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Archives for March 2011

Orwell Prize: English spoken without fear

Paul Mason | 08:27 UK time, Thursday, 31 March 2011

Getting myself longlisted yet again for the Orwell Prize (and good luck to all the real bloggers who don't have a mainstream media pension, salary and self-censorship training to fall back on)... made me ask: what single bit of Orwell's writing I would recommend to somebody starting a blog, or studying journalism?

Actually it's Inside The Whale, where Orwell takes apart the literary industry of the late 1930s, concluding that of 5,000 novels published, 4,999 were "tripe". He does this sandwiched between two lengthy eulogies to a book that, at the time of writing, was banned - and banned in the 1930s meant impounded at Dover and burned, to be found only in the secret cupboards of anarchists and wierdos.

The book in question is Tropic of Cancer, by Henry Miller - a strange choice of book to praise for a man who'd just come back from the Spanish Civil War and who, with the Dunkirk fiasco, believed Britain was entering a "revolutionary period".

Musing on this very point, Orwell concluded that Miller had probably founded a new school of writing with this one book, and its successor Black Spring:

"In Miller's case it is not so much a question of exploring the mechanisms of the mind as of owning up to everyday facts and everyday emotions. For the truth is that many ordinary people, perhaps an actual majority, do speak and behave in just the way that is recorded here. The callous coarseness with which the characters in Tropic of Cancer talk is very rare in fiction, but it is extremely common in real life; again and again I have heard just such conversations from people who were not even aware that they were talking coarsely. It is worth noticing that Tropic of Cancer is not a young man's book. Miller was in his forties when it was published, and though since then he has produced three or four others, it is obvious that this first book had been lived with for years. It is one of those books that are slowly matured in poverty and obscurity, by people who know what they have got to do and therefore are able to wait. The prose is astonishing, and in parts of Black Spring is even better. Unfortunately I cannot quote; unprintable words occur almost everywhere. But get hold of Tropic of Cancer, get hold of Black Spring and read especially the first hundred pages. They give you an idea of what can still be done, even at this late date, with English prose. In them, English is treated as a spoken language, but spoken without fear, i.e. without fear of rhetoric or of the unusual or poetical word. The adjective has come back, after its ten years' exile. It is a flowing, swelling prose, a prose with rhythms in it, something quite different from the flat cautious statements and snack-bar dialects that are now in fashion."

The whole essay is meandering like this, and in a way "provisional" - because there was no way of knowing what the outcome would be, given five more years of war still to go.

But we know the outcome of Miller's experiments with language, profanity and honesty: it inspired the post-war "beat" generation - there is a direct lineage to the work of Kerouac - and Kerouac then inspires the Sixties. So that in every Pynchon novel, Doors lyric, Hendrix guitar solo, in every dispatch from Vietnam by the "New Journalism" school and beyond, filtering through to the NME and Rolling Stone in the 1980s, there is a bit of Henry Miller.

Orwell sensed that at some point people would start writing about ordinary life in ordinary language, dramatising the ordinary, peeling back layer upon layer of literary finesse, pretension, writing-school prose, irony etc.

The blog is the logical outcome.

And like the novels of 1940, the vast majority of blogs are mediocre, "tripe" as Orwell might have said. But they are mostly attempts at honesty - whether literary or non-fictional.

I give you two excerpts, both from fellow longlisters, writing about the same recent event:

"I find myself in front of the riot line, taking a blow to the head and a kick to the shin; I am dragged to my feet by a girl with blue hair who squeezes my arm and then raises a union flag defiantly at the cops. "We are peaceful, what are you?" chant the protestors. I'm chanting it too, my head ringing with pain and rage and adrenaline; a boy with dreadlocks puts an arm around me. "Don't scream at them," he says. "We're peaceful, so let's not provoke."

And this:

"I've just watched the soi-disant "March for the Alternative" snaking its way across London. It is clear enough, from the banners and slogans, what the protesters are against: spending restraint, open markets, private enterprise, property rights, free contract, Tories, bankers and Nick Clegg. Fair enough. But what are they for? Their website suggests that they think the answer to our debt crisis is more spending. In fact, they don't think we have much of a debt crisis. They want higher taxes, particularly for the rich, whom they expect to wait around meekly to be fleeced. And they insist that higher state expenditure ("investment") will create more jobs. Why so half-hearted, comrades? Why not go all the way, nationalise every business, place every adult on the state payroll and confiscate all income? By your logic, it would surely make Britain the most prosperous country on Earth."

The first is from New Statesman blogger Laurie Penny, the second from Dan Hannan MEP, who blogs in the Telegraph. Two ends of the political spectrum, two kinds of language, but both part of a combative, Anglo-Saxon-word infested, plebeian writing tradition that in the space of ten years has begun to swamp the polite, official media with its deference to experts, to everything "middle", its restraint and euphemism.

