A Greek Tragedy on the London Stage

The City of London, the Greater Euroland Crisis and the Urban Dark

Age to Come

Simon ParkerCURB, University of York

CapitalThe City is, collectively, astonishingly wealthy. It earns 19 per cent of Britain’s GDP. People don’t mind that in itself but they do mind City bonuses. Last year, these amounted to a truly boggling £19 billion, all of it paid at the end of the year. In London, the effect of that money has become almost entirely toxic. I’m not talking here about middle-class envy – the resentment increasingly expressed among the ‘middle-class poor’ about how unfair it is that these bankers get paid so much for contributing so little. That resentment seems to me to be largely hypocritical, a middle-class resentment of one of the few forms of inequality that doesn’t benefit them. But City money is strangling London life. The presence of so many people who don’t have to care what things cost raises the price of everything, and in the area of housing, in particular, is causing London’s demographics to look like the radiation map of a thermonuclear blast. In this analogy only the City types can survive close to the heart of the explosion. At this time of year, when the bonus stories come out, you can understand why. A bar announces that it is offering the most expensive cocktail in the world: £35,000. That buys you a shot of cognac, a half bottle of champagne, a diamond ring and the attentions of two security guards to protect you for the rest of the evening. A deli, at the special request of a customer, creates a £50,000 Christmas hamper. Word gets out, and another customer immediately orders two more. The expense of London is forcing people further and further out of the city, and making life harder and harder for the ones who remain.

John Lanchester, LRB, Cityphilia, 2008.

Government SachsAround 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

-Der Spiegel, February 8, 2010

Mario Draghi, the president of the European Central Bank, was a Goldman Sachs partner and Mario Monti, the Italian technocrat prime minister, was formerly an adviser to Goldman.Mark Carney spent 13 years at Goldman, joining after he graduated from Harvard, and worked for the bank in London, Toronto, New York and Tokyo. His appointment cements Goldman’s reputation as a bank whose reach extends into the highest echelons of central banking and government.- Daily Telegraph, 27 Nov 2012.

IMF: We got it wrong…

There are also political economy lessons to be learned. Greece’s recent experience demonstrates the importance of spreading the burden of adjustment across different strata of society in order to build support for a program. The obstacles encountered in implementing reforms also illustrate the critical importance of ownership of a program, a lesson that is common to the findings of many previous EPEs (ex-post evaluations).

…but the EU was to blame.

• the EC tended to draw up policy positions by consensus, had enjoyed limited success with implementing conditionality under the Stability and Growth Pact, and had no experience with crisis management. The Fund’s program experience and ability to move rapidly in formulating policy recommendations were skills that the European institutions lacked.

No we weren’t

• "We fundamentally disagree," said a European Commission spokesman.

• "With hindsight we can go back and say in an ideal world what should have been done differently. The circumstances were what they were. I think the Commission did its best in an unprecedented situation.”

• “We tend to forget that when the discussions were taking place the situation was much, much worse. The fear of contagion and the high volatility…”

The Bankers: It’s Politics stupid…

At the start of the crisis, it was generally assumed that the national legacy problems were economic in nature. But, as the crisis has evolved, it has become apparent that there are deep seated political problems in the periphery, which, in our view, need to change if EMU is going to function properly in the long run.

-J.P. Morgan, 2013

The political systems in the periphery were established in the aftermath of dictatorship, and were defined by that experience. Constitutions tend to show a strong socialist influence, reflecting the political strength that left wing parties gained after the defeat of fascism.

Political systems around the periphery typically display several of the following features: weak executives; weak central states relative to regions; constitutional protection of labor rights; consensus building systems which foster political clientalism; and the right to protest if unwelcome changes are made to the political status quo.

The shortcomings of this political legacy have been revealed by the crisis. Countries around the periphery have only been partially successful in producing fiscal and economic reform agendas, with governments constrained by constitutions (Portugal), powerful regions (Spain), and the rise of populist parties (Italy and Greece).

– J.P. Morgan, 2013.

Brothers, sisters we do need this fascist groove thang…

There is a growing recognition of the extent of this problem, both in the core and in the periphery. Change is beginning to take place. Spain took steps to address some of the contradictions of the post-Franco settlement with last year’s legislation enabling closer fiscal oversight of the regions. But, outside Spain little has happened thus far. The key test in the coming year will be in Italy, where the new government clearly has an opportunity to engage in meaningful political reform. But, in terms of the idea of a journey, the process of political reform has barely begun.

-J.P. Morgan, 2013.

You couldn’t make it up…but the ratings agencies actually did.

The Financial Crisis Inquiry Commission published a case study in 2011 of Moody’s…and discovered that between 2000 and 2007, the agency gave nearly 45,000 mortgage-backed securities AAA ratings. In just one year Moody's awarded AAA ratings to 30 mortgage-backed securities every day, 83 percent of which were ultimately downgraded. "This crisis could not have happened without the rating agencies,” - FCIS.

