경제經濟 복지福祉 WelfareEconomics

청경수려淸勁秀麗 2012. 8. 15. 20:32

 

http://www.guardian.co.uk/commentisfree/2012/jul/31/fix-euro-crisis-european-stability-mechanism#start-of-comments

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  • There is a euro crisis solution – use the European Stability Mechanism

    Granting a banking licence to the ESM, rather than using the European Central Bank, would be a more democratic fix

    European Central Bank
    'The European Central Bank does not really have the expertise on the fiscal and economic reforms required to make public debt sustainable and kick-start growth.' Photograph: Michael Probst/AP

    Across Europe, reactions to the latest signals that the European Central Bank (ECB) might play a larger role in battling the euro crisis have been very different. While markets have rejoiced and spreads of periphery government bonds have come down significantly, the German public has been outraged. Not only have populist politicians from both the government and opposition parties denounced the ECB's plans, editorials in important media have also warned of a slippery slope towards financing governments with the printing press.

    In spite of the German outcry, however, the economic argument for ECB action is extremely sound. There are signs that we are observing something which is known among economists as a "self-fulfilling fiscal crisis". The set-up of such a crisis is simple. If government debt has reached a certain level, the country's solvency depends on investors' expectations. If investors believe that a government can continue to service its debt, they will demand low interest rates and the country in question remains solvent. If investors start doubting the government's ability to fulfill its payment obligations, they will demand higher interest rates and these higher interest rates themselves will cause insolvency.

    The catch of such a set-up is that one can stabilise expectations (and hence the situation) by promising ample credit to a government in distress. If the country in question can tap decently priced loans from a multilateral institution in case private investors withdraw, there is no reason for private investors to call into question the solvency of the government and the self-fulfilling crisis is defused.

    Alternatively, if the central bank would explicitly or implicitly guarantee to buy enough bonds in the secondary market to keep interest rates from rising above a certain threshold, expectations would also be stabilised in the "good" equilibrium. This mechanism is also the reason why countries with their own central bank and debt in their own currency such as the US or the UK have so far not been victim of market panic, even though their debt-to-GDP ratio has been higher than in some of the euro crisis countries.

    What is central to stabilise investors' expectations is that there is no doubt that a sufficient amount of loans can be provided. As the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) rescue funds are too small to promise such unlimited support, the ECB is the only actor to really prevent the self-fulfilling crisis.

    Moreover, in contrast to popular German fears, there is little doubt that the ECB could do so without creating inflation. The European economy is extremely weak at the moment. Additional money supply is not used for transactions, but is saved, mainly in central bank accounts. In such a situation, there is little danger of higher price increases due to bond purchases. In addition, the ECB would have sufficient time to sell bonds again and thus mop up liquidity, should the crisis submerge and the euro area economy recover.

    Of course there are political complications. In some of the countries of the euro area – such as Greece and to a certain extent Italy – excessive public spending or insufficient taxation were elements that contributed to the current crisis. In these cases, one should not give unlimited and unconditional loans at low interest rates.

    Last summer, the ECB thus dictated conditions in terms of fiscal and structural reforms to the Italian government before it started buying Italian bonds. However, such a set-up creates a lot of problems: for one, the ECB does not really have the expertise on the fiscal and economic reforms required to make public debt sustainable and kickstart growth. Moreover, it clearly does not have the legitimacy to dictate such wide-ranging policies. It has been given independence for a closely defined realm of maintaining price stability. Giving it the additional power to control economic and fiscal policy across Europe would turn the democratic principle on its head.

    A much cleaner solution would thus be to grant a banking licence to the ESM. The ESM, which is controlled by democratically elected national governments, could then set conditions under which it guarantees low interest rates to crisis countries. Such low interest rates could easily be enforced if the firepower of the ESM were increased, by allowing it to borrow from the ECB against its holdings of government bonds.

    The pressure on member states to reform would remain in place, yet a self-fulfilling solvency crisis could be averted. Instead of crying wolf about any possible ECB intervention, Germany should also push for such a solution: a rule-bound ESM with a banking licence would be much closer to Germany's approach of rule-based policy-making than an ECB that intervenes in bond markets at its own discretion.

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    • Sanl

      31 July 2012 2:15PM

      How dare the German population & politicians be outraged - in the post democratic world these decisions will be left to us "experts"

    • BrianClaydon

      31 July 2012 2:21PM

      The Germans are being stitched up royally and your description of ''populist politicians from both the government and opposition parties denounced the ECB's plans'' just shows how detatched the European project is from ordinary people. The German people are understandably scared, as are the Greeks, Spanish, Italians etc and all you can do is dismiss any ounce of Euroscepticism or questioning of a failed policy as 'populist'.

      No signs of any belt tightening amongst the Brussels elite. If we've hit an iceberg, we know who is sitting safely in the life rafts with all the food and water. And the German taxpayer is a long way away.

    • huzar30

      31 July 2012 2:21PM

      he ESM, which is controlled by democratically elected national governments, could then set conditions under which it guarantees low interest rates to crisis countries.

      Are you acquainted with King Canute?

    • Openline

      31 July 2012 2:30PM

      Hang on – does the ESM even exist yet?  Last I heard, it was supposed to start this month (July) but was delayed by a case in the German constitutional court.

      And when the ESM does start, how democratic will it be?  Sebastian Dullien says it'll be "controlled by democratically elected national governments".  Yes, in a way.  Each eurozone government will appoint a member.  So it'll be about as democratically accountable as the European Commission.

    • MarxTheTruth

      31 July 2012 2:35PM

      This article scores one out of two. The is a solution to the euro crisis - correct! - but it is not a capitalist solution, so minus one mark.

      The solution is solidarity and socialism. It is a revolutionary solution, but the endtimes of capitalism (when, as Marx predicted, the contradictions of capitalism lead to it eating itself up by the tail) are a revolutionary problem and demand revolutionary answers.

      The people of Europe have no alternative but to arise from their slumber and cut the capitalist, bankster chains that are rapidly becoming a noose around their neck.

    • physiocrat

      31 July 2012 2:37PM

      There are three preconditions for the long term sustainabilty of the Euro.

      1) All members must have a robust tax system
      2) There is a means of recycling wealth from the core to the periphery to compensate for geographical disadvantages.
      3) The recycled funds are invested wisely and honestly.

      It isn't going to happen, is it?

    • BrianClaydon

      31 July 2012 2:42PM

      ''This article scores one out of two. The is a solution to the euro crisis - correct! - but it is not a capitalist solution, so minus one mark.

      The solution is solidarity and socialism. It is a revolutionary solution, but the endtimes of capitalism (when, as Marx predicted, the contradictions of capitalism lead to it eating itself up by the tail) are a revolutionary problem and demand revolutionary answers.

