In attempting to justify the savage economic policies of the Coalition government and its refusal to abandon current austerity measures in the face of a stagnating economy, Prime Minister David Cameron came into direct conflict with Robert Chote, chairman of the Office for Budget Responsibility (OBR). Chote had been appointed by the Chancellor George Osborne to lead the OBR, set up in 2010 to provide ‘independent’ forecasts for the Treasury. In a speech on 7 March Cameron claimed that the OBR ‘has made clear that growth has been depressed by the financial crisis, the problems in the eurozone and a 60% rise in oil prices between August 2010 and April 2011’. He continued that the OBR is ‘absolutely clear that the deficit reduction plan [the austerity measures] is not responsible; in fact, quite the opposite.’ The next day, in an unprecedented rebuke, Chote wrote a letter to the Prime Minister informing him that every forecast published by the OBR since the June 2010 Budget ‘has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term’. The letter went on to say that the ‘fiscal consolidation measures’ (OBR spin for austerity) would have been sufficient to reduce GDP in 2011-12 by around 1.4%. This was yet another humiliating blow for Cameron and Chancellor George Osborne in the period leading up to the Coalition’s fourth Budget. DAVID YAFFE reports.
On 22 February Moody’s, the rating agency, downgraded the UK’s credit rating by one notch from top grade AAA to Aa1 in a major and embarrassing setback for the government. Osborne has repeatedly boasted that the UK’s credit rating is a benchmark of the government’s success. The Conservative Party manifesto in 2010 had pledged: ‘We will safeguard Britain’s credit rating with a credible plan to eliminate the bulk of the structural deficit over a parliament.’ Both these election pledges have now been broken.
The credit rating has been downgraded and the structural deficit (a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors) is predicted to remain until 2018 at the earliest, well into the next parliament. Moody’s told the Financial Times (26 February 2013) that the prospect of sluggish economic growth extending into the medium term had increased the risk that the government would not be successful in reducing the UK’s debt to GDP ratio, making it more vulnerable to further economic shocks. The Coalition’s ‘significant commitment to austerity’ was said to be a ‘drag’ on the economy, along with deleveraging by the private sector. On receiving the news, Osborne made it clear that he would continue with the austerity programme saying that: ‘Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.’
Britain’s relationship with Europe continues to deteriorate after Cameron’s announcement on 23 January that the Conservatives would hold an in/out referendum on Britain’s membership of the EU by the end of 2017 if they win the next election.1 At the end of February it became clear that no other EU leader would support Britain’s campaign to alter the terms of its 40-year membership of the EU and then put this to a referendum. A few days later Osborne was totally isolated at a meeting of EU finance ministers on 5 March in his fight to stop an EU cap on bankers’ bonuses. The EU is proposing to cap bankers’ bonuses to 100% of their annual salary or to 200% if a special majority of shareholders approve. This will apply to all banks operating in Europe and their international subsidiaries and branches. These developments are seen by the government as a damaging and deliberate attack on the City of London, the financial arm of British imperialism.
To begin to understand the actions of the ruling class in Britain, it is necessary to look beyond the crude justification of its economic policies to its political intent. The government is obviously correct in arguing that the financial crisis, the economic and political turbulence in the eurozone and elsewhere, external factors over which it has little or no control, have contributed to stagnant economic growth. Such arguments, however, camouflage the real class interests behind savage austerity policies. The government is testing the water for further and deeper attacks on state welfare and working class living standards as it attempts to sustain Britain’s parasitic and crisis-ridden capitalist economy, and with it the wealth and power of a corporate and financial elite. So it has to justify its austerity policies. The government is fighting an ideological battle, a class war, and has been able to do this in the most brazen way because it faces little or no resistance from the organised working class movement or from the so-called Labour opposition. Nevertheless these are dangerous times for the ruling class as the global economic crisis intensifies and with it inevitable resistance to the capitalist/imperialist system.
No end to the eurozone crisis
The economies of the eurozone are stagnating. In the fourth quarter of 2012 growth of the 17-nation bloc fell by 0.6%. The eurozone’s strongest economy Germany shrank by 0.6%, France by 0.3%, Spain by 0.3%, Italy by 0.9% and Portugal by 1.8%. The aggregate GDP was 3% below its pre-crisis peak. Eurozone GDP is expected to fall again in 2013. The unemployment rate in the eurozone reached 11.9% in January 2013. In Spain the rate was 26.2% and and in Greece 26.4% (December 2012). The youth unemployment rate (under 25) was 24.2% overall in the eurozone. It was 38.7% in Italy, and a staggering 55.5% in Spain and 59.4% in Greece (November 2012).
After Mario Draghi, the president of the European Central Bank (ECB), made a pledge at the end of July 2012 to do ‘whatever it takes to preserve the euro’ the immediate threat to the eurozone appeared to recede. It has now returned with a vengeance. The Italian election of 24-25 February 2013 produced a stalemate with no party so far able to form a stable government or coalition. The result was a resounding rejection of the austerity programme of the outgoing Prime Minister Mario Monti. The anti-establishment Five Star Movement of the comedian-blogger Beppe Grillo received around 25% of the vote. The country was split three ways between Grillo’s movement, Pier Luigo Bersani’s centre-left coalition and Silvio Berlusconi’s centre-right alliance. A period of prolonged political instability faces the country, which could have serious repercussions in the eurozone.
