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    • London Weather: Sunday: white cloud, Max Temp: 15°C (59°F), Min Temp: 9°C (48°F)
      Max Temp: 15°C (59°F), Min Temp: 9°C (48°F), Wind Direction: N, Wind Speed: 10mph, Visibility: good, Pressure: 1011mb, Humidity: 81%, UV risk: low, Pollution: low, Sunrise: 05:01BST, Sunset: 20:55BST
    • London Weather: Monday: white cloud, Max Temp: 19°C (66°F), Min Temp: 12°C (54°F)
      Max Temp: 19°C (66°F), Min Temp: 12°C (54°F), Wind Direction: N, Wind Speed: 11mph, Visibility: good, Pressure: 1009mb, Humidity: 68%, UV risk: moderate, Pollution: low, Sunrise: 05:00BST, Sunset: 20:56BST
    • Guardian Business News: Eastern Europe's neoliberal disaster provides a warning for the Arab spring | Neil Clark

      Rather than help enhance democracy and reduce corruption, following western advice on privatisation does the exact opposite

      I wonder if David Cameron spent any time in eastern Europe in the 1990s.

      Judging from his recent remarks about the Arab spring and international aid, the British prime minister seems to believe that having a more "open" and "free", ie privately owned, economy is the key to both economic development and a successful transition from one-party rule.

      The evidence from the former communist countries gives lie to that neoliberal viewpoint. In a recent study entitled Mass Privatisation, State Capacity, and Economic Growth in Post-Communist Countries, published in American Sociological Review, sociologists from the universities of Cambridge and Harvard claim to have established a "direct link" between the mass privatisation programmes followed by around half the countries of the region – enthusiastically urged upon them by western economists and western financial institutions – and the "economic failure and corruption that followed". The more closely the countries followed western advice, and the more they privatised, the worse things became.

      The study is at sharp variance with the dominant neoliberal narrative, which portrays the ex-communist states as thriving after they sold off their industries and "liberalised" their economies after the end of one-party rule. Its findings won't though come as too much of a surprise to the citizens of the countries concerned, who suffered enormous hardship as their economies were made more "open".

      The level of economic output crashed throughout the region (the average fall in GDP in was nearly 30% in the early 1990s) as eastern Europe suffered a slump far worse than the Great Depression experienced by the US and the UK 60 years earlier, but which the Hollywood film industry or western writers have up to now shown little interest in covering. Millions of workers lost their jobs as state-owned enterprises were privatised. The price of basic essentials rocketed as price controls were lifted and utilities were taken over by the private sector. Governments lost valuable revenue from publicly owned enterprises and state bankruptcy ensued. "We argue that a post-socialist country's choice to rapidly privatise its enterprise holdings immediately reduced that state's financial capacity, due to high budgetary dependence on the earnings of state-owned firms," say the authors of the Cambridge/Harvard report.

      Having wreaked such havoc in eastern Europe in the 1990s, the west's neoliberal elite now have the Arab world in their sights. "Western development banks are now lining up to re-enter Egypt or in the case of the EBRD [European Bank of Reconstruction and Development], to enter Egypt and other north African countries in a highly ambitious extension of its founding mandate that saw it focusing purely on the central and eastern European states since its founding in 1991," reports the organisation Bankwatch, which monitors the work of European lending organisations.

      Although it does concede that privatisation may have been pushed through too quickly in the past, the EBRD is still singing from the same "free market" hymn sheet of 20 years ago. "The most pressing economic problem for many of the Arab spring countries and the region is that it has been unable to develop a private sector that is independent, competitive and integrated with global markets," writes the bank's president, Thomas Mirow.

      "The state is the dominating force in the economy," Mirow complains, adding: "We will be working hard to remedy that, just as we have done in the former communist world." Last month, the EBRD president visited Tunisia, the country that kickstarted the "Arab spring", and declared: "We are aware of the needs of countries in transition and we can offer our expertise and our 'know-how' to Tunisia." Watch out Tunisia, is all I can say.

      The neoliberal belief – pushed by both the EBRD and David Cameron – that reducing levels of state ownership in the economy is an essential part of democratic reform and that "free markets" and "free societies" go together is as flawed as the view that "structural adjustment" helps economic development. Chile, under Augusto Pinochet, saw its economy "liberalised", to the approval of Milton Friedman and the Chicago School, yet political freedoms there were greatly curtailed.

      By contrast, Norway, criticised by the World Trade Organisation in 2004 for its high level of state-ownership in the economy, is a model democracy, as well as having one of the highest standards of living in the world. Rather than helping to enhance democracy and reduce corruption, privatisation does the opposite. It allows a small group of people to become enormously wealthy and powerful – just think of the emergence of the oligarchs in Russia in the 1990s – while making the majority poorer. As an economy is "liberalised", political power is effectively transferred from the ballot box to the wallet – does anyone think that in Britain in the current neoliberal era, our main political parties are more amenable to public opinion than they were in period 1945-79, when a large section of the economy was in public ownership?

      It is of course good news that Burma and several Arab countries are moving away from systems where one party kept a monopoly on power. But let's not be fooled into thinking that moving towards an "open" economy which is "integrated with global markets" is part of the democratisation process, or that large scale privatisation will mean anything but hardship for ordinary people.

