Excellent: Ed Balls starts to back away from Eurozone bailouts


4:54 pm - April 8th 2011

by Sunny Hundal    


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I blogged earlier today about Labour MP John Cryer warning that working people and and the unions are likely to get increasingly angry over the Labour party backing Eurozone bailouts to the hilt.

Now it seems Ed Balls is also moving in that direction, albeit slowly.

In an interview with BBC News today he expressed scepticism of participating in the bailout of Portugal. I hope he will go further.

Presenter on BBC News asks:

We don’t know exactly what’s going to emerge from Budapest but if, as looks quite possible, the UK has to underwrite £4 billion of any loan giving, under existing arrangements and the Chancellor decides that’s the right thing to do, would you support him in that?

Ed Balls replies

Well we’ll have to wait to see the details of the deal but as a member of the IMF first of all the UK will be part of this discussion, also as a member of the EU. There was a facility agreed last year by Alistair Darling when he was Chancellor, and by George Osborne, on the weekend of the election – there could be a contribution from that.

But I have to say, I think this is a crisis of the eurozone and the clear bulk of the financing should come from the eurozone countries as well. And I think what we need as Britain to be doing is pressing the eurozone to actually face up to the nature of the crisis they are going through because simply having austerity package after austerity package, bailout after bailout, it’s not working.

The problem in Portugal is that the economy has not grown for years. The markets are now saying it’s not going to grow for the next few years. If you’re not growing then it’s very hard to get your deficits down and in the same week we’ve got the German economy clearly also stuck into a tough approach to fiscal policy. We’ve also got interest rates going up in the eurozone. If you’ve got a whole continent not growing and certain southern countries stuck into the euro, having a really hard time as well then it’s very very hard to deal with this.

And simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs. Until it gets one I fear we’re going to have a continuation of these problems.

The last line needs to be repeated endlessly.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


As you unaccountably fail to mention it, it’s worth pointing out that it was Labour who signed us up to Euro bailout mechanism.

The obvious answer from the point of view of those heavily indebted is to leave the Euro, devalue and force bondholders to take haircuts. It wont be much fun for us if they do but then neither is lending ever more cash to a bad risk at low rates.

2. scandalousbill

Falco,

Given the dependence the UK has on EU markets for export customers, and given the fact that the Osborne growth projections rely to a significant degree upon these exports, how do you feel that the UK will emerge unscathed should the PIIGS default? This is the only scenario where the UK participation in the bailout mechanism would be a detriment to the UK

Secondly, the differences between the interest rate charged by the UK in these bailouts are favourable to the cost of these funds. A default would wipe such a gain away.

@1 Falco

It mattered not how Darling voted we would have been out voted anyway and effectively as an EU member had no choice.

@3 True, however is was a pertinent detail that had somehow gone missing and perhaps a protest vote might have gained him some sympathy. None of the parties like to drag up the amount of power that has been ceded nor mention the thoroughly dishonest twisting of the relevant clauses to establish the bailout mechanism though.

@2 “how do you feel that the UK will emerge unscathed should the PIIGS default?”

I don’t think we would. We’re looking at the shitty end of the stick whichever way this plays out. What I was suggesting in 1 was that it would be in the PIIGS interest, not so much ours, to exit. However, if they do take this option then it wouldn’t be all downside for us either. We wouldn’t have an open ended liability to fund and the PIIGS would be on their way to dealing with the structural issues behind their debt that the bailout is only masking.

5. The EU - Billions in wasted British money

“Given the dependence the UK has on EU markets for export customers, and given the fact that the Osborne growth projections rely to a significant degree upon these exports, how do you feel that the UK will emerge unscathed should the PIIGS default?”

Non EU members, Norway and Switzerland export twice as much per head to the EU as Britain does and they are not participating in the bailout.

See the website of Labours euro realists

“Labour Euro-Safeguards Campaign”

Chair: Austin Mitchell MP, House of Commons, London, SW1A OAA.

http://www.lesc.org.uk/

6. The EU - Billions in wasted British money

“Tony Benn speaks in favour of a referendum”

http://www.youtube.com/watch?v=o0I-ZdvQz1o

7. Charlieman

Ed Balls presents an incoherent case.

1. He spoke about the failure of austerity programmes in Portugal and Greece, and then says “no bailouts”. Without loans, Portugal will have to become more austere or go bust. With loans, Portugal has the opportunity to develop its economy and pay back what it owes.

2. The bailouts are loans, not gifts. The UK has the opportunity to borrow money at one rate and lend it to Portugal at a higher rate. It is what the UK government has already done for Ireland.

3. If Portugal goes bust, the UK government will lose £4 billion directly. Indirectly, the UK economy will lose much more.

