Bill Jamieson: March towards euro Armageddon

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The current economic crisis leaves future governments with one major priority – debt management

'IT IS exciting. It is also terrifying". Such was the crisp summation on BBC Radio 4 yesterday on a story all but blotted out by the Murdoch-phone-hacking-BSkyB affair: the deepening financial crisis across the eurozone.

Italy, the latest to enter the ring of fire, with the cost of servicing its debt pushed close to unsustainable levels, has now brought forward a €40 billion (335.2bn) austerity package to be approved by its parliament today. This may help Italy in the interim - though it only moves the storm back to Greece where a sovereign default now looks certain. The wrangling among senior eurozone officials in recent weeks is not over the exact state of the Greek economy (how precisely do we need the definition of "dire" to be?) but how to effect a default without calling it such and triggering the full consequences of default.

Everything, they seem to think, is in the name. But the reality for tens of millions while this game is played out is that Italy joins Greece, Portugal and Ireland (the latter two experiencing further credit downgradings in the past week) where austerity budgets have effectively pushed "normal" politics aside.

How fortunate, in a way, for the UK government that the Murdoch scandal has kept the deepening implications of market events off the front pages. For this rolling storm across Europe will have profound implications for politics and economics here in Britain - and for a separate Scottish government should that be the path we choose.

For the past 60 years the business of government has been centrally about expansion: what more it can do and which services it could provide. This is now checked at best and will be forced into retreat.

More than ever in our history, government is caught between the two massive requirements: one of servicing the debt incurred by previous generations and administrations; and the other, of managing the growth of future debt: making provision for rising pension liabilities and the costs of an ageing population. The proportion of the population aged 65 and above is set to rise from around 17 per cent currently to about 26 per cent in 2061 - and with half the inward migration flows experienced in recent years.

Little wonder that it will seem to a new generation of politicians that history has left them a role no greater than old age home operators and debt commissioners. The scope for the type of government and politics enjoyed for half a century will shrink drastically relative to these two obligations.The implications of this have yet to be grasped by social democrat parties: what is the strategy for a debt repayment era - other than debt repayment?

For an independent Scotland, debt management will be its single greatest obligation. It is unlikely that Scots would vote in favour of an independent Scotland joining the euro, given everything that has transpired. But whether we stick with sterling or go for a separate currency, a credible debt management programme will have a critical bearing on our prospects.

Meanwhile, two developments in particular merit attention. The first was the revolt in the Commons earlier this week when more than 30 backbench Conservative MPs voted against the 88 per cent hike in Britain's contribution to the International Monetary Fund to 21.15bn. That is an extraordinary figure. The increase will be used in part to boost the IMF's fire-power in eurozone bail-outs. The motion to increase the UK's contribution was passed in Westminster by just 274 votes to 246, the opposition front-bench also voting against, even though the increase was initially mooted by Labour when in office.

Whether even this will be sufficient to meet the full scale of eurozone bail-outs in prospect has to be in doubt given the manner and degree to which market apprehension has spread beyond Greece to settle on the Eurozone's third largest economy and one with a debt to GDP ratio of 119 per cent. While this ratio is largely unchanged since the mid 1990s, a large chunk is soon to fall due. Today's austerity package marks the end of Silvio Berlusconi's dolce vita.

The creation of the euro without first ensuring underlying convergence of the economies taking part is proving Europe's single biggest policy disaster of the post-war era. The problems of Ireland, Greece, Portugal and Spain have been made massively worse by the loss of ability to devalue and by entrapment in a one-size-fits-all interest rate regime largely responsible for the asset price bubble in the first place and which is now quite at odds with underlying conditions. This is the economics of Bedlam. And quite why UK taxpayers should be asked to assume greater debt liabilities to bailout a system so fundamentally flawed is little short of scandalous.

There is a second development that gives rise to concern over our debt and borrowing position: where we stand on Whole of Government Accounts. Yesterday may hardly have been the most propitious time for the government to have unveiled new methods of calculating its long-term liabilities including estimates of unfunded pensions and the outstanding totals for PFI contracts.

While no new "black holes" have been discovered and the headline total for Public Sector Net Debt (66 per cent of GDP) remains unchanged, this exercise reminds us that spending constraint is not some passing "soft patch" that we will leave behind once debt on the conventional National Accounts measure starts to fall. It will become a permanent feature of government policy for a generation. The figures reveal an unfunded public sector pensions liability (on top of Public Sector Net Debt) of 1.13 trillion, or 78.7 per cent of GDP. To this total we should add 40bn of PFI liabilities - only 5.1 bn of which are currently in the national accounts total. Then there are eyebrow-raising items such as a 60.6bn provision for decommissioning nuclear plants over the next century.

It is easy to feel helpless when confronted with such figures. And it is important to bear in mind that as growth recovers to its long-term norm, the growth in these totals becomes more manageable.

But when you are obliged to borrow such gargantuan amounts, it's the lender who's in charge, and who gets to decide the terms and conditions to cover the risk of default. That is the lesson of the crisis unfolding in Europe.

From Ireland to Greece, from Portugal to Italy, post-war politics is being swept aside by austerity programmes and debt reduction targets.

Heaven help those who fail.

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