A tale of two referenda

The call last week for a referendum on the UKs membership of the European Union and yesterdays announced referendum by the Greek Prime Minister on the proposed bailout and austerity package, draws an interesting parallel.  Referenda are both rare and divisive, especially in the UK.  The reason for the former is that they are not a particular good way of making decisions as they have questionable democratic value.  The reason for the latter is that they usually present a binary offer – in/out, yes/no – as demonstrated by the Electoral Reform referendum last May.  This is hardly conducive of a balanced and moderate discussion in which all possible options are examined.  As an example the recent calls from Euro-sceptics called for a yes/no on EU membership, it was only later after much opposition that a third option in a referendum was considered.

The purpose of a representative democracy is to appoint experts to make decisions on the people’s behalf.  During its passage through the Commons a prospective law is examined philosophically in debates in the chamber, practically as evidence is gathered and considered by committees and technically during its various readings, including a line by line examination.  The vast majority of people have neither the time nor expertise to properly weigh up matters as complex as EU membership nor scrutinise a Parliamentary Bill; besides they are often lost in the fog of misinformation such as that propagated by the media and groups such as UKIP and the BNP.  That’s why we ask politicians to make complex decisions on our behalf.

Similarly referenda can descend into ridiculous arguments such as that over AV; even its supporters weren’t fans of AV but they chose to support the compromise they were offered.  There was no third, fourth or fifth alternative.  This creates two issues; polarised arguments that get lost in emotional propaganda designed to confuse voters.  As the rhetoric is ratcheted up, each side becomes entrenched in polarised positions that present the argument in black and white when it should be shades of grey.  

Secondly, they are fundamentally undemocratic.  Those setting the referenda have decided the policy options prior to the vote taking place; they’re value is somewhat illusory or at best, their application extremely limited.  Those voting aren’t deciding an issue, their deciding which of the politicians decisions to endorse.  For example, the AV referendum was not based on sound analysis of evidence, but a political compromise.  To be truly democratic, it should have offered a range of different systems.  

That point aside, the conclusion to be drawn is that direct democracy in the form of referenda is often not a good approach and is thought with problems as attested to by the call for a vote on EU membership.  However the situation in Greece offers a very different situation and challenges this perception.  At this stage a referendum seems not only politically the right thing to do, but morally also; economically it is likely to prove a disaster.

Politically, the Government is offering the people the opportunity to reject or accept the actions of their government.  The current situation in which the Government is essentially working in spite of its population, can’t continue.  The population are clearly rejecting its current actions; the offer of a vote will allow them to make their view clear.  Morally, its imperative; what happens in the coming months will shape Greece for generations to come, if it hasn’t already.  The austerity measures and bailout package or the alternative – default and withdrawal from the Euro – will shape the fundamental nature of Greece for the next few decades.  In such a situation, a referendum seems appropriate.

Economically it is likely to cause further problems as markets react badly in the short-term and if a default were to occur, we are likely to see a major Lehman-style credit event.  But this is the whole recession writ large; the subtext of the last three years has been the tension between democracy and economics.  Our reliance on the financial sector and its lack of accountability, the socialisation of the bank bailout, ongoing debates over 50p tax rates are all symptoms of this relationship that has faltered now that crisis has arrived.

Can we draw a distinction between Euro-sceptic wishful thinking – that we can maintain our current trading terms and level of influence while withdrawing from every other element of European union – and the crisis besetting Greece?  If we can, it’s by drawing a distinction between the technical debate of one and the philosophical nature of the other.  This might be a false dichotomy, the Euro-sceptics certainly see our membership of the EU as a philosophical issue and the bailout package is certainly technical in most senses of the word.

Perhaps instead it comes down to what is at stake.  The Greeks are voting on the future shape of their society, the social contract, the economic settlement.  The experience of post-Soviet Russia and Argentina demonstrate quite how desperate and fundamentally different things may become.  Withdrawal from the EU would be just another chapter in the UKs steady post-war decline, our economy suffering significantly and our global influence diminishing dramatically.  Whatever your view, it’s hard to begrudge Greeks an opportunity to influence the austerity that’s tearing their society apart.