George, you would have loved blogging: 99% of English literary novels are still tripe but here - in the world of the hyperlink - we are well and truly "inside the whale"; and English is definitely spoken without fear.

Euro: It's all down to Timo Of Finland (sorry!)

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Paul Mason | 23:03 UK time, Wednesday, 30 March 2011

A short summary of the Euro snafu that's about to happen:

1) Tomorrow Ireland publishes the results of bank stress tests. It has to find - or the EU has to find - another E18-25bn to shore up its failing banks.
2) It goes to Brussels and demands what it asked for three weeks ago and failed to get: better terms, lower interest rates, greater forebearance from the bailout fund that is keeping its banking system alive (or I should say actively zombified)
3) Meanwhile in Lisbon they do the same, or try to - hampered only by the fact that the government just lost its parliamentary majority (and parliament may be dissolved Thursday).
4) Meanwhile, in Greece, beset by continued downgrades of their credit rating and declining prospects of being able to grow their way out of fiscal crisis, they join in the clamour for a more generous deal.
5) Meanwhile in Helsinki, voters go on ticking the box on opinion poll questionnaires that is marked "True Finn": Finland is stymied from putting up its share of the proposed bailout fund because parliament is dissolved: after 17 April, if the True Finns (leader, Millwall fan Timo Soini) join a coalition with the centre right, they may stymie the new mechanism full stop.
6) It all points towards the thing the EU leaders have been trying to head off since the December crisis: a chaotic default on peripheral debt, blowing apart the carefully crafted compromises that have allowed the interim bailout mechanism to work.
7) Then the question is - if Ireland, Portugal and Greece default - how much the governments of northern Europe are on the hook for? Because it is big European banks - in Spain, Germany, France and, oh, Britain - that will see their loans go up in smoke in any default.

At this point what you want is Antoine de Caunes to introduce some kind of (warning, slight profanity in link) glib, funny spoof video to sum it all up, but he's moved on from all that.

A snapshot of the 26 March demo

Paul Mason | 18:49 UK time, Saturday, 26 March 2011

1815: I've just left Trafalgar Square, where about 200 people are holding an impromptu rave, with a minuscule number of police present to notice the thick waft of sensimilia.

At Fortnum and Mason the demonstrators who took it over are trying to get out, texting me to point out the difference between themselves and the "black block". This latter, about 500 anarchists with black and red flags, systematically threw paintbombs, thunderflashes and flares, trashing a few shops and banks etc, causing mayhem around central London all day, and presumably into the night.

But the massive fact of today was a very large demo of trade unionists and their supporters. I estimate upwards of 250,000. Probably less than half a million but certainly bigger than the Poll Tax demo of 1990, which I witnessed.

The demographics were interesting. Unison - a union which has a reputation in the trade union movement for passivity - had mobilised very large numbers of council workers, health workers and others: many from Scotland and Wales; many from the north of England. Unite likewise, and the PCS seemed capable of mobilising very large numbers.

What this means, to be absolutely clear, is people who have never been on a demo in their lives and in no way count themselves to be political.

I also saw many small self-selected groups not mobilised by unions: family groups, school groups, speech therapy groups.

My guess is that though this is the "labour movement", a number of those marching would have voted Libdem also.

The sheer size and social depth of the demo is what all political strategists will now have to sit down and think about. I'm still thinking about it myself, but recording its size is important: the anti-war demo was bigger - maybe 1m plus - but this was certainly the biggest and most representative demo for 25 years.

At the rally Ed Miliband was heckled by a few, when he said he supported some of the cuts that are coming: Mark Serwotka, the PCS leader, not only called for no cuts at all but fired the crowd up with a call for co-ordinated strike action.

I got a sense that the labour and trade union movement slightly stunned itself with its ability mobilise so many people on the streets. That with Ed Miliband they now have a leader who they don't hate, but in turn Mr Miliband faces a challenge of what to do about this movement.

I picked up a bit of scepticism about him from the protesters; meanwhile his handlers will be pondering the problem of how "associated" he wants to be with the biggest labour protest for 20 years, because most people on the demo would be a little way to the left of the ideas Mr Miliband claims to espouse.

The big takeaway from today is that the trade union movement - though dominated by the public sector - is certainly a force to be reckoned with: what it chooses to do now will be interesting because Miliband's strategists certainly want nothing to do with the mass, co-ordinated strike movement advocated by Serwotka, Len McCluskey etc.

We tend to forget, because we obsess about political parties, that in organisational terms the unions are much bigger than the Labour Party itself. Indeed the Labour Party branch banners I saw were often carried by a few, oldish, colourfully dressed people, whereas unionists tended to be younger and very "branded" by their professions or unions, as with the Unison Filipino Nurses, the FBU etc.

