Extractive capitalism: Britain has been a high-inequality, high-poverty nation for most of the last 200 years, with significant consequences for life chances, social resilience, and economic strength

Stewart Lansley writes that Britain’s model of ‘extractive capitalism’ – with a small elite securing an excessive slice of the economic cake – has created a two-century-long high-inequality, high-poverty cycle, one broken for only a brief period after the Second World War.

Over the last four decades, Britain has moved from being one of the most equal of rich nations to the second most unequal (after the United States). The same period has also seen a surge in levels of poverty, with the child poverty rate more than double that of the late 1970s (figure 1).

That these two key measures of social fragility have moved in line is no surprise. History cannot be clearer: poverty and inequality are critically linked. Poverty occurs when sections of society have insufficient resources to be able to afford a minimal acceptable contemporary living standard. Its scale is ultimately determined by how the ‘cake is cut’. Barring the short post-war period, Britain has been a high-inequality, high-poverty nation for most of the last 200 years, with significant consequences for life chances, social resilience, and economic strength. Because of the impact of inequality, the poorest fifth of Britons are today much poorer that their counterparts in other, more equal nations (chart 2). Germany’s poorest, for example, are a third better off than those in Britain.

Poverty and inequality levels are ultimately rooted in the outcome of the political and economic power games that play out between big business, state, and society. With the exception of the immediate post-war era, the struggles for share over the last 200 years have been won by the richest and most affluent sections of society, often with the compliance of the state.

For most of the nineteenth century, Britain was a near-plutocracy, with society run mostly by and for the richest sections of society. Colossal and heavily concentrated wealth sat beside crushing poverty through a form of collective monopoly power exercised by a small landowning, industrial and financial elite. The governing and wealthy classes created a form of ‘extractive capitalism’ aimed at securing a disproportionate share of the economic gains from industrialism, often by steering economic resources into unproductive use, with no or limited addition to economic value. ‘The efforts of men are utilized in two different ways’ declared the influential Italian economist Vilfredo Pareto in 1896. ‘They are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others’.

The long high poverty/inequality cycle and the strength of extraction are inter-connected. The cycle has only been broken once, when from 1945 the bitter ideological battle of ideas was finally won by pro-equality thinkers. The achievement of peak economic equality and an historic low for poverty in the 1970s was a seminal moment in British history. Yet it was short-lived, with the ideological baton passing to a group of New Right evangelists who proclaimed, falsely as it turned out, that a stiff dose of inequality would drive economic progress. As Sir Keith Joseph, a key adviser to Margaret Thatcher, put it in 1976: ‘the pursuit of income equality will turn this country into a totalitarian slum.’ From that point, egalitarianism was replaced by an entrenched bias to inequality. But instead of creating the promised economic and entrepreneurial renaissance, the new licence to get super rich simply triggered a second era of extraction and of Pareto’s ‘appropriation’ and a second wave of high poverty and inequality that is still in place.

Few other nations have applied a pro-inequality economic strategy as comprehensively as Britain and the United States. With the world’s top one per cent emitting twice the carbon emissions of the poorest half, the return of extraction also lies at the heart of the global climate crisis. Corporate leaders have exploited their growing muscle using business practices that have played havoc with pay, jobs, and livelihoods. As the American megabank Citigroup wrote in a confidential note to its clients a few years ago, the United States has long been aplutonomy, one that allows ‘the economic disenfranchisement of the masses for the benefit of the few’.

Examples of complex and carefully hidden extractive devices have included the application of monopoly power through the ruthless destruction of rivals and the rigging of financial markets, to the ‘skimming’ of trading profits – a process City traders like to call ‘the croupier’s take’ – and the engineering of company accounts. The boom in the private takeover of public companies since the millennium, from the AA to Boots and Morrisons, has enriched a generation of private equity barons, often at the expense of the survival of the targeted companies themselves. The long list of companies destroyed by such financial manipulation include ICI, GEC, BHS and Debenhams. Under extraction, economic activity becomes detached from new wealth creation, with the boost to profitability and rising corporate surpluses of recent times used to reward executives and investors rather than boost productivity. In 2019, global stock markets paid out record dividends of $1.37 trillion.

What has been at work is a form of levelling up at the top by levelling down at the bottom.  While egalitarians have yet to regain the ideological high ground, one of the big questions of political economy of the next few years must be the extent to which an entrenched anti- egalitarian model of capitalism can be reformed?


Note: the above draws on the author’s new book, The Richer, the Poorer, How Britain Enriched the Few and Failed the Poor, a 200-year history ( Bristol University Press, 2021).

About the Author

Stewart Lansley is a visiting fellow at the University of Bristol, a Council member of the Progressive Economy Forum and the author of Breadline Britain, The Rise of Mass Poverty (with Joanna Mack, 2015) and The Cost of Inequality (2011).

LSE Blogs

‘Levelling-up’: the government’s plans aren’t enough to promote economic growth and tackle inequality

The government’s levelling-up plan dodges the hard choices says Henry OvermanCountering the economic forces behind the UK’s spatial disparities requires addressing multiple barriers and allowing differing approaches – and the funds committed so far don’t appear to be proportionate to the scale of the challenge.

The government’s Levelling-Up White Paper focuses on 12 missions that aim to level-up the UK. Lots will be said about whether the government is spending enough (almost certainly not), whether devolving more powers is a good thing (almost certainly), and how much of their plan is different to past efforts (not much, for those of us that remember the 1990s and 2000s).

Setting these issues aside, does the economic strategy make sense? If government spent enough, and gave places the right powers, would pay, employment and productivity gaps narrow? The answer will depend on how government resolves the fundamental tension between the role of ‘globally competitive cities’ (part of mission 1) and other local economies spread across the country. For the economic strategy to work, the evidence suggests that spatially concentrated investment is crucial, but politics and a concern for quality of life make the case for equalising spending.

Many things determine spatial disparities in Britain. The legacy of 1970s deindustrialisation, the ongoing shift from manufacturing to services, and falling communication and transportation costs all play a part in changing the geography of jobs and the demand for different types of workers. Spatial differences in educational attainment, the selective migration of skilled workers and differences in amenities and costs of living help determine the supply of different types of workers. Demand for and supply of skills interact in a way that can be self-reinforcing, meaning large spatial differences can emerge and persist. Levelling-up policy must counter these economic forces if it is to succeed.

One important consequence of these economic forces is that spatial disparities in earnings – which the government wants to narrow – largely reflect the concentration of high-skilled workers. The share of adults with degrees ranges from 15 per cent in Doncaster to 54 per cent in Brighton. High-skilled workers tend to work in better performing labour markets, which further magnifies individual labour market advantages. At least 60 per cent and up to 90 per cent of differences in average wages across areas can be attributed to differences in the types of people who work in different places.

This has important consequences for ‘levelling up’. A pragmatic aim for the economic strategy might be to improve economic performance in some areas outside of London and the South-East – reducing spatial disparities at the regional level, if not necessarily across more narrowly defined local areas. This would allow talented young people in left-behind places to access better paid opportunities without having to move across the country.

To generate these opportunities and counter the self-reinforcing feedback loops – which mean the highest paid jobs are concentrated in London and a handful of other areas – large investments will be needed in a limited number of cities to attract high-skilled workers and the firms that employ them. The mention of globally competitive cities (as part of mission 1) suggests that the government understands this key point.

Why focus on the high-skilled? Because the evidence – much of which is discussed in a report on spatial inequalities by myself and Xiaowei Xu, written for the IFS Deaton Review – suggests that the impact of targeted R&D investment(mission 2), infrastructure (missions 3 and 4), public sector relocation and other place-based policies will be small unless they significantly alter the composition of the workforce in an area. Even a project of the size of HS2, for example, will do little for the economy of the West Midlands unless it somehow improves local educational outcomes for children growing up there or encourages a much larger share of graduates and the firms that employ them to locate there.

And why cities, not towns? Such investments could improve earnings in any area. However, there are many small towns, investment in infrastructure and innovation is costly, and there are only so many public sector jobs to relocate. Focusing on towns, especially with limited funds, does not scale up to produce large effects across lots of areas.

Looking to cities recognises that the advantages of high-skilled areas are self-reinforcing. The concentration of high-skilled firms and workers generates productivity advantages for firms and better labour market outcomes for workers. In turn, this attracts high-skilled workers from across the country. In short, London’s economic advantages stem from the concentration of skilled firms and workers, and from its economic size, and these factors are self-reinforcing. London’s economic strength also spills over to benefit towns and cities across the wider South-East.

To provide a counterbalance to London and the South-East, investment needs to kick-start these self-reinforcing processes elsewhere. The fact that size is one key part of this self-reinforcing cycle explains why that investment needs focusing on cities.

Unfortunately, we need to recognise that these policies are likely to benefit high-skilled workers more than low-skilled workers. For talented children growing up in struggling towns, increased opportunities nearby offer the option of commuting or a small-distance move, making it easier to maintain links with family and friends. Moreover, some of these benefits will trickle down to the lower-paid in the form of moderately higher wages and improved employment rates, but at the cost of expensive housing.

Sadly, while all these trickle-down benefits are possible, London – with its many poor neighbourhoods, expensive housing and high poverty rates – points to the limits of this approach for improving outcomes for those at the bottom of the income distribution. A more equal spread of graduates – and globally competitive cities in each region – may help reduce spatial disparities and may even help improve the overall performance of the economy, but it is no simple fix for improving outcomes for poorer households. To do this, complementary investments must make sure that households can access the opportunities generated.

The current debate often interprets this as being about ‘better transport’. For many poorer households, however, transport investment generally will not be enough. Again, examples from London illustrate the issues – Barking and Dagenham (areas in the east of London) have good transport links to one of the largest concentrations of employment in the world, but this is not enough to prevent low earnings for many households who live there. If poorer households are to benefit from the kind of investments described above, then they will need help to improve their education and skills.

For some households, the multiple barriers that prevent individuals from being able to access better economic opportunities go beyond education and skills. Many of the ‘left-behind’ places that levelling-up wants to target have high proportions of vulnerable people with complex needs and low levels of economic activity. This compounds their problems, as long-term unemployment, poverty, mental illness and poor health often go hand-in-hand.