The social implications of economic crisis

Where economic crisis prevails, social upheaval is soon to follow.  The Arab Spring may offer a glimpse of what is to come in Europe.

Whatever you may wish to call it (The credit crunch, Great Recession, World Financial Crisis etc) , the financial crisis at the end of the last decade has been roundly described as the worst since the Great Depression of the 1930s.  It’s a sobering comparison in a social, as well as economic sense; the rise of fascism tore Europe apart in hitherto unimagined ways.

The lessons of protectionism that exacerbated the Great Depression have already heeded; the dangers of unfettered capitalism less so.  But the Depression sits within the larger chapter of modern history that is the inter-war period; glibly put the First World War begat the Great Depression which in turn begat the Second World War.    

All of these events are interrelated and are difficult to separate from one another.  The devastation of WWI destroyed economies and toppled governments and Empires across Europe.  The economies of Europe attempted to return to their state of affairs in 1914 but this simply wasn’t possible, eventually the world economy collapsed.  Out of this emerged political and social revolutions as fascism swept across Europe.

The policy response of world leaders in 1942-7 reveals much about the lessons learned from the Great Depression just over a decade earlier.  Following another catastrophic World War, world leaders sought to head off the threat of social revolution that was fermenting in the economic ruins of post-war Europe, much as it had done throughout the 1920s and 1930s.  This resulted in the Post-War consensus; capitalist economies regulated by the state, nationalised industry, full-employment and a robust welfare state. 

Both social democrats on the left and economic liberals on the right agreed; the world economy would have to be fair and benefit those people who participated in it if destructive revolutions were to be avoided.  The lessons of the Great Depression taught them that an unemployed and impoverished population would not tolerate a socio-economic system that had left with them with nothing, but others with everything.  This threat of revolution focussed their action and clearly illustrated that there could be no return to business as usual.

A return to ‘business as usual’ has been the sole aim of policy responses to the financial crisis thus far.  Yet as the crisis looks set to take a turn for the worse and sovereign debt threatens to destroy the Eurozone, this approach is no longer tenable.  Should the worst occur the repercussions are difficult to predict, but they would certainly result in an unprecedented global financial crisis greater than that already experienced.  Even a mild crisis would have serious repercussions for the societies in the Eurozone periphery.

In the last year the crisis has developed a social dimension.  Although there is no Soviet Union alternative model for radicals to rally around, there is widespread disenchantment at the status quo.  Italy, Spain and Greece have all witnessed calls for changes to the economy and society.  These will only increase should this crisis engulf the whole of Europe yet further.

The Arab Spring has demonstrated what can happen when economic collapse forces a population to question the assumptions under which they have been living.  Dictators were tolerated when the economy flourished and employment was high; only once the dream was over did people realise the trade-off (economic success at the expense of democracy) was a false economy.  The elites were rich and in power, the general population had no power, no jobs and no security.

The volte-face of both Arab and Western governments from opposing the uprisings to at the very least accepting their legitimacy, demonstrates the survival instincts of governments and their elites.  Hosni Al Mubarak hoped to placate his population with reform, but that was not enough.  Once it became untenable to support Mubarak’s despotic regime, the US quickly moved to oppose it.

Europe is not in the same situation as the Maghreb region by some distance, let alone the post-war Europe of 1945.  But social unrest and a will for change are likely to grow if the economy collapses once more.  The people of Greece, Spain and Italy are already questioning the assumptions upon which their societies are constructed.  Unfettered financial capitalism, does not after all, trickle down its benefits to the wider population but instead trickles its problems down to the bottom in the form of taxpayer bailouts and austerity measures. 

