• By On 12 September 2006 In The Global Economy Tags , , , ,

    Implications of the Euro

    Implications of the Euro

    The subtitle of “Implications of the Euro’ (edited by Philip Wyman, Mark Baimbridge and Brian Burkitt and published by Routledge, 2006) is “A critical perspective from the left”, and that is exactly what it provides. With a foreword by David Owen, and essays from academics like the editors and Jonathan Michie, politicians like Austin Mitchell and Tony Benn, and journalists like Larry Elliott, it is a long overdue and valuable exploration of the political and economic aspects of the euro from a left perspective.

    Bryan Gould provides a preface which summarises the issues in these terms:

    “This book is long overdue. The debate about Britain and the euro – so far as there has been a debate at all – has been largely the preserve of the right, and has been pretty much dominated by simplistic posturing. On the one hand, those in favour of British adoption of the euro have stressed the lower transaction costs and the convenience to travellers, and – if they are a little more knowledgeable – the familiar argument that to stay out would be to threaten trade and investment.

    The opponents, on the other hand, go for the nationalistic pitch, stressing the importance of national symbols like the pound and the Queen’s head on our currency. Neither side seems greatly interested in exploring the fundamental issues of economic and political significance that could help shape both Britain’s and Europe’s future.

    The left has hardly entered the debate, reflecting an unwillingness to be identified with either position adopted by the right, a broad but rather fuzzy commitment to internationalism, and an unthinking suspicion that exchange rates and currencies are properly the concerns of right-wing businessmen and technicians. Some – like the commentators – prefer to see the issues in terms of domestic and especially personality politics. Could Tony win a referendum? Or will Gordon use opposition to the euro to open the door to Number Ten?

    All of this misses the point – or rather several points. As a policy issue, the euro poses real challenges, and real opportunities, to the left. The careful exploration and successful resolution of these issues could determine the prospects of Labour governments for years to come.

    The economic consequences of embracing the euro can hardly be overstated. A single currency inevitably requires and dictates a single set of monetary conditions brought about by a single monetary policy. In an economic zone as large as the current European Union, it is inherently unlikely that a single monetary policy could conceivably meet the interests of all the diverse parts of that economic zone. A monetary policy that suits the stronger countries (who have the major say in what that policy should be) will harm the interests of the weaker, reinforcing the natural tendency in any economy for productive capacity to concentrate in the stronger parts.

    A single currency means the renunciation of one of the major (and potentially beneficial) instruments for dealing with this misalignment. Correctly aligned exchange rates allow differently developed economies to interact with each other to mutual advantage, encouraging each to move resources to the potential growth points where they enjoy a comparative advantage. With a correctly aligned exchange rate, a weaker economy can trade productively with a stronger one, with both concentrating on the things they do best.

    In the absence of that possibility of adjustment, inequalities do not disappear. They simply re-emerge in other forms. Those parts of the wider economy that find the going tough will experience a further loss of economic activity, investment and employment. The consequent fall in demand will in turn depress the wider economy, affecting even the stronger parts who were the initial beneficiaries of the single monetary policy.

    It is for these reasons that the United Kingdom’s decision on the euro is important for Europe as well as for the United Kingdom. A decision to stay out of the euro zone could be argued not only to be in the United Kingdom’s interests but to point the way to a better economic future for the European Union as a whole. The European economy would function better if component parts had the freedom to set their own monetary conditions and exchange rates so that they can trade with each other in optimal conditions.

    These arguments are not purely theoretical. The experience of European countries over the last twenty years (bearing in mind that the Exchange Rate Mechanism gave us an early test of the economic consequences of currency union) testifies to the damaging effects of compressing diverse economies into a single monetary and currency zone. It is no accident that the European Union continues to struggle while the United Kingdom has, by comparison and since leaving the ERM, prospered.

    In the absence of any possibility of exchange rate adjustment, there are only two escape routes for depressed parts of a wider currency zone. First, they can wait until a lower level of economic activity so depresses comparative living standards and wage rates that investment is attracted by those lower labour costs. The problem with this is that it takes a long time and that the loss of output while this slow and painful adjustment takes place will harm both the particular component part and the wider economy. This is, nevertheless, where the euro zone now is.

