In These New Times

Here, New Labour mouthpiece, Will Hutton, gives a fairly comprehensive outline of the Brown plan, a “global new deal”. This involves using the UN. IMF, World Bank and EU to spearhead the kind of policies already put into the practice in the US/UK i.e. massive handouts to financier interests and the bankrupting of the nation state. Brown understands that reform is necessary within organisations like the IMF, UN etc. In other words, in order to maintain their credibility some other nations must be given a place in the inner circle. This not the kind of refoundation of global organisations we need for the new multipolar world.

“But now, more than ever, we need a stronger, free-trading EU with pan-EU financial regulation that speaks with one voice as a core constituent of a new order.”

This is a reference to already existing plans to create a huge trans-Atlantic free trade area. It is also in this context, and this alone , that we should understand Mandelsohn’s pro-Euro sentiment.

Will Hutton

Guardian

1st March, 2009

This week, Gordon Brown becomes only the fifth British prime minister to address both American houses of Congress. He will speak against the background of the gravest economic times in living memory. Each of his listeners will know that, without massive American government support, both the US banking system and its car industry would now be bust. Instead of unemployment rising by a sickening 600,000 a month, it would be going up by more than a million.

Over the last three months of 2008, American exports plunged by 24% with the annualised decline in GDP dropping by a stomach-churning 6.2%. The new president has submitted a 2009 budget anticipating a deficit of 12% of GDP – in British terms, around £180bn.

America’s travails are reflected in a crisis enveloping the entire world. Japan’s industrial production fell 10% in January; its exports fell by 46%. Eastern Europe is emerging as the most economically vulnerable part of the EU, so that Austria’s banking system, exposed to East European lending, is suddenly looking fragile. The interconnectedness of the global system makes no place or bank safe. The open question among economists and, increasingly, the financial markets, which touched new lows last week, is whether an acute recession is toppling into a global depression because so much economic poison is being inserted into every corner of the system on such a scale at the same time. Britain’seconomic policy makers are using maximum and thought-through force to underwrite our stricken banking system, but what disturbs them is that so few other countries seem to understand – beyond the rhetoric – that the problem is global. Anything Britain does would be so much more effective if it were part of a collective and co-ordinated effort.

Brown needs to say this as he spells out his case this week for a global bargain at the G20 meeting in London on 2 April. He must tread a fine line between being courteous to his hosts and spelling out harsh realities. One senior cabinet minister told me that the atmosphere in today’s Washington is eerily reminiscent of the US in 1944 that Robert Skidelsky describes in his biography of Keynes. Keynes might have been the most formidable economist of his generation, but whether it was during Britain’s negotiations over war loans or later over the foundations of Bretton Woods, even he could not persuade the Americans to take an enlightened, even moderately internationalist view of how the postwar trade and financial order should be structured. They simply organised the system so that the dollar and the US would be king. As another minister says, the Americans feel they don’t need to make compromises in the need for international collaboration because they can go it alone.

Brown has to persuade them otherwise. He is hardly likely in one speech to change attitudes, but whether the US likes it or not, it is deeply embedded in the global economy. Every one of Obama’s recent efforts, whether fiscal stimulus or measures to restore American bank lending, would be more effective if the rest of the world was with him. Equally, America is in this position in part because of its role in the world economy. The world savings glut of the last decade was deposited in New York, driving down American interest rates. American banks sold trillions of dollars of sub-prime mortgage advances at teaser interest rates to no-income households because overseas investors were suckers enough to buy the resulting securitised assets. AIG, the US’s largest insurance company, would still be solvent if it had not bought hundreds of billions of now valueless credit default swaps in the deregulated financial slum that was London. So it goes on.

One sign of optimism is that Obama has given Brown his platform. His guest might have been one of the cheerleaders of financial globalisation and light-touch regulation, whose speeches are now an embarrassment. But Brown was one of the first to see that the world has changed and that the interdependencies that produced such growth in the good times have all the power to produce a self-reinforcing depressive vortex in bad times. He is an international financial statesman and if he can’t persuade Congress, then be sure that Angela Merkel, Nicolas Sarkozy and Japan’s Taro Aso won’t have a chance.

It needs to be made clear to both Democrats and Republicans that if the EU, Britain and the US had got their act together and collectively announced a “shock and awe” intervention in the banking system, the impact would have been huge. The elements would have been a commitment to keep banks’ capital high whatever the depth of the slump, jointly to kick-start the global money markets, to announce that toxic assets would be insured everywhere along the lines announced for RBS last week and that governments would create “good banks” to plug the worldwide lending gap. They could also take joint action on capping bank salaries and bonuses, jointly committing to recover bonuses and pensions from executives who led their institutions to bankruptcy. Fred Goodwins thrive in every country.

Nor should Brown stop there. He likes to make the case for an invigorated IMF. But it needs cash. It now has $300bn. It should have $500bn as a step towards the necessary goal of $1 trillion. He should explain how the international system needs to be run with more trust and fairness and that weaker countries need to know a reinvigorated IMF will protect them from speculation. They should not need to build up huge protective financial reserves that end up deposited in New York, and so should spare the US from having to deal with so much liquidity. That means that their voices have to be heard in the inner governing councils of the IMF and that means that the rich countries have to surrender votes and influence.

One obvious and long-standing grievance is that the rich countries are over-represented. Brown should say that part of his global deal is his recognition that the EU should represent Europe in the IMF and that individual EU members should thus lose individual votes. This opens the way for the IMF to have a fairer and rebalanced constitution, crucial to its legitimacy. The same principles should be extended to the World Bank. And both should regularly be held to account by a similarly reconstituted United Nations.

In other words, avoiding depression means building a fairer capitalism and fairer institutions to govern it. And, of necessity, one of the building blocks is a strengthened EU that can speak for all its member states in the supranational institutions to create space for less-developed countries. If the US is going to be invited to downgrade its formal influence as part of creating fairer world institutions, then European countries must follow suit. Creating such a system is called statesmanship and the impact will spill over into climate change, security, terrorism and every dimension of global regulation.

Mr Brown won’t dare to go that far; it may disturb British Eurosceptics. But now, more than ever, we need a stronger, free-trading EU with pan-EU financial regulation that speaks with one voice as a core constituent of a new order. But if he is not prepared to take risks for the dividend of avoiding slump along with better environmental and security outcomes, why should Obama take on the “America first” brigade? The London summit in 1933 could not break such entrenched prejudices; the consequence was continued stagnation, trade protection and, ultimately, war. We have to hope that the 2009 summit does better. Mr Brown is in pole position to make sure that it does.