This actually presents an opportunity for serious and meaningful reform, which has yet to take place in the aftermath of the crisis.  European leaders will do everything possible to stave off a social crisis, including closing the barn door after the horse has bolted and implementing serious regulation.  Unfortunately the opportunity to seriously reform our economies and the financial sector will only be achieved if and when we reach the bleakest possible point.

The lesson is that governments and elites are, and always have been, prepared to act decisively when under threat.  It’s unlikely that major financial institutions will ever call for strenuous regulation, but they may accept it if the alternative is a call for mass nationalisation by populations on the streets with nothing to lose.  It will be a case of seeing who blinks first. 

But it is also important to note that social revolution can take place without mobs taking to the streets. Social media and the internet, with their ability to circumvent traditional hierarchies have undoubtedly played a crucial role in changing our major institutions.  Five years ago financial institutions were unquestioned sources of our economic growth, MPs claimed ludicrous expenses as if it were a right, a vote on AV was a mere fantasy of electoral reformers, News International was an unstoppable media juggernaut, North Africa was dominated by decades old dictators and Wikileaks was completely unknown.

Social upheaval and or revolution is not just the preserve of the Left, many right wing governments have come to power to enact austerity measures across the globe.  The de facto privatisation of the NHS seemed unthinkable even a year ago, the threat has yet to recede.  Whether prompted by Left or Right, the major institutions of the UK (welfare state, Parliament, press) have all been subject to serious challenge since 2008.

For now we must wait and see if Eurozone leaders can finally muster the will to take decisive action and prevent a second financial crisis in less than five years.  Depending on the solution adopted, the crisis may not be averted and we may see many more citizens taking to their streets to demand reform, fairness and justice.  The deeper the crisis, the louder the cries; only time will tell if the crisis sinks deep enough for our governments to listen.

California: land of the future

The sovereign debt crisis that threatens to sink the Greek economy and perhaps in time, the world economy should a default occur, is being regularly compared to the collapse of Lehman Brothers.  That incident brought about the crash and 'credit crunch' of 2008 when banks worldwide had to write-down (devalue) their assets and billions of pounds essentially disappeared from the world financial system, resulting in a lack of credit (the proverbial 'credit crunch').  Its effects are still being felt today as the UK economy bounces along the bottom, a full-blown recovery perpetually just around the corner.

But Lehman Brothers by itself did not cause the crash of 2008; it was merely the denouement of a property speculation bubble that would inevitably burst.  Its causes are complicated, but broadly speaking the search for (profit) growth  and the availability of cheap credit led to banks lending to all and sundry (whether they could afford repayments, such as the NINJAs) and packaging up the risks into financial instruments to be sold on to others, a bit like spreading disease via a contaminated bank note that gradually travelled around the world.

The source of cheap credit can be traced to the economic slowdown of 2001; the Dot Com bubble burst and 9/11 threatened to plunge the US economy into recession so interest rates were slashed, reducing the cost of borrowing.  The US Dollar is the primary currency of global trading and as a result the knock-on effects were felt worldwide, cheap credit flooded the global markets.  The availability of cheap commodities from China was also a large element, consumers had something on which to spend their goods and Dollars flooded into China (which is why it is technically the USAs biggest creditor).

The result was an overheated global economy in which Greece and its population had access to cheap credit that allowed them to grow through the boom.  When the house of cards fell, they were left badly exposed.  It then emerged that the Greeks had misled the European Central Bank in order to gain access to the Euro.  However these issues are not what have affected Spain, Portugal and Ireland, indicating a more systemic problem.

But despite the near collapse of the world economy nothing much has changed.  The wealthy get ever wealthier; the poor are faced with huge cuts to public services.  In Greece, taxpayers’ money has been poured in to the country but has simply disappeared back out again into the hands of private investors who have pulled their capital out of the country as it flirts with default.  Our economy is built on the same foundations as it was pre-crash and there is no attempt to alter this; indeed property speculators have returned to the drawing board to revise their plans ready for when the economy takes off once more.