Another note: we tend to think of the public sector unions as white collar or from the service industries but this was not true of today: there were many tens of thousands of manual workers in their bibs, hi-vis uniforms etc. I met binmen from Southhampton furious that they pay is being cut; and of course the Firefighters, designated "stewards" in order to deter the anarchists from coming anywhere near the demo.

At present the sporadic violence around Piccadilly is dominating the headlines. The three groups are getting coverage in inverse proportion to their importance: the anarchists with their thunderflash thowing (I've been close to this stuff all day and it is, though dangerous, fairly ritualistic); the UKUncut groups (a couple of thousand) which have managed to shut down many branches of Vodafone, Boots, various banks and Top Shop with largely nonviolent direct action; and 300,000 people who demonstrated completely peacefully, enduring for many four to five hours of marching and standing.

This passive but fairly angry mass are the people that pose the biggest political problem both for the government and the opposition; because when you can mobilise more or less your entire workplace - be it a special school, a speech therapy centr, a refuse depot, an engineering shop or a fire station - to go on a march, then "something is up".

I should add that, from what I saw, the policing was up until nightfall deliberately restrained. No kettling attempts, no baton charges even when attacked with missiles, few arrests and injuries. This must have been a high-level decision - though of course each contingent of anarchists is followed by forward intelligence teams with cameras and notebooks: for several hours a large group of masked anarchists were allowed to march around, smashing various storefronts.

It now seems like this is changing, and escalating, from the live coverage by my News Channel colleagues, which shows the Fortum & Mason invaders being arrested. But I am now off the demo and watching it on TV.

More follows, including on Newsnight, Monday.

Europe: one currency, two souls?

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Paul Mason | 12:12 UK time, Friday, 25 March 2011

Something Mats Persson, of the think tank OpenEurope, said to me yesterday has stuck in my mind: the EU leaders have come to identify the stability and survival of the EU with the Eurozone. Likewise they have come to believe the Eurozone's survival intact as the bedrock of all policy and therefore inevitable.

This prompts a question: why then do their actions continually fall short of defending this thing they find so crucial?

Why, within the space of 12 days, do we get a "grand bargain" to create a Euro Stability Mechanism (11 March), which is then (a) knocked back by Finland (b) defied by Portugal (c) renegotiated at the behest of Germany's FDP coalition partner so they can do a tax giveaway in the coming elections; and (d) excludes Ireland anyway?

There is a serious chance that the Portugese refusal to implement the demanded 5% fiscal tightening (in a single year) will lead to defaults on sovereign debt. The IMF, recognising this, has activated a $580bn contingency fund.

Ireland was already excluded from the 11 March deal - its request for lower interest rates put on hold because the EU (ie Germany) did not like its retention of 12.5% corporation tax.

Now Portugal is facing BBB (near junk) status and 30 small Spanish banks got the overnight downgrade treatment - not so much for their exposure to Portugal but because the markets no longer believe the Spanish government will save them.

Though it has the potential to escalate, the potential for this moment to be one that actually ends the Euro crisis is also great.

The markets, awash with Asian cash, are prepared to buy Spanish debt. Indeed one market participant told me yesterday that there are repeated surges of money into both Spanish and Italian debt whenever risk appetites rise. Why? I said. I dunno, he said, and I'm Italian! Spanish debt is trading like Italian debt, and has been since the December bailout of Ireland - and this is good, because it means - rationally or otherwise - the markets believe Portugal can be where it all ends.

If the Spanish cajas can be allowed to go bust or recapitalise, and Spain can stay out of recession, the crisis stops at Portugal: you get Ireland, Portugal and Greece bailed out; you allow them to delay their fiscal retrenchment, keeping them out of the markets for three to five years, so that they avoid the doom-spiral of recession/deflation/default.

But these are big ifs.

There are two big problems ahead. The first is the European Central Bank. It is currently keeping the EU banking system afloat by issuing liquidity - this stops the banks having to recapitalise and write off debts, and governments likewise. But soon the ECB will raise rates and withdraw liquidity. Having overseen a decade of too-loose monetary policy for the Euro-periphery it will now impose a regime that is too tight for them to recover: they will get thin but their arteries will harden - the monetary equivalent of the Atkins diet.

If the ECB imposes higher interest rates, to rein back inflation in the northern core, there is a chance it will provoke recession in Spain. And then the chance of creating a north-south firebreak across the Iberian peninsular is lost, as David Owen of Jefferies investment bank told me yesterday.

The second problem is the shape of the coming deal on the permanent European Stability Mechanism. Some people in the bond market are getting nervy about this because what it looks like is a permanent sovereign debt resolution mechanism which says: hey, banks - next time a country goes bust you will be classed as irresponsible lenders and you will be last in the queue to get your money back.

