Has The Government Improved The Standard Of Living In The UK?

With General Election campaigns well under way and the speculative dust settled from the 2015 Budget the timing is right for an analytical look at the coalition and their five-year premiership so far. This piece is not aimed at dissecting each manifesto claim made by the Tories, rather a commentary on living standards in the UK today.

Have the government’s policies actually improved the living standards of the average UK citizen?

Measuring living standards and the statistics and data used is critical to illustrate an accurate portrayal of actual living standards for the average person. Undoubtedly aggregate figures are important, especially when making macro comparisons with other economies. Nonetheless individuals should also be made aware with stats and figures they can truly relate to; GDP Per Capita figures give a clearer indication of this because they show the average wage per person. Moreover, people can see what the average person earns; they can also use the figure and compare how they are doing in comparison.

To arrive at a GDP per capita figure we take the Gross Domestic Product, (the sum of all work, spending and production) and we divide that by the total population we then arrive at a GDP per capita figure. This figure is a more accurate representation of the living standards for the average Briton as it provides the mean wage for everyone in the nation. Like all stats, always take them with a pinch of salt and never consider them to be final or conclusive, rather a useful analytical tool used to portray the bigger picture.

If we go back to 2009 the UK and most advanced economies were in the midst of the worst financial crisis since the Wall Street crash of 1929. I have opined my thoughts on the matter here and here. Prior to the hung parliament and David Cameron assuming leadership, Gordon Brown, the Prime Minister at the time and his Chancellor Alastair Darling, sanctioned tax payer’s money to be used on “bailing out the banks.” The term often used to describe the process that saw taxes being deployed as a monetary safety net for the struggling banks; banks that would have been crushed by their own recklessness had the tax funded finance package not arrived.

It is worth mentioning the background to the crisis in some minor detail as Prime Minister David Cameron has described this election as the “most important in a generation.” This is because the Tories have structured their election campaign on their idea of economic recovery and why continuity rather than change is required for the citizens in the UK. In the pre-election Budget Chancellor of the Exchequer George Osborne claimed, “Our economy had suffered a collapse greater than almost any country.”

Britain’s GDP like other nations suffered as a result of the global financial crash but can The Chancellor truly suggest that the financial crisis hit Britain as hard as some of the less developed nations such as Ireland, Greece or Portugal? The UK is not a Eurozone member, so it does not have to adjust economic policy in line with eighteen other nations, unlike the mentioned nations. In addition, nations such as France and Germany have higher GDP and GDP per capita figures than the UK. Both are members of what is clearly an unbalanced monetary union and still have had a stronger recovery in living standard terms since 2009.

Mr. Osborne added:

“Five years ago, living standards were set back years by the great recession. Today, the latest projections show that living standards will be higher than when we took office.”

At a time when the electorate needed reassurances and tangible evidence of a recovery it seemed a little odd to refer to living standard projections rather than the subsequent record during the coalition’s time in office. The graph below highlights GDP per capita from 2007-2014:

Figures from the World Bank. Constructed by Author
World Bank

As you can see in 2009 when the coalition took office living standards where at the lowest point on the range displayed. This is no surprise as the aftermath of the banking crisis combined with the deficit reduction policies imposed by the government caused a shock to the economic system. Since then living standards have been the lowest among Britain’s adversaries, Germany and France respectively. So it remains unclear what the Chancellor meant when he proudly professed “Britain was walking tall again.”

According to ONS figures, unemployment in the UK ( February 5.7%) is lower than France (10.6%), Germany (4.8%) has a lower rate however; but the news was welcomed by the coalition. With French unemployment higher than the UK’s it highlights the importance of looking at the average wage per person as opposed to other figures because they do not portray a clearer picture of living standards.