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    • Money Mail: Cameron backs controversial Beecroft plan to make it easier to dismiss staff
      It is understood that the document will call for firms to be given greater flexibility to make redundancies and for a cap on employment tribunal payout.
    • Money Mail: A to Z of the Sunday newspapers
      We round-up some of the top headlines from Sunday newspapers, with attention firmly on the eurozone crisis, but with news on BSkyB, French banks, bank charges and RBS bonuses.
    • Guardian Business News: Greek vote for 'cranky extremists' would be disastrous, warns Ken Clarke

      Justice secretary says Greece has to 'face up to reality' while Ed Balls warns of catastrophe if Germany doesn't 'change course'

      Greece will face a disastrous future in which it will default on its debts and may be forced to leave the euro if it votes for "cranky extremists" in next month's general election, Ken Clarke has warned.

      In one of the starkest warnings by a British cabinet minister of the dangers posed by the Greek crisis, the justice secretary also said Britain was "heavily exposed" to banks in the eurozone.

      Earlier Ed Balls warned of a "catastrophe" for Britain and the eurozone unless Germany allowed a relaxation of the tough austerity programme.

      "Somebody has got to persuade Germany that this is a catastrophe for Britain, Europe and the world and that Germany has got to change course," the shadow chancellor said on Sky News's Murnaghan programme.

      On the same programme, Clarke dismissed as "ludicrous" any suggestions – which he attributed to Balls – that growth measures should be funded by more borrowing. Greece would have to abide by the terms of its bailout programme agreed with other eurozone leaders, Clarke said.

      "The Greek voters have really got to face up to reality. It is very, very difficult for them, they are having a terrible time, these are hardships inflicted on them by the irresponsibility of their old politicians. But they cannot just vote for saying: 'Could people just carry on giving us some money so we do not have to change anything.'"

      Clarke warned: "If they get a hopeless lot of cranky extremists elected at the next election then they will default on their debt and everybody says they will leave the euro – actually that's quite likely but it doesn't necessarily follow, but they'll default on their debt."

      The justice secretary did not define what he meant by "cranky extremists". Alexis Tsipras, leader of the radical left Syriza party, is demanding a renegotiation of Greece's bailout package but remains committed to Greek membership of the euro.

      Clarke said a Greek default would have serious consequences, including in Britain. "The problem then is for the Greeks that will be disastrous, they will encounter real poverty I think. No one knows exactly what will happen in the rest of Europe but the banking system is in tatters, it's weak in very many places. We don't know what the knock-on effects could be, they could be very serious and of course people will start barking at the door of Portugal, Ireland, Italy, Spain; and here in Britain our banks are heavily exposed to some of these countries.

      "It is the unknown that everybody fears and once the markets fear the unknown you get into terrible turmoil."

      Clarke, who is the most pro-European Tory in the cabinet, dismissed the views of eurosceptic Conservatives who say Britain should not be supporting the eurozone bailout through the IMF. He said: "Britain has got to be part of the international effort and we've also supported the IMF. It is utterly ludicrous that the British do not take part, and the Japanese and Chinese and these other major economic powers, in actually using the IMF for what we've always said it's for, which is supporting these things."

      Balls said a disorderly Greek exit from the euro would cause huge damage to the world economy. But he said the eurozone bailout for Greece and the wider deficit reduction measures across Europe, including in Britain, were choking off growth and turning recession into depression in Greece.

      "It ended up with Merkel, Sarkozy and Cameron – this Camerkozy economics – all agreeing austerity would work," Balls said. "They tried to persuade Germany, they failed and thought, well, for a quiet life we'll go along with it.

      "I think David Cameron was always a believer … Somebody has got to persuade Germany that this is a catastrophe for Britain, Europe and the world and that Germany has got to change course. The problem is, the German people went into the eurozone 10 years ago on the clear promise that they weren't going to bail out Italy and the central bank wasn't going to play this role. Both things have got to change."


      guardian.co.uk © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

    • Money Mail: Sunday newspaper share tips: EKF Diagnostics, Noble Investments, Facebook & Compass Group
      Every Sunday we round up the newspaper share tips.This week EKF Diagnostics, Noble Investments, Facebook and Compass Group.
    • BBC Business News: Euro banks 'in tatters' - Clarke
      Former chancellor Ken Clarke says Europe's banking system is "in tatters" and warns the UK is "heavily exposed" to potential problems.
    • London Weather: Tuesday: sunny, Max Temp: 23°C (73°F), Min Temp: 13°C (55°F)
      Max Temp: 23°C (73°F), Min Temp: 13°C (55°F), Wind Direction: NW, Wind Speed: 9mph, Visibility: very good, Pressure: 1015mb, Humidity: 51%, UV risk: n/a, Pollution: low, Sunrise: 04:59BST, Sunset: 20:57BST
    • Guardian Business News: The euro is ripe for creative destruction

      The realistic options for the euro are that it breaks up or staggers on in a zombie-like condition

      The spectre of Lehman Brothers looms large in the world's financial markets. Memories of the chaotic days of September 2008 came flooding back as Alistair Darling appeared on TV amid reports of capital flight and bank runs.