The logical response of the bond investors to this will be: "hey, South and Eastern Europe - get lost". More likely they will force the stricken countries to create debt vehicles that get round the pesky rules that dictate private sector losses on sovereign debt defaults, as they did with the rest of Latin America after Argentina defaulted.

Now there is of course a structural solution to this: a German/French funded "Marshall Plan" for the peripheral countries, combined with massive structural reform there (Portugese public sector wages are 50% higher than private sector says McKinsey, compared to a 7% average in northern Europe); then you unify the fiscal rules and create the beginnings of a common tax and budget system.

But, ahem. Here I should pause while some of Idle Scawl's readers do that spitting-out-their-cocktail thing that Jeff Lebowski does when Maude tells him she's trying to conceive his baby. Because this is understandably anathema to many people.

But logically if you are going to keep basket-case economies inside the Eurozone you have to help them become modernised, de-bureaucratised, less riddled with informal economic activity, organised crime and corruption.

If this is off the agenda, then it is hard to see how countries like Greece and Ireland recover inside the Eurozone.

Hanging over the whole situation is the European banking sector - undercapitalised, opaque, passing stress test after stress test without ever recovering in reality.

Peter Oborne in today's Daily Telegraph offers a scathing judgement on how we got to this point:

"The scary truth is that the scale of the problem facing the eurozone has been gravely underestimated by British commentators. The reasons are shaming. One significant factor is the financial and economic illiteracy of political journalists and foreign correspondents. Too many are ill-equipped to look behind the bland statements made by European chancellors or to interpret the deliberately misleading balance sheets of major European banks."

While I would question anybody's ability to get inside the balance sheet of a Landesbank, I think the bland statements have certainly been questioned on this blog and, when you can get a word in edgeways, at the press conferences. The problem is it does not stop the statements being bland.

I watched a whole bunch of "rushes" coming out of European parliaments yesterday, above all Germany, where it's instructive to observe how both Angela Merkel and her deputy Herr Westerwelle play to the German gallery on Euro-toughness. We are very little exposed to this in Britain - probably over-exposed to the thoughts of minor US congressmen but under-exposed to the detailed pronouncements of the people who actually control Europe.

Likewise I suspect few Newsnight viewers were prepared for the news that a man called Timo Soini, who supports Millwall FC and leads a UKIP-like party called the True Finns, may soon be in a Finnish coalition government and capable of stymie-ing the Finns' participation in a future ESM fund.

European political reality is fragmented and not really grasped in its totality by any media outlet, here or anywhere else. The poor hacks standing outside the Justus Lipsius building (as I have done many times) are all too aware that they are seeing and hearing nothing of any value in those arrival and departure shots, and that the press conferences they are forced to attend are a study in opacity.

What Europe's leaders have begun to do, at today's summit, is drag the political psyches of their own countries to the negotiating table: protestant north Europe does not want to go on paying for the "profligate" south; meanwhile if the south and Ireland have already taken some austerity, the sheer scale of what's demanded challenges the very essence of the societies though they were creating after throwing-off decades of fascism, dictatorship and religious conservatism.

The antidote to this would be a vision of how the two psyches - north and south - can co-exist within a new, common system; or a new arrangement which dismantles the common system in a non-chaotic way.

I am listening hard for that vision thing.

Portugal, Summit: Enter the Euro masses, annoyed

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Paul Mason | 13:27 UK time, Thursday, 24 March 2011

Portugal's PM resigned last night because his ruling Socialist Party failed to get through parliament an austerity package they had just agreed with the EU. There will now be an election, but in the meantime the bond markets will put pressure on Portugal to go for the same kind of EU-IMF bailout that Ireland was forced into.

Meanwhile EU heads of government are meeting in Brussels to try and thrash out a new version of the "grand bargain" that Portugese lawmakers so defiantly rejected. What is needed is a total strategy; a total solution that wipes out the past mistakes, the dodgy national accounts, the stupid lending practices, the fudge at the heart of the Eurocurrency arrangements.

But at the Brussels summit our leaders are about to find that it is easier to bomb Libya than it is to find a solution to the Euro crisis.

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Portugal's problems are specific. It does have some effectively busted banks, but these do not look big enough to take the country down, as with Ireland. It does have a problem with political corruption but nothing on the scale which saw the Greek government collude with the non-collection of middle class taxes, pulling the wool over the eyes of Eurostat for a decade.

No, Portugal's problem is more profound: it has a stagnant, unmodernised economy. It cannot grow out of its sovereign debt crisis on its own. Its export-oriented industries were largely low tech - like the wood factory I visited last month - and have been wiped out by competition from Asia. It is also poor: the minimum wage is about 500 Euros a month - Ireland's is more than double that. It is now looking - even before any new austerity package - at minus 0.9% growth.