      The people of Europe have no alternative but to arise from their slumber and cut the capitalist, bankster chains that are rapidly becoming a noose around their neck.''

      Do you wear a sandwich board?

    • BenCaute

      31 July 2012 2:48PM

      The ESM is just the European branch of the IMF.

      Not legally, but ideologically, with all that this entails.

      Just look at the terms of the enforced austerity packages - these take the form of corporate debt restructurings (rationalisations of workforces; fire sale of unprofitable assets; triggers measured on debt ratios).

      Having shoved this down the throat of the Latin Americans, Europe is now colonising itself.

      How long will it take for us to following the Lat Am exit from this suicidal impasse? To follow the routes of Argentina, Ecuador, Bolivia et al.?

      I note that Syriza have already sent their best people to Latin America to learn all they can from those who broke these shackles.

    • BrianClaydon

      31 July 2012 2:58PM

      In fact, seeming as you have the Peterloo Massacre as your avatar, you might want to see the elightened 'MarxtheTruth' posts about the repressive North Korean regime;

      http://www.guardian.co.uk/commentisfree/2012/jul/28/north-korea-no-laughing-matter?commentpage=all#start-of-comments

    • PeterS378

      31 July 2012 2:59PM

      one can stabilise expectations (and hence the situation) by promising ample credit to a government in distress. If the country in question can tap decently priced loans from a multilateral institution in case private investors withdraw, there is no reason for private investors to call into question the solvency of the government and the self-fulfilling crisis is defused

      But private investors are not stupid enough to believe that German taxpayers will fund the likes of Greece forever.

    • BABELrevisited

      31 July 2012 3:00PM

      Whatever combination of words are chosen to nominate a saviour it is difficult, nay impossible, to brush off complete systemic insolvency.

    • Chummie

      31 July 2012 3:02PM

      "There is a euro crisis solution –"


      .
      One solution is to disband the EU,get rid of the Euro and go back to the original idea of a trading association.---perhaps we could call it the Common Market??

    • neilwilson

      31 July 2012 3:04PM

      The most rational solution is for the Euro governments to have a line of credit directly at the ECB (via the NCBs as required).

      If the ECB is supposed to be able to set interest rates for an entire continent the surely it can work out how much to charge a mere government.

      Then the whole ridiculous government bond nonsense comes to a complete halt.

      No Wizard of Oz manoeuvres required. Just straightforward banking.

    • mcneilio

      31 July 2012 3:06PM

      While I do have sympathy for the German case here, they do seem to want to pick and choose only the benefits of currency union without having to accept the other consequences.

      They want the low exchange rates provided by currency union with weaker economies, which benefit them but don't benefit Spain for example. However, when recession bites they don't want seem to want to shell out to rescue the union which has benefitted them for years.

      It is often said that London 'subsidises' other parts of the UK, but if London were a seperate currency to the rest of the UK it wouldn't be very competitive. Thus London benefits from being tied to the rest of Britain and Britain benefits being tied to London. Millionaires in London couldn't turn around one day and say 'we are sick of some of our taxes being spent on public services in Hull (for example)' because the economic entity within which it exists benefits its residents.

      Of course the Germany/southern Europe thing is very different to this, but it is similar in the way that within a single economic currency zone wealth will inevitably move from the stronger areas to the weaker.

    • BenCaute

      31 July 2012 3:10PM

      No but I doubt he'd be allowed to post online under his preferred system judging by his.

      What, like twitter for example. Because no one in the US would be censored for just posting stuff on twitter?

      And that is just today's news.

    • gruenebaum

      31 July 2012 3:15PM

      Total hogwash.

      1. This all amounts to the ECB financing state debts. This is illegal under the EU Treaty and the ECB statute. It's just a matter of time until this ends up in the ECJ.

      2. once the ECB opens the flood gates, countries with extremely poor governance such as Italy will no longer have any incentive to reform and fight tax evasion. Why should they when money can also be printed? Monti will be gone in a few months, it will then be over to a professional clown or the amateur version Berlusconi.

      3. The UK and the US demonstrate that the idea of cheap money is not really working. It pacifies short term investors, but it expropriates everybody else in the long term. And after all, wasn't the whole mess caused by cheap money to start with?

      4. The author explains that flooding the market with money serves the purpose of building trust with the investors. How can anyone seriously trust Greece with its outrageous public sector perks and a productivity close to zero, Italy with half of the economy in the black or run by the Mafia, Spain with its greed set in concrete forever and its regional rulers who are trying to out-do Nero? The base for any trust was the Euro which these countries misused in an incredible way. Now the trust is supposed to come from having access to German savings. Anyone can see that Germans will not accept this.

    • BenCaute

      31 July 2012 3:17PM

      In fact, seeming as you have the Peterloo Massacre as your avatar

      Hmm, you seem to wish to conflate the Peterloo Massacre with what you regard as a defence of the Kim's. An insult to those who died.

      The logical non sequitur is a classic rightist tactic, as is smearing one's opponents merely with the smear of smearing itself - i.e. shouting smoke and claiming that there must fire.

      Try an argument from principles.

    • BrianClaydon

      31 July 2012 3:19PM

      Who has a more liberalised system in terms of freedom of expression? North Korea (MarxTheTruth's preferred system judging by his posts on the other thread) or the USA.

      http://en.wikipedia.org/wiki/File:Democracy_Index_2010.png

      http://en.wikipedia.org/wiki/File:PFI_2010.png

    • gruenebaum

      31 July 2012 3:20PM

      One problem with your reasoning is that the Euro had strict rules. These were broken and actually never complied with by Greece and Italy.

      Germany rightly insists that the rules are respected. There would be no souvereign debt crisis if the rules had been followed.

      And Germany clearly benefits from the common currency, but only as it provides a better market for German goods - goods that have to be produced and sold.. The southern European countries had very low interest rates that they did not deserve. They made a windfall profit from the Euro and decided to waste it. These types of Euro benefits are of totally different quality.

    • BrianClaydon

      31 July 2012 3:23PM

      Hang on a moment.... where on earth an insult to the dead fits into all this I don't know but the left are a sanctimonious bunch.

      I am not conflating the 2 things you mention. I am saying that if yours is a tribute to people standing up against oppressive governments (in this case that of Lord Liverpool's almost 200 years ago), and you're making digs at people's avatars, it is interesting that you choose to portray America as the great oppressor when the bloke I am (in my view) rightly questioning the sanity of, is someone who defended the North Korean regime and seems unconcerned by the plight of 200,000 people living in death camps.

      But you pick on the bald eagle eh.

    • KrawuziKapuzi

      31 July 2012 3:29PM

      Tinfoil hat more likely.

      Tell us MarxTheTruth, how do you arrive at your staggering conclusions? Oh, Marx asserted it? In the 19th century? Well, that's allright then.