Addressing these multiple barriers will involve significant investment not only in education and skills, but also in childcare, and in mental and physical health services. Research suggests that small tinkering and minor tweaks of existing policies will not be enough to tackle the multiple barriers faced in these places. The White Paper recognises these issues with its focus on education (missions 5 and 6) and health (mission 7), but the funds committed so far do not appear to be proportionate to the scale of the challenge.

I have focused on the economics of levelling up but it is important to be clear that spending on levelling-up does not always need to be justified based on economic growth. There are important public good arguments that can justify increased expenditure across a wide range of policy areas. And unlike the economic strategy, there is a strong case that these funds should be equally distributed. For example, it is possible to argue for subsidising rural broadband (part of mission 4) as a public good, while recognising that its economic impacts are likely to be limited. In addition, although such policies, including those around wellbeing (mission 8), pride in place (mission 9) and crime (mission 11) do not specifically target the bottom of the income distribution, they will often benefit poorer households most.

Places matter to people. For many people, the place where they grow up will become the place where they live and work. Disparities in economic opportunities, in costs of living and in amenities provide the context for, and directly influence, the decisions they take and the life they will live.

Improving economic performance and helping to tackle the problems of left-behind places are both important policy objectives. Addressing these challenges requires a new approach to policy, one that allows for different responses in different places. Such variation makes many people nervous. Constituency based politics mean that political messages tend to prefer spending everywhere. However, policy must allow for this variation. Devolved power (mission 12) will help but central government will still need to grapple with the fundamental trade-off between concentrating spending to help achieve the economic strategy while spreading out spending to meet the other objectives.

I would argue that this becomes easier if we remember that we should care more about the effect of policies on people than on places. If this is the case, we should judge the success of levelling-up on the extent to which it improves individual opportunities and on who benefits, rather than on whether it simply narrows the gap between places.



About the Author

Henry Overman is Professor of Economic Geography in the Department of Geography and Environment at the London School of Economics and Director of the What Works Centre for Local Economic Growth. He is Research Director of the Centre for Economic Performance.


Official statistics underestimate wealth inequality in Britain

The latest statistics from the ONS are a welcome but limited insight into what has been happening to wealth in Britain, write Arun Advani andHannah Tarrant. Limitations in survey response mean they will underestimate the share of wealth at the top. But while they will not tell us what has happened as a result of the pandemic, we can use them to provide an educated guess.

The ONS’s latest figures on what has been happening to wealth in Great Britain, released in January 2022, are already out of date, covering only the period up to March 2020, and therefore missing the effects of the pandemic. But they are also limited in another way: they underestimate the share of wealth going to the richest households. Given the debates about inequality, discussion about wealth taxes to pay for COVID-19, and the growing importance of inherited wealth as a share of lifetime resources, it is important to get this right.

Total wealth is underestimated

Looking back at the past 12 years of the ONS survey, the figures show that total wealth in Great Britain has risen from £10.4tn to £14.6tn (in 2016–18 prices), meaning average household wealth has risen from £402,100 to £564,300. Over the same period, the share of all wealth held by the wealthiest 10% of households has risen very slightly, from 44% to 45%. However, there are two problems with these figures. First, they do not include business wealth, which is an important source of wealth for the wealthiest households. Second, they substantially under-record the total wealth held by wealthy households, since, unsurprisingly, the very wealthy do not tend to respond to such surveys.

Adjusting the data to account for business wealth – which is measured in the survey but excluded from official statistics – we find that total wealth in Great Britain is £0.7tn higher in 2016–18. This is about 5% of the current estimate, and the proportional underestimation has been similar back to 2010–12. After adding in wealth observed in the Sunday Times Rich List, and using a statistical approach to correct for the under-representation of other wealthy households, total wealth is higher still, by £0.5tn in 2016–18. Total GB wealth is therefore underestimated in the ONS figures by about 8%.

Top wealth is higher than officially reported

After making these adjustments, the level of inequality is also higher (Figure 1). Adding business wealth into the calculation, the share of wealth owned by the wealthiest 10% of households actually rises significantly, by two percentage points. Consistent with the ONS figures, this has remained broadly steady over the period. Correcting for missing wealth at the top, we find the share of wealth going to the top 10% is further increased slightly, to around 47%, and still flat.

Notes: Constructed using data from the Wealth and Assets Survey (WAS) and the Sunday Times Rich List (STRL). ‘Including business’ adds business wealth to the ONS measure of wealth used in official statistics. ‘Also correcting top wealth’ additionally includes the wealth from the STRL and a ‘Pareto correction’ for under-reported wealth among the wealthiest households. See Advani Bangham and Leslie (2021) and Advani Hughson and Tarrant (2021)for details of the correction method. Top shares are measured at household level, consistent with the ONS.

Political movements after the financial crisis, and the work of economists like Thomas Piketty, have favoured looking at wealth concentration among smaller groups – specifically the top 1% wealthiest households. The ONS does not provide figures for this group. Constructing this measure ourselves, we see the importance both of including business wealth and of correcting for under-coverage at the top. Together, these adjustments add around 55% (6 percentage points) to the share of wealth owned by the top 1% in 2016–18 (Figure 2).

Notes: same as for Figure 1.

Other inequalities in wealth

There are also important demographic differences in wealth holdings that are worth highlighting. Men typically have higher levels of wealth: they hold almost 40% more wealth than women, on average. Wealth is concentrated among older individuals. This is partly because individuals close to retirement have had their whole working life to save, but they also benefited ‘from both benign economic developments (such as rapid rises in the value of their homes, generous occupational pension provision and decades of healthy wage growth) and generous government policies (such as free university tuition, big tax breaks for pension saving and capital gains on main homes, and the ‘triple lock’ on the state pension)’.

Wealth differences between households from different ethnic groups are stark: households whose ‘Household Reference Person’ (HRP, the main respondent to the survey) is of white ethnicity are four times more likely to have wealth in excess of £500,000 than households with a black African HRP. There are important differences in household wealth portfolios too: Pakistani and Indian households are less likely to hold pension wealth, with home ownership being more important in their asset holdings.

Previous analysis by the ONShighlights significant regional variation in household wealth. Median wealth is more than 2.5 times higher in the South East compared to the North East. This variation can largely be explained by differences in house prices, with changing house prices contributing to a growing divergence in wealth levels across regions.

Wealth trends since the pandemic

Although these latest figures will not provide direct information on what has happened to wealth since the start of the pandemic, a look at the historic survey data does provide some insight. Dividing the population up into deciles, there are clear differences in asset holdings across the distribution. We know that the average house price rose by 16% between the start of the pandemic and October 2021, and these gains were middle-weighted (Figure 3). Falling interest rates also increase the value of pensions, which are similarly middle-weighted. Meanwhile, stock market growth of around a third since the pandemic lows has disproportionately benefited richer households, though the impact of the pandemic on private businesses is less easy to measure. COVID-19 has also led to those at the bottom of the distribution, who experienced the biggest hit to their savings, falling further behind the rest.

Notes: The lowest decile is excluded as net wealth is negative. Source: Advani, Bangham and Leslie (2021).

What does this mean for the effects of the pandemic on wealth inequality? Overall, the wealthiest have clearly gained most in cash terms over the pandemic. But apart from among the super-wealthy – where there has been very rapid wealth growth – the effect on wealth concentration is likely to be less visible because there are large gains relative to initial wealth for those in the middle as well as those at the top.


About the Authors

Arun Advani is Assistant Professor in the Department of Economics at the University of Warwick.

Hannah Tarrant is Research Officer in the International Inequalities Institute at LSE.


Low tax v levelling up: the Tories’ policy tensions will not go away

Thatcherites hate the ‘big state’, but economic realities are forcing the party into messy compromises

Published: 15:14 Sunday, 31 October 2021 Follow Larry Elliott

The days of the big state are back. Plans announced by Rishi Sunak last week mean public spending as a share of the economy is on course to reach levels not seen since the Thatcherite revolution was about to begin in the late 1970s. The Iron Lady’s disciples are having kittens at the prospect.

It’s worth saying that the economy has changed substantially over the past four decades, with manufacturing accounting for a much smaller share of national output and the service sector growing in importance. Since the 1980s, the UK has run a large and persistent trade deficit in goods, only partly offset by a surplus in services.

Manufacturing’s relative decline has meant the economy has produced fewer greenhouse gases but this doesn’t give the whole picture, because Britain has outsourced its carbon emissions to other parts of the world. Factories and coalmines have closed in the UK but have opened in China.Advertisement

The bigger British cities have been able to reinvent themselves as centres for the retail, leisure and hospitality sectors, but towns on the edges of conurbations have not been so fortunate. There has been a shift in the nation’s economic geography that has allowed some places to prosper while leaving others a long way behind.

The notion of levelling up is not new. Governments have been aware of regional imbalances for decades and have tried a variety of methods to regenerate communities where the staple industry – be it coal, shipbuilding, cotton or steel – has been in decline. In the first decade of the 21st century, Labour governments recycled tax revenues from a booming City into regional aid, but when the financial crash arrived the money taps were turned off by David Cameron and George Osborne.

That has left the current generation of Conservatives with a problem. Deep unhappiness in parts of Britain that felt forgotten contributed to the vote for Brexit and to the loss of Labour’s “red wall”, but now those who backed Boris Johnson – first in the 2016 referendum and again in the 2019 general election – expect the government to deliver.

Doing so requires Johnson and his ministers to repudiate much of what happened in the 2010s. Last week’s budget, which announced real-terms increases in funding for every Whitehall department, was an example of that.

Sunak said extra money for education would allow per pupil spending to return to 2010 levels by 2024, coming close to saying Osborne’s cuts were not a great idea. Likewise, the spending on early years provision tacitly admitted that getting rid of Labour’s Sure Start programme was a mistake.

But as Paul Johnson, the director of the Institute for Fiscal Studies, pointed out, the increase in education spending between now and 2024 will be 2% a year on average, against 4% a year for health. Over the 15 years from 2010 to 2024 the comparison is even more stark: education spending up by 3% when adjusted for inflation, and health spending up by more than 40%.Advertisement

“For the chancellor to have felt it appropriate to draw attention to the fact that per pupil spending in schools will have returned to 2010 levels by 2024 is perhaps a statement of a remarkable lack of priority afforded to the education system since 2010,” Johnson said. “A decade and a half with no growth in spending despite, albeit insipid, economic growth is unprecedented. Spending per student in further education and sixth-form colleges will remain well below 2010 levels. This is not a set of priorities which looks consistent with a long-term growth strategy. Or indeed levelling up.”