So what happens next? The EU leaders kicked off this phase of the crisis by outlining the general terms of the agreement they hope to sign this weekend: it required Portugal to execute a fiscal tightening of 5% in this year alone and 9% of GDP over the next three years in total.

This, to put it bluntly, is the price populations are now being asked to pay for the EU's refusal to heap any economic pain onto the banks that lent these countries money. The alternative to shutting down schools, emergency wards, slashing pension rights etc would be to impose a penalty on those who lent the money in the form of a so-called "haircut".

Paradoxically this is exactly what the EU's proposed future grand bargain involves: to create a permanent mechanism capable of lending E500bn the price is that any banks that lend to countries that show themselves in danger of going bust would be deemed "irresponsible lenders" and penalized by not getting all their money back. The proposed deal involves recognizing any money lent by the European Stability Mechanism as "senior" to private sector lending to governments - and this is designed to force such governments to impose losses on the banks in future.

So why don't they simply apply this market logic in retrospect and impose losses on the banks now?

Here we come to the naked struggle between countries and between interest groups. The banks that irresponsibly lent so much money to peripheral Europe are mainly in, er, northern Europe. France, Germany and Britain would be hammered if their banks were forced to take losses now on the stricken sovereign debts of the periphery.

So the essential deal involved in the new "stability and growth" (don't you just love Euro doublespeak?) arrangements would be: poor countries must pay through austerity so that rich countries do not go through a banking crisis.

And it's the same deal you find at the heart of the current strategy of the ECB. The ECB has chosen to simply spray money around in Europe: using "liquidity" rather than debt restructuring to solve the problem.

The problem is it doesn't solve the problem. It simply allows players in the financial markets to make money out of speculation while failing to increase either the lending power of banks or the borrowing power of companies. The result, Steen Jakobsen of Saxo Bank spells it out in a note today:

"The debt is still there! So their debt to equity is the same, but their purchasing power is reduced through the spill-over into energy prices and food from the extremely loose monetary policy. The more money central banks print, the more it seems they devalue both the purchasing power of the Main Street as its income stream fails to keep pace with input costs, while at the same time they are expanding the future liabilities in the form of a ballooning national debt."

Now the ECB is set to raise interest rates. That will be the final straw for peripheral Europe, raising the cost of borrowing even as their economies slide into austerity (ie policy) driven recession.

But here is where you get to understand why we call this discipline "political economy".

The emerging stance of both the non-mainstream left and right in Europe coalesces around a refusal to accept the deal on offer from the ESM mechanism and from the ECB.

There's a growing movement among the parliamentary left in Greece, Portugal and Ireland to have the existing debts declared "odious" - that is irresponsibly incurred and without benefit to the borrower - and for a controlled default. The only silver lining for the Euro authorities, is that large parts of the left do not (yet) want to quit the Eurozone.

Markets are also beginning to notice the strong resurgence of the anti-Euro right: in Finland and in France. In Finland, one of only 6 AAA countries in the Eurozone, the right prevented the ratification of the 11 March agreement, on grounds there was not enough control and austerity exerted onto the economies of southern Europe. It is possible that the right wing True Finns could become the largest party at the next election.

If there was a strong centrist leadership in the Eurozone, able to convince the populace that the deals coming out of Brussels were worth having, able to articulate a vision for a Europe more strongly united around fiscal rules and a new, shrunken, "social" deal - then all talk of breakup and catastrophe would be misplaced.

But there is not.

We are approaching the moment where the populations of Europe, so long sidelined, are entering the picture to determine the outcome.

It is clear the Portugese will not tolerate much more austerity: when I was there last month it has the appearance of a placid country, where the dominant emotion is not anger but gloom. Greece has been at tipping point for many months - and any attempt to impose yet further austerity there may be the thing that tips it. Ireland - again one of those countries still living off the fat of an unsustainable boom - is also primarily passive, resigned.

Likewise the populations of the rich north are sick of the fudge solutions that leave the possibility that the whole thing happens again.

So what happens next is unpredictable. If the Eurozone leaders fail to put a lid on the sovereign debt crisis - ameliorating austerity by imposing costs on the banks themselves - it will lead either to a social explosion somewhere in peripheral Europe, or to the mass rejection of the Euro project at the ballot box, as has begun in Finland.

The politicians' response as always is to buy time, buy time, buy time - create the appearance of doing something without ever having to do it. That's actually worked for ten years, but it's hard to see it working forever.

Portuguese PM resigns - FM: 'doubt we will bear this on our own'

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ADMIN USE ONLY | 19:36 UK time, Wednesday, 23 March 2011

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There have been stormy scenes in the Portuguese parliament tonight. The EU-backed austerity plan was rejected, with only the ruling Socialists voting for. The PM stormed out of the chamber before the debate ended and promptly resigned. There will now be an election. (For the background, click on my report, above on the structural crisis facing Portugal).