    • ballymichael

      31 July 2012 3:42PM

      Such low interest rates could easily be enforced if the firepower of the ESM were increased, by allowing it to borrow from the ECB against its holdings of government bonds.

      Let's look at that proposal (which, as you know, has been widely reported in the german media today) a bit more closely.

      -By virture of its bank license, the ESM is allowed to borrow from the ECB, against collateral such as the bonds the ESM buys.

      -it then goes out and buys more bonds, which it then deposits at the ECB for more loans, to buy yet more bonds.

      And all this, "controlled" by politicians.

      As someone has already said, this is clearly against the no-state-financing-by-the-ECB clause in the Lisbon Treaty (Article 125).

      It's also not going to work. Two reasons:

      1. All it would do would load the ECB balance sheet with worthless collateral, while utterly undermining the independence of the institution, and eventually lead to a need to recapitalise it.

      2. That "democratic control" over the ESM. It does actually exist, you're right. Or rather, it does for one country - germany, which has disabled any authority over its representative on the ESM governing council. Instead this representative has to inform and be directed by either the full Bundestag, the Bundestag Budget Committee, or the Bundestag "special committee" in the case of bond-purchases on the secondary market.

      (this is all covered in the ESMFinG accompanying legislation (german required).

      And do you really think borrowing from the ECB is going to get through those committees. Come on Sebastien, it's a non-starter. You're german, you know that can't get through!

    • BenCaute

      31 July 2012 3:42PM

      But you pick on the bald eagle eh.

      Sorry, who mentioned sandwich boards?

      Hypocrite.


      you choose to portray America as the great oppressor

      I merely stated a fact from today's news. I'm sorry if facts rouse you in this way.


      he bloke I am (in my view) rightly questioning the sanity of

      Ah yes, waving mental health around as a club to crush your political enemies. you have become the enemy you loathe so much.

    • BenCaute

      31 July 2012 3:43PM

      1. All it would do would load the ECB balance sheet with worthless collateral, while utterly undermining the independence of the institution, and eventually lead to a need to recapitalise it.

      The ECB balance is probably already loaded with useless collateral.

    • FergusBlackburn

      31 July 2012 3:46PM

      Since all money is created as debt, it will always be a problem.

      Banks create the stuff out of thin air and expect to be paid back with interest. What gives this select group of people the right to do this to everyone else ? Why do we tolerate it ?

    • exsanddancer

      31 July 2012 3:58PM

      "Granting a banking licence to the ESM, rather than using the European Central Bank, would be a more democratic fix"

      a more democratic fix.........???

      Ceding all power to Darth Vader would be equally a democratica fix as that Seb.

      Admit it! The game is up and nothing is going to stop the final Euro collapse.

    • donafugata

      31 July 2012 4:05PM

      I'm with you, Chummie.

      The Common Market was enough, a free trade area of nation states each with its distinct character.

      Now it's an homogenised mass of bureaucratic madness that's grown completely out of control.

    • LazarusOnceMore

      31 July 2012 4:05PM

      There is no solution.

      The idea of a single currency an a single interest rate shared by economies as diverse as Greece and Germany, or Finland and Portugal was - and remains - fundamentally flawed.

      The only way out is break up the Eurozone.

    • ballymichael

      31 July 2012 4:25PM

      The ECB balance is probably already loaded with useless collateral.

      sure. But an EZ bond bought with ESM funds advanced against an EZ bond bought with funds against an EZ bond bought with funds from the EZ taxpayer pushes it to a whole new level. It's practically Wall Street levels of idiocy.

    • terencepatrickhewett

      31 July 2012 4:39PM

      And a Fair was set up in a town called Vanity:

      "here is Britain Row, the French Row, the Italian Row, the Spanish Row, the German Row, where several sorts of vanities are to be sold. But as in other fairs some one commodity is the chief of all the fair, so the ware of Rome and her merchandise is greatly promoted in this fair; only our English nation, with some others, have taken a dislike thereat."

      Only a heart of stone, etc etc.

    • jacks1

      31 July 2012 4:47PM

      Hahahaha

      So the solution is to allow the ESM to borrow from the ECB, using govt bonds as collateral.

      In other words using complete junk to borrow freshly printed money to lend to bankrupt govts in exchange for more junk bonds which act as collateral for more printed money to lend for more junk bonds.

      What could possibly go wrong.

      Lets face it, when the elite start seriously proposing solutions that just a few years ago would have consigned the proposer to the nut house you know we're totally fucked.

    • Mark Urbo

      31 July 2012 4:50PM

      Draghi was trying to calm the market. Look at the last 2.5 years of deals and non-deals on this crisis. There is a clear pattern of buying time with proposals that never materialize.

      This maneuver will not last either. Greece has run out of money and they owe tens of billions on past due payables - they are very close to shutting down. Spain's banks will be the straw that forces Spain into a massive bailout. When that happens the healthy EU members are going to have to consider underwritting a trillion or more in bailout / stablization debt that could easily take their own economies down...

      That debt (if they agree to do that) will hurt the EU for a decade or more... Get out of the euro and play it short because even if they agree on bailouts, it will devalue the euro.

    • jacks1

      31 July 2012 4:54PM

      I've got the solution.

      Give me a banking licence. I'll make damned sure that I spend as much as I can borrow from the ECB. I'll use the contents of my septic tank as collateral.

      We'll all be rich beyond our wildest dreams.

    • ballymichael

      31 July 2012 4:55PM

      When that happens the healthy EU members are going to have to consider underwritting a trillion or more in bailout / stablization debt that could easily take their own economies down

      Alternatively, they might just let a lot of banks go into receivership, clean out all the shareholders and non-secured bondholders, and see which bit of the global financial system are still standing at the end of it.

      Good luck finding a counterparty wanting a long position on that scenario.

    • MarkoTobias

      31 July 2012 4:56PM

      "There is a euro crisis solution."

      Break up the damn thing or 17 countries create one economy.

      Thats the solutions and everybody knows it.

    • SustainableFuture

      31 July 2012 5:13PM

      the ECB does not really have the expertise on the fiscal and economic reforms required to make public debt sustainable and kickstart growth.

      Why not make the whole economy sustainable? Economic growth, as we know it, is inherently unsustainable. How about adapting to a steady-state economy by attempting to stabilise the population, improve resource efficiency and equalise resource/wealth distribution - instead of perpetually clamouring for more growth growth growth!

    • mcneilio

      31 July 2012 5:36PM

      One problem with your reasoning is that the Euro had strict rules. These were broken and actually never complied with by Greece and Italy.

      Germany rightly insists that the rules are respected.

      I agree, to an extent.

      These rules weren't only undermined by the southern European countries, as there are various rules and agreements which the French and even the Germans ignored. This helped to create the situation where EU agreements were ignored by Greece et al.

      The southern European countries had very low interest rates that they did not deserve. They made a windfall profit from the Euro and decided to waste it.