In truth, the Conservatives under Boris Johnson have become something of a hybrid: a big-state party in favour of active industrial strategy with a low-tax, market-driven party tacked on. It is a messy compromise, and one that makes life a lot easier for those less conflicted about their support for a more interventionist economic approach.

A pamphlet due to be published this week by the campaign group Rebuild Britain, calling for measures to build up the manufacturing sector, illustrates the point. Unsurprisingly for a body that emerged from the Trade Unionists Against the EU group, it sees Brexit as an opportunity rather than a threat, but its argument that a more successful economy requires a stronger industrial base would be supported not just by leavers but many remainers as well.

Policy recommendations include a more competitive pound, a buy-British procurement strategy, higher investment in skills and technical training, an increase in state aid with a strong regional bias, and an expansion of public ownership starting with steel.

It would be easier for ministers to dismiss all this as a return to the “bad old days of the 70s” if much of the Rebuild Britain agenda were not already part of the current policy mix. The fall in the value of sterling since 2016 has made UK exports cheaper; the chancellor has admitted the UK lags behind other countries when it comes to skills; the prime minister announced in the summer new state-aid laws to replace EU rules on taxpayer-funded bailouts and business support; and the railways are back under state control.

Sunak is clearly uneasy with all this and wants a different direction of travel. But the tax cuts in the budget were modest in comparison to the spending increases and the tax rises announced earlier this year. The impact of the chancellor’s pet project – freeports – will be minuscule in comparison to an enhanced role for the state prompted by demography, climate change, the pandemic and past policy failures.Advertisement

Rebuild Britain is not the first pressure group to sense the way the wind is blowing. It is unlikely to be the last

Now it’s official: Brexit will damage the economy long into the future

Jonathan Portes
The Covid threat to GDP is waning, but don’t expect the pain wrought by leaving the EU to subside any time soon
Jonathan Portes is professor of economics and public policy at King’s College.
Published: 18:45 Thursday, 28 October 2021

We’re used to hearing apocalyptic descriptions of the impact of the Covid-19 pandemic on the UK economy: “the largest fall in economic output since 1709”, was the Office for National Statistics’ verdict eight months ago.
Yet the Office for Budget Responsibility, in its report on Wednesday’s budget, estimates that the long-term impact of Brexit will be more than twice as great as Covid. It thinks that Brexit will reduce UK productivity, and hence GDP per capita, by 4%, while the impact of Covid on GDP will only be 2%, with a slightly smaller impact on GDP per capita.
This shouldn’t be surprising. The fall in output in 2020 was both inevitable and desirable – it was not, in economic terms, that different from an extended holiday. Just like a holiday, we chose to shut down large parts of the economy. The difference was that it was by necessity – to save lives – rather than by choice, but the consequences aren’t that different. The economy shrank, and by a lot.
Brexit worse for the UK economy than Covid pandemic, OBR says
Holidays don’t reduce the productive capacity of the economy. If a factory shuts down for a month, the machines are still there when it reopens. Similarly, when workers return, they still know how to do their jobs. The virus does not destroy factories, roads, buildings or software and, while its human toll has been dreadful, the impact on the size or composition of the working-age population will be relatively small in macroeconomic terms.

So the worry was not the huge short-term fall in GDP. It was that temporary closures would do permanent damage to the economy. The biggest risk was that, as in the 1980s, we allowed mass unemployment to become entrenched, or viable businesses to go bust.
But, thanks to the furlough scheme and other business support measures, we seem to have avoided that risk in the UK and elsewhere. Indeed, US GDP – boosted by Joe Biden’s stimulus package – has already exceeded its pre-crisis level. The UK is not that far behind, albeit still well below the pre-crisis trend.
Indeed, the most obvious short-term economic problem in most advanced economies are now supply bottlenecks and labour market mismatches as economies reopen, leading to rising wages and shortages of some goods. But while this will – as the OBR also says – reduce both growth and, via inflation, real wages, it will mostly be temporary.
The OBR isn’t entirely sanguine – it still thinks Covid will permanently push some people out of the labour force, through early retirement or potentially long Covid, and that there will be some lasting hit to productivity. But things could have been a lot worse.
By contrast, Brexit is, by its nature, a long-term issue. Just as it took decades for the UK to see the full benefits of EU membership, we’ll still be discussing the economic impacts of Brexit long after I’ve retired.

The direction of those impacts isn’t controversial. The principle that increasing barriers to trade and labour mobility between two large trading partners will reduce trade and migration, and that this will, in general, reduce economic welfare on both sides – but especially for the smaller partner – isn’t really at issue. While there was no shortage of politicians who argued that, somehow, new trade barriers would not make much difference, or that trade with our closest and largest single trading partner could easily be substituted with trade with the rest of the world, no credible economic analysis endorsed such claims.
Nor is the OBR’s 4% estimate of the impact on the UK economy that different from that of independent economists – we at UK in a Changing Europe put it at just under 6%.
But crucially, both those (and other) estimates predated Brexit. So the news here is that the OBR has taken a hard look at the evidence to date on the actual impact of Brexit. Its conclusion, briefly, is: “so far, so bad”. That is, the UK’s trade performance this year is consistent with its original estimates that UK exports and imports would both fall by 15%.
Indeed, in some respects, the data so far looks even worse than that – UK exports have already fallen by approximately this much compared to pre-pandemic levels, while advanced economies as a whole have seen trade grow. And, again in common with external analysts, the OBR sees no evidence that trade deals with third countries, or any of the other putative economic benefits of Brexit, will offset this in any meaningful way.
No model includes everything. The OBR’s is no exception. It hasn’t accounted for the damage done to education during the pandemic, especially for poorer kids. Here, the government’s failure to fund a serious catch-up programme could leave permanent scars – both economic and social. And, on the other side, a more liberal migration system towards non-European migrants could, in principle, offset some of the damage of Brexit.
But so far, it looks as if, from an economic perspective, Covid is for Christmas, while Brexit is for life.

Jonathan Portes is professor of economics and public policy at King’s College London


Budget 2021: a missed opportunity to make permanent the £20 increase to Universal Credit

Posted: 03 Mar 2021 09:50 AM PST

Ruth PatrickKayleigh GarthwaiteGeoff PageMaddy Power, and Katie Pybus comment on the government’s decision to extend the £20 uplift to Universal Credit by six months only. They argue that the increase should be a permanent one, as part of a broader commitment to reforming the social security system.

We’ve learned a lot over the past 12 months of the pandemic. About ourselves, our children, our local areas, but also, inevitably, about our politicians and government. We’ve learned that our government is sometimes willing to make bold policy decisions, such as the recent announcement of the extension of furlough into the autumn. As part of the 2021 Budget, Rishi Sunak promised that he would ‘do everything it takes’ to protect ‘lives and livelihoods’. His government’s budgetary measures simply did not live up to these words.

The decision Sunak announced to extend the £20 uplift to Universal Credit by justsix months is testament to this. Not only has the government missed the opportunity to properly invest in social security into the longer term, but they have also failed to extend the support provided through the £20 Universal Credit uplift to an estimated 2.5 million legacy benefit recipients. They have further failed by not acting to make those subject to the Benefit Cap eligible for support through the £20 uplift.

These failures on the budget are part of a broader narrative emanating from this government on ‘welfare’, which continues to rely on divisions between ‘deserving’ and ‘undeserving’ populations, and shows an unwillingness to retire old (and arguably ineffective) policy tools, such as welfare conditionality. Both Sunak and Johnson have also shown an unwillingness to think more ambitiously and structurally about the social security system. They have been unprepared to delivery long overdue reform to address issues tied to adequacy and eligibility to social security support, whilst they have also failed to address the design limitations with Universal Credit, which negatively impact on the experiences of existing claimants, and the millions of households who have claimed as a direct result of the pandemic.

Through the Nuffield Foundation funded COVID Realities research programme, we are working in partnership with over 100 parents and carers living on a low-income, who are documenting their everyday experiences in online diaries and by responding to weekly video questions. The parents are also meeting up together in virtual discussion groups. In these monthly meetings, parents work with us to develop recommendations for change, recommendations which are rooted in their own experiences, that are all too often of insecurity, of poverty, and of a social security system that is failing them.

After the budget, some of the parents we have been working with gave their reactions to the decision on Universal Credit. Dorothy, a single parent to two children, one of whom is disabled, told us:

I am a bit relieved that they have extended the £20 UC payment, but I’m disappointed it is only for six months because I don’t think the pandemic is going to go away within six months. The cost of living went up so much from the pandemic and from having children at home. In my eyes, the pandemic is no way near over and the £20 just did not go far enough.

Aurora, a widowed single parent, spoke for many who do not receive the £20 uplift at all:

We as the poorest members of society cannot understand why we’ve been overlooked yet again. Why have we been ignored? We have already bared the brunt of austerity and continue to do so. That extra £20 would’ve been going towards feeding us or ensuring we were able to meet the increased costs the pandemic has inflicted on our lives. But we don’t receive it at all because our benefits are capped. I’m just thankful to Covid realities for giving us a voice when no one cared.

The Universal Credit decision extends and perhaps makes permanent the insecurity and anxiety that social security claimants face. Now, Universal Credit claimants must wait till the autumn to find out what will become of their £20 a week, which for many is the difference between keeping their heads above water, and finding it simply impossible to get through the week. Winter explained what this feels like and the difference the £20 currently makes to her family:

The proposed change [removing the £20 uplift] is the difference between paying our bills and not being able to pay some of them. And if [a] one off expenses crop up (like new shoes for kids etc) then you can’t cover it. Amy changes to benefits are very stressful.

From our work with parents and carers, we know how this financial insecurity intersects with, and is compounded by, the insecurity that we all face because of the conditions that the pandemic creates. We also know that the £20 uplift is not a panacea, and it is not enough: families with children urgently need help with the costs of their children, and to address the stubbornly high levels of child poverty. Lexie, who receives the £20 uplift explained:

The £20 is the bare minimum of help to be honest. I know that sounds ungrateful but £20 doesn’t cover much these days. By the end of the month, we are still choosing between eating and heating. We have always aimed to do better by our children than what we had but it’s almost impossible. No one in today’s day and age should be choosing between eating and heating.