    Secondly, the depressed area can throw itself on the mercy of the wider entity, arguing that it is making a sacrifice of its own economic prospects for the sake of some wider goal, and that it is therefore entitled to all the benefits (such as they are) of the wider entity’s regional policy and, ultimately, social security largesse, in order to offset the loss of economic welfare.

    The wider goal for which this sacrifice is made is presumably a degree of political integration which is also the necessary pre-condition for the assumption of regional policy and social security responsibilities by the wider entity. It is only in a political union (and even then the strains are immense) that the parties recognise such a community of interest as to make possible both the sacrifice on the one hand and the assumption of responsibility on the other.

    The economic aspects of a single currency, in other words, inevitably elide into the political aspects. The deleterious economic effects of an inappropriately wide currency union can only be made tolerable – so it is calculated – if the parties agree to throw in their lots with each other to the point where the value they place on their common political identity outweighs the economic sacrifice. Those who do not dare propose such a step in its own right calculate that it can be achieved by a detour.

    Such a step remains, however, fraught with difficulty. We know from our own experience in the United Kingdom that even a long-established political union suffers huge strains that are only exacerbated by economic divergence. Major questions of concern to any democrat arise – issues of self-determination and accountability, representation and identity. Democracy is, after all, about more than voting. It means being governed by those by whom we choose to be governed.

    The price we are asked to pay for a less than optimal economic performance is, in other words, a political step which we might be prepared to take one day, but which even its proponents do not dare to describe openly right now. This should be of real concern to the left – indeed, to any democrat – and this book is a valuable step towards a proper exploration of that concern.”

  • By On 5 September 2006 In British Politics Tags , , ,

    Tony Blair’s Easy Options

    Writing in The Guardian on 27 June 2006, Tony Blair asserts that “economic efficiency and social justice are entirely compatible.” The assertion, quoted with approval in a leading article by The Guardian a day later, is redolent of “third way” thinking and reminiscent of Lionel Jospin’s maxim “Yes to a market economy, no to a market society.”

    But like so much that is offered under the “third way” label, the assertion confuses more than it clarifies. Taken literally and at face value, it is unexceptionable. But it is not meant to be taken literally. We need not agonise for too long about the meaning of “social justice” in Blair’s formulation (though there is no doubt a debate to be had about that), but the meaning of “economic efficiency” is meant to and does cover a multitude of sins.

    In Tony Blair’s thinking, “economic efficiency” is shorthand for and synonymous with the kind of free-market economics enjoined upon – not to say imposed upon – us by global investors. As a self-proclaimed “globaliser” (see his speech to News Corp in July), Tony Blair is categorical in his belief that the global economy and the triumph of free-market economics on a global scale are not only good in themselves but are also consistent with – indeed guarantors of – social justice, however defined.

    This is, however, self-delusion on the grand scale. As I argue in The Democracy Sham, the huge power of global capital is not deployed in virtually every country to ensure that right-wing economic policies are adhered to, simply to have the outcomes undone by national governments intent on securing “social justice”. What the “third way” proponents overlook – or resolutely turn a blind eye to – is that the cardinal tenets of free-market economics are that only market-driven outcomes are to be tolerated, that governments must not be permitted to intervene in the market, and that costs that do not have a market rationale must be “externalised”, if undertaken at all. The whole point of free-market economics is to leave the market dice where they fall, which is just another way of saying that the objective is to achieve social injustice.

    The notion that market outcomes can be reversed or even modified by publicly funded social policies is simply a piece of window-dressing – either deliberate or self-deluding – on the part of governments that have no political will or analytical capacity to do any such thing. The sloppiness and laziness of the Blair formulation and the perpetuation of this delusion by “third way” academics or The Guardian have themselves become major obstacles to the “social justice” that is in increasingly short supply.

    Bryan Gould
    5 September 2006

  • By On 1 September 2006 In British Politics Tags , ,

    How Has Labour Done?

    My friend and colleague, Austin Mitchell MP, asked me a month or two ago to write a short piece for the House Magazine on the state of the Labour government. He was kind enough to publish it on his own website but I reproduce it here for visitors to this site.