      Do you mean this in terms of the southern European governments or on an individual level?

      Because I agree, again to an extent, that some of the governments (primarily Greece) were profoundly irresponsible. on the other hand, had there never been a global economic crisis I severely doubt that Spain would be in difficulty right now, and probably neither would Italy. If they had their own currencies they could cope with the recession much more easily, and so they can't wholly be blamed when the eurozone was designed on French and German terms, above theirs.

      If you were referring to individual debt, that given the chance to get credit at low interest southern European citizens did so, I don't believe this makes the current situation their fault. Better availability of cheap credit was one of the main reasons for them joining the euro - we all knew that from the start.

    • JezJez

      31 July 2012 6:12PM

      "The ESM, which is controlled by democratically elected national governments"; these would be the same buffoons that governed us into this mess in the first place? Maybe the author would like to explain why the ESM , with such governance, is, really, such a good idea?

    • darquelourd

      31 July 2012 7:10PM

      Holy Shiznit, not the ESM Batman!

    • thebinmancometh

      31 July 2012 7:14PM

      There is a euro crisis solution – use the European Stability Mechanism

      There is a bullshit crisis solution: use ordinary language to describe ordinary theft, fraud and economic incompetence - instead of sniveling corporate-speak to hide the criminality of the so-called 'euro crisis'. Do grow up, dear.

    • SimonWebster

      31 July 2012 7:20PM

      Sorry but I'm going to have to use caps.

      READ THE ESM BEFORE YOU CONSIDER ENDORSING IT.

      Google ESM text.

      From memory section 8 or article 8 is a true stinker amongst many,many true stinkers.

    • pastendgame

      31 July 2012 7:29PM

      There is so much taxpayers can do to save the banks. The banks' policies need to change as their risk appetite and high leverage rates have caused a mess in Europe. It is impossible to move from crisis to crisis and expect taxpayers to bail out the overlending, overassumption of risks and overextending with respect to capital:leveraging ratios. The taxpayers' credit card is not limitless and is starting to show some 'wear and tear'.

    • Pobinr

      31 July 2012 7:38PM

      A more democratic fix would be to give all the people in the EU a referendum
      If Cameron wasn't in bed with Clegg we'd get the referendum we deserve.
      EU = A politicians heaven built to exclude the masses and entrench the power of the elite, a fabulous new and improved USSR.
      A political union imposed without the consent of the people
      More & more centralised control
      More & more immigration
      More & more of our taxes squandered by unaccountable Eurocrats
      Proof we don't even need to be in the EU ->http://www.express.co.uk/posts/view/333795/Proof-we-don-t-need-to-be-in-EU

    • mcmahonmedia

      31 July 2012 7:46PM

      ''The answer is solidarity and socialism.'' Is it? Then why has this never worked in the past? And is it not the case that all socialism does is to create a super-powerful state that is, in itself corrupt, and is that corruption not even more inpenetrable than the corruption associated with capitalism?

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  • Our economic ruin means freedom for the super-rich

    Cameron and Osborne's neoliberal agenda promised prosperity for all, but created a totalitarian capitalism that feeds on crisis

    Scorched-earth capitalism: illustration by Daniel Pudles
    'Where is the economic elite? Counting the money it has stashed in unregulated tax havens. Thirty years of neoliberalism have allowed the super-rich to detach themselves from the lives of others to such an extent that economic crises scarcely touch them.' Illustration by Daniel Pudles

    The model is dead; long live the model. Austerity programmes are extending the crises they were meant to solve, yet governments refuse to abandon them. The United Kingdom provides a powerful example. The cuts, the coalition promised, would hurt but work. They hurt all right – and have pushed us into a double-dip recession.

    This result was widely predicted. If you cut government spending and the income of the poor during an economic crisis, you are likely to make it worse. But last week David Cameron insisted that "we will go on and finish the job", while the chancellor maintained that the government has a "credible plan, and we're sticking to it".

    Two questions arise. The first is familiar: why has the public response to this assault on public life and public welfare been so muted? Where are the massive and sustained protests we might have expected? But the other is just as puzzling: where is the economic elite?

    Surely the corporate class and the super-rich – the only people the government will listen to – can see that these policies are destroying the markets on which their wealth relies? Surely they can see that this scorched-earth capitalism is failing even on its own terms?

    To understand this conundrum we should first understand that what is presented as an economic programme is in fact a political programme. It is the implementation of a doctrine: a doctrine called neoliberalism. Like all such creeds, it exists in its pure form only in the heavens; when brought down to earth it turns into something different.

    Neoliberals claim that we are best served by maximising market freedom and minimising the role of the state. The free market, left to its own devices, will deliver efficiency, choice and prosperity. The role of government should be confined to defence, protecting property, preventing monopolies and removing barriers to business. All other tasks would be better discharged by private enterprise. The quest for year zero market purity was dangerous enough in theory: distorted by the grubby realities of life on earth it is devastating to the welfare of both people and planet.

    As Colin Crouch shows in The Strange Non-Death of Neoliberalism, the state and the market are not, as neoliberals insist, in perpetual conflict. Instead they have united around the demands of giant corporations.

    When the state cuts regulation and social provision, business is enriched. It uses this wealth to trample on the doctrine that enriched it. Through campaign finance, networking and lobbying, big business recruits the state to champion its interests. In Britain corporations lobbied for privatisation programmes that replaced public monopolies with private ones. They also persuaded the government to create hybrid schemes (like the private finance initiative) that guarantee state funding for business. In the US, giant corporations persuaded Congress to remove the key regulations governing auditors and the banks. This led first to the Enron and WorldCom scandals, then the financial crisis.

    Big business has used its power to persuade the state to let it keep dumping its environmental costs on the rest of us. It has vitiated anti-trust laws. It has excluded new entrants to the market (through its advertising budgets and distribution networks); and become big enough to prevent its own exit even when it fails (note the bailout of the banks). These are results of neoliberal policies of the kind that Cameron is applying, but they are sharply at odds with the predictions neoliberals made of how free markets would behave.

    Above all, the neoliberal programme has closed down political choice. If the market, as the doctrine insists, is the only valid determinant of how societies evolve, and the market is dominated by giant corporations, then what big business wants is what society gets. You can see this squalid reality at work in Cameron's speech last week. "We have listened to what business wants and we are delivering on it. Business said, 'We want competitive tax rates,' so we are creating the most competitive corporate tax regime in the G20 and the lowest rates of corporation tax in the G7 …". What about the rest of us? Don't we get a say?

    The neoliberal hypothesis has been disproved spectacularly. Far from regulating themselves, untrammelled markets were saved from collapse only by government intervention and massive injections of public money. Far from delivering universal prosperity, government cuts have pushed us further into crisis. Yet this very crisis is now being used as an excuse to apply the doctrine more fiercely than before.