Unemployment figures cannot account for underemployment. Underemployment looks at labour utilization (how productive workers are) as opposed to just labour (people in jobs). For example, a PHD holder working in a fast food restaurant is said to be “underemployed” because they posses a skill set that exceeds their requirements for the role, yet they are employed nonetheless. An extreme example yes but the idea is to look at situations where highly qualified individuals are accepting roles where their skills are not enhanced or utilized. This is a likely factor behind the UK’s laborious productivity and why it can have more people in jobs yet lower wages for those workers. According to the Bank of England in their Quarterly Bulletin 2014 Q2

“Since the onset of the 2007-08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend.”

In addition to that, Stephanie Flanders writing in the Financial Times suggests:

 “That the average UK worker, in Yorkshire or anywhere else, now produces less in five days than a French one does in four.”

Clearly the recovery is not close to pre-crisis levels so the government has not raised living standards for the average UK citizen. With slothful productivity levels systemic of what little recovery the nation has seen, it is difficult to fathom how the Chancellor could be so optimistic when clearly the past five years have been subdued. Political rhetoric should not be confused with economic reality and the reality is clear: living standards in the UK are not close to pre-crisis levels.

Scottish Independence: Be Careful What You Wish For

Scottish not British
Scottish not British

This is a special piece about the SNP’s attempts for a Currency Union with the rest of the UK. It is flawed and the implications could be drastic. All patriotic rhetoric aside, the Scottish people should be careful of what they wish for.

Without question the potential breakup of the United Kingdom of Great Britain and Northern Ireland is a monumental and truly unique event. The Scottish people have been granted their request for the right as Scots to self-determination. This would result in much greater powers shifting away from Westminster and into the Scottish Parliament.

From an emotional and patriotic perspective their cries for independence are fully justified and understandable; the fact is Scotland was an independent nation a very long time ago. Most people in Scotland do not consider themselves British and feel disillusioned with the decision making process over four hundred miles away in Westminster. This is not a matter of mere geography, the distance purely emphasizes the point that they are culturally their own people.

It is this reason why the SNP have completely sold the Scottish YES campaign short by seeking a currency union with the England. If we analyse this call for ‘independence’ how independent can independence be if your currency; the common factor and medium that binds the market based society together, is determined by the same people you are claiming to want to leave? Surely that creates a more dependent nation than before?

Currency union is what the Eurozone is based on. Because the ECB (European Central Bank) controls all monetary policy (interest rates & supply of money) across the entire region. Nation states are rendered somewhat useless to self-determination when it comes to economic planning, specifically fiscal policy (government spending and taxation). Therefore, the ECB must always factor in contrasting economies when deciding what interest rates will be. Think of large economies such as Germany and France and then smaller economies such as Portugal and of course Greece.

Hypothetically, the ECB may raise interest rates across the Eurozone in order to curtail an economic boom. This could help the nations that are booming at a higher rate. Booming in the sense of higher and more potent economic activity. This is certainly possible when you look at just how different the economies are in the Eurozone. Some nations may benefit from higher rates of interest, whilst some may suffer. It will help some nations and hurt others.

This is a very realistic scenario for Scotland. All patriotism aside and let the facts dictate. Several businesses such as RBS, Lloyds, Standard Life and others have all stated they are in unwavering support of the Union and will leave Scotland if they get their independence. Firms such as Next and John Lewis suggest that Scottish versions of their stores could have to increase prices in order to maintain price stability with the rest of the union. Can you imagine Scottish people driving to Northern England just to save money for the same goods and services? This could boost England’s economy and deplete Scottish business in the long run.

There is a simple and rational solution and it is a genuine surprise that the SNP have not considered a fully independent Central Bank and Currency. Rather than seeking a currency union with the UK why not create your own? This is what a truly independent Scotland deserves. This hybrid, this poorly choreographed collaboration between two neighbours is not independence. It is dependence. This top-heavy relationship is highly unlikely to work for Scotland. As the evidence suggests for currency union in the Eurozone, (Greece, Spain, Ireland and Portugal) without fiscal AND monetary union determined by one single body tailored to the needs of your own economy there will ALWAYS be an imbalance. Mark Carney accurately described a currency union as “incompatible with sovereignty.” The SNP have however suggested a fiscal framework to avoid a Greek and Spanish like currency imbalance situation but it simply does not go far enough. The Union have made it clear what their view is and they want Scotland to remain. They have no obligation to make special arrangements for Scotland.