As analysis by the Institute for Fiscal Studies has shown, the £20 uplift to Universal Credit represents the first significant real increase in benefit levels in the last half century for families without children. However, and this is especially important, while a sizeable and significant increase, it has made ‘barely a dent’ in the decline in the real value of the social security safety net (excluding housing) for childless families as a faction of earnings levels, which has fallen almost continually for the last 50 years. The picture for families with children, the focus of our COVID Realities work, is more complicated; but there is a broader message that the £20 uplift is only a partial and limited corrective for decades of decline in the real value of social security, which hastened under the 2010-2019 Conservative-led governments, especially due to the freezing of benefit levels. Against this context, it was especially important to make the £20 increase a permanent one as part of a broader commitment to the social security system in the UK.

We have seen the possibility in their pandemic response for the government to be bold, to spend money, and to intervene to protect livelihoods. But there has been a failure to do this on social security, and this failure needs to be writ large in all the analysis of this budget, in the weeks and months ahead. It is a failure of ambition and a failure to do what our society so urgently needs.


Note: The project on which the above draws has been funded by the Nuffield Foundation, but the views expressed are those of the authors and not necessarily the Foundation.

About the Authors

Ruth Patrick is Lecturer in Social Policy at the University of York.

Kayleigh Garthwaite is a Birmingham Fellow in the Department of Social Policy, Sociology and Criminology at the University of Birmingham.

Geoff Page is Research Associate at the University of York.

Maddy Power is a Research Fellow at the University of York.

Katie Pybus is a Research Fellow at the University of York.


Austerity by Design

Yanis Varoufakis’s lessons for reasserting European social democracy.

J. W. Mason

Image: Ververidis Vasilis/Shutterstock

Adults In The Room: My Battle With Europe’s Deep Establishment

Yanis Varoufakis

Farrar, Straus and Giroux, $28.00 (cloth)

In the spring of 2015, a series of debt negotiations briefly claimed a share of the world’s attention that normally goes only to events where celebrities give each other prizes. Syriza, a scrappy left-wing party, had stormed into office in Greece on a promise to challenge the consortium of international creditors that had effectively ruled the country since its debt crisis broke out in 2010. For years, austerity, deregulation, the rolling back of labor rights and public services, the rule of money over society, had been facts of life. Now suddenly they were live political questions. It was riveting.

Syriza was represented in these negotiations by its finance minister, Yanis Varoufakis. With his shaved head, leather jacket, and motorcycle, he was not just a visual contrast to the gray-suited Eurocrats across the table. His radical but rigorous proposals for a different kind of Europe—one based on meeting human needs rather than rigid financial criteria—offered a daily rebuke to the old refrain “there is no alternative.”

The drama was clear, but the stakes were a little obscure. Why did it matter if Greece stayed in the euro? Orthodox economic theory, after all, gives little role for money or finance. What matters are real wants and real resources, for which money is just a convenient yardstick. University of Chicago economist John Cochrane probably spoke for much of the profession when he asked why it made any more sense to talk about Greece leaving the euro than about Greece leaving the metric system.

Transformed from a critic of the play to one of the main characters in it, Varoufakis is like the protagonist in a postmodern fable.

But money does indeed matter—especially in economic relations between countries, as Varoufakis himself has convincingly shown. In his three books—The Global Minotaur (2011), And the Weak Suffer What They Must (2016), and Adults in the Room (2017)—Varoufakis offers a fascinating lens on the euro system and its masters. While the first two books chart the history of the international monetary system from World War II up to the debt crisis, his last and most recent book is a reflection on his five months as Greek finance minister. Taken together, they read as if Varoufakis is the protagonist in some postmodern fable, in which he is transformed from a critic of the play to one of the main characters in it.

Greece today has 20 percent unemployment—the highest in Europe. It would be higher still if it weren’t for the loss of a tenth of the working-age population to emigration. The most recent IMF projections say that unemployment will remain in the double digits well into the 2040s. Multiple rounds of bailouts and “reform” packages left its GDP a quarter below pre-crisis levels, and the IMF projects it will not regain the lost ground until around 2030.

And yet the Greek government is committed to sending 3.5 percent of national income abroad as tribute to its creditors each year, for the indefinite future. The battle by Varoufakis and his Syriza comrades against this intolerable state of affairs is, even in defeat, a rare spot of genuine heroism in today’s discouraging political landscape. There is plenty to question and criticize. But any political movement that hopes to reassert the values of European social democracy against its current legatees will have much to learn from his example, as well as his books.

National economies are linked by a vast web of money flows—payments for goods and services, of course, but also loans, interest payments, asset purchases, profits on foreign investment, and so on. Since David Hume in the eighteenth century, theorists have looked for automatic mechanisms—changes in prices, or interest rates, or exchange rates—that would bring all these flows of money across borders into balance. If such a mechanism existed, then in discussing the economic relations between countries we could safely ignore money, and imagine a kind of international barter serving the needs of all sides. The central claim of Varoufakis in The Global Minotaur, however, is that there is no such mechanism.

In Varoufakis’s story, money is not just an accounting device; real productive activity is organized—and disorganized—by flows of money. The stable reproduction of an international economy requires flows of money across borders to balance. But when this has happened over any significant period, it has either been through dumb luck or else because some more or less conscious “surplus recycling mechanism” moves money from countries gaining it back to those losing. Otherwise, human labor and other real resources must be sacrificed to bring the money flows into line, or else the imbalance will eventually end with a crisis.

The Eurozone’s crisis can only be understood through the political choices of its central bankers. This is the most important lesson of Adults in the Room.

Since World War II, there have been two main global surplus recycling mechanisms. The first, in the twenty-five or thirty years after World War II, is the Bretton Woods system, or what Varoufakis calls the “global plan.” During this period, the United States ran trade surpluses, but recycled them—plus whatever additional dollars the world needed—through a mix of foreign aid, military spending and foreign investment. During this period, exchange rates were more or less fixed; the first resort for a country losing hard currency was expected to be not devaluation, but capital controls—restrictions on financial flows out of the country. This system worked well, says Varoufakis, as long as the United States accepted responsibility for running it, managing the U.S. economy to maintain a sufficient but not excessive outflow of dollars to the rest of the world.

By the 1970s, this responsibility came to seem like too much of a constraint on achieving domestic policy goals. After a chaotic period of experimentation, the recycling mechanism shifted toward what Varoufakis calls “the global minotaur” and what others, less creatively, sometimes call Bretton Woods II.

Under this system, the pattern of flows was reversed: the United States runs a trade deficit, financed by foreign investment from the rest of the world. Capital controls were now verboten, and exchange rates were supposed to float; countries losing foreign exchange would solve the problem by allowing their currency to depreciate until their exports were competitive enough to earn the hard currency they required.

Perversely, the new recycling mechanism, and the U.S. position within it, benefited from the now-frequent currency crises. Safe assets—meaning dollar assets—were in great demand by anyone who wanted to protect themselves against the vicissitudes of international markets. The United States could comfortably finance its trade deficits with financial inflows from the foreign central banks that desperately needed reserves in the new regime of capital-flow and exchange-rate uncertainty. The United States was, in effect, selling insurance against the instability it had itself created when it abdicated responsibility for the international order.

One way of looking at the financial crisis of 2008 is as a breakdown in the post-Bretton Woods surplus recycling mechanism. Mortgage backed securities had played a key strategic role in the system in which dollars flowed out of the United States to pay for imports, and then back in as investment in the safe financial assets the United States was uniquely able to provide. So when the U.S. mortgage market blew up, so did the international payments system.

Europe at first seemed to better weather the 2008 financial crisis. But it soon suffered a financial breakdown and deep recession even worse than those in the United States. This crisis—and its deep institutional roots in the development of the euro system—is the subject of And the Weak Suffer What They Must?

The euro project, as Varoufakis tells the story, sprouted from the rubble of Bretton Woods. Elsewhere, the flexibility of floating exchange rates was supposed to help countries weather the rougher waters of the new international non-system. But in Europe’s tightly integrated economies, the idea that stable trade flows could coexist with wild swings in exchange rates was a non-starter.

It is rare to get such a frank and seemingly unfiltered account of the private conversations in which power is exercised.

A vast array of cross-border links were “calibrated to function under the assumption that all European currencies moved gradually together.” If Europe was to be tightly integrated in terms of real productive activity—something no one had seriously questioned once plans for a permanently deindustrialized Germany were abandoned shortly after the war—then it needed a tightly integrated monetary system as well. When the global system of fixed exchange rates broke down, a European equivalent had to be built up.

With one difference: the New Dealers who set up “the global plan” at Bretton Woods recognized that someone had to actively manage the international monetary system. Their European successors did not. Obsessed with “the fantasy of apolitical money,” they placed at the center of their new system a central bank with no political oversight, and no responsibility for Europe’s financial system.

The combination of maximally fixed exchange rates with maximally free trade led, inevitably, to the development of large trade imbalances within Europe—imbalances that were amplified by the otherwise desirable convergence of incomes across members of the union. (Despite the focus on competitiveness, faster growth probably played a larger role in southern deficits than did higher costs.)

For the corresponding financial flows from north back to south, the system relied on the private decisions of profit-seeking investors. This meant that when things broke down there was no one at the center focused on getting payments flowing again or maintaining the viability of the weaker partners, only a gaggle of burghers who wanted their money back.

The play-by-play of this breakdown is ably narrated by Varoufakis. The short version is that a number of poorer countries in Europe—Spain, Greece, Ireland, Portugal—enjoyed huge expansions of credit in the first decade of the euro, which financed (among other things) a big run-up in property values. The immediate lenders were the banks in the peripheral countries, but they in turn financed themselves by borrowing from elsewhere in Europe, an arrangement made much easier by the euro system.

Among the lessons in Varoufakis’s story is that real power does not always lie where titles and organizational charts say it should.

The crisis saw an abrupt halt to these cross-border financial flows. The result was a steep decline in lending, in asset values, and soon in real activity. With incomes falling steeply and interest rates rising, the debts incurred by a number of governments—Greece, Portugal, Ireland, but also Spain and even Italy—threatened to become unpayable. The deep cuts in public spending these countries were forced to make in response—along with business-friendly reforms to boost their “competitiveness”—were an economic disaster, plunging millions of people into a new world of deprivation and insecurity.