    So where is the economic elite? Counting the money it has stashed in unregulated tax havens. Thirty years of neoliberalism have allowed the super-rich to detach themselves from the lives of others to such an extent that economic crises scarcely touch them. You could see this as yet another market failure. Even if they are affected, the rich are doubtless prepared to pay an economic price for the political benefits – freedom from democratic restraint – that the doctrine offers.

    A programme that promised freedom and choice has instead produced something resembling a totalitarian capitalism, in which no one may dissent from the will of the market and in which the market has become a euphemism for big business. It offers freedom all right, but only to those at the top.

    Twitter: @GeorgeMonbiot

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    • Strummered

      30 July 2012 8:53PM

      Cameron and Osborne's neoliberal agenda is a parasite that feeds off the people creating nothing but misery for the majority.

    • kingcreosote

      30 July 2012 8:56PM

      All we have on offer is a never ending crisis which will obscure the more brutish aspects of their sick ideology.

    • kristinekochanski

      30 July 2012 8:57PM

      A good article, showing that neoliberalism is basically a scam for the boss class.

      The question is - are neoliberal politicians just useful idiots being taken for a ride, or are they part of the scam?

    • happytolive

      30 July 2012 8:59PM

      a totalitarian capitalism that feeds on crisis


      Such a good description of what is left of our country. The power of people is diminishing further and corruption and illegal acts are the traditions of the elite, the rest is a cover up and brute force to silence the indignant masses. I really think we must act to stop the rampaging gangsters which live on people’s lives.

    • TeazerTat

      30 July 2012 8:59PM

      Doomed!!! Doomed!!! Doomed!!!

      Doomed, tell you!!!

      We're all doomed!!!

      If global warming and environmental meltdown don't kill us all, "totalitarian capitalism" will!!!

      It has never been hard to tell the difference between George Monbiot with a domm'n gloom story and a ray of sunshine.

    • englandarecrap

      30 July 2012 9:00PM

      Get back to North Korea....Only joking, but the trolls will be here soon.

    • davidabsalom

      30 July 2012 9:00PM

      But last week David Cameron insisted that "we will go on and finish the job",

      And that job is reintroducing serfdom.

    • mrkfm

      30 July 2012 9:00PM

      Isn't it perhaps the case that in the end, whilst there is a smaller and smaller minority of the super rich elite that gain short term from this crisis capitalism, there are many who are even right wingers who aren't happy with how things are but do know how to contol this system?

      If we don't say we will make vast cuts then the cost of borrowing goes up. and yet having made the cuts we have seen that it doesn't work in the midst of a depression.

      It appears that it will take a crisis almost on a level with a world war for everyone to realise that we need a coordniated international agreement to return to Keynesian economics to create jobs and growth and to tell the "markets" that there neo-liberal economic policies of cuts cuts cuts is wrong and there judgements on our economies is wrong.

    • AQ42

      30 July 2012 9:01PM

      A programme that promised freedom and choice has instead produced something resembling a totalitarian capitalism, in which no one may dissent from the will of the market and in which the market has become a euphemism for big business. It offers freedom all right, but only to those at the top.

      Assume for the sake of argument you are right. Then substitute "socialism" for "capitalism", "workers" for "market" and "nomenklatura" for big business. Lastly remember Animal Farm: The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.

      So what is your solution?

    • LordPosh

      30 July 2012 9:01PM

      Why has the public response to this assault on public life and public welfare been so muted?

      Inflation - down;
      Unemployment - falling;
      AAA credit rating - secure.

      George Osborne - The Iron Chancellor.

    • teaandchocolate

      30 July 2012 9:05PM

      Contributor

      Britian took nearly 1000 years to win small battles against the elite, from the Magna Carta, to male suffrage, to votes for women, to constitutional monarchy, to the welfare state, and it has taken just 30 years of neoliberalism to take away everything - absolutely everything - we fought for.

    • mwhite

      30 July 2012 9:05PM

      Why are we 2 years into a 10 year economic slump? Because global capitalism has created a transnational, corporate welfare state which transfers wealth from taxpayers to a kleptocratic elite. It works like this:

      Method 1: Taxpayers pay for not only the infrastructure on which the private sector depends, but also the state-funded research carried out by the military and public universities to develop technology such as the jet engine, the desktop computer, the internet, nuclear power and GPS. This technology gets handed over to the private sector, which proceeds to make vast profits from it. Then, even though the last 30 years have seen drastic and worldwide reductions in corporation tax and the top rates of income tax, the corporate kleptocracy evades taxes by hiding offshore up to £20 trillion of its profits (an amount equivalent to almost a third of annual global GDP), whilst governments cut spending and charities open food banks to provide for the victims of this criminality.

      Method 2: Until their private sectors are able to compete globally, capitalist economies such as the US (from the 1830s till the 1940s) and Britain (from the 1720s till the 1850s), reject the free market and develop their economies through state intervention, using protectionism, subsidies and capital controls. The ruling elites in countries such as Japan, Singapore, Taiwan, France, Austria and Finland follow the lead of the world’s two biggest economies. Then, as soon as they have gained a competitive advantage, these beneficiaries of corporate welfare inflict market liberalisation on developing countries with disastrous effects. Thus, having increased by 37% between 1960 and 1980 as a result of interventionist economic policies, the GDP per capita of sub-Saharan Africa fell by 7% in the years 1980-2000, as countries which borrowed from the IMF were forced to cut spending, privatise their state-owned industries, deregulate their financial sectors and remove trade barriers. And at the same time that they were wreaking havoc in Africa, the free market prescriptions of the Washington Consensus were also failing in the developed countries, where average, annual GDP per capita growth fell from 3.1% during the 30 years before 1975 to 2.1% during the 30 years of neo-liberalism which followed.

      But slowing GDP growth and stagnating median incomes didn’t stop wealth from being shovelled upwards ever more quickly. In the US for example, the 18 years preceding the 2008 financial crash was one of only two periods in the country’s history when the share of total income of the top 1% exceeded one fifth. The other was the 8 years before the Great Depression.

      Method 3: Governments have to subsidise employers who don’t pay their employees a living wage. In the UK, for example, the government spends £23 billion per year on the tax credits it pays to working families. Then there’s the £4 billion per year in housing benefit given to households with at least one person employed. And, to keep wages low and its workforce compliant and insecure, the private sector needs an army of unemployed – again financed by the taxpayer. As Margaret Thatcher’s chief economic adviser in the 1980s, Alan Budd, admitted to The Observer in 1992:
      “….......... the 1980’s policies of attacking inflation by squeezing the economy and public spending were a cover to bash the workers. Raising unemployment was a very desirable way of reducing the strength of the working class. What was engineered – in Marxist terms-was a crisis of capitalism which re-created a reserve army of labour, and has allowed the capitalists to make high profits ever since...........”