But three years on we’re staring down the barrel of a gun once more; or if you belief the pessimists, staring down a cannon.  The collapse of the Greek economy could bring about the 1930s style depression we’ve all been pretending or hoping could never happen.  

The victims of that outcome are those that had little in the first place, such as the unemployed in Greece.  Arguments that they are the deserving poor because they didn’t pay enough tax are spurious; they were sold the capitalist dream and ran with it.  Further, tax avoidance is hardly the exclusive practice of the Greeks; many wealthy individuals and organisations in the UK continue to follow similar practices yet enjoy the trappings of affluence.  Before moralising on the Greek people, we should take a look in the mirror.  We should also asks who benefits from the 'us vs them' narrative.

In the UK those with the least are also the hardest hit; via cuts in benefits or lack a of jobs for those without formal qualifications.  To place blame on individuals is misleading; they are but one element of a society which we have all created.  If people are falling off the bottom we are all collectively responsible as we sustain the system that creates these disparities.  The same applies worldwide; the UK is a key element in a financial system that is helping to impoverish the Greek people.  On the other hand, some currency speculators and hedge funds are set to make a fortune should the worst happen.

The central problem is that since Lehman Brothers we – or our policy makers – have attempted to patch up the existing system in the hope that it would return to business as usual.  Bank bailouts that transferred the risk from the private to the public sector are a major symptom of this.  This approach has led to where we are today; the potential collapse of the Greek economy and huge drops in the standard of living across developed nations as the fundamental flaws in our system have returned to haunt us and dictate what action we can now take to remedy the situation.  This is before the parlous state of the US economy is taken into account; at some point the enormous national debt and deficit will have to be addressed with huge repercussions for the world economy.

There have been no concerted efforts to change the economy or society, to address huge disparities in wealth, opportunity or standards of living.  The wealthy are now more affluent than before the recession, the rest are growing poorer as inflation and commodity prices shrink real incomes.  By most estimates we have passed the point of peak oil and therefore its price will continue to raise regardless of short term factors such as the Libyan crisis.  There is little appetite for change outside of those nations worst affected; presumably we are all hoping it won’t affect us.

California offers a terrifying glimpse of the future.  By itself the state of California is the eight largest economy in the world, yet its government is essentially broke, unemployment is soaring, the prison population is the highest in the world and 15% of its inhabitants live below the poverty line.  As oil prices soar a city built for the car is impoverishing its commuters who spend their disposable incomes getting to and from work.  But it’s still home to Hollywood and Silicone Valley and a fantastic number of millionaires and profit making corporations, so the situation in which it finds itself is all the more disconcerting. 

California's problems don't arise exclusively from the credit crunch, they're part of a much wider issue.  Peak Oil came arrived in 2005 and would always harm a city so betrothed to the car.  The housing speculation bubble that has impoverished thousands was an inevitable consequence of the capitalist system; the Dot Com bubble burst as speculators piled in to make a quick profit and to stave off collapse the housing bubble was born. 

But the huge disparities in wealth - a major problem in itself - have amplified these issues.  Those at the bottom have even less than before thanks to job losses, the cost of fuel and mortgage defaults.  The prison population soars as the wealthy become ever fearful of those with nothing.

It is essentially, a society of extremes of wealth and opportunity and the UK is on a similar path.  The crash of 2008 did not amplify these problems in the UK to such an extreme as the underlying problems are less acute, but government cuts will soon see to that.  The fallout of the last crisis is not only that worst-off feeling the greatest pain and the old way of doing business continuing unchallenged, but the tax payer propping up a clearly flawed system.  The result is another crisis in which the same is likely to occur again; Greece is experiencing more austerity than any other developed nation ever has done and more is being demanded.

The UK and California are very different places, but we should ask if the situation in which the it finds itself is one we would like to draw anywhere near to.  If not then new answers to the same old questions need to be found; preferably before the next collapse occurs.