They were also the euro system working as designed.

Thomas Mayer, the former chief economist of Deutsche Bank, once described the euro as an attempt to create “the modern equivalent of a gold standard.” The goal was to subject the managed economies of postwar social democracy to a hard external constraint, outside the control of national governments. Forced to rely on money that “politicians could not conjure up from thin air,” governments would once again be subject to the judgment of the market. Capital would be fully mobile, national governments would voluntarily surrender the tools once used to manage financial flows, and exchange rate adjustments would no longer be available as even a last ditch resort to cushion trade imbalances.

Governments that wish to maintain a stable position in the international system would instead have to focus on two goals. First, to maintain an acceptable balance on the financial account, they would have to maintain the confidence of the markets; and second, to maintain an acceptable balance on the trade account, they would have to keep wages down and productivity up. The narrowing of policy space for national governments was, arguably, not a bug but a feature—even the central one.

Some version of this analysis is widely shared by both supporters and critics of the euro system. It has an important element of truth. But reality isn’t so simple, for a number of reasons. First, the role of exchange rates in stabilizing trade flows has been greatly exaggerated. It is simply not the case that Greece, for instance, could “pay its own way” before the euro by devaluing its currency, as is sometimes suggested. In fact, despite frequent devaluations Greece ran trade deficits continuously for decades before entering the euro. (As Varoufakis points out, the last time the country had a trade surplus was under German occupation in 1943.)

Second, financial flows often shift for reasons that have nothing to do with the policies of particular governments. The experience of peripheral Europe, like the experience of smaller countries around the world that have accepted free capital mobility, is not the strict but fair discipline of stern foreign investors, but rather of wildly unpredictable floods and droughts of money from alternately credulous and panicky markets, which depend more on financial conditions in the world’s financial centers than anything happening in the receiving countries.

At times Varoufakis’s narrative has the feel of a horror story where the protagonist tries to operate by the rules of normal life, only to gradually discover the conspiracy all around him.

A third difference between the euro system and the gold standard ideal is more subtle. Under the gold standard, as under the dollar standard that most of the world operates on today, central banks are subject to the same constraints as national governments. The Bank of Mexico cannot print dollars, it can only acquire them in the same ways as anyone else in Mexico. The European case is different. Despite the common perception that the European Central Bank is, well, the central bank of Europe, national central banks still exist and perform almost all the routine functions of central banking. (Among other things, they literally print euros.)

The central banks, in turn, make payments to each other through the TARGET2 system. If, say, there are more payments from people and businesses in France to Germany in a given period than from Germany to France, the difference shows up as a credit for the German central bank in the TARGET2 system, and a debit for the French central bank. This system has one critical feature: no one has to approve a central bank borrowing through it, and there are no limits to the balances it can run up. In effect, each central bank in the euro area has an unlimited overdraft facility from all the others.

There were good reasons to design the system this way. Indeed, it is hard to see how one could have a monetary union without some mechanism to ensure that a euro in a bank account in one country can always be used to make a payment of one euro to any other. But from the point of view of creating a disciplining mechanism on states, it is a fatal flaw. With a cooperative central bank, it is impossible for a euro area government to ever run out of euros.

Whatever limits the system puts on public spending, then, do not come automatically, but must be actively imposed by central banks. Under the gold standard, central banks were inside the nation-state, sharing its international constraints. But in the euro system they are outside it, part of the machinery that imposes those constraints. This critical difference means that the euro area’s crisis cannot be understood in terms of bad institutional design; instead, it must be understood in light of the political choices of its central bankers. This is perhaps the most important lesson of Adults in the Room.

In January of 2015, when Varoufakis entered the stage, Greece was already on its third loan negotiations with its official creditors. The first one had swapped the Greek government’s debt to private lenders elsewhere in Europe with debt to other European governments, to the ECB and to the IMF. The money loaned to the Greek government had been used to repay loans that private lenders were unable or unwilling to roll over. It was a bailout—but for banks in Germany, France, and elsewhere, not for Greece. From the point of view of the Greek state, their debts to private lenders had simply been replaced with debts to official lenders.

‘We were dealing with creditors who did not really want their money back.’ The real issue was power.

While the bailouts did not reduce the amount of debt owed by the Greek state, they did change its character. While private lenders are primarily interested in getting their money back, public authorities often have a broader set of interests in the behavior of their debtors. The new loans to Greece were governed by a Memorandum of Understanding (MoU) laying out a set of policy changes the Greek government had to make to receive the money. The loans were to be doled out in installments, with each new payment contingent on the “conditionalities” being satisfied.

This model followed a precedent set by numerous loans to developing countries since the 1970s. In principle, the goal was to not just solve the immediate crisis, but to make the “hard choices” necessary to put the borrower on a sound footing to avoid future payments crises—something that, by hypothesis, local political institutions would not be willing to do on their own. Whatever their intentions, these agreements necessarily involve a substantial transfer of authority from national governments to creditors.

By the time Syriza took office, the Greek state had already agreed to a long list of “reforms”—from banning collective bargaining to loosening restrictions on milk freshness—and had surrendered control over key government functions, including tax collection, to officials appointed from outside. Varoufakis describes the arrangement as “neocolonial,” and with reason. In the nineteenth century, turning over tax collection to European authorities was a penalty imposed on defaulting governments from China to Turkey to Egypt, often as a first step toward outright subjugation. The central issue under dispute in the first month of negotiations was whether the new government would continue to be bound by the agreements signed by the previous one.

The bulk of Adults in the Room is a detailed account of the negotiations between the Greek government and its creditors between February and June of 2015. The creditors were, notionally, three public institutions—the IMF, the European Central Bank, and the governments of the other euro-area states as represented by the European Commission. It was this “troika” that had drafted the MoUs and appointed the officials running the Greek tax authority and other government functions under government control. The legitimacy of this body was immediately challenged by the new Greek government, leading to the famous exchange at the end of the first public meeting between Varoufakis and Dutch Finance Minister Jan Dijsselbloem, who angrily told him “you’ve killed the troika!” before pointedly refusing to shake his hand. (In the end, the accusation proved premature.)

Confusingly, the negotiations themselves took place in the Eurogroup, an informal working group that included all euro-area finance ministers as well as representatives of the three troika bodies. Within these meetings, the dominant figures were Dijsselbloem, as president of the Eurogroup, and perhaps the book’s most fascinating character, German finance minister Wolfgang Schäuble.

Austerity was supposed to be just a means to stabilize payments by Grece to its creditors. But what if the actual goal was austerity, and the crisis and unpayable debt just convenient openings to pursue it?

Varoufakis’s description of his time in the Eurogroup meetings is never less than gripping. He is a master storyteller, and it is very rare to get such a frank and seemingly unfiltered account of the private conversations in which power is exercised. For this narrative alone, the book deserves a place on the short shelf of great political memoirs. The content of the negotiations described by Varoufakis—not to mention his own political role—will look very different in retrospect, depending on whether Europe continues down its current path toward a Hayekian prison of nations, changes course, or blows itself apart. But no matter what happens, this book will be read in fifty years by anyone who wants to understand how elite politics actually works.

Several lessons are clear from Varoufakis’s story. First, real power does not always lie where titles and organizational charts say it should. Neither Schäuble nor Dijsselbloem has, on paper, any more authority over the Greek debt than any of the other fifteen finance ministers. Nonetheless, their control of the proceedings is seldom questioned and never seriously challenged.

In one striking scene, Pierre Moscovici (representing the European Commission) initially agrees to replacing the existing MoU with language he and Varoufakis draft together and promises to get the new text through the Eurogroup. But the moment he presents their new language “in the room,” Dijsselbloem swats it down. And “in a voice that quavered with dejection,” Moscovici meekly assents: “Whatever the Eurogroup president says.”

A second lesson is that the rigidity or flexibility of rules is a decision variable for whoever is in charge of enforcing them—and the more opaque and indirect the decision-making process, the more space for discretion there is. In a dramatic scene near the end, Dijsselbloem announces that the Eurogroup will depart from its til-then ironclad principle of unanimity and issue an official statement over Greece’s veto. When Varoufakis asks how that is allowed, he gets this response from the EU secretariat: “The Eurogroup does not exist in law. . . . and therefore its president is not legally bound.”

Third, arguments are seldom decided, or even debated, on the merits. Varoufakis’s main activity during his months in office seems to be putting together detailed “non-papers” (the EU’s suggestive term for unofficial proposals) on possible resolutions, which the other side simply ignores. As he puts it:

On the assumption that good ideas encourage fruitful dialogue and can break an impasse, my team and I worked very hard to put forward proposals based on . . . sound economic analysis. Once these had been tested on some of the highest authorities in their fields . . . I would take them to Greece’s creditors. Then I would sit back and observe a landscape of blank stares. . . . Their responses, when they came, took no account of anything I had said. I might as well have been singing the Swedish national anthem.

Curiously, no matter how often it is repeated, this experience doesn’t lead him to question his assumption that good ideas are what matter. Even when Schäuble tells him bluntly in a one-on-one meeting that “I am not going to negotiate with you,” Varoufakis goes on gamely trying to make a deal. Right to his last days in office, he is offering new proposals, all vetted by the highest authorities.

At times the narrative has the feel of a horror story where the protagonist tries to operate by the rules of normal life, only to gradually discover the conspiracy all around him. In Berlin, for example, Varoufakis is invited to a dinner by a couple of leading figures in the Social Democratic Party. The Social Democrats are Merkel’s junior coalition partners but, they assure him, they see the insanity of what is being done to Greece and they want to support him in his struggles with their government. The dinner must be a secret of course—no aides, no press—so they can strategize together. Then, at the restaurant, one of the Germans’ phone rings. He hands it to Varoufakis: it is ECB president Mario Draghi, calling to say that assistance for Greece’s banks is being cut off.

The message is threatening enough, but it is doubly chilling that it is delivered through a supposed ally.

What was it all about, then? More precisely: what did the creditors want? What leverage did they use to get it? And, could Greece have done any better?

The negotiations which dominated Varoufakis’s five months in office were ostensibly aimed at a long-term resolution in which the Greek state could continue servicing its debts while getting the resources it needed to foster economic growth and development. But it would be a mistake to see the stakes as being whether the debtor could continue borrowing, or the creditors would get their money back.