      Method 4: Instead of retaining monopoly control of the money supply, governments allow private banks to create money, which is conjured up on a computer screen and used to speculate, fuel asset price inflation, pay bankers’ bonuses and create an endless debt spiral as more and more money has to be printed to enable the repayment of interest. Then, when the asset bubble finally bursts, governments have to spend trillions of pounds of taxpayers’ money to prevent the financial system from imploding and national economies from disintegrating. Finally, to add insult to injury, governments have to borrow what should be their own money back from the same banks to which they have given the power to create money out of nothing – and pay high interest rates because of an economic crisis which the banks themselves have caused.

      And worst of all, whilst the beneficiaries of the corporate welfare state drain the global economy at the expense of taxpayers, the media organisations and politicians they own lecture the poor and unemployed, endlessly moralising about their fecklessness and lack of responsibility. In doing so, they only confirm what most people already know – that capitalist democracies really are the best that money can buy.

    • NeverMindTheBollocks

      30 July 2012 9:05PM

      last week it was the "neo-feudal" lead bullet British hunters, this week we are back to the more common neo-word again: neo-liberals.

      Why do people without a credible argument so often think that prepending words with the "neo" prefix will somehow make their claims and slogans right regardless?

    • kristinekochanski

      30 July 2012 9:08PM

      Politicians who are part of the scam lack any long term planning abilities. When wealth trickles up, then it becomes hard to govern.

      It must be a short term project they envisage. Loot everything they can then leave.

    • TeazerTat

      30 July 2012 9:08PM

      Britian took nearly 1000 years to win small battles against the elite, from the Magna Carta

      The Magna Carta was only about the elite winning a battle for itself.

      30 years of neoliberalism to take away everything - absolutely everything - we fought for.

      And the gold medal for OTT over-exaggeration on this thread goes to ....

    • SirJohnFalstaff

      30 July 2012 9:10PM

      Excellent, as always.

      I would love to to see George address what we persistently hear free market fundamentalists claim was the cause of the global financial catastrophe: the little government involvement that was taking place in the market (eg. the Federal Govt. assisting people trying to buy homes in the US). I don't for a second believe it but we need to win over those ordinary people who keep voting for the plutocratic cancers.

    • GlobalDemocracy

      30 July 2012 9:10PM

      Our Government is not interested in making things better for the masses. No Government is anymore, with very few exceptions.

      Their policy is working. The 'Rich and Ruling Elite' have now become the 'even Richer and more Powerful Ruling Elite.

      The more debt they create, the more powerful they become and watch Osborne keep racking up the bonds to keep the the nations masses, firmly in the gutter - for the banksters profit.

      Did anyone really think it would ever be any different given how established the establishment is, especially with the Conservatives in power ?

    • physiocrat

      30 July 2012 9:10PM

      The difficulty is that whilst the proof of the pudding is in the (unpleasant) eating, there is no coherent philosophical critique of neoliberalism in circulation. With Marxism discredited, the opposition is working in an ideological vacuum.

      This ideological vacuum is leading to faulty analysis and flawed conclusions. Absurd statements are being made. Blame is being misplaced, for example that the banks for are to blame for the problem. They are not. The corruption of the banking system is merely an effect of a deeper corruption and will therefore not be cured by legislation. And trillions of pounds worth of wealth has not been hidden away in tax havens. There are no secure warehouses full of gold bars in the Cayman Islands, with the name of one of the 1% stamped onto it. No giant container ports have been built there either, to receive this flow of - what, precisely?

    • VentalaRaya

      30 July 2012 9:11PM

      why has the public response to this assault on public life and public welfare been so muted? Where are the massive and sustained protests we might have expected?


      The middle classes are frightened of loosing what they have got.

    • FergusBlackburn

      30 July 2012 9:11PM

      What did you expect from the Bullingdon Club ?

    • Timak

      30 July 2012 9:12PM

      I am yet to be persuaded why "protectionism" is bad and "free trade" is good.

      All that seems to happen in the current system is all production goes to areas where child labour and workplace deaths are common, the western countries then lose jobs and have huge trade deficits and all the profits are held offshore.

      Why can we not make our own stuff and only accept imported goods from countries that don't use slave labour?

    • jazzdrum

      30 July 2012 9:12PM

      George is spot on in his article. We in Scotland are looking south and pitying the hell of privatization wrought on a once proud England .

    • kristinekochanski

      30 July 2012 9:13PM

      The killer punch against Osborne is that everything that is going wrong with the economy was predicted to happen as a result of his policies. Before he was the Treasurer.

      With that historical record to hand it is justified to call him, as Will Hutton did, one of the worst Chancellors of all time.

      Even the Torygraph hate him.

    • thebinmancometh

      30 July 2012 9:13PM

      Far from regulating themselves, untrammelled markets were saved from collapse only by government intervention and massive injections of public money. Far from delivering universal prosperity, government cuts have pushed us further into crisis. Yet this very crisis is now being used as an excuse to apply the doctrine more fiercely than before.

      It's a lovely piece of writing but it doesn't really make much headway. Of course public money is injected into the market in vast quantities: that is what capitalism is. Of course governments promote social crises: that is what capitalism is. Of course crises are propagandized to funnel policy towards unequal outcomes: that is what capitalism is. You ask 'where are the elites'? Well, they are visibly and lustily promoting precisely the processes that you decry because that is what capitalism is. I am not judging this array of realities as good or bad - the alternatives so far have not proved themselves much more morally or socially acceptable. I'm simply observing that it is pretty obvious that capitalism does these things. It always has and it always will. The key question is what to do about it in political terms. That's where the real debate is - not in bearing witness to the obvious.

    • xenium1

      30 July 2012 9:13PM

      The free market, left to its own devices, will deliver efficiency, choice and prosperity.

      As you say, it's never happened. And never will. It's political dogma built on lies.

      The "job" these crooks are intent on finishing is nothing less than the destruction of the welfare state & any idea of public good.

    • Payguy2

      30 July 2012 9:15PM

      Expect massive redistributions of wealth. From the "working class" of India and China, who will be relatively wealthier. The working class of the US and EU will be much much poorer. Public services that act to slow increasing inequality such as education, transport and healthcare will be utterly privatised and inaccessible to middle and working class people. The global elite will rule over us with levels of wealth never seen before. At the moment inequality levels in the US and Uk are at the same level as in the 1930s with a third of US citizens living on less than $3 a day. Expect the one dollar one vote principle to increase. Expect the media arm of the global elite to become more aggressive. Expect ubiquitous surveillance to intensify with all dissent quashed instantly before it starts. Your children will live in a capitalist dystopia. 