Chronicle of a crisis foretoldGreece’s economic boom was propelled by large foreign-funded fiscal deficits that enabled demand to outpace output. The global crisis threatened the continued financing of this growth model. After the Lehman shock in September 2008,spreads on Greek government bonds over 10-year bunds jumped to 300 bps compared to about 50 bps before the crisis. Standard and Poor’s downgraded Greece from A+ to A in January 2009 citing a loss of competitiveness worsened by the global financial crisis. Against this backdrop, Greece had become extremely vulnerable to a stop in private capital flows.

IMF

Source: EU Banking Structures 2010

• Greek expansion of financial sector modest compared to UK, Ireland and Cyprus.

• Greek public debt was 129 per cent of GDP at end-2009, with 75 per cent held by foreigners.

• At the beginning of the crisis in 2007 it was 110 per cent and by 2013 it had risen to 170 per cent.

• Luxembourg is off the map, its former PM Jean-Claude Juncker –since 2005 leader of the Eurogroup - also once governed the World Bank. Luxembourg thrives as a destination for global hot money because it has one of the most deregulated and secretive banking regimes in the EU.

The Threadneedle and the damage done

UK manufacturing outputbefore and after the crash

Forever blowing bubbles…

• Property speculation in urban land created the bubble that led to the crash – The parliamentary report found that in the three

years after the crash, £25 billion of UK corporate loans, mostly involving commercial property, had gone wrong; the figure amounted to 20 per cent of the loan book.

– John Lanchester, LRB.

Eurotrash“A possible additional effect arose from banks paying more attention to internal pricing policies. Misaligned internal pricing of funding costs during the crisis seem to have contributed to the incentives of business units to leverage and maximise volumes”.

See EU banks’ funding structures and policies, ECB, May 2009

Translation:

Euribor, [is] the Eurozone version of Libor…in very many cases these banks would be more likely to turn themselves into lap dancing clubs than make unsecured loans to each other. The rates are largely fictional – and not realist fiction.

John Lanchester, LRB.

Eurocash

In 2012, the overall impact on government debt resulting from past and present support for financial institutions was estimated at 5.2% of GDP for the EU and 5.5% for the euro area.

(Eurostat 2013)

The Biggest of Treasure Islands: The City of London

The question we should ask ourselves about these incidents is why they happened in London, and why London has become the global capital of this kind of trading, and what the costs and consequences are for us as a society. That’s a large question and it’s strange that in all the fury and rhetoric and publicity swirling around the City, it has gone largely unasked: are we benefiting from the fact that London is a global financial centre, or do the costs outweigh the benefits?

- John Lanchester, LRB.

UK plc agent to The City of London

• Osborne opposed any cap on bank bonuses as agreed by the EU Council and Parliament in April 2013.

• The Corporation of London has threatened to sue in the ECJ on the grounds of a breach of the principle of subsidiarity.

• Osborne and Cameron have also staunchly opposed the establishment of the European Banking Union.

The subsidiarity of penury• Local government in England and Wales is now half way

through a period of significant funding reductions. Central government grant funding to local authorities is being cut by over a quarter in real terms (£7.6 billion) between 2011 and 2015

• Local authorities' funding continues to be cut yet the number of statutory duties they have has stayed the same, and in some areas, such as adult social care, the demand for services is increasing. If these trends continue there is a risk that the worst-affected councils will be unable to meet their statutory obligations, and that serious questions will arise about the viability of some councils.

- Dept for Communities and Local Government: Financial sustainability of local authorities - Public Accounts Committee, June 2013.

No European Financial Stability Facility (EFSF) for Local Authorities

• The Department's procedures for managing serious problems with local authorities' finances or service provision are designed for dealing with one-off failures, often the result of internal and unique factors within an individual council.

• In the current funding environment, however, there is an increased risk that a number of councils become financially unsustainable - with the example of West Somerset Council, deemed "not viable" by an LGA report, serving as an early warning sign. The Department must clarify its role and responsibilities in the event of multiple financial failures of local authorities, and draw up contingency plans for intervention.

• i.e. No Plan A, B or C…as only sovereign debt defaults matter not the social and economic disruption caused by sub-state failure

The lights are going out even in Germany…

• FRG has 130 billion euros in combined municipal debt

• Goslar in Bavaria needs to cut its spending by 50% to balance its books.

• Turning the street lights off at midnight has ushered in a new dark age even in the heart of the most successful economy in Europe

Is the urban dark age inevitable?

• Post-agrarian states do not increase their wealth by aggrandizing territories and seizing lands and natural resources…the key to post-agrarian wealth is the complicated task of nurturing economic diversity, opportunity, and peace without resort to oppression. Dark Ages and spirals of decline are in prospect for agrarian cultures that can’t adapt themselves to generating wealth through human ingenuity, knowledge and skills. Jane Jacobs, 2004, 164.