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Time to man the bulwark

In its first full year of government, elements in the  approach to the Welsh economy adopted by the coalition administration in Westminster have become much clearer. For the main part, Wales features only as an object of collateral damage in the wider pursuit of neo-conservative economic policy. This aspect gathered particular pace in the final weeks of 2011.

In so far as a distinctive approach has emerged in relation to Wales, then the last year has seen the Tories revert to an agenda which dominated their tenure in government during the 1980s and 1990s: Wales is a place, they believe, where all the excesses of the welfare state are to be seen writ large. The only future lies in a form of internal devaluation, in which Welsh workers price themselves into jobs and the Welsh Government takes responsibility for reducing public services.

Much has been written already about the Prime Minister’s actions in refusing to sign up to a solution to the Euro crisis. From a Welsh perspective, it is difficult to imagine a more toxic set of outcomes. On the one hand, the deal on the table at Brussels is one which no-one of sane economic mind ought to be prepared to contemplate. It commits its signatories (assuming that there is, in the end, a deal to which signing-up actually takes place) to a period of Europe-wide deflation and austerity which is utterly self-defeating. It is very important to understand that David Cameron’s refusal to add his name to the list had nothing to do with the content of that part of the agreement, and everything to do with his political necessity of keeping out of the hands of those Europhobic Conservative MPs whom the Prime Minister himself has described as ‘frankly barmy’.

That doyenne of Tory economic commentators, Samuel Brittain, captured the point in his Financial Times column when he suggested that history’s verdict on the Cameron-Osbourne era would identify its main fault as acting so vociferously to “sway the balance of official international opinion away from the pro stimulus approach of the Obama administration and towards the restrictionist approach of those who believe in fighting the spectre of depression with ever more austerity”.

From a Welsh perspective, a set of main conclusions can be drawn from all of this:

  1. Europe is headed for a period of grim retrenchment, in which all hope of an export-led recovery will have been extinguished. The chilling contraction of the Irish economy by fully 2% over the last quarter demonstrates, for anyone willing to see it, what happens when the cure for a starving patient turns out to be cutting off whatever remains of the food supply. Wales continues to have a more important manufacturing sector than most other parts of the United Kingdom. Any hope that the sector would have been able to lead a recovery has effectively been choked off, before it ever began.
  2. All of this exposes, too, the fictional character of the coalition’s claims to favour a ‘rebalancing’ of the UK economy, away from financial services and towards manufacturing. In reality, as was quickly known, Mr Cameron failed to secure any protection for the City of London, but his willingness to make enemies right around the table, in attempting to do so, demonstrates what a stranglehold is still exercised by those who got us into the mess in the first place. When the whole of macro economic strategy is so distorted by a single sector, then it is no wonder that so little is left over for those parts of the United Kingdom where finance capitalism is weakest. Wales has already paid a massive, and disproportionate price for the bail-out of the banks in Scotland and England. The Prime Minister’s willingness to walk away from the table in Brussels, in a vain attempt to keep bankers’ bonuses intact demonstrates just how far below that level are kept the interests of Wales.
  3. As the latest pre-Christmas deal to save the Euro unravels in the post-Christmas light of day, so many senior economists argue, the revaluation of the £ against the € will begin in earnest. In many ways, the  fact that this has not happened already is a testimony to the fragility of the markets’ belief in the UK economy, so much vaunted by the Chancellor as demonstrating the success of his strategy. However, as the Euro goes south, speculators will have to go somewhere, and sterling may well be a least-worse option, certainly for those who wish to keep their holdings in Europe. Every time the pound appreciates against the Euro the dire outlook for exports, outlined above, worsens. For every Euro cent which the pound gains in value, £15 million is knocked off the value of European funding which comes to Wales.
  4. Finally, it is difficult to overestimate the damage done to the UK’s reputation, and by contamination that of Wales, on the European stage. Of course, from the onset of devolution, the notion that Wales needs a strong voice in Europe has secured support across a wide part of the political spectrum. With a third round of convergence funding to be negotiated, the importance of such strong, positive, relationships is more significant than ever. Now they will be conducted under the cloud of hostility which Mr Cameron’s actions has generated. When so many European states believe that, when their economies were in crisis, the UK chose to throw fat on the fire, rather than help staff the fire engine, it is hardly to be surprised when the same states chose not to rally round, when help for the UK is at stake. Except that, in the case, for ‘UK’ read ‘Wales’, the only place likely to qualify for European aid, and all the more expendable for that.