For true, unaltered and FULL independence Scotland require full control over both fiscal (government spending) and monetary (interest rates) policies. Without control over both Scotland need to ensure they have enough of a thriving and stable market to ensure their economic activity does not stray too far from that of England if they want to use the Pound Sterling. It will be very difficult to maintain that balance however, especially considering the unwavering stance from the Union.

Being Scottish is of the heart and mind and not necessarily of the ballot. Of course officially being an independent nation and having full national recognition is something to savour and for Alex Salmond, he gets to write his name into history forever. It should be approached with caution because the SNP’s approach lacks the real vision and authenticity the Scottish people deserve. If the Scottish economy does not create enough well paid and productive jobs in both short and long-run, if it does not open itself for real and beneficial investment then Scotland will suffer.

 

Good luck to the people of Scotland no matter what the outcome.  

 

How can the EMS crisis of 1992-93 crisis help the Eurozone today? Part 2

In my previous post I began by drawing some similarities between the EMS currency crisis of 1992-3 and the current Euro zone crisis today. This piece is a continuation of that discussion. I shall be elucidating further details on the EMS and shedding further insight on how the damage from the current crisis could have been reduced significantly.  

The Cypriot banking system not fared well throughout this episode.
The Cypriot banking system not fared well throughout this episode.

The Delors report draws similarities to the Werner Plan[1] of 1969. Both proposals advocated for the idea of a united European union that would allow the movement of capital and labour to move with considerable ease, which in turn would be facilitated by the adoption of a common currency. Both documents are therefore imperative to the realization of the EMU. The current crisis in the Euro zone highlights some of the shortcomings of the proposals. Some of the recommendations that were encouraged in the Delors report could be viewed as potential reasons as to why the Euro zone is in a precarious position today. Firstly, the Delors report suggested the establishment of a European System of Central Bank (ESCB). Although it was and remains an exogenous agent of the European economic system, the similarities of other central banks stops there. Arguably, one of the most critical features of most a central banks is the fact that most central banks are the lender of last resort. The current Euro zone crisis has highlighted what can now be viewed retrospectively as a limitation within the Delors proposal. French monetary authorities have argued that the current Euro zone crisis could be aided significantly if the ESCB could buy Euro zone debt.

“The best way to avoid contagion in countries like Spain and Italy is an intervention or an announcement that a lender of last resort could intervene.” (Baroin 2011)

German authorities are notoriously opposed to debt monetization because of the inflation and therefore potential hyperinflationary pressures it could bring to the common currency. Therefore, the current crisis is a reflection that the ESCB do not have enough monetary control the deal with a crisis of this magnitude.

Both monetary and fiscal harmonization was not only a goal; it was a necessity if European ministers were to achieve their aim of a closer economic zone. If one is to critically assess the Delors report, it could be argued that there may have been too much of an emphasis on monetary integration and evidently not enough focus on fiscal integration. The Maastricht Treaty[2] however identified the need for fiscal stability within Europe and the Stability and Growth Pact (SGP) made several recommendations in order to promote both monetary and fiscal stability. Dimitri Syrrakos suggests that the SGP would prevent nations from needlessly resorting to certain monetary policies that could undermine the creditability of the common currency

“Once the countries were eligible to participate in the single currency they would not resort to policies based on monetary laxity, as this would damage the credibility of the new currency.”

