Anyone who has lived through the last few years does not need reminding of the power of myth in politics. Used in skilful hands it can be extremely powerful – and very damaging.
The mantra that the recession of 2008-9 was caused by “Labour profligacy” rather than by aggressive bad lending by banks proved to be a deadly weapon in the hands of the Chancellor George Osborne and the Prime Minister David Cameron. By sheer weight of repetition they managed to convince the electorate that the high budget deficit was the result of overspending by the previous Labour Government, rather than of the necessity of bailing out the banking system.
They were aided by the LibDems, who went along with the conceit while they were in government, and the Labour Party, which made only half-hearted attempts to rebut the claim and now seems to have fallen for it themselves. This myth may have been a major factor in Mr Cameron winning a majority in the general election, but it has also had at least three negative effects on the economy and on living standards.
The first has been the most destructive. Having blamed the crisis on too much public spending, the coalition government adopted what would seem therefore to be the antidote: they cut public spending at a time when demand from other sectors of the economy – investment, consumer spending and exports – was also weak. They were trapped by their own myth into following the wrong policy.
The result was not difficult to predict. An economy which was growing when they came to power in 2010 immediately started shrinking. We missed a double dip recession by a whisker, but still managed the slowest recovery for 300 years. Living standards, especially for the poorest in society, were hit hard by the double factor of low wage growth and cuts to benefits.
The second consequence has been the failure to address the real problem – the banks. The response of the last government and this one to the banking crisis has been supine. We have had to rely on international regulators like the Basel Committee and the EU to impose higher capital limits and restrictions on bonuses that encourage risky lending and trading and to curb market dominance. It was Brussels, not London, which forced Lloyds to hive off TSB and will force RBS to divest 600 branches into a reborn Williams & Glyn.
Having established the Vickers Commission, the coalition government then watered down its proposals and allowed the banks a long lead time to implement them. Even these are now under sustained assault from the British Bankers’ Association, one of the most powerful lobby groups in Britain.
Despite the Chancellor’s professed enthusiasm for ‘challenger banks,’ we have a banking system which is even more concentrated and offers less competition than before the crisis. Now he proposes to sell of RBS at a loss, seemingly ignoring the fact that there is a Competition & Market’s Authority investigation underway into the lack of competition in the retail and small business banking market.
The third consequence is perhaps the most controversial. We missed an opportunity to sort out the Eurozone crisis. When Dominique Strauss-Kahn resigned as head of the International Monetary Fund in 2011 there was desperate need for a strong and able figure to bang heads together in the Euozone and achieve an early end to the debt crises which were coming to a head in the smaller, heavily over-borrowed countries.
Leadership of the IMF is always in the gift of Europe. France had provided the last head and there was no obvious candidate from the other nations. The ideal leader would have been Gordon Brown. He had more experience as a finance minister than anyone else and he had shown he could act decisively in the credit crunch, when he recognised before anyone else that the banks had a capital as well as a liquidity crisis.
Crucially, he also had political weight. To be crude about it, he was a bully at a time when a bully was needed to get France and Germany to see that it was in their interests to get the crisis resolved quickly, even if that meant short term financial costs and swallowing a mouthful of pride.
But having blamed Brown for the UK crisis, Osborne and Cameron could hardly nominate him as the man to sort out the Eurozone. So instead France put forward Christine Lagarde, an extremely able woman, but one with little ministerial experience and no political weight. She was never going to stand up to her old boss Nicolas Sarkozy, nor the much more formidable Angela Merkel. So the crisis has dragged on, hobbling the recovery in Europe and the UK’s main export market.