More on the Greek crisis:
This article originally appeared on VICE UK.
It's difficult to watch Greece being plunged into turmoil without imagining the country's issues being theoretically transposed to the UK. After all, we're going through our own austerity trauma, though admittedly it's not that often we see people throw flaming bricks at walls of riot police. But what would happen if things escalated and all of our money did run out?
James Meadway is an economist and co-author of Crisis in the Eurozone with Costas Lapavitsas. The UK has long excelled at having financial meltdowns, from the collapse of the South Sea Bubble in 1720 to the 2008 crisis, when bailing out banks pushed the country's national debt up by a third. We asked James to explain how the UK would cope with a Greek-style financial crisis.
VICE: Could a Greek-style debt crisis happen to Britain?
James Meadway: We are a massively bigger country than Greece. In the event of a crisis, what we could do immediately would be to get the government to spend like crazy, and that's what happened from 2008 to 2010. Secondly, we could borrow loads of money. We've got the Bank of England, so we always repay it; it's our money. And the third one is you can do quantitative easing. You can say immediately, "Right, we're just gonna print a load of cash." If you do all that you can stop the collapse being too big.
If you are in the Eurozone, at least one of those things and quite possibly all three of those things suddenly become impossible. If Greece weren't in the euro, it would be much easier for the Greek government to try to fix the situation.
So what would have happened in 2008 if Britain was in the Euro?
Assuming things ran as they did, Britain would have hit the financial crisis in a spectacularly bad position. The reason the crash wasn't worse was because the government was able to allow its own spending to rise, relative to taxes, to cope with the sudden collapse in people buying stuff after the Lehman Bros. bankruptcy.
This meant the British government set a "floor" to the recession, which stopped the effects becoming so dramatic. The state also provide immediate bailout assistance to banks, up to and including actually nationalizing some of them. The total cost of all this was, according to the IMF, £1.2 trillion [$1.9 trillion]: the largest bailout, relative to the size of the economy, of any developed country.
Finally, the government was able, in early 2009, to launch "quantitative easing." This means it created new money to pump into the financial system as a form of additional support. This now stands at £375 billion [$583 billion] in total.
So what would happen if there was a financial meltdown and we couldn't bail ourselves out? What if we got cut off from the global financial system?
That's an enormous question. Currently, we import a shitload more than we export and we finance it, collectively, by selling off assets and borrowing more and more from the rest of the world. As a result, the UK has one of the largest external foreign debts, relative to GDP, of any developed economy, at over 400 percent of GDP. If there's no access to financing, then funding all those imports becomes difficult [and you start to become cut off].
But it's hard to see how or why Britain would simply get disconnected [from global finance] in this way. It's a major financial center, arguably the most important financial center in the world, and if it were cut off it would imply that there'd been an extraordinary shock to the global financial system. Of course, the size and centrality of that financial system creates other problems—not least of which is the expectation that the immense costs of cleaning up after it crashes will be borne by the rest of British society, as happened in 2008.
So it's unlikely that Britain would ever find itself unable to pay its debts, having creditors tell us what to do, and making our government impose austerity?
Britain is a little impervious to these sorts of threats. Party because it has its own currency, partly because it's such a big financial center.
In Greece at the moment, a left-wing government is basically being forced into abandon its own plans and push through austerity. Could that happen in Britain? Say Jeremy Corbyn became PM and he was trying to push through a socialist program, would that be scuppered? Who would stop it and what tools would they use?
The ones you'd anticipate are the ones that have been deployed in the past. The civil service might refuse to act, delaying policy. Secondly, you've got to consider the role of the media. Finally, the secret service.
We know that the last time a more left-wing government was in power here, in the late 1970s, right-wing sections of the security services at the time worked to undermine it. The revelations from Colin Wallace about Operation "Clockwork Orange" [a security services plot to smear left-wing politicians], and subsequent investigation by the BBC and others, have revealed deliberate attempts to undermine [Labour's] Harold Wilson as Prime Minister through smear campaigns, spreading of rumors about an impending "coup," all originating in a section of MI5 that viewed Wilson as little more than a crypto-Communist.
We had a massive financial crisis in the 1970s. There was "rubbish in the streets and reports of bodies lying unburied in mortuaries." That looked a bit like Greece does now—the IMF was telling the government what to do.
In the 1970s the UK was running a big current account deficit and the government wasn't able to finance its own operations properly. There were wider fears, too, that the labor movement by this point had simply got too powerful—that workers were claiming an unacceptably large part of the pie. The share of national income going to wages and salaries peaked in 1975. High inflation was partly a manifestation of those distributional struggles.
Anyway, by mid-1976 James Callaghan, Labour Prime Minister, thought the pound sterling was going to crash in value. So the Labour Cabinet took the decision, opposed by left-wingers like Tony Benn, to invite the IMF in. This was the first time the IMF has intervened in a developed economy, and they provided a foretaste of the medicine they were going to apply to the developing world throughout the 1980s and 1990s—the imposition of austerity, just as Greece is forced into today. So Labour was compelled, under the conditions of the loan, to start imposing spending cuts—the first major cuts really since 1948 or so, and pre-empting Margaret Thatcher by a few years.
Could another crash happen? What would that mean for Britain?
Britain remains uniquely exposed, among the larger economies, to financial risks. It has an extraordinarily large and vulnerable financial system, even with the pretty feeble reforms brought in since the crash. Household debt is expected to rise to record levels over the next few years, and it's this that is fueling the recovery. The risk of a future crash is what lurks behind the drive to austerity—it's the desire to clear some "fiscal space" in case another crash and recession hits.
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