The intentions of the SGP were understandable; any union that would amalgamate several contrasting economies needed a stringent fiscal framework in order for it to function appropriately. If we analyse the current EMU crisis, the authenticity of the SGP is in question because strict sanctions were to be imposed on any nation who did not adhere to the ‘strict’ conditions set by the EU. If this were the case then several nations including Germany, Italy and Greece in particular would have been punished appropriately for their fiscal mismanagement. Former UK Prime Minister John Major speaking to the Financial Times in November 2011 suggests that:

“Southern states over indulged on low interest-rates and racked up debts. When Germany and France over-stepped the criteria without any penalty by the commission, the criteria became toothless.”

It is fair to suggest with hindsight that sanctions on nations who had failed to abide by the framework set by the EMU would have almost minimalised the severe economic damage that has beset the Eurozone today. Had sanctions been imposed some ten years ago, or even five, then the severe problems that appear only to be appearing now could have been dealt with then.

 GDP to debt ratio (%) 2007-2010

Nation

2007

2008

2009

2010

Germany

65.2%

66.7%

74.4%

83.2%

Ireland

24.9%

44.3%

65.2%

94.9%

Greece

107.4%

113.0%

129.3%

144.9%

France

64.2%

68.2%

79.0%

82.3%

Spain

36.2%

40.1%

53.8%

61.0%

Italy

103.1%

105.8%

115.5%

118.4%

Portugal

68.3%

71.6%

83.0%

93.3%

With regards to the realization of the EMU, the SGP was implemented in 1997, ten years before the data range in the table. Despite a prerequisite of national debt being less than 60% of GDP levels, the table highlights the inability of Euro zone members failing to deal with nations not following the fiscal framework. This tacit failure to impose sanctions on members allowed certain members continue to let national debt to grow until it became an apparent and uncontrollable problem, hence, the systemic failure of the system itself. Clive Cook is one of several commentators who have critical views on not only the SGP, but of EU governance in general,

Remember the EU’s vaunted Stability and Growth Pact of 1997, which supposedly put limits on public borrowing — and which Germany, by the way, violated? The same syndrome is evident today. Write a new rule now, worry about enforcing it later. This has been the hallmark of EU governance.”

Moreover, this has been a consistent theme that has underpinned EU and Euro zone governance. Despite apparent mechanisms being in place to prevent severe economic shocks, Euro zone nations appear to have repeated the same systemic errors, the only difference with the EMS crisis of 1992 and the current crisis is the severity, the current crisis however appears to be of a much greater magnitude.

The fundamental aim of the EMU was to integrate several economic zones, politically and more importantly economically in order to reduce exchange-rate uncertainty and provide a zone of cohesion as opposed to a network of conflicting monetary and fiscal interests. A solution to the current Euro zone crisis is not only the desire of policy makers, but it is a fundamental requirement because if the Euro zone were to collapse, the consequences would be catastrophic. Fiscal harmonization is required if the current Euro zone crisis is to be resolved, this was the case following the collapse of the EMS. The EMU may be politically viable because it has increased European integration, economically however it may appear no more than a ‘utopian’ idea. Dinan suggests the necessity of EMU was “debatable on economic grounds.” (Dinan 2005). Following the failure of the EMS, ministers appeared to recognize the errors that had damaged the economic system, and, policy appeared to identify the errors that had damaged the European economy. What is ironic about the current crisis is that there are a number of policy issues designed to prevent the problems that realistically could destroy the entire EMU or even the EU. Had the SGP rules been implemented, the problems that have only come to fruition in the last two years or so would have been tackled. The Euro zone crisis is an extraordinary economic crisis, whatever the outcome, European economics will never be the same again.


[1] The Werner Plan could be seen as the prerequisite of the Delors report of 1989. They share similar themes and raise a number of concurrent issues, however, the adoption of the Werner plan’s proposals and subsequent dismissal in 1973 does suggest that Europe was not ready to adopt such proposals.

[2] The Maastricht treaty was based on the Delors Report and the main objective was to complete the market integration with the creation of the common currency.