    “What is the role of the Left in an advanced democracy like Britain? What can reasonably be expected of a Labour Government? And these two questions prompt a third. Does the Labour Party still represent the Left in British politics?

    My answer to these questions (which were often raised with me by Labour Party members on my recent visit to Britain) is a personal one and starts with a proposition. In every society, power – unless checked – tends to concentrate in fewer and fewer hands. Britain is no exception. The powerful will always use their power to make themselves more powerful. The role of the Left in a properly functioning democracy is, surely, to counteract that concentration of power. The true business of Left politics, in other words, is (pace Mrs Thatcher) the diffusion of power throughout society.

    If that is to be achieved, the less-than-powerful majority must use their democratic political power to put in place a government that will achieve that purpose. That is what they think they are doing – even if not articulated – when they elect a Labour government.

    The expectation of a Labour government is, therefore, that it will restrict the growth of untrammelled economic power, especially in sensitive areas like the media. It will ensure that political power is equally shared – that the democratic process is maintained in good shape and that human and civil rights are protected. It will allow less powerful people to organise themselves so that their collective strength can protect them against the economic force of powerful individuals and groupings. It will guarantee the basic decencies of life to all in society, irrespective of their power or lack of it in the market-place, so that their life-chances are not arbitrarily restricted. It will develop the cohesion of society so that communities as well as individuals have a role to play and enjoy a stake in its success.

    None of this means that Left politics must always act against the powerful. Nor does it mean that the undoubted and unique benefits of market operations must be eschewed. It takes no account of other important requirements of good government, of which basic competence and good sense would rank high on the list and where the Labour government has, arguably, scored well. But it does mean that Left politics, and a government of the Left, should be distinguished by their willingness to restrain the powerful and to ensure that the less powerful are not overlooked or ground down and are, on the contrary, encouraged and liberated.

    This is not, it should be noted, a revolutionary agenda. It owes little or nothing to Marxism. It is, on the contrary, a sober, careful and non-ideological statement of what might reasonably be expected to distinguish a government of the Left from that of any other persuasion.

    So, how much of this can we see in today’s politics? And how does the Labour government measure up?

    The answers are – not much and not well. We see a Labour government which pays excessive attention to the powerful, both internationally and domestically, and which apparently believes that nothing can or should be done without their support. We see a Labour government that is prepared to endanger the democratic process and civil liberties by placing the interests of government and other big players ahead of those of ordinary people. We see a Labour government that has pursued an economic policy that favours asset-holders but jeopardises the jobs of those who make and sell things, a government that has – in areas like education – re-introduced unwelcome and unnecessary divisions, a government that apparently distrusts the idea of community and collective organisation, and prefers to entrust the functioning of society to the unchallenged market-place.

    If I am right in identifying a gap between what a Left government might reasonably be expected to do and what a Labour government has actually done, we might begin to make sense of the current political landscape. That gap means that there is a void in British politics – a hugely significant part of the political spectrum is no longer represented in the politics of power. This is more than just a deficiency, or an absence. The democratic Left, which has been the wellspring of so much that is progressive, innovative and reforming in Britain, finds that it is not only unrepresented but has actually been supplanted by what it thought was its own instrument – that, instead of what should be its voice, a different and contrary voice is heard.

    This in turn explains the sense of disappointment, even of betrayal, that I found so often expressed. Left activists and supporters are at best bewildered and apathetic, at worst angry but impotent, at what has happened. There is a powerful sense of lost opportunity. The thoughtful realise that the opportunity presented by an overwhelming popular mandate for change, the intellectual bankruptcy and debilitating divisions of the Right, and a consequent period of virtually unchallenged power in government, is unlikely to be repeated.

    They know that, while the Tory party may still – under an unproven leader who has yet to demonstrate any substance – lose the next election, there is a palpable sense that the balance of political advantage is shifting. David Cameron is at least succeeding in drawing a line under the disintegration of the past fifteen years and signalling that a new Tory Party is ready to contest for power. The risk to Labour is compounded not only by the cumulative failures that attend the progress of any government but by the loss of trust and sense of disappointment on the part of its own natural supporters.