For one thing, Greece already had a primary surplus—its revenues were more than enough to fund expenses other than debt service costs. No one on either side contemplated a return to primary deficits. So the funds being doled out or withheld by the creditors were not in any sense financing the activities of the Greek government. Quite literally, the creditors were lending Greece money only so that it could keep paying back those same creditors. In effect, the Greek state was paying a substantial tribute to its creditors each year for the privilege of remaining in debt to them.

Privatization, weaker unions, more employer control over hiring and firing, skimpier pensions go well beyond what we normally think of as the remit of a central bank.

The circularity of this arrangement in financial terms makes it clear that the financial side was never what mattered. As Varoufakis shrewdly notes, “we were dealing with creditors who did not really want their money back.” The real issue was power—the power the debt gave the creditors to dictate the Greek government, and the power they had to punish Greece if it didn’t comply.

Concretely, this meant, on the one hand, acceptance of the existing MoU and everything it implied, including even deeper austerity, fire-sale privatization of everything owned by the public, a permanent end to collective bargaining, and steep cuts in public and private wages; and on the other hand, the ECB’s ability to shut down the Greek banking system.

We will return to the second point—the key strategic role of the ECB. As to the first: why were the European authorities so insistent that Greece surrender control over domestic policy and accept the ultra-liberal program of the MoU? Varoufakis suggests two possible answers.

At some points, he argues that the MoU and the larger austerity agenda were embraced opportunistically by politicians who did not want to admit that the first bailout had handed over public funds to their own banks. Blaming Greek profligacy was the politically easier cover story. “The sole reason that the IMF and EU were asphyxiating us [was] because they did not have what it took to confess the error” of the earlier bailouts, he says. Austerity, in this telling, is not a goal in itself, but merely “a morality play pressed into the service of legitimizing cynical wealth transfers from the have-nots to the haves during times of crisis, in which debtors are sinners who must be made to pay for their misdeeds.”

A second possibility is that austerity and the rolling-back of social democracy were the goals all along, for which the Greek crisis simply provided an opportunity. In this version, Greece was subject to “fiscal waterboarding” not to avoid acknowledging the earlier bailout, but precisely to force compliance with the MoU—and even more, to provide an example for other governments in Europe.

It is clear why Varoufakis prefers the first story: the logic of his position in government required something like it to be true. If austerity were not an accident, a mistake—if the authorities would not in principle be just as happy with an active, egalitarian Greek state—then what was he sitting in all those meetings for? You can’t walk into negotiations unless you believe that a mutually satisfactory agreement is at least possible.

Unfortunately, Varoufakis’s narrative doesn’t cooperate with his analysis here. Just a few pages after the “sole reason” line, he describes a meeting with Pier Carlo Padoan, Italy’s finance minister:

Our discussion was friendly and efficient. I explained my proposals, and he signaled that he understood what I was getting at, expressing not an iota of criticism but no support. To his credit, he explained why: when he had been appointed finance minister a few months earlier, Wolfgang Schäuble had made a point of having a go at him at every available opportunity. . . .

I enquired how he had managed to curb Schäuble’s hostility. Pier Carlo said that he had asked Schäuble to tell him the one thing he could do to win his confidence. That turned out to be ‘labour market reform’—code for weakening workers’ rights, allowing companies to fire them more easily with little or no compensation and to hire people on lower pay with fewer protections. Once Pier Carlo had passed appropriate legislation through Italy’s parliament, at significant political cost to the Renzi government, the German finance minister went easy on him. ‘Why don’t you try something similar?’ he suggested.

“I’ll think about it,” is Varoufakis’ diplomatic reply.

A couple days later, he has his first meeting with the German finance minister himself. Schäuble brushes off Varoufakis’s suggestions for strengthening the Greek tax authorities, insisting instead on “his theory that the ‘overgenerous’ European social model was no longer sustainable and had to be ditched.”

Comparing the costs to Europe of maintaining welfare states with the situation in places like India and China, where no social safety net exists at all, he argued that Europe was losing competitiveness and would stagnate unless social benefits were curtailed en masse. It was as if he was telling me that a start had to be made somewhere and that that somewhere might as well be Greece.

Schäuble’s frank language is revealing, and we owe Varoufakis thanks for bringing it—and many similar statements by other officials—into public view. At the same time, it is a problem for his argument that the only obstacle to a decent deal was the authorities’ need to save face over the earlier bailouts.

The exchange with Schäuble also makes clear how right Varoufakis is to dismiss as a “fundamental misconception” the idea that Europe’s crisis involves “a tussle between Germans and Greeks.” The battle in Europe may be between interests, classes or ideas; but it is not, except superficially, between nations. Whichever way the austerity machinery is pointed at the moment, it can easily be turned somewhere else.

During the debt negotiations, one of the rare moments of disunity on the creditor side is a shouting match between Schäuble and the French finance minister Michel Sapin. Varoufakis, on the other side of the room, asks someone what is going on. “Wolfgang said that he wants the troika in Paris,” is the reply. For German conservatives such as Schäuble, Greece is indeed just somewhere to make a start; the real target is the larger and stronger welfare states of Europe—and ultimately their own working class.

The ostensible purpose of the negotiations was to resolve the crisis and stabilize payments by the Greek government to its creditors; austerity was supposed to be just a means to that end. In that case, if the same financial results could be achieved with a less brutal set of policies, everyone should be ready to sign on. But what if it is the other way round? What if the actual goal was austerity, and the crisis and unpayable debt just convenient openings to pursue it?

One doesn’t have to look far to find this argument being made quite openly. I suspect the real attitude of much of the European elites is well captured in a 2006 Economist editorial, which argued:

The core countries of Europe are not ready to make the economic reforms they so desperately need—and that will change, alas, only after a diabolic economic crisis. . . . The sad truth is that voters are not yet ready to swallow the nasty medicine of change. Reform is always painful. And there are too many cosseted insiders—those with secure jobs, those in the public sector—who see little to gain and much to lose. . . .The real problem, not just for Italy and France but also for Germany, is that, so far, life has continued to be too good for too many people.

If Varoufakis didn’t want to take Schäuble’s word for the real stakes, he might have listened to the various representatives of the troika who repeatedly made clear that “labor reform”—specifically, a permanent ban on collective bargaining—was one of their red lines. Or he might have looked at the ECB’s record as an enforcer of austerity in Ireland, Italy, Portugal and Spain, years before Syriza came into office.

In 2011, when the Italian bond market was in turmoil, the ECB intervened to stabilize it—but only after sending a private letter to then-prime minister Silvio Berlusconi demanding a long list of “structural” reforms, including “full liberalisation of local public services,” particularly “the provision of local services through large scale privatizations,” “reform [of] the collective wage bargaining system . . . to tailor wages and working conditions to firms’ specific needs,” “thorough review of the rules regulating the hiring and dismissal of employees,” and cuts to private as well as public pensions, “making more stringent the eligibility criteria for seniority pensions” and raising the retirement age of women in the private sector. (Strangely, this intervention and the similar demands by the ECB on the governments of Spain, Ireland and Portugal get almost no mention here.)

Privatization, weaker unions, more employer control over hiring and firing, skimpier pensions go well beyond what we normally think of as the remit of a central bank. And since the letter was private (it was published later) it can hardly be seen as a cover story for a bank bailout. The only reason for the ECB to make these demands is if they really wanted them met.

Dozens of poor countries have been forced to sign humiliating agreements with the IMF. What was new here was just that this treatment was being applied to a country in the rich world.

Looking beyond Europe, Varoufakis might have looked at the many structural adjustment programs promulgated by the IMF in countries of the South. Varoufakis is not wrong to liken Greece’s treatment to that of Europe’s colonies and protectorates in the age of gunboat diplomacy. But one needn’t look back to the nineteenth century for precedents. Since the 1980s, dozens of poor countries have been forced to sign humiliating agreements with the IMF, surrendering autonomy over economic policymaking and committing to brutal austerity. What was new here was just that this treatment was being applied to a country in the rich world.

Late in the book, Varoufakis has a meeting with IMF chief Christine Lagarde. Of the leaders on the creditor side, Lagarde comes off as the most sympathetic, and Varoufakis is cautiously optimistic he may be able to win her over. But when he gets his private meeting, what is the first thing she wants to talk about? Pharmacy deregulation! In a country with a quarter of the workforce unemployed, massive poverty, and public services in a state of collapse, that has already seen wall-to-wall deregulation, the most urgent problem she sees is that family-owned drugstores are still too sheltered from competition with international chains.

Stories like these—and the book is full of them—suggest that the creditors were not just looking for a politically palatable way to avoid responsibility for their earlier failures. They were sincere and consistent ideologues, striving to remake Europe in the model of an idealized free-market society. Varoufakis recounts these stories masterfully, yet curiously they never seem to shake his view that a mutually beneficial deal is just around the corner.

If Varoufakis’ account of his opponents’ motives is somewhat unsatisfactory, his account of their means is lucid and compelling. One of the central points is that the European Central Bank is a thoroughly political actor. Its decisions to buy or not buy government debt, to lend or not lend to banks, are always described in terms of statutory rules, but in practice, the rules mean what the ECB wants them to mean.

Perhaps the most dramatic expression of this was Draghi’s 2012 interventions to bring down rates on euro-area governments’ bonds—something the ECB’s charter was understood to explicitly forbid. In Greece, of course, the rules were bent the other way.

‘They want to destroy us.’

Varoufakis gets this exactly right: “In reality, after 2008, any attempt by the ECB to impose its charter rigorously . . . would have ruled out any of the various waivers, reinterpretations and extraordinary shenanigans that have so far prevented the eurozone from collapsing altogether. Far from being apolitical, the ECB’s huge discretionary power over when to enforce its rules and when to circumvent them . . . make it the most political central bank in the world.”

The ECB was also the only one of the three troika institutions with direct coercive power. The other creditors could, of course, refuse to extend new loans. But by 2015, the funds Greece was receiving from its official loans were being used entirely to service their existing debt. So a threat to cut off lending would just mean that if Greece defaulted on its loans, it would have to default on its loans.

The ECB, on the other hand, had the power to withdraw liquidity assistance from Greek banks, forcing them to shut down. Indeed, even the threat that assistance might be withdrawn was enough to provoke a bank run. This was the creditors’ only real stick, but it was a big one.