The finance minister, in an emotional speech, warned deputies the fall of the government would present "additional difficulties for the country's financing which I doubt we will be able to bear on our own".

The opposition centre-right PSD is not opposed to seeking an IMF bailout. The 20% of parliament that is far left and communist most definitely does oppose it, so the Socialists' eventual representation in parliament will determine on what terms the country now goes to the EFSF-IMF for a bailout.

Budget 2011: Second thoughts - on growth, debt and rebalancing

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Paul Mason | 17:22 UK time, Wednesday, 23 March 2011

Last June, straight after the election, the government set out an aggressive plan to shrink the budget deficit.

The plan was based on the assumption that growth would bounce back strongly this year - 2.3% - and that inflation would be just above target - at 2.4%.

Since then the economic data has got worse: growth is estimated at just 1.7% and inflation is now predicted to be above 4% for most of this year.

So what does this do to the deficit reduction plan?

The answer is - the government meets its target of eradicating the deficit - but its debt remains higher for longer.

It was predicted to peak at 70% of GDP in 2013 then fall back below 70% in 2014 and again in 2015.

This accords with the government's self-defined supplementary fiscal target: "public sector net debt as a percentage of GDP to be falling at a fixed date of 2015-16"

Now it still peaks at just under 71% of GDP, stays above 70% in 2014 then falls slightly in the alloted year, to 69.1%. Thus, by 2015, though debt is falling, it's 38 billion higher than we thought it would be.

This means the coalition only JUST meet one of their own targets and their margin of error on this is now smaller, says the OBR.

But some economists think even these projections are over-optimistic. Doug McWilliams of the CEBR says:

"It is unlikely that consumer spending will rise this year - OBR forecasts show the consumers expenditure deflator up by 4.6% this year and average earnings up 2.0%. This cannot mean anything other than a major squeeze on consumers but the OBR expects consumer spending to rise by 0.6% in 2011.
"The OBR seems remarkably sanguine about the world economy. It is possible that the price of oil may edge down over the next 4 years; it is also possible that world GDP growth will be over 4% in each of these years. But it is highly unlikely that both will occur at the same time. So the export growth forecasts are exposed."

There's another couple of worries: first the impact of spending cuts on growth. This is the key point at issue between the government and Labour - and the negative impact of the spending cuts has now shrunk from minus 0.7% in the OBR forecast (June 2010) to minus 0.2% - and though these tiny percentages sound arcane that minus 0.7% represented about a third of all projected growth.

The OBR explains this by saying that the switch of the Coalition's spending cuts from departments (ie public services) to AME (ie welfare) meant that the impact of the cuts "disappears" from that line in the calculation and pops up in reduced consumer spending (this according to OBR spokesperson).

Second is trade. All the government's assumptions about a growth recovery rely on Britain's trade situation becoming positive - it's been strongly negative for a decade and did not do very well even last year, as while manufacturing boomed, imports also boomed. The OBR says a few big aeroplane purchases may have distorted this figure - so if we don't buy so many jumbojets, Britain finally gets its positive trade number.

But let's see. The UK does not currently feel like an export powerhouse to me.

One final observation from the OBR document. They are not very impressed with the Plan for Growth.

The pro-growth measures are tangible and mainly focused on business - and on the kind of business you want to create jobs and boost exports. The corporation tax cut is significant, likewise the fuel duty escalator cut and the enterprise zones. But says the OBR:

"We do not believe there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011" (OBR, 3.19)
Just to translate: that means they are not factoring in George Osborne's Plan for Growth AT ALL into their predictions for the medium term prospects of the economy. For example it says that the structural impact of the corporation tax changes would be, "minimal".

So the big takeaway from the figures in today's budget is really this: there is no certainty that growth will rebound in the way the Chancellor claims it will. The micro measures are being widely welcomed by business and in the markets, with the conservative right saying they wanted more and Labour rubbishing them. But the fact remains...

The growth figures have been revised down twice; inflation is much higher; real incomes are squeezed.

However for now the markets give the government the benefit of the doubt - and we'll see that in the lower cost of government borrowing which Mr Osborne points out is lower than any other country with sovereign debt worries.

(And while I mention it, the debate has just begun in the Portugese parliament that could bring on the latest phase of the Euro sovereign debt fiasco).


Budget 2011: First thoughts

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Paul Mason | 13:40 UK time, Wednesday, 23 March 2011

The growth forecast is down: for this year and next. They had thought the economy would grow 2.1% - now the OBR thinks 1.7%.

If we dig deeper into this prediction there is also a softening of the OBR's rebalancing prediction.

In June last year the OBR prediction for 2011 got 2.3% as follows: 0.8 from consumption and 0.8 from investment; 0.2 from housing; 0.4 from stockbuilding by businesses. Then subtract 0.7% because of spending cuts and add 0.9% for a rebound of net trade.