      Consider that under austerity the relative wealth of the world richest people has increased. For example the Times Rich List of the 1000 wealthiest people in the UK has shown their combined wealth has increased by 5% in the last 12 months to a new record high of £414 billion-

      http://www.bbc.co.uk/news/uk-17883101

      As an aside we might ask why these people are so desperate to earn their next billion. My own preconception is their greed is a product of the way they were potty trained, serious only child syndromes and seriously bad bullying in certain English boarding schools. Certainly these people are dysfunctional enough that they are capable of inflicting limitless misery on everybody else in order to get exactly what they want. 

      Back to the point though which is to compare the effect of austerity on the super rich and the other 99.999% of the population. The effects of the austerity policies propagated by the Tory led coalition have been severe and immediate 
      With average incomes dropping over 6% last year in the UK (according to onS earnings figures). 

      Indeed austerity is likely, with only 10% of the Tories cuts implemented, to intensify and carry on for at least a decade. For example see last years IFS report- 

      Presenting its analysis of 2011 autumn statement, the Institute for Fiscal Studies (IFS) predicted real median household incomes would be no higher in 2015-16 than they were in 2002-3. In other words, more than a decade will have passed without any increase in living standards for those on average incomes. The same analysis estimates 1 in 4 children will also end up in poverty. 

      So the implications are clear. Our current policies lead to rising incomes for the ultra rich but grinding poverty for everybody else. But what would endanger this balance and result in policies that increased living standards for the 60 million UK citizens as the expense of constraint in inequality for the ultra wealthy?

      To my mind the answer to this and the reason the entire right wing press, the Institute of Directors, CBI, economic think tanks, Tory donors and so forth are behind the austerity is the role of wage equalisation in international trade. 

      It has been known for a long while (
      http://en.m.wikipedia.org/wiki/Factor_price_equalisation ) that when two countries enter a free trade agreement, wages for identical jobs in both countries tend to approach each other. After the North American Free Trade Agreement (NAFTA) was signed, for instance, unskilled labor wages gradually fell in the United States, at the same time as they gradually rose in Mexico.[citation needed] The same force has applied more recently to the various countries of the European Union.

      The implication of this is that globalisation has begun to open up the huge workforces of China and India who are currently paid much lower wages than their US and European counterparts. 

      Given that we know, through Factor Price Equalisation, as long as we continue free trade, that the wages of these workers are going to equalise over the next 20 years. 

      There are of course two ways that wages could equalise. In the first scenario governments in Europe and the US deliberately pursue their current austerity program’s and suppress workers wages. The Chinese and Indian wages gradually rise to meet our levels and the converged wage for workers in a decade or twos time is modest. This scenario of course supplies much larger profit margins to the ultra wealthy owners and managers of multinational corporations as their wage bill is low. Bankers are happy to as austerity allows greater indebtedness to them and inflation isn’t allowed to eat into the real interest paid by households on the debts owed to those that have lent the money. As a side benefit, privatising the profitable parts of the state (tuition fees, the NHS, NATs etc) under the excuses of austerity allows further tax payer backed profit opportunities. 

      The other scenario for wage equalisation- sovereign debt monetization, tax reform , financial transaction taxes, Keynsian stimulus etc- are not to be welcomed by the global elite.

    • Payguy2

      30 July 2012 9:16PM

      The other scenario for wage equalisation- sovereign debt monetization, tax reform , financial transaction taxes, Keynsian stimulus etc- are not to be welcomed by the global elite. They circumvent the Austerity for the hundreds of millions of citizens in the US and Europe but at the cost of wage equalisation at a higher level with China and India. 

      This is an unacceptable outcome for the worlds global elite who will lose profit margin from the higher wage bills they will need to pay their workers. This is the reason we see the forces of business, Tories, all right wing economists and so forth lobbying so hard for austerity and the continuation of misery.

    • Coolhandluke77

      30 July 2012 9:17PM

      Far from regulating themselves, untrammelled markets were saved from collapse only by government intervention and massive injections of public money.

      You forgot that the state expanded as Gordon Brown mistook a financial bubble for the end of boom and bust. Remember all the flannel about "borrow to invest".? The state as 45% or more of the economy is not "neo-liberalism", the only thing "untrammelled" was public spending in the good times. So rather than complaining about cuts, you should perhaps be thanking the City for helping to create the illusion which allowed Mr Brown to finance the public sector.

      Bad news George, it seems like you may need to plug yourself back into the Matrix..

    • CanYouFlyBobby

      30 July 2012 9:17PM

      Yet again he describes corporatism and calls it neo-liberalism. Yawn

    • JamesHeartfield

      30 July 2012 9:18PM

      Hang on a minute... Surely this is the same George Monbiot who wrote the article 'Bring on the Recession'.

      For more than a decade George Monbiot has been calling for a reduction in mass consumption to save the planet - austerity, in fact.

      Now that we have a government that agrees with him that consumption must be reined in, Mr Monbiot is all against it. Have you forgotten all those things you wrote before? Are we just to ignore the fact that you argue things that contradict one another from one week to the next?

    • DJT1Million

      30 July 2012 9:19PM

      Would that be the hugely successful Iron Chancellor that is now so incompetent and so toxic that even Tories don't consider him worthy of leading them into the next election? Is that the one you mean?

      Excellent article that encapsulates the situation we are in at the minute.

      Personally I think we are at a high water mark of the system George Monbiot describes, it is not a bright new dawn of nealiberalism, more the last (for now) final flourish. There's change in the air. Not heads on pitchforks revolution change but change nonetheless. We had a hint of it when Cameron failed to win the biggest open goal of an election ever but him and his party are just a rapidly failing sideshow right now. There is a need for a new vision for our nation, the grand Thatcherite/Reaganite experiment has ground to a halt and what's new has yet to be clearly articulated but that's not the same as apathy, as a willingness to let the sideshow continue in exactly the same way as before. Interesting, though not overly pleasant times for many of us that's for sure.

    • anotheralex

      30 July 2012 9:20PM

      I've been thinking about a solution for a while. What I've come up with so far is this:

      o A maximum salary (including all options and benefits) of £100K a year.
      o A minimum salary of £20K.
      o A ban on price increases.
      o A ban on profit.
      o A maximum worldly wealth allowance of £3 million (including property).

      All surplus monies to be ploughed into sustainable development bound by the above conditions.

    • FergusBlackburn

      30 July 2012 9:21PM

      And trillions of pounds worth of wealth has not been hidden away in tax havens.

      Depends how you define wealth, doesn't it ?

      The $21 trillion in tax haven banks is made up of book entries on bank computers. on the other side of the equation is the money other people owe - the debts countries and other people are drowning in. This debt must be serviced by interest and principal repayments from the wage earners and governments, who are having a hard time meeting their obligations.

    • JaneBasingstoke

      30 July 2012 9:21PM

      Where are the massive and sustained protests we might have expected?

      When I didn't have a job, and kept being rejected and ignored by all the jobs I applied for, I had a lot of sympathy from friends and relatives. They encouraged me to apply for jobseekers and housing tax benefits.