Dijsselbloem, who uses his first meeting with Varoufakis to deliver an ultimatum (“the current program must be completed or there is nothing else!”), clearly expects that the mere threat of a bank shutdown will end all resistance. As Varoufakis observes, “Experience has taught functionaries operating on behalf of Europe’s deep establishment [that] . . . government ministers, prime ministers, even the president of France, buckle at the first whiff of . . . the ECB’s big guns.”

Was there anything to be done? Could different choices by the Syriza government have allowed them to deliver on their promises? Or were the creditors always going to get their way?

Varoufakis’s answer is unambiguous: Greece should have walked away from the negotiating table at the end of February, when the creditors withdrew an earlier offer to reconsider the policy commitments made by previous Greek governments, and made it clear that the troika would not accept any modifications to the existing MoU.

If Greece had walked away at that point, the ECB and Bank of Greece would certainly have withdrawn liquidity assistance from the Greek banking system, forcing it to shut down—just as they eventually did in June.

But if the confrontation had come in February rather than June, Varoufakis believes, his colleagues would have chosen to fight rather than to surrender. Four months of fruitless negotiation, of “fiscal waterboarding” (letting the state get enough resources for minimal functions but not for any new initiatives), of vilification in the press, and of public and private pressure on individual members, left the Syriza government too demoralized and divided to resist when the ultimatum eventually came.

Varoufakis, to his great credit, takes responsibility for the decision to go on with talks even when it was clear that the other side would accept nothing but continued austerity. In a section entitled “mia maxima culpa,” he doesn’t mince words: “It was a tough call,” he writes, “but I should have made it. . . . I failed to rise to the challenge.”

This book will be read in fifty years by anyone who wants to understand how elite politics actually works.

Suppose the Greek government had refused to continue negotiations after February 24. What would have happened then? The ECB and/or the Bank of Greece would have announced an immediate end to emergency liquidity assistance (ELA) to Greek banks. The pretext would have been that the Greek government debt held by the banks, being rated below investment grade, was not acceptable as collateral, and that a waiver from this requirement could only be granted if an IMF program was in place and Greece was in compliance with it.

Without ELA, the Greek banks would have shut down and available cash would have had to be carefully rationed, just as eventually happened in June. At that point—as did not happen in June—the Syriza government would have activated its “deterrent.” The three key pieces of this were, first, a unilateral write-down or “haircut” of Greek bonds held by the ECB; second, the introduction of a parallel payment system, including both a system of electronic payments and certificates against future tax liabilities that could circulate in the place of cash; and emergency legislation to replace the head of the Bank of Greece, an establishment politician hostile to Syriza who had been appointed in the final days of the previous government.

Varoufakis is convinced that the bond haircut was seen as a serious threat by the ECB—not of course for the financial loss involved, which is trivial and anyway irrelevant for a central bank, but because of the administrative and political headaches it would cause. But given the ECB’s flexible approach to its own rules, it is hard to be convinced on this point.

Much more important is the second piece. If an alternative payments system could allow purchases to be made, workers to get paid, and businesses to buy needed inputs even with the country’s private banks shut down, then the ECB would be largely defanged. With the creditors’ threat to bring economic life to a halt removed from the game, Greece could return to the bargaining table in a much stronger position. And in the worst case, if the creditors still refused to accept anything but the existing package, the parallel payments system would become the basis for a new currency, allowing a gradual transition out of the euro instead of a wrenching leap. Obviously there are many devils in the details, but the logic of what Varoufakis describes seems sound.

The greatest strength of the political establishment in Europe—as of political establishments everywhere—is the perception that their rule is an unchangeable fact, that there is no alternative. The sight of Greece still standing—businesses running, people working and paying bills, public services functioning—after the ECB had done its worst would severely damage this aura of inevitability.

For precisely this reason, a Greek non-capitulation was directly threatening to conservative politicians elsewhere in Europe, especially those facing challenges from the left. As Varoufakis says, “What mattered to them was their authority, and that was being challenged by a leftist government whose success at negotiating a new deal for its country was the creditors’ greatest nightmare, as it might give ideas to other Europeans.”

Spanish finance minister Luis de Guindos directly confirms this at one point, telling Varoufakis that his position in the Eurogroup meetings was dictated by fear that any Syriza success would give ammunition to his government’s opponents in the leftwing party Podemos. Conversely, as Varoufakis observes, a hardline treatment of Greece served “as a deterrent to any other politician in Spain, Italy, Portugal or indeed France, who might be tempted” to challenge the reigning orthodoxy.

It would be easy to cast Varoufakis as naïve, but he isn’t. Rather, he is a believer in the European project.

In short, Greece had to be made an example of so people in the rest of Europe wouldn’t get ideas. Varoufakis is bluntly told at one point that austerity is necessary not to improve Greece’s repayment prospects, but “to demonstrate to Paris what is in store for France if they refuse to enact structural reforms.” Or as the Slovak finance minster—“Schäuble’s keenest cheerleader in the Eurogroup”—put it, “We had to be tough on Greece because of their Greek Spring.” But this dynamic might also have worked in Greece’s favor if they had stuck to their guns. Rather than risk an example of successful noncompliance, the creditors might have compromised instead.

As for the third component of the Greek response—replacing the leadership at the Bank of Greece—Varoufakis doesn’t think much of it. It is certainly true that Stournaras, the holdover governor, did everything he did to undermine the Syriza government, deliberately stoking panic in financial markets in direct violation of a central banker’s core responsibility. And it is true that, officially, the final decision to shut down the Greek banks was made by the Bank of Greece, not the ECB. But Varoufakis is convinced that Stournaras was just following instructions from his masters. Against those in Syriza who see control of the central bank as critical, he insists that it is just “a branch office of the ECB.”

I’m not sure he is right about this. On paper, at least, the euro system gives considerable autonomy to the national central banks, and it is easy to find examples of national central bank leaders defying the central authorities in Frankfurt (most visibly, Jens Weidemann of Germany). Any future European government considering a challenge to the authorities will need to explore whether, and how, the national central bank can become a strategic asset.

We’ll never know whether Varoufakis’s “Plan X” could have worked. When the moment came it was not activated. Faced with the troika’s final ultimatum in June, the Syriza government put it to a referendum—and then ignored the public’s resounding vote of “No.”

Varoufakis makes a convincing case that, contrary to what some have alleged, he did have a coherent plan for dealing with a breakdown in negotiations. But it is also clear that he was not really prepared to use it. In a small but telling detail, the alternative payments system is always described as a “deterrent,” as if it is merely leverage to get a better deal from the authorities, not as a step toward greater independence from them. And while the basics of the plan were in place when he took office, neither he nor his staff seems to have put much effort into developing it further.

Despite all the evidence, he seems to have been convinced to the end that the creditors would eventually come around. It is striking that whenever he talks about the need for more time, the benefits of waiting just a bit longer, it is in the hopes that the creditors will at last see reason. Even after the “No” vote, preparing the alternative payments system is only one of four priorities for his staff; number one is developing yet another offer for the creditors to reject. When he assures Alexis Tsipras, then the Prime Minister of Greece, that Merkel will “100%” accept his new proposal if she is rational, one wants to reach through the page and shake him and say, “Yanis, haven’t you been reading your own book?” The dejected Tsipras has a clearer view of the situation when he replies that new proposals don’t matter: “They want to destroy us.”

Game theorist that he is, Varoufakis must know that the bargaining power of the weak depends on their exit options.

It would be easy to cast Varoufakis as an academic out of depth in the deep waters of power. But I don’t think he is naïve. Rather, he is a believer in the European project.

The tension between believing in Europe and regarding its current stewards as enemies comes out clearly in his discussion of capital controls—the restrictions on financial payments across borders. Many people thought that the new Syriza government should have immediately limited payments from bank accounts in Greece to accounts outside it, slowing the bank run and making the Greek banking system less dependent on emergency liquidity of ECB and BoG. But Varoufakis rejected this, writing, “Capital controls are inconsistent with monetary union.” And later, “capital controls would be detrimental to the EU member states common interests and for that reason alone we had to oppose them.” Here and elsewhere, he comes across as a committed European—an honorable stance but perhaps not the best fit for the position he occupied.

The same logic plays out with the Bank of Greece. Tsipras and the rest of the Syriza leadership urgently wanted to replace the hostile Stournaras as bank governor. But Varoufakis is against it: “For as long as the ECB negotiated with us in good faith, I argued, we needed to show respect for its Greek branch.” It is an old story—the insurgent who unilaterally disarms in an effort to show good faith while the authorities have no intention of reciprocating.

Five months of being stonewalled, lied to, and vilified by the European establishment did nothing to diminish Varoufakis’s faith that the future of democratic, egalitarian politics lies at the European level. The book ends with him, now out of office, barnstorming France and Germany to build up a new Europe-wide political movement. His refusal to give in to cynicism or despair (or return to the safe harbor of academia) is inspiring, and indeed, there is no one better to make the case for a humane, democratic Europe.

But, from the outside, one might still wonder if his way is the only way. It is exhilarating to imagine a genuinely democratic Europe, one that reflects the collective choices of the continent’s people as a whole. But perhaps the best route to this model of integration would be, paradoxically, for some countries first to de-integrate—to reassert their sovereignty and reject the free movement of money and goods that have defined the European project in favor of a model in which economic ties are managed in the service of a national program of development.

The greatest strength of the deep establishment that Varoufakis struggled with so valiantly is the idea that there is no alternative. In Europe today, integration is presented not as something that will bring a better life for ordinary people, but rather something for which they must sacrifice—since the alternative is unthinkably worse. As long as there is no credible path to prosperity and sovereignty outside Europe, why should the authorities feel compelled to offer them inside? Game theorist that he is, Varoufakis must know that the bargaining power of the weak depends on their exit options.

Germany and Brexit: Berlin won’t put economic interest above its political support for European integration | British Politics and Policy at LSE

If the UK wants to secure favourable terms during the Brexit negotiations, it will be crucial to win the support of Germany. But what are Germany’s key priorities? Luuk Molthof writes that the 2015 Greek debt negotiations offer some insights into the German approach, and that the UK is likely to be disappointed if it believes Germany will put economic interests above its political support for European integration.