By November this had been scaled back to 2.1% - and the negative impact of government cuts scaled back to minus 0.4.

Now, according to the OBR, the negative impact of the cuts is only 0.2%.

While all these micropercentages sound arcane, they matter because in them is contained the story of rebalancing the UK economy, which is what Mr Osborne's growth strategy aims to do. I will now try and find an answer to why the negative impact of government spending cuts on the economy is much lower than thought.

It's academic, but had the government stuck with Sir Alan Budd's understanding of the impact of fiscal tightening, we would be looking at a growth prediction of 1.2% - which is still what some economists think we will get.

Now the impact of government cuts has been scaled back to just 0.2% in 2011. But this is offset by the halving of the contribution of private consumption, the reduction of predicted investment by a quarter; and the halving of predicted stockbuilding.

OK so what does this mean? We need to hear from the OBR of course, but it means the macro-economic impact of government spending cuts and investment cuts

Portugal - a few more moves towards endgame

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Paul Mason | 21:33 UK time, Tuesday, 22 March 2011

The EU agreement on a long-term solution for Euro sovereign debt is less than two weeks old - but now it's been stymied in the Portugese parliament.

The centre right opposition (confusingly called the Social Democrats) refused to support it and it looks like the measure may fall in a vote in parliament tomorrow.

That could trigger an election, and if the PSD wins they will try to go for an IMF-backed bailout.

Portugal's problem remains its inability to grow its way out of a fiscal crisis. Since I was there last month (when there had been few demos) there has now been a mass protest involving 300,000 people.

Portugal is still solveable - either by a Euro-solidarity pact that actually sticks, or by an IMF backed bailout. Why it's under pressure is because failure to solve it in an orderly way could still impact badly on Spain. Anyway, while my eyes will be glued to George Osborne tomorrow, I'll save a few pixels for watching the Lisbon Parlamento.

Oil, inflation, sovereign debt and revolution

Paul Mason | 12:30 UK time, Sunday, 6 March 2011

I'll keep this brief. In the next six weeks we're going to get the collision of three strategic problems in economic policy and the outcome is going to shape not just the global recovery path but in particular the different continental stories.

First, we're in the middle of a mini oil shock. The price of crude oil has risen 15% in three weeks and this after a sustained period of energy inflation and food price inflation. This will now take its toll on growth. Barcap's economics team estimates that if oil rises to $125 and stays there, it's going to knock at least 0.5% off the growth of the developed world (see graph on left).

inflationscenarios

In the same scenario inflation rises by 2% more than it would have done already (graph on right). (Barclays Global Economics Weekly, 4 March 2011).

So we come to the second strategic problem. Monetary policy. Both the Federal Reserve and the European Central Bank have been making signals recently: the Fed that its policy will remain loose, the ECB that it is about to tighten, raising interest rates to choke off inflation.

A Eurozone interest rate rise will please the the kind of stereotypical mittel-Europeans you still meet who will shop only in Netto and who refuse to carry a credit card.

However it will tank the recoveries, such as they exist, in Europe's periphery.

And that brings us to the third problem: the sovereign debt crisis. As I've reported before, this is building to a climax that will begin at the end of this week, and needs to come to some denouement before the summer. Ireland's new coalition will head to Budapest to try and renegotiate the bailout terms; Portugal's refusenik government will come under pressure to seek a bailout and in Greece they will struggle to hold the line against default. It was under-reported but the general strike in Greece, late February, was pretty strong and wider social unrest is simmering.

The USA doesn't have much more it can do, policy wise, but its palliatives finally seem to be working - fiscal stimulus money and QE are having both domestic and global impact, with the first good news on the jobs front finally coming through.

It's the Eurozone that is in a bind: Barcap's economist refer to it as a "different planet". It is about to face an inflationary spike with a policy regime that is monofocused on inflation - so the ECB will hike rates just to prove it has the guts to do so. This will increase the pressure on peripheral governments to renegotiate the bailout terms, and banks of Germany, Britain and France may finally lose some money in the form of haircuts, repayment delays or even, if it gets chaotic, defaults.

They were already facing problems 2 and 3: problem one simply exacerbates problems 2 and 3.

What you want to avoid at all costs is "problem 4" - some kind of war, revolution or military coup in the Mediterranean, Africa and the Middle East which takes the oil price to $200.

When I say "avoid" of course - these things are difficult to avoid in an age of multilateralist diplomacy, where the most powerful military power in the world has to tread on eggshells - so the global risks are rising.

Wars and revolutions tend to be quite symbiotic: what's going on in Libya gives a foretaste of what you might see if a full-blown democratic revolution broke out in Iran.

If oil goes anywhere above $150 all the policy mechanisms become frayed: rate rises have little effect on inflation but heavily impact growth - meanwhile inflation also impacts on growth and what you probably get is stagflation, as after 1973. So, fingers crossed.