      But then they would lecture me about all the benefit cheats.

      They didn't actually know any benefit cheats. They just knew benefit cheats got all the money cos everyone said so.

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  • The Northerner
  • Sheffield bashes the balsam

    But maybe they'll leave us a bit. The seed-popping mechanism is a small wonder of the UK plant world

    Himalayan Balsam (Impatiens glandulifera) with flowers and seed pods
    Himalayan Balsam (Impatiens glandulifera) with flowers and seed pods. It is SO good giving the latter a little squeeze and triggering the pop. Photograph: Jeff Tucker/Alamy

    Sheffield has declared war on Himalayan Balsam, news which gets a mixed reception here at the Guardian Northerner because of romantic associations with the plant.

    My parents did some of their courting among the great swags of pink and maroon flowers along the Leeds-Liverpool canal near Rodley and kept a lifelong love of popping the seeds – a fascinating method of distribution involving a small but powerful spring within the bud.

    Triggered by the slightest pressure – so you can imagine the effect of courting – this catapults the plant's seeds for an impressive distance; and that is the problem in the eyes of Sheffield city council. Its rangers have recruited local people to join in what they call 'balsam bashing', uprooting the plant in areas where its clever take on Darwin's survival of the fittest is just too fit.

    Urging Sheffielders to rise up and "help to rid local waterways of a foreign invader," the council says:

    Himalayan Balsam was introduced to the UK for ornamental gardens, has spread into the wild and now smothers riverside habitats, harms native plants and leaves banks bare and subject to erosion when it dies down. It has to be pulled up before seed pods explode and spread along the rivers.

    Cities - Sheffield Botanical Gardens Sheffield's winter gardens. It's a great city for plants. Photograph: Alamy


    Mobilising volunteers for six separate bashes last Sunday, Coun Isobel Bowler who is Sheffield's Labour cabinet member for culture, sport and leisure said:

    Sheffield is blessed with some beautiful natural countryside but it does need some human intervention to keep it in a good state. Alien invasive species such as balsam are harmful to the natural ecology but labour intensive to remove. Time and effort given by local people working with our rangers to remove this plant is most welcome.

    The alternation of wet and warm weather is encouraging everything to grow this year so we need help more than ever. But it also offers a great opportunity to get outside and get some fresh air and exercise.

    Point taken; and much balsam was duly bashed along the Porter and Rivelin valleys, in Smelter wood and Periwood and beside Charlton brook. But I hope they leave some, for children of all ages to enjoy the popping. It's like squeezing a fuschia bud, but with added mini-artillery.

    The plant will almost certainly stick around anyway, like those other victims of occasional surges of energy and bashing, ragwort (home of the lovely cinnabar moth) and Himalyan Knotweed. The balsam was first recorded in the UK in 1855, 34 years before Sheffield Corporation was given county borough status.

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  • http://www.guardian.co.uk/commentisfree/2012/aug/01/how-britain-make-more-things 
  • Comment is free
  • How Britain can make more 'things'

    Now is not the time to panic, but for the private and public sector to invest long term in skills and – preferably green – technology

    The finishing touches are added to a Bentley
    The finishing touches are added to a Bentley, one of the UK manufacturing brands enjoying an uplift in volumes. Photograph: Christopher Furlong/Getty Images

    Data published today has shown that the manufacturing sector shrank at its fastest rate in more than three years in July. Naturally, this is disappointing news, but it is essential we keep our perspective: in 2010 and 2011, manufacturing grew 1.9% faster than the whole economy and the present contraction is much lighter (actually 75% less in scale) than the "great recession" that began in Q4 of 2008.

    That should not mean complacency – rebalancing the economy so we make more "things" in Britain is absolutely critical to achieving long-term and sustainable economic growth – but explains why we shouldn't panic. We need to be aware that confidence is critical to avoid the downturn spiralling into a self-fulfilling prophecy. The worst thing that could happen at this point is that industry stops investing in the technology and skills needed to drive innovation and growth in the UK.

    Let's be clear: in order to rebalance the economy, this country would need to achieve the biggest restructuring in a generation. It will not happen quickly or automatically, and co-ordinated action from the private sector and government is absolutely vital.

    So far, I am largely positive about the UK's plans and activities. But it's too early to see the real effects – manufacturing generally has stalled because of the pressures of the sovereign debt crisis in Europe, and the marked slowdown in China. The latter exacerbates the problems on the continent because China is a key importer of goods made in Europe. Fiscal policy in the UK is also playing its part reducing demand, and lack of liquidity is still a critical issue for the British supply chain.

    But while these are significant headwinds, they are not permanent and there is plenty to be optimistic about in the UK. Domestic demand is surprisingly good, retail sales are up 1.6% year-on-year, and lower inflation is a boost for our sector – and employment is up, which in turn will help boost demand.

    We should also be proud that we have some great UK manufacturing brands, for example in car making, Jaguar Land Rover and Bentley – the latter up 30% on volumes in the first six months this year compared with last.

    There are also endless opportunities from greening the economy: the renewable technology market will be of immense benefit to UK businesses. The government needs to stay consistent and supportive with subsidies and regulation and must be actively engaged in this market so we reap the benefits in terms of skills, R&D and inward investment and ultimately a strong supply chain capable of exporting in large numbers.

    We are encouraging investment in modern and sustainable production technologies which make an important contribution to energy savings and improved productivity, boosting competitiveness – all essential for the growth of our manufacturing supply chain. Our investment in advanced manufacturing catapults – centres of excellence that bridge the gap between business, academia, research and government – are already becoming a great vehicle to support this.

    We are supporting technical apprenticeships in higher numbers, which is encouraging, though we should accept that results will take time. Germany, which has been on this journey for decades, invests almost a third more than the UK manufacturing sector in capital plant machinery and automation. Our skills system is not yet up to the challenge of providing the labour required to support enough manufacturing growth in the UK.

    We must work harder with the government in programmes encouraging R&D and innovation, in upskilling young people, creating more apprenticeships – so that our sector can grow but also so that we can play our role in reducing the number of young people – currently one million – unemployed in the UK.

    From government we need policy consistency and a clear strategy for growth areas, such as offshore wind energy. We need stable policies to support manufacturing that chime with a long-term vision of how we want the UK economy to look not just in five years but 25 years too. I'm pleased that exactly this project has been begun by the coalition and I hope this will be realised into more than just a glossy report.

    Action needs to be taken now to make the most of the economic recovery when it arrives. As a country we must invest more in skills and in technology to make our manufacturing sector world beating in terms of knowledge, innovation and productivity – underpinned by a consistent industrial and energy policy from government.

    A failure to stay consistent with this action over the next two decades will cost the UK an incalculable amount in lost growth, jobs and opportunities.