4. The economy of Portugal is not only a Eurozone concern. It is a worry to trading partners outside the Eurozone including the UK or Brazil.

5. If Balls believes that it would be too risky for the UK to loan Portugal £4 billion, why does he assume that Eurozone members will pick up the tab? If it is too risky for us, it should be too risky for them.

6. Portugal needs friends at the moment. Portugal will not be in economic trouble for eternity. Portugal may not remember its friends but it will certainly remember its enemies.

7. “And simply piling austerity on austerity is not going to work.” But Balls is not suggesting a less austere solution. He is arguing that somebody else make the loan (see point 5). Balls’s final argument is in essence that Portugal, Greece et al need to be able to borrow more than they are currently asking.

@2. scandalousbill actually the EU relies on trade with the UK more than we do with them, we have a huge trade deficit with them, and a massive trade surplus with places like the US

9. Charlieman

@5 The EU – Billions in wasted British money: “Non EU members, Norway and Switzerland export twice as much per head to the EU as Britain does and they are not participating in the bailout.”

The population of Norway is c. 5 million, Switzerland c. 8 million. That means that exports from the UK are about three times bigger than the sum of those two nations.

The interesting thing in those figures is how poorly the UK trades with its neighbours.

Note also that not a penny has been lost (so far) in supporting Eurozone economies.

10. The EU - Billions in wasted British money

http://blog.peoplespledge.org/2011/04/06/colin-bullen-of-labour-euro-safeguards-–-the-essence-of-democracy/

Colin Bullen of Labour Euro Safeguards – The essence of Democracy

“Unless we withdraw from this undemocratic organisation then soon elections will be nothing but a hollow sham and we will be unable to control those in power. When one considers the sacrifices made from the days of the Tolpuddle martyrs through the suffragette movement and the fight to assert the rights of the electorate to hold their rulers to account then the chance of a referendum to return power to the people is one all true democrats should support….”

11. Richard W

Mr Balls is going for the perfidious England title. Who are England’s as opposed to Britain’s oldest allies in the world? Umm, Portugal. They have not exactly been allies with Ireland over the years.

12. Charlieman

@8 Dan Brown: “actually the EU relies on trade with the UK more than we do with them, we have a huge trade deficit with them, and a massive trade surplus with places like the US”

The UK’s trading relationship with other EU countries is not a dependency. We buy goods and services from them because the deal appears good to us and to them.

In the near future, we may rely on gas from Russia which is a dependency and is a bad thing.

13. Charlieman

@11 Richard W: “Who are England’s as opposed to Britain’s oldest allies in the world?”

This point came up in a side discussion on LC a few months ago. If you walk around Portugal, you cannot escape Britishness. Every historic town has a letter box designed in the UK with a Portuguese crest.

When Portugal became a democracy and member of the EU, British trade tailed off. Those events corresponded with UK inability to make anything very well, but that selling failure must be a more complicated story.

And, as exhibited on news reports, don’t educated Portuguese people speak English so well? Unlike the Danish and Dutch, they haven’t been watching BBC TV for all of their lives…

14. Richard W

We actually try not to be exposed to Russian gas through doing bilateral deals with Norway, Netherlands and Qatar. Russia can’t be trusted in anyway. Shale gas promises to be a game changer and there is lots of it including under much of England and Scotland.

http://blogs.ft.com/energy-source/2011/04/06/us-energy-dept-shale-adds-40-to-global-gas-supplies/

http://www.eia.gov/analysis/studies/worldshalegas/pdf/fullreport.pdf

Without loans, Portugal will have to become more austere or go bust. With loans, Portugal has the opportunity to develop its economy and pay back what it owes.

No. You default. You restructure the debts. You tell the ones who took the biggest risks to bugger off (after all, they invested in something, and they lost money) and you stabilise the economy. Then once it grows again (unlikely if you push in a severe austerity package) you pay off restructured debts.

I thought this was a good analysis of the situation and the conflicts by Paul Mason. Moreover, I notice more and more folks on the left across Europe are coming to the view that it is in fact the current set up of the Eurozone that is a busted flush. Lefties on this site have not realised that yet, but they will eventually come to that conclusion. Sure, they will default. That is why the private sector capital markets will not lend to them. However, the EU/ECB binds them against default, so the only way that they can restructure their debts and get their unit labour costs competitive is by in fact by leaving the EZ. The alternative is internal devaluation and deflation over many years which will be painful and lead to social conflict. To say they should default is to also say that they should leave the EZ because one would lead to the other.

http://www.bbc.co.uk/blogs/newsnight/paulmason/2011/04/trichet_welcome_to_my_great_bi.html

My teacher tryed for 2 horus nowadays to obtain my to understand this, thank you!