    As the Blair period draws to an end, and an unparalleled window of opportunity closes, an alleged government of the Left will not only have wasted a unique chance of promoting real change. They will have achieved the reverse of what many of its supporters expected. They will have presided over, even engineered, an entrenchment of power for the powerful. Gordon Brown may well find that his inheritance is worth little more than a mess of pottage.”

  • By On 26 August 2006 In Miscellany Tags , , ,

    Rates Reform

    Recent and prospective rate increases have prompted a renewed debate in New Zealand about the financing of local government. The following article by Bryan Gould was published in the New Zealand Herald on 30 August 2006.

    In the London of 1990, the poll tax protesters were on the streets and created a political and public order crisis that eventually forced Mrs Thatcher from office. I was at the time the Shadow Secretary for the Environment, responsible not only for Labour’s assault on the poll tax, but also for devising the Labour alternative.

    Mrs Thatcher was just the most high-profile casualty of what has always been one of the most sensitive of political issues – the role of local government and by whom and how it should be paid for. Rates have always been one of the most resented taxes but attempts to replace them have usually – as in the case of the poll tax – been disastrous.

    Very few would dispute the case for local government. Bringing decision-making closer to the communities affected by policy decisions has always been seen as worthwhile. Most people want to have the power to influence decisions in their locality rather than have them taken by some remote bureaucracy in central government.

    New Zealand has a rather more centralised system of government than is commonly found in most Western democracies. We have a unitary (as opposed to a federal) state and the powers of local authorities are less extensive here than in countries like the United Kingdom. One of Mrs Thatcher’s weapons in her battle against a recalcitrant local government that stubbornly resisted her so-called reforms was to transfer power from the local to the central tier of government, but there would not be much support for a further limitation of already limited local government powers in New Zealand.

    If the role and value of local government are not widely disputed, and if the price paid for failing adequately to carry out its functions is painfully evident in our major cities, the remaining question is – how is it to be paid for? There will always, of course, be room for critics to say that money is wasted and that local government should be reined back. But we also know, or should do, that one person’s wastefulness is another person’s essential service. No one likes paying for public services, but a stance that produces continuing demands for better local services while refusing to pay for them is hardly realistic.

    So, are we stuck with the rates? Mrs Thatcher’s disastrous experiment with a poll tax is unlikely to be repeated. Local income taxes are generally resisted as an unwelcome addition to an already heavy income tax burden. Local sales taxes create unnecessarily cumbersome and unhelpful differentials between regions which would be seen as ludicrous in a small country like New Zealand.

    There are of course many potentially thorny issues about how rates are calculated and levied – what should be the basis of valuation, who should carry it out and how often, what rebate schemes should be put in place – but a property-based local tax as an alternative or complement to income and sales taxes has long been recognised as a valuable widening of the tax base and has proved over centuries to be pretty resistant to challenge. Rates are fraught with difficulties but have so far been seen as preferable to any alternative.

    One of the aspects of rates most commonly resented is the impact they have on those – often the elderly and retired – who are property-rich but income-poor. The plight of the elderly widow forced by an excessive rates bill to leave her family home was one of the most powerful images used in Britain to make the case for replacing the rates with the poll tax.

    When I faced up to these issues in 1990 and proposed Labour’s alternative to the poll tax, I came up with a solution that solved some of these fundamental problems. I wanted to stick to the tried and true property tax as the basis of financing local government, but I proposed that its impact should be moderated by taking account of people’s income. Modern computerisation, even 15 or 16 years ago, made this eminently possible. The income tax code based on the income tax return that people made in any case could easily be applied to the rates bill so as to reduce that bill where income was low in relation to the rateable value of the relevant property.

    Unfortunately, my colleagues misunderstood my proposal and were spooked by what they saw as an income tax element to be added to the rates. They feared the reaction to what they thought might be seen as the introduction of a second tax or a local income tax. As a result, we missed the chance to reform the rates. Some say that the episode cost me the Labour leadership when I came to contest it a year or two later. It is interesting that a renewed British dissatisfaction with the Council tax (as the rates are now called) has led to a revival of interest in my proposals.

    It may be that in New Zealand in 2006 a serious and considered reappraisal of local government financing will come up with still more far-reaching reforms. But no one should bet against the survival of the rates in one form or another.

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