A sigh of relief was heard on both sides of the channel when Jean-Claude Juncker announced on 8 December that ‘sufficient progress’ had been made in the first round of Brexit talks, opening the way for the second, and much more important, phase of the negotiations. Some commentators saw the breakthrough as a sign that the British government had finally acknowledged its place as the junior partner. Indeed, to be able to move on to the trade talks, Theresa May had given in to most of the EU’s demands.

Yet the British government still seems fully confident that it will be able to negotiate a bespoke trade deal for itself. At the heart of this optimism is the assumption that some EU countries, such as Germany, the Netherlands, and Belgium, have a significant interest in good trading relations with the UK and won’t want to harm themselves economically merely to ‘punish’ Britain for leaving the EU. The British government seems to be particularly counting on Germany, the EU’s central power, whose export sector is seen as being much too dependent on the British economy for it to allow Britain to walk away without a deal.

However, many German politics experts have warned the British government not to keep its hopes up. According to Charles Grant, “Germany’s top priority is to ensure that Brexit does not weaken the EU, and that means the UK must not be allowed any kind of special arrangements that could undermine the European institutions”. In a similar vein, Sophia Besch and Christian Odendahl point out that “politically, nothing is more important to Germany than the stability and integrity of the EU”.

To understand why the British government would do well to heed these warnings, it is useful to be reminded of Germany’s role in the 2015 Greek bailout negotiations. The case is illustrative for two reasons. First, Germany’s decision back then to agree to a third bailout package for Greece, despite the apparent failings of the first two packages, is indicative of Berlin’s willingness to prioritise political over economic ends. Second, Germany’s refusal to soften Greece’s bailout conditions, even after repeated attempts by the Greek government to put pressure on Berlin, suggests that Germany is not one to soften its position at the behest of a junior negotiating partner.

Berlin’s willingness to prioritise political over economic ends

What the British government tends to forget is that for Germany, the EU is first and foremost a political project. In its efforts to further and safeguard European integration, Germany has often prioritised political over economic interests. So too in the summer of 2015, when Germany, alongside the other eurozone countries, agreed to extend a third bailout package to Greece. To be sure, over the course of the Greek debt negotiations, Germany never lost sight of its economic interests, refusing to grant Greece its much wanted Schuldenschnitt and remaining firm in its insistence on a strict reform programme. However, it always kept a larger perspective in mind.

Greece had received two bailout packages before, the first in 2010 and the second in 2012. An important motivation for both bailouts was the concern over a potential domino effect in the case of a Greek default and/or exit from the eurozone. Another – at least in 2010 – was the exposure of German and French banks to Greek debt. In bailing out Greece, then, Germany and the other eurozone countries acted perfectly in line with their own economic interests.

The situation in 2015, however, was markedly different. Not only had the chances of a domino effect been significantly reduced, Europe’s banks had written off most of their Greek debt. The economic argument for bailing out Greece yet another time was therefore not particularly strong, especially since Greece was increasingly seen as a Fass ohne Boden, or a bottomless pit. The reason why Germany ultimately agreed to another bailout was because a Greek exit from the eurozone would undermine the euro’s credibility as an instrument of political integration. Most significantly, a Grexit would mean that European integration would no longer be an irreversible and linear process – note that this was before the Brexit referendum. Speaking to the Bundestag on 19 March 2015, Merkel stated:

I have repeatedly said: If the euro fails, Europe fails. Some found and still find this too dramatic. But I remain insistent; for the euro is much more than just a currency. It is, next to the institutions that we have established, the strongest expression of our willingness to really unite the populations of Europe in prosperity and peace.

Economically, it may well have made better sense to let Greece go. Yet in order to protect the euro’s role as a political instrument, Germany was willing to bear the economic costs. Similarly, Germany is likely to be willing to bear the economic costs of a no deal Brexit should that be necessary to protect the integrity of the internal market.

Germany is not one to soften its position at the behest of a junior negotiating partner

Just like the British government is currently expecting the German government to eventually soften its position and give in to certain demands, so too did the Greek government expect the German government to eventually soften its austerity demands and perhaps even write off some debt. Greece found out the hard way, however, that Germany is not one to soften up when negotiating with a junior partner. Over the course of the 2015 debt negotiations, the Greek government made continued attempts to put pressure on Germany to adjust its position, using delaying tactics, insisting Germany still owed Greece compensation for WWII, and even calling a domestic referendum on the bailout conditions. All these attempts proved futile and in fact only strengthened Germany’s resilience.

Only after Germany’s finance minister, Wolfgang Schäuble, started talking about the option of a temporary ‘timeout’ from the eurozone, did it dawn on the Greek government that it had vastly overestimated its negotiating position. In the end, the Greek government inevitably caved, accepting all of the conditions that had been so resoundingly rejected by the Greek population in the bailout referendum. The drawing out of the negotiations had been a costly affair for all involved, but primarily for Greece. The British government faces a similar suboptimal outcome should it fail to come to the realisation soon that it is indeed the junior negotiating partner, that time is really not on its side, and that empty threats to walk away from the negotiations without a deal aren’t likely to change anyone’s mind, least of all Germany’s.

The fact that Germany is likely to prioritise its political interests over its economic interests in the Brexit negotiations, and is unlikely to give in to the demands of a junior negotiating partner, is not to say that Germany does not seek a good trading relationship with Britain. It is merely to say that it won’t agree to a type of deal that undermines the EU institutions simply because it doesn’t want to see a drop in Mercedes’ sales. Indeed, even the German industry itself has let it be known that the integrity of the internal market should not be sacrificed for access to the UK market. The British government would do well to keep this in mind and prepare a realistic vision for its post-Brexit relationship with the EU, instead of waiting for the Germans to lend them a helping hand.


Note: This post was originally published on our sister site EUROPP.

About the Author

Luuk Molthof is a Research Fellow at d|part, a political think tank based in Berlin. He completed his PhD in Political Science at Royal Holloway, University of London. His thesis examined Germany’s role in European monetary history and provided an explanation for Germany’s reaction to the euro crisis.

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.


Paid work is never enough: we need to pay attention to the quality as well as the quantity of jobs created

Getting people into employment will not on its own ensure decent living standards and reduce poverty, finds Peter Taylor-Gooby. His research shows that, while higher employment is associated with lower poverty, other factors are more important. The most important factor in reducing poverty levels across the countries looked at was the strength of contractual rights, and other policies, such as access to child care, policies to reduce discrimination against women were also significant.

Most people think paid work is the royal road to a better life for people of working age. The value of work is at the centre of policy thinking across the board, from Labour’s Compulsory Jobs Guarantee to UKIP’s commitment to ‘enroll unemployed welfare claimants onto community schemes or retraining workfare programmes’. Ian Duncan Smith’s Universal Credit puts work ‘at the centre of our welfare system’. The EU’s 2020 Growth Strategy ‘is about more jobs and better lives.’ And so on.

The idea that getting people into work will solve the problem of achieving decent living standards for those of working age was given extra impetus as unemployment rose from about 5 to over 8 per cent between 2008 and 2012, paralleled with a rise in working-age poverty. Now unemployment is falling back towards pre-crisis levels but, as IFS analysis shows, poverty among working age adults is failing to respond. The poor quality of many of the new jobs indicates short-comings in the case for paid work as the foundation of welfare.

Most of those in poverty live in working households. Among families the proportion in households with at least one member in work rose from 50 to 68 per cent between 1996 and 2013 according to the DWP’s Households Below Average Incomes statistics. The job market started to recover from its low point in 2012 but many of the jobs on offer are far from satisfactory. The number of part-time workers rose from 7.2 million to 8.2 million between the recession in 2008 and 2014, the numbers of involuntary part-timers from 0.7 to 1.7 million and the number of temporary workers from 1.4 to 1.7 million. The Labour Force survey shows a doubling of zero-hour contracts between 2007 and 2013 to 300,000.

These statistics suggest that we need to pay attention to the quality as well as the quantity of jobs created. Our new research examines factors affecting employment and poverty across 17 European countries for the period of prosperity and growth between 2001 and 2007. This is the time when the sun shone, the most favourable period in recent history for the work = welfare = decent living standards project. The research shows that, even at this time, new welfare was much more successful at getting people into work than at reducing poverty.

Employment rates rose across Europe, especially for women. However, far from declining, poverty rates also increased (by the standard EU 60 per cent of median income measure) from 18 to 18.6 per cent between 2001 and 2007 in the UK, and also in other successful economies such as Germany (11 to 15.2 per cent), Sweden (9 to 11.5 per cent) or Poland (16 to 17.3 per cent). One explanation is to do with access to paid work. Governments need to make sure that even more people move into work. This is the logic that lies behind the EU’s Employment Strategy and Horizon 2020 programme and behind national work-centred policies such as Universal Credit. Then the great recession swept everyone towards work at any price policies, redoubling the stress on paid work.

These were the good times, when, if ever, the link between work and decent incomes should be strongest. Higher employment is associated with lower poverty, but the analysis shows that, even during this period, other factors were more important. In fact the most important factor in reducing poverty levels across the countries was the strength of contractual rights. Other policies such as access to child care, policies to reduce discrimination against women were also significant.

The level of employment plays a role in ensuring decent living standards, but one that is less powerful than that of employment rights. The suggestion is that while employment is probably a good thing, if we want people to be better off, we also need to make sure that the quality of jobs is adequate. The best way to ensure that is to strengthen contractual rights against dismissal and to promote trade union membership. Recent trends in policy to weaken employment protection, to undermine the role of trade unions and to introduce high fees for access to employment tribunals move us in entirely the wrong direction. Shovelling people into low-paid jobs is all the fashion, but it is not the answer to the problem of poverty among those of working age.

For more, see “Can ‘New Welfare’ Address Poverty Through More And Better Jobs?” by Peter Taylor-Gooby, Julia M. Gumy and Adeline Otto.

About the Author

Peter Taylor-Gooby is Research Professor of Social Policy at the University of Kent’s School of Social Policy, Sociology and Social Research. He chaired the British Academy New Paradigms in Public Policy Programme (2010/2011) and is Chair of the REF Social Work and Social Policy and Administration panel 2011-15, a Fellow of the British Academy, a Founding Academician at the Academy of Social Sciences and, previously, a Fellow of the Royal Society of Arts and President of the British Association for the Advancement of Science, Sociology and Social Policy Section.