At the same time as the Italian election, the second round of the presidential election took place in Cyprus, in which the centre-right leader Nicos Anastaslades with 57.5% of the vote easily beat the Communist-backed Stavros Malas with 42.5%. Anastaslades is in favour of an EU bailout of the near bankrupt Cypriot economy and of accepting the associated austerity measures that the troika (EU/IMF/ECB) would impose in return for a financial rescue. Malas favoured a bailout but opposed austerity.
For more than eight months Cyprus has been negotiating with the EU on a €17bn bailout package (about the size of its GDP) to stave off the collapse of its banks. This became necessary after Cypriot banks lost about 75% of their investments in Greece, following the restructuring of Greece’s debts in a bailout agreement that resulted in large losses for private bondholders. Cypriot banks had made loans to Greece equivalent to 160% of GDP. Cyprus has been a tax haven for years and its banking system has assets equivalent to eight times it GDP. More than 25% of bank deposits come from Russia, much of it having its origin in the wealth plundered from the country after the collapse of the Soviet Union.
The EU bailout agreement, for the first time, imposed a compulsory levy on bank deposits in Cyprus. €10bn would come from the eurozone bailout fund, €5.8bn from the levy and the remainder from new austerity measures. The levy would be raised through a tax of 6.75% on deposits of less than €100,000 and a tax of 9.9% above that threshold. This would have meant that the eurozone had effectively defaulted on a deposit insurance guarantee for deposits of up to €100,000. The dominant rich countries of the eurozone led by Germany are forcing Cyprus, responsible for around 0.2% of the eurozone’s GDP, to part-finance its own bailout. There was real anger in Cyprus. The Russian government was livid with the EU over the lack of consultation. Russian investors with around €30bn deposits in Cypriot banks, look set to lose more than €3bn. This could have deep repercussions throughout the eurozone. A bank run could set off in Cyprus when/if the banks reopen on 26 March after being closed for more than a week. Investors in the other southern countries of the eurozone having or facing new bailout agreements have been forewarned to take steps to safeguard their savings.
When the agreement was put before the Cypriot parliament on 19 March it was overwhelmingly thrown out. The ECB has given the country until Monday 25 March to agree a new deal or it will cut its emergency loans to Cypriot banks forcing the country into bankruptcy and out of the eurozone.
As we go to press, the Cypriot parliament has voted to restructure the country’s banking system, set up a ‘national solidarity fund’ of state assets to attract new capital and establish capital controls to prevent the exit of funds from the country when the banks eventually reopen. It has still to vote on a revised bank levy on deposits above €100,000, an essential component of the measures needed to raise the €5.8bn necessary for a bailout deal. There is a proposal for a 25% levy on deposits of more than €100,000 in Cyprus’s largest bank. Cypriot ministers are travelling to Brussels for urgent talks with eurozone officials over the deal.
The backlash against this bailout threatens once again to set off the market turmoil in the eurozone that had receded over the past seven months. It could have severe consequences for a stagnating British economy dependent not only on the eurozone for more than 40% of its exports but, crucially, reliant on the earnings generated by its parasitic banking and financial services
No austerity for the bankers
It was the speculative activities of the financial corporations and their uncontrolled lending that precipitated the biggest financial meltdown in history. To ensure the survival of the imperialist banks and financial institutions, central to the functioning of the British economy, a savage austerity programme has been imposed by the Coalition government on the working class.3 That is why, in the words of the Financial Times (22 February 2013), the ‘financial crisis was just a blip for the bankers’. Between 2008 and 2011 the salary and cash bonuses of London’s finance workers rose 14.2%, compared to a 3.7% rise – a real terms fall – for all other workers. Judging by the bonus announcements for 2012, in the wake of fraudulent and criminal activities of the large banking corporations, this looks set to carry on. The large UK banks have had to set aside more than £12bn to compensate millions of customers for mis-selling Payment Protection Insurance.
RBS, 83% publicly-owned, made an annual loss in 2012 of £5bn and was fined £390m after admitting criminal price fixing in relation to rigging Libor, the benchmark interest rate which governs over $350 trillion global contracts. However, the bank will pay out £607m in bonuses, £215m going to the investment bankers whose division was behind the Libor scandal. RBS boss Stephen Hester will receive £5.5m. Barclays, also fined £290m for rigging Libor, will pay out £1.8bn in bonuses. £38m in bonuses will go to seven of its top executives, with the head of the investment division Rich Ricci taking £17.6m. 428 staff will receive more than £1m. Finally HSBC, Britain’s biggest bank, made £13.7bn profits in 2012 despite being fined £1.2bn by US authorities for helping Mexican drug barons launder money through the financial system. Their profits were 6% down on 2011. The bank still paid 204 of its staff more than £1m in 2012, with eight of its highest paid staff receiving between £2.3m and £7m.
The ruling class will not take serious steps to curb the banking corporations and their banking friends. The banks are a vital engine of this parasitic and decaying capitalist system. Capitalism can only survive on the backs of the millions of working class people in Britain and throughout the world. We must organise to defend ourselves.
1 See David Yaffe ‘Cameron fuels ruling class divisions on Europe’ in FRFI 231 February/March 2013. On our website at http://tinyurl.com/bvb8m3h
2 See David Yaffe ‘Britain: parasitic and decaying capitalism’ on the City of London and the British economy, FRFI 194 December 2006/January 2007 on our website at http://tinyurl.com/88po6dx
3 See the FRFI pamphlet No cuts – full stop! Capitalist crisis and the public sector debt, Larkin Publications 2011.
Fight Racism! Fight Imperialism! 232 April/May 2013