How do you leave the Euro? Plan C: odious debt...

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Paul Mason | 10:42 UK time, Tuesday, 1 March 2011

I once used to frequent a very decent restaurant on Kefalonia where you could get lobster pasta for 1700 drachmas. In the summer of 2002 I was stunned to find, chalked on the very same board in the very same harbour, that lobster pasta was now to cost 17 euros. In fact the old zeros were still faintly visible, but not the drachma sign.

The final exchange rate of the Greek drachma was 340/1, making the pre-Euro lobster a notional 5 euros - so this was a > 3x increase. But on adoption of the Euro the restaurant had simply decided it had entered the north-European economy and would now charge north-European prices. I have to say, it was still worth it - but it was a shock.

Soon Greeks may experience a shock in the other direction.

For, with GDP shrinking by 4.5% last year, on track to shrink a further 3% this year and unemployment on track to hit 15%, it is not clear how Greece will avoid a deflationary spiral. With Ireland scrambling to renegotiate, money flying out of the Emerald Isle at an alarming rate - and Portugal (10 year bond yield currently 7.5%) about to go through the wringer of bailout pressure from the ECB, everyone is talking about a "Plan B".

Plan B is that these countries go cap in hand to the EU Summit on 24 March 2011 and demand a collective renegotiation of the terms of the bailout. This would then move the stress in the European finance system towards the core, with most probably an uptick in the interest rate on French and German debt. Possibly it would involve an element of debt restructuring, so far ruled out by the ECB for any debts incurred before 2013.

But some are now openly contemplating a "Plan C". Around the fringes of mainstream politics in the stricken countries are now quite significant leftist or quasi-leftist parties in parliament and they are beginning to link up with debt NGOs more normally associated with the developing world over the issue of so-called "odious" debt.

Once the term "odious debt" enters the conversation, it leads inexorably to the suggestion that the stricken countries - above all Greece - should default on their debts. That is, instead of waiting for some kind of controlled restructuring of debt under the aegis of the ECB/IMF, they take control of the process themselves and declare - as with Argentina in 2002 - a default (Argentine investors got about 30% of their money back over the decade).

The odious debt concept emerged in 1927 as a discussion in international law about what to do with debts contracted by one state with another, where the debtor state then experiences a revolution and decides the previous government were rotters who contracted the debt without benefiting their own population. There is a sporadic case law on the question, outlined in this UNCTAD research paper.

However the bad debt sinking the peripheral economies of Europe is not primarily state-to-state debt, but state-to-bank debt: so the "odiousness" is not really relevant. If you are going to default, then you default - for whatever reason - and get on with it.

In polite European society it is not done to talk about default: but the cost of insuring E10m of Greek five year debt against default is currently about E0.8m - that is, there a precisely measured likelihood of default understood by the markets and it's about 12-1 and "coming in" as they say at the bookies'.

Two weeks ago Greek labour minister Louka Katseli, a perennial grumbler about the austerity plan, is said to have made some remarks that I cannot track down in the English language press along the lines that Greece might have to form a committee of wise men to look at what to do about its debt. I will try and find the precise quote.

We are going to see all kinds of peripheral rumblings about odiousness, "studying the structure of debts", the potential haircuts, repayment delays etc: and these of course form the thin end of the wedge of a full-blown default debate.

Right now, EU governments are obliged to hold the line on the impossibility of Plan C.

Yet the markets keep reflecting its possibilty, by edging upwards the cost of insuring against default, and by removing money from the countries they deem to be at risk of default.

This influential post from the geo-economics team at the Council on Foreign Relations is worth quoting in full (and the graph is worth a look, too):

"In the midst of the financial crisis of 2008, governments helped to prevent bank runs by guaranteeing bank debts. Yet as sovereign solvency itself becomes an issue, such guarantees quickly lose their value. If Ireland provides a rule of thumb, bank runs can be expected once sovereign credit default swap yields pass 3%. The figure above shows that when Irish government CDS yields first passed 3% in early 2009, foreign deposits fled the country. This happened again in late 2010. Now that Spanish CDS yields have broken the 3% threshold, there is reason to be concerned about the stability of Spanish bank deposits as well." (Council on Foreign Relations blog, 5 January 2011)

To summarise: nobody in mainstream European politics wants to see any country leave the Euro. Yet the non-mainstream politics are getting bigger as the elections tick over, and the markets themselves are registering a growing possibility that one country will go through a controlled default. An uncontrolled default would send the stress straight through from the periphery to the core: it would hole several EU banks below the waterline - as pointed out in my previous post.

Then the countries of the EU's northern core would have to finally pay the price of a decade of misalignment, profligate lending, low competitiveiness and tax evasion they turned a blind eye to in southern Europe.

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