The UK will NOT escape unscathed should the PIIGS default.
All for one and one for all.

19. Charlieman

@15 Sunny Hundal: “No. You default. You restructure the debts.”

Apologies for confusion. My definition of “going bust” is to default on loans. Thus my point becomes that “Without loans, Portugal will have to become more austere or default on existing debt.”

Default is scary and the consequences are unknowable. If I default on my bills and reschedule payments, those owed money become upset and will not lend me any further credit. Risk of default by a single individual is built into how credit is issued.

Banks that loaned money to Portugal ten years ago did not conceive that there was a risk of default. Somehow Portugal, which is in between governments, needs to create confidence that it is credit worthy and going bust is not the answer.

20. Anon E Mouse

scandalousbill – If people in overseas countries want to buy our manufactured goods and we are legally allowed to sell those goods then who cares if they fail or not?

What is it exactly that we sell to Greece or Portugal? Apart from supporting their tourist business…

It’s their problem and Portugal and Ireland dithering and Greece lying about their economic problems has got them to where they are.

We should have helped bail Ireland because it directly affected our exports. I cannot see a single way Portugal can get out of this mess and remember it’s not the bailouts that are important (there is after all a mechanism for that) it’s when they default or the public in those countries or Germany just say “That’s enough”.

Spain is too big and has a chance to get out of this unless the markets aggressively go after them.

What are you doing in these parts anyway scandalousbill – a good Labour supporter like yourself? ;-}

21. Richard W

Just to be clear what we are speaking about in relation to the Portuguese so-called ‘ risky loans ‘ that they should just default on. This is sovereign debt not private sector debts that the state have assumed. Sovereign debt that was paying for teachers, health services, pensions and public sector workers. The Portuguese case is completely different from the Irish situation and that is why it is wrong to lump them together as if they are the same. The state in Portugal can’t internally finance itself i.e. they can’t afford the state that they have built. Now to say that they should just default on the investors who have been financing the state because paying for the Portuguese public sector is ‘ risky.’ Why would investors continue to pay for the Portuguese public sector when they have just suffered a default?

22. Anon E Mouse

Richard W – I wasn’t trying saying Portugal and Ireland were in the pickle for the same reasons just that both their electorate’s seemed to dislike the austerity measures which meant the dithering by the respective governments meant they both got booted/will get booted out at an election.

Greece is in a mess because it cooked the books to get into the Euro and now will have (shock to the public) to increase taxes to pay the bills back…

23. Richard W

@ Anon E Mouse

I was really referring to Sunny when he said Portugal should just default. I can see the argument for haircuts and restructuring of debt in relation to Ireland. In the Irish case it was the state who took on private sector debts and burdening the taxpayers with the debts. However, he wants to tell the people who have been financing the public sector in Portugal to ‘ bugger off ‘ because financing governments is risky. At the same time the investors told to ‘ bugger off ‘ should continue to provide finance because Portugal must not cut spending and they clearly do not have the money or they would not be asking the market for funding. I don’t think Sunny has thought this one through.

15. Sunny Hundal

” No. You default. You restructure the debts. You tell the ones who took the biggest risks to bugger off (after all, they invested in something, and they lost money) and you stabilise the economy. “

24. Charlieman

@20. Anon E Mouse: “What is it exactly that we sell to Greece or Portugal?”

To Portugal, we sell spare parts for the infrastructure that they bought from us a generation ago. Making stuff and selling stuff generates a healthy income stream.

To Greece, aside from telephony and other goods that we make well. we sell meat from sheep. The value of that export is not huge on a national scale. But in our interconnected world, what Greeks eat for dinner determines the income of UK farmers. By bizarre but logical connections, survival of the lowest earning farmers in the UK is dependent on economic confidence in Greece.

25. scandalousbill

Anon,

You say,

“We should have helped bail Ireland because it directly affected our exports. I cannot see a single way Portugal can get out of this mess and remember it’s not the bailouts that are important (there is after all a mechanism for that) it’s when they default or the public in those countries or Germany just say “That’s enough”….Spain is too big and has a chance to get out of this unless the markets aggressively go after them. ”

While I agree that the UK’s direct exposure to Portugal is marginal, (Robert Peston has an interesting overview).
http://news.bbc.co.uk/today/hi/today/newsid_9435000/9435645.stm

It is indeed difficult to see, given the high rate of interest these bailouts carry, that default is not a very high risk for Ireland, Greece or Portugal. In fact, default may be their best option. While it would force them out of the Euro, these countries after short term pain, would regain solvency in the absence of the current and proposed heavy debt pressures.