If all this represents one outward facing arm of the pincer movement which is lying in wait for Wales in 2012, then the second is to be found more in the internal economic policies of the coalition. Over the past twelve months a number of different, apparently disparate, straws can be identified which, taken together, represent a variation on the neo-con experiment of Latvian ‘internal devaluation’, only now applied to Wales. In essence it amounts to nothing more than a return to the old Tories polices of the 1980s and1990s, in which the only economic future for Wales was regarded as setting ourselves up as the bargain basement of Europe – not good at anything, but always cheap. Three aspects of such a policy, in contemporary circumstances, can be identified:

  1. Internal devaluation relies on pushing down wages in order to make an area more competitive for jobs. The Chancellor’s recent announcement on regional pay would, if carried through, have more impact on Wales than any other part of the UK. It would depress wages by up to 10% in the public sector, in a country where public sector jobs are especially important. In the minds of the neo-cons, this would be a contemporary way of pricing Wales into jobs – although, the same experiment attempted in Lativa resulted in a four fold increase in unemployment, as part of the price paid.
  2. Of course, rising unemployment is itself a fundamental part of the internal devaluation strategy, not a side-effect of it. Wales is already, therefore, well in the vanguard of this experiment.  ILO rate unemployment in  the quarter ending October 2011 stood at 9.1%, a rise of 11,000 over the previous quarter to 133,000. The ILO rate in Wales was the highest of the four UK nations. In economic orthodoxy, a reserve army of unemployment ensures that wages are suppressed through competition for jobs. It is not only in raw numbers that unemployment in Wales is heading back to 1930s levels, but the thinking behind that rise is rooted in the same decade.
  3. Finally, there is the Silk Commission. With Barnett reform excluded from its remit, the Commission is asked to look at ways in which raising revenue in Wales could be more directly aligned to decisions to spend it. The theory has to be that this will produce a downward pressure on spending, so that – indeed, as in Latvia – budget contraction can add to the attractiveness of Wales as a low-tax, low-spend haven, within the United Kingdom.

Maybe all of this would not matter, if the results of such an experiment were not so readily available. As well as rocketing unemployment (and large scale, disguised under-employment), the Lativan economy lost 24% of its output and 10% of its population (through emigration of the young, the fit and the most economically able) in the immediate aftermath of 2008.

Taken together, then, the outlook for the Welsh economy is bleak indeed. In the 1980s, Wales was the testing ground for successive Conservative Secretaries of State, each determined to prove that their own brand of Toryism could be made to work in one country. Some 30 years later, the same experimentation is happening all over again.

This time, of course, we have a Welsh Government, willing and, to certain extents, able to interpose itself between the grand theoreticians of the Europhobic right and the needs of the Welsh population. While opposition parties can do little more than provide a running commentary on events as they emerge, being in government means the ability to act, even within the constraints which are inherent in devolution. Thus, the power of public spending will be more important than ever, and the ability to devise new ways of adding to that spend will be more important still.

The political energy to mobilise a broad consensus among different Welsh interests, so that a united front can be displayed in favour of a different economic model will need to be prominently deployed. The Assembly-as-bulwark was, in Labour areas, the most attractive argument which could be made to voters, in the 1997 referendum. The promise that Thatcher-past could never turn into Thatcher-future had a Christmas Carol-like appeal. Next year will be the time when we have to demonstrate that it was an appeal rooted in fact, and not fiction.

This article first appeared at Welsh Home.

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