and political system. In our society, there those who own and control production and finance (aka capitalists) and those who are employed by them (aka the working class). This relationship extends to the public sector where the employer is the state.

The “interests” may appear identical in the sense, for example, that an employer needs workers and a worker needs resources and a place to labour. But it is an identity of opposites because ultimately the interests at stake are essentially different. Employers need to generate profits and will drive down costs, including wages when they can. Workers have an interest in maximising their income and defending what they have, which is why trade unions have had to strike to defend their pension rights.

None of this is exactly new. Nor is the use of the term “national interest” to disguise the very real social, class-based divisions in society. Yet people are not fooled into thinking that the interests of the banks, for example, are the same as theirs. Or that politicians represent ordinary people rather than powerful corporate interests.

In a the state of the nation survey 2006, only 17% questioned thought they had a great deal or a fair amount of power over government policies. compared with 67% that large corporations exercised. No doubt that figure would be higher today in the wake of the meltdown and bank bail-outs.

So a “national interest” actually doesn’t exist in practice. But it is a convenient smokescreen that can be rolled out to justify the odd invasion (Iraq for example), or to justify a veto exercised to protect the narrow interests of (global) bankers, or simply as a way to whip up patriotism and hatred of foreigners in general and France/Germany in particular.

Some like Guardian columnist Aditya Chakrabortty accuse Cameron of being too narrow in his definition of “national interest” by overly focusing on the importance of the City of London and financial services in Brussels.

But Chakrabortty lends the term credibility it does not merit by suggesting that a real “national interest” would be better served if it included a whole range of other economic activities. His sociological, non-class viewpoint is simply a liberal acceptance of the status quo of capitalist social relations.

The interests of ordinary people cannot be served, defended or advanced by submerging them into those of the ruling economic and political elites – in any country. The political crisis within the European Union is driven by the global failure of a debt-driven capitalist economy and its impact on the euro. A new democratic, internationalist framework that unites ordinary people against corporate and financial power wherever it is located has to be our answer to nationalist rhetoric and downright lies.

Paul Feldman

Communications editor

The 99% lose out all over Europe

In the end, the “choice” was between a British government determined to protect the City of London at all costs and the rest of the European Union agreeing to allow bureaucrats to impose co-ordinated spending cuts on their increasingly angry populations.

Thus the “interests” at stake in the all-night crisis summit in Brussels were essentially the same – whatever side of the Channel the member states happened to be located. And they weren’t those of ordinary people, the 99%.

Prime minister Cameron used Britain’s veto to try and keep the City free from any new EU taxes and regulations, while chancellor Merkel and president Sarkozy were driven by the financial markets towards a so-called fiscal union to save the euro. The 1% are the only potential winners here.

Cameron’s talk of “national interests” is in any case somewhat hollow, considering that the City is dominated entirely by global investment banks and dealers. Individuals n the UK own just 10% of the shares traded on the London stock exchange compared with 54% in 1963. Foreign investors, of all types, are the biggest group and now own 42% of shares on the London stock market.

All Cameron is concerned about – just like his New Labour predecessors – is protecting the tax revenue from a financial sector that was itself bailed out in 2008 to the tune of billions (while cutting the budget deficit at our expense). All Merkel and Sarkozy are worried about is cutting sovereign debt deep enough to appease the financial markets. Same difference.

The political breakdown in Brussels cannot disguise the summit’s failure to agree on a rescue plan for the single currency, or at least one that might impress the financial markets. The European Stability Mechanism (ESM), the permanent rescue mechanism due to come into force in July 2012, will be capped at €500bn while the Germany opposed giving it the banking licence sought by Herman Van Rompuy, president of the European Council.

Running in parallel is a profound banking crisis. Yesterday, “stress tests” showed European banks had a shortfall of €115bn compared to €106bn in October. Germany's banks were found to need more than double the amount of capital anticipated. And French banks are also under pressure. The rating agency Moody’s has downgraded three French banks including Societe Generale, which it says may need government support.

The banking crisis is directly connected to the sovereign debts overwhelming countries like Greece, Italy, Spain, Ireland and Portugal. Many banks are exposed to loans to these countries and do not have sufficient capital to handle a default, let alone the collapse of the euro. In a desperate move, the European Central Bank has cut interest rates, given loans to cash-strapped banks and is accepting virtually any collateral for loans, including the notorious mortgage-backed securities that drove the 2008 meltdown. ECB chief Mario Draghi admitted that a new credit crunch was under way, with banks refusing to lend to each other.

The EU was until the 2008 crisis a cosy, corporate, bureaucratic, undemocratic club run increasingly on free-market lines. It was the European arm of capitalism’s globalisation project. Deregulation of the financial system applied throughout the continent, not just in Britain.

Because the global economy’s growth was fuelled by debt, the recession exposed its soft underbelly and wrecked the finances of national governments. It wasn’t deregulation that did it for the capitalist economy but the in-built drive to grow or die to sustain profits that ultimately broke the back of finance.

A democratic Europe run in the interests of ordinary people, the disenfranchised majority, is a goal worth struggling for. The chances of the EU as presently designed being the vehicle for such a project are precisely nil. Cameron, Sarkozy and Merkel have made that abundantly clear.

Paul Feldman
Communications editor