Flip a Coin

On the same day that Greece introduces capital controls, we learn that UK banks want the government to relax regulation of the financial sector. The latter is couched in the somewhat mimsy terms of "reducing the cost of regulatory compliance", but it's obvious that this simply means a quantum reduction in regulation and not an improvement in productivity. Pedants might argue that there is no equivalence here, as capital controls restrict civilians while regulations govern bankers, but that is to misunderstand that significant international movements of capital are initiated within bank backoffices, not via ATMs. The financial crash of 2008 was converted into a sovereign debt crisis across the Eurozone periphery essentially to protect core area banks and shift the cost of the ensuing recession from capital to labour. The latest turn in Greece sees the drama return to its source in the banks.

The UK financial sector continues to bleat about the iniquities of the bank levy, the possible introduction of criminal sanctions for executives, and the regulatory "red tape" that prevents them making larger profits. Some of this is just industry lobbying ahead of George Osborne's July budget statement, which many observers anticipate being a Lawson-like landmark now that the constraints of coalition have gone, but it also sits within a wider narrative about the centrality of financial services to the UK's economy and how this should influence David Cameron's negotiations with the EU. Just as you cannot understand Greece without appreciating the dominant economic role of tourism and shipping (and how these impact on seasonality, self-employment and tax receipts), so the UK government's manoeuvrings invariably reflect the interests and concerns of the City.

A hallmark tactic of the rightward turn across Europe since 2009 has been historical revisionism, from the claims of Labour's "profligacy" in the UK to the recasting of Eurozone history as a conflict between strivers and skivers. Another example of this revisionism was the claim in May, by Philip Booth of the Institute of Economic Affairs, that the deregulation of the City under Margaret Thatcher was a myth: "It is unambiguously the case that statutory regulation of financial markets increased under the Thatcher government. Furthermore, it is clear that markets are able to develop comprehensive systems of regulation when left to themselves. Indeed, it was these systems of regulation that the government prohibited because of competition policy concerns about restrictive practices that were operating within the market". In other words, the desire to increase competition, by the removal restrictive practices, led to greater state interference in the market.

Booth has been banging this drum for a while, partly because he is a market fundamentalist, and thus averse to state interference whatever the stripe of government, but also because it allows him to claim that the disaster of 2008 was the result of state mismanagement, with the happy accident that much of the blame can be laid at Gordon Brown's door, even though the Labour Chancellor was arguably more sympathetic to Booth's preferred self-regulation and institutional independence that his Tory predecessors. In reviewing Thatcher's record, Booth recognises a key point usually ignored by her supporters, namely that she was an instinctive centraliser. For all her harping on about The Road to Serfdom, her fundamental issue with the postwar state was not its dirgisme (consider her record as Education Secretary) but that the "wrong sort" had taken charge. Her famous phrase "not one of us" reflected her social snobbery as much as her ideological convictions.

Booth's plea for self-regulation ignores the nature of the institutional and cultural changes that occurred in the City in the 1980s. Much of the tacit regulation of the old City arose from the institutional separation of stock jobbers and brokers, which served to make certain conflicts of interest difficult, if not impossible. Likewise the separation of merchant and retail banking. This could only be done away with - thereby opening up new commercial opportunities - by substituting new regulations to prevent abuse. Similarly, the cultural norms, which depended on personal ties and class identity ("my word is my bond"), could not survive globalisation. Structural regulation and convention was formalised as part of the harmonisation demanded by the new global financial markets. This highlights the role of the neoliberal state in the era of globalisation, namely to act as an agent for class interests and negotiate across national boundaries. This is a role that is often tacitly supported by the regulated entities themselves, as it helps create barriers to entry and thus privileges incumbents.

Booth warmed to the theme in his criticism of the 79 economists who recently pooh-poohed George Osborne's proposal to outlaw deficits. In doing so, he made a case for the deliberate restraint of government: "There is plenty of economic theory that suggests that a government tying its own hands increases credibility and thereby lowers borrowing costs." This is essentially the "confidence fairy" nonsense that has been comprehensively disproved by continuing low interest rates in recent years (hence Booth's use of the word "theory" rather than "data"). Credibility in the eyes of the lenders is determined by a government's ability to meet interest payments, not by the size of its debt or its current deficit. The situation in Greece is proof of that, with the immediate trigger for the escalation of the crisis being the June repayment to the IMF. That Greece's debt is unpayable has been clear since 2010, but that has been an irrelevance to the bailout negotiations. Similarly, the last UK government's failure to eliminate the deficit by 2015 as promised has not noticeably dented confidence among creditors.

The ideological consistency between Booth's two positions - the government should be restrained, the market shouldn't - is the belief that private markets are better-suited to designing and managing regulation because of dispersed and tacit knowledge (i.e. the Hayek insight), while governments are poorly-suited because of central planning and vested interests (i.e. public choice theory). The problem with this view is that it must ignore the reality of vested interests in the private sector (or seek to mitigate them by appeals to ever more "competition"), despite the ample evidence of the failure of self-regulation in the City, while denying the capability of government to ever gather information efficiently, despite the historical evidence to the contrary and the fact that the private sector is dominated by large, bureaucratic organisations that mimic government at its undemocratic worst. As Paul Krugman rightly noted, "We may live in a market sea, but most of us live on pretty big command-and-control islands ... most of us are living in the world of Dilbert."

The broader context of Booth's revisionism and the UK finance sector's many complaints is the fear that the new Tory government may be tempted to compromise on EU financial market regulation in return for political concessions. In other words, they will settle for marginal gestures around sovereignty and immigration that please eurosceptics. George Osborne, as he has shown with the enhanced powers of the Bank of England and the extension of anti-abuse safeguards following the LIBOR scandal, is happy to regulate the market when it is politically expedient. What the financial sector and its academic and media-outriders like Booth want, is for the government to prioritise the independence of the British state (i.e. subsidiarity) in determining financial regulations, on the basis that this can then be biased towards a "light-touch" regime, ideally centred on self-regulation. The paradox is that while the UK remains within the EU, the City's interests are best served by an interventionist state.

Today's coordinated response by the Eurozone hardcore to the Greek government's decision to call a referendum on the current bailout terms has been to frame the vote as a choice between the euro and the drachma, with the former entailing unqualified acceptance of the terms dictated by the "group of 18" and thus the delegitimising (and presumably removal from power) of Syriza. If they were keen to keep Greece in the Eurozone, they would not be proceeding in this fashion, regardless of their distaste for a "leftist" government, because of the risk that their intervention might antagonise the Greek people. They seem determined on pushing Greece out (despite the crocodile tears of France and Italy), which might (ironically) allow them to write-off some of the country's debts in a way that is domestically palatable (i.e. by "washing their hands" of the Greeks), leaving the management of Greece's remaining debts in the hands of those nice people from the IMF.

One bystander who must be feeling a little queasy at the sight of this is David Cameron. Neither a democratically-elected government nor an explicit referendum appears to cut much ice with the hardcore, so why should he imagine that he will get any concessions? Just as the choice facing the Greek people on Sunday may be unpalatable, because either outcome is likely to lead to a worsening standard of living, so the choice facing British electors at a date yet to be determined may be inconsequential. Ironically, and contrary to the City's worst fears, Cameron may actually need substantive concessions in the area of EU financial regulation to obscure the limited concessions elsewhere. While the Greeks are faced with "heads they win, tails you lose", Cameron is hoping that a deal that doesn't have an adverse impact on the euro will be cynically accepted as a double-sided coin by an EU hardcore that now cares for little else.