      Forget the idea that Europe's policymakers are better prepared this time than they were back then. Take with a pinch of salt the idea that they have a big enough war chest to cope with the consequences of a Greek exit from the single currency. The much-vaunted firewall is a Maginot line.

      Events have moved quickly since the French and Greek elections a fortnight ago. Greek departure from the eurozone is now pretty much priced in by the markets, with the focus of attention on how bad the collateral damage will be. Expect the worst. Last week, pressure was mounting on Spain and its troubled banks. The idea that the European leaders who have been like rabbits in the headlight for the past two years can mastermind a clean break for Greece is utterly fanciful. The crisis will be messy, painful, prolonged and probably terminal.

      Even now, there is a failure or an unwillingness to grasp a basic truth about the single currency: it doesn't work. Monetary unions only succeed if there is economic flexibility, financial solidarity and cultural homogeneity. If those three factors are in place, as they are in the United States, there is a chance that a common interest rate and a single currency can encourage economic convergence, up to a point. Europe's problem is that it has none of these things. Countries such as Greece cannot become German overnight. The European Union lacks the resources to help poorer nations adjust. Most crucially of all, the crisis has exposed the fact there is no sense of common purpose beyond a desire to ensure the "project" continues.

      The survival plan, such as it is, involves countries embarking on a long process of structural reform to make them more competitive, a fiscal pact to ensure that governments live within their means, and perhaps a bit of extra pan-European infrastructure spending to satisfy voter demands to soften the impact of austerity.

      There is little prospect of this blueprint working. Take Ireland, one of the three countries subject to harsh bailout terms. Does it have a competitiveness problem? As Dhaval Joshi of BCA Research notes, Ireland accounts for 0.3% of global GDP yet accounts for 3% of world trade in services and 6% of trade in pharmaceuticals. Ireland ranks third in the world for foreign direct investment, on which the return is 17%, compared with 6% in Germany. "As a trading economy in key sectors, Ireland is punching 10 or 20 times above its weight. This is hardly a sign of an economy that needs to become more competitive," Joshi says.

      Nor would the proposed fiscal pact, on which Ireland votes in a referendum later this month, have prevented the crisis that has reduced GDP by 15% and prompted a fresh exodus of the young and talented. Ireland, like Spain, had healthy public finances in the years before the crisis broke. The problem in both countries was not too much public debt but too much private debt. The reason there was too much private debt was that borrowing was too cheap in economies that were growing fast and at risk of overheating. And the reason borrowing was too cheap was that Ireland and Spain had given up the right to set their own interest rates and were subject to the one-size-fits-all dictates of monetary union.

      To their immense credit, this fundamental flaw was recognised by Gordon Brown and Ed Balls, which was why they resisted the siren voices of those who pressed hard for Britain to join the single currency. All the UK's worst economic tendencies – speculation, housing bubbles, the live-now-pay-later mentality – would have been amplified by euro membership and the result would have been an even bigger crash than the one suffered between 2007 and 2009, a bigger budget deficit and an austerity programme imposed not by David Cameron but by Angela Merkel.

      It was not fashionable to voice these fears a decade or so ago, when the euro was seen as exciting and cutting-edge. The irony is that monetary union was really the last gasp of the mid-20th-century vision of economics: top down, bureaucratic and based on the notion of western economic hegemony.

      Despite this monetary chaos, there are still some in Brussels or Frankfurt who argue that the euro has been a success and will go from strength to strength. They sound suspiciously like the members of the politburo who in the 1980s said the Soviet Union was working and would last for ever. The undoubted political commitment to the euro means that there are now calls for a fast-track approach to full political union, but this means repeating the top-down approach used for monetary union and – at a time when the markets are talking about a Greek exit within weeks or months – would take years to finesse.

      Instead, the realistic options for the euro are that it breaks up or staggers on in a zombie-like condition, with low growth, high unemployment, growing public disenchantment and widely divergent views in Europe's capitals about what needs to be done. As a company, the euro would have gone bust by now. It had a duff business plan, which has been poorly executed. The experiment survived in the benign conditions of the early 2000s but only the core business, Germany, has been able to cope with the much tougher climate of the past five years. There is boardroom squabbling, the workforce is in open revolt and there are no new product lines.

      The euro, in short, is ripe for what Joseph Schumpeter called creative destruction. Capitalism, according to Schumpeter, was the story of constant, normally gut-wrenching change, in which innovation put established firms out of business and made whole sectors obsolete. Anybody working in the music industry, publishing or newspapers in the past decade understands what Schumpeter was talking about.

      Does Schumpeterian theory apply to the eurozone? In a way, it does. The centre of gravity in the global economy has moved from Europe, which looks old-fashioned and lumbering in a world of rapid innovation and loose networks. Tweaking the flawed model in the way François Hollande is suggesting will not do the trick. The only real solution is to rip up the blueprint and start again with the small group of countries that could hack it together. Making the eurozone work is like finding a long-term business model for HMV or Thomas Cook. Like them, monetary union is the past, not the future, an analogue construct in a digital world.


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