The Greek debt crisis of spring 2010, and the austerity agenda that it heralded, brought tear gas and smoke bombs to the streets of Athens. But it also ignited an otherwise colourless General Election campaign being fought two thousand miles away in the UK. Seemingly overnight, the storm in Athens provided the context for a toughening of the economic message that had been long overdue here. If we failed to elect a government sufficiently determined to tackle the UK’s gaping budget deficit (or so the story went), financial calamity of the Greek variety would soon be visiting our shores.
Five years on, and the perennial Greek financial woes once again provide the backdrop to a domestic General Election campaign. However this time its dictation of the mood is subtler – and potentially more dangerous. After half a decade of grinding reform, acute debt servicing and squeezed public expenditure, the Greek electorate has rebelled against the austerity consensus by electing a radical Syriza-led government.
Cast as the plucky leftist challenger to Germanic fiscal rigidity, the new Greek leadership has since won a four month bailout extension. As ever in the Eurozone saga, more time has been bought as politics continues to outweigh economic realities. Expect to see the anti-austerity agenda debated more widely over the coming months, and the sustainability of the Eurozone without Greece.
Incidentally the strongest critics of Athens at the moment hail not from Berlin, but from Ireland, Spain and Italy who feel that they have swallowed their ECB austerity medicine and finally see light at the end of the tunnel.
The Greek situation matters to the mood of the UK electorate. For a start, voters may well reflect on how little has changed since they last went to the polls. In spite of it all, the Eurozone has muddled through courtesy of ultra-low interest rates, sheer political will and the markets’ incorporation of Grexit risk into their assumptions. For all the talk of imminent collapse and economic meltdown, the reality has in many ways been far more benign. As a result, talk of looming disaster no longer carries the weight it once did.
Second, challengers to the consensus are on the march as the schism grows between northerly Eurozone members and those with a more Mediterranean outlook. Extreme leftist movements are swiftly going mainstream in places like Spain, where the fledgling Podemos party commands 30 per cent in polls in spite of having been in existence for only 18 months. This is largely a reflection of voters’ desperation, but it also indicates a growing appetite for a radically alternative way of thinking that has been embraced, albeit in different form, on these shores.
Finally, global quantitative easing programmes have not (yet) proved inflationary. In fact, the imminent threat in the West is now one of deflation, which is why the European Central Bank has belatedly and cautiously turned to the printing presses itself. And add to this the fact that interest rates remain at rock bottom and continental governments continue to be able to borrow from the markets at suicidally cheap rates. In short, we have now had over half a decade of sustained borrowing and money printing – and the roof has not fallen in.
Looking across at Greece in spring 2015, therefore, the British voter might mistakenly conclude that the risks of choosing a path other than austerity are not quite what they were five years before. Would it really be that economically reckless for the British government now to borrow a little more in order to give the NHS, social services and perhaps even our Armed Forces what they need, particularly now that the economy seems to be growing so robustly?
The Coalition has spent much of its time in office carefully building a consensus on the necessity for sustained spending constraint. That narrative was bought into by the electorate perhaps more readily than we might have imagined. But the reaction to George Osborne’s most recent Autumn Statement showed its potential limits. When he forecast a budgetary surplus by the end of the decade, he was roundly attacked for the scale of spending cuts that reaching such a target would entail over the next parliament. This has given Labour a window of opportunity, allowing them to put forward an ‘austerity lite’ agenda, a theme they are likely to build on over the coming weeks.
Opinion polls have long suggested an indeterminate outcome following May’s ballot, with the Scottish Nationalists boosting their representation substantially north of the border. Nicola Sturgeon, the new SNP leader, has already called on Ed Miliband to champion an alternative approach to austerity that could see an additional £180 billion spent of public services by 2020 and would be a condition of any pact between their parties.
Labour has shown itself receptive to such a prospective deal by choosing to use last week’s Opposition day debate to reject the government’s ‘failing austerity plan’. We Conservatives comfort ourselves by thinking it a great danger for Miliband for him to be cast as Britain’s own Tsipras or Hollande, devoid of any support from big business. But the nagging doubt is that such a characterisation would be in tune with the mood of the times, which is increasingly distrustful of the establishment and large corporations.
This all adds up to a political problem, certainly. But it is also an economic one. The Coalition has hitherto done an excellent job of convincing the public that it has presided over a period of sober restraint. Yet while Greece has borrowed £185 billion under its bailout plan since 2010, the Coalition itself looks set to have borrowed £572 billion by the end of its term.
One of the Chancellor’s most impressive achievements has been to maintain the confidence of the markets in spite of this. But the truth is that while we have talked the talk of austerity, a fair bit of the heavy lifting is yet to come. Assuming that we continue to ring-fence health, schools and international aid, the OBR forecasts that spending on non-protected departments will need to halve from £147 billion in 2014-15 to £86 billion in 2019-20. The job of fixing the public finances is not even halfway through and will need to be completed at a time of increasing, not diminishing, risk globally.
We are entering uncharted waters within the international economy. Far from paying down debt since the financial crisis seven years ago, the 16th Geneva Report revealed in September that the total burden of world debt has increased from 180 per cent of global output in 2008 to 212 per cent in 2013. Much of this increase was driven by China, which vastly expanded credit in the aftermath of the financial crisis to keep the global economy going and has woven a large amount of risk into its economy as a result, primarily through the inflation of a rampant real estate bubble.
Meanwhile, central banks have hit the printing presses with gusto. The United States may now be winding down its programme of quantitative easing but Japan, the world’s third biggest economy, has been cranking up its own version in an audacious attempt to tackle deflation. Net global QE by the European Central Bank and Bank of Japan is due to hit $400bn a quarter, with the latter’s programme so colossal that it is essentially buying up Japan’s entire bond market.
These are unprecedented policy interventions that ought to be highly stimulative. Yet all the evidence suggests that the effectiveness of quantitative easing in reviving economies is ever more in doubt. It begs the question: how will this all end?
I have written before to express my concern that excessively loose monetary policy, alongside the racking up of ever more debt, will eventually spark another financial crisis on a potentially more devastating scale. When all the normal market signals have disappeared under a mountain of cheap money, it remains nigh-on impossible to make a rational investment decision, ensuring that risk is always and everywhere mispriced – and creating enormous danger at the point at which the authorities try to return the economy to some kind of normality.
The situation in Greece may indicate a fracturing in our own consensus on austerity, but we cannot allow Miliband and his fellow travellers to develop that theme unchecked as we approach May’s General Election. The UK remains hugely over-leveraged at a time when there are considerable risks in the global economy that could well lead to fresh financial crisis.
The greatest signal the Chancellor can now send to the electorate and markets that he is serious about fixing our public finances is the delivery of a deeply unexciting Budget. No glittering giveaways. No electoral sweeteners. Just the sober message that no matter the rumblings on the continent, Britain understands that the need to live within our means is every bit as pressing as it was five years ago.