I think, however, the exposure of Spain t the Portuguese crisis, and the Spanish banks have significant funds tied there, would have a knock on effect that would significantly impact the \UK as well as the euro. Spain becomes the acid test A Spanish bailout would definitely be difficult to underwrite and Spanish debt default would have wide ranging repercussion for both the Euro and Pound fiscal structures and institutions.

That being said, it is Portugal that may well be the straw that broke the Camel’s back.

Scandalousbill is correct that it is Spain who are the big ones in this situation. The EU/ECB do not give a shit about the other three as they are too small in relation to the whole Eurozone to matter. All the patched solutions so far have been to contain contagion spreading to Spain. Even the EU/ECB might not have capacity to bailout Spain if the market turned against them. The Europeans would then humiliatingly be forced to turn to the IMF for help with Spain. They will do anything to avoid that humiliation no matter the social cost to the periphery. Market sentiment towards Spain has been improving recently. However, all that could change if things in Portugal spiral out of control. Geopolitics are as much in play in the European debt crisis as economics.

The chart @ 16 illustrates just how uncompetitive the periphery have become vis-a-vis Germany. All consumer prices, products made by peripheral firms and wages are 25-30% too high. One way or another those prices must get back into line or the economies will not grow. If the economies have no prospect of growing the market will not keep lending them money. Basic economics would dictate that their local currencies would depreciate by 30%+. However, that option is not open to them through being in the euro, which acts as a straitjacket on their economies. Therefore, unemployment, huge cuts in services and grinding deflation over many years is the only other option. No democratic government has ever survived the level of austerity that the periphery population have to go through. Who knows what the future holds but there must be tipping point where the costs of leaving are no worse than the pain of staying in the monetary union.

No. You default. You restructure the debts. You tell the ones who took the biggest risks to bugger off (after all, they invested in something, and they lost money) and you stabilise the economy. Then once it grows again (unlikely if you push in a severe austerity package) you pay off restructured debts.

The biggest risks? Lending to Portugal (as opposed to Portuguese banks or companies) was considered the least risky loan imaginable. As an OECD member, Portgal’s sovereign debt was considered, under Basel II, as carrying zero risk of default. An interesting paper on sovereign risk is here:

http://www.bis.org/bcbs/events/b2eacla.pdf

I also think you should at least consider the fact that a Portuguese default will raise the cost of borrowing to such a degree that severe cutbacks in public spending would be as much a feature of a default as of a bailout. It’s certainly not a panacea.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Excellent: Ed Balls starts to back away from Eurozone bailouts http://bit.ly/gU7Eqt

  2. Richard Murphy

    Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  3. Simon Barrow

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  4. Duncan Weldon

    Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  5. Tom Miller

    RT @DuncanWeldon: Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  6. Patrick Osgood

    RT @DuncanWeldon: Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  7. Liam Shields

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  8. milli tant

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  9. neilrfoster

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  10. John Farrar

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  11. Lee Hyde

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9

  12. Fazey Pie

    RT @DuncanWeldon: Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  13. Searching Finance

    RT @DuncanWeldon: Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  14. Calm Confusion

    Excellent: Ed Balls starts to back away from Eurozone bailouts | Liberal Conspiracy http://t.co/pinemk4 via @libcon

  15. Angelo Weekes

    RT @DuncanWeldon: Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  16. clint iguana

    RT @libcon: Excellent: Ed Balls starts to back away from Eurozone bailouts http://bit.ly/gU7Eqt

  17. James Doran

    RT @DuncanWeldon: Ed Balls absolutely correct on austerity & 'bailouts' not working in Europe. http://tinyurl.com/6cwn37f

  18. sunny hundal

    Very glad that @EdBallsmp is sounding the alarm on Eurozone bailouts.We shouldn't go along with them http://bit.ly/gU7Eqt

  19. sajj

    RT @sunny_hundal: Very glad that @EdBallsmp is sounding the alarm on Eurozone bailouts.We shouldn't go along with them http://bit.ly/gU7Eqt

  20. ray turner

    RT @sunny_hundal: Very glad that @EdBallsmp is sounding the alarm on Eurozone bailouts.We shouldn't go along with them http://bit.ly/gU7Eqt

  21. Grace Jessup

    RT @sunny_hundal: Very glad that @EdBallsmp is sounding the alarm on Eurozone bailouts.We shouldn't go along with them http://bit.ly/gU7Eqt

  22. Omar Sahal

    @RichardJMurphy RT Ed Balls "…austerity on austerity…not…work[ing]. Europe needs…growth and jobs" http://ow.ly/4w9J9

  23. matthew smith

    RT @RichardJMurphy: Ed Balls "simply piling austerity on austerity is not going to work. Europe needs a strategy for growth and jobs" SO TRUE http://ow.ly/4w9J9





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