Episode 2 The Party's Over: How the West Went Bust

Britain and the West are on the brink of financial and economic catastrophe.

The squeeze on real incomes is

possibly the worst since the Great Depression.

I think people in the street have figured out the game's up.

In this series I'm investigating

how we flunked the challenge of the relentless rise of China,

how we boosted our living standards by

borrowing lethal amounts, and why the party's over.

You cannot go on living beyond your means for ever.

How are we in Britain

going to pay our way in this challenging new world?

It's a whole change we have to go through in our society,

in order to deal with globalisation.

Change is painful,

will it lead to further unrest in Britain and the rest of Europe?

The big question will be asked, "Why?"

"Why is this happening?"

The kind of Armageddon scenario is that you have disintegration.

In these dangerous times,

can we cure our addiction to debt and build an economy

on more stable foundations?

NEWS REPORTS: Greek MPs will begin voting on a new round

of austerity measures against a backdrop of mass protests.

It all comes back to Greece. The reason these banks are in trouble

is because they lent so much money to Greece.

Public sector workers in Greece

have begun a 24 hour strike in protest

against spending cuts and tax rises.

Violence has continued in the streets of Athens

while Greek MPs were voting to accept austerity measures.

The protestors say they're not giving up the fight.

I'm working as freelance engineer for different companies,

but most of them don't have the money to pay you...

So you choose either to stay at your house and do nothing,

or work and don't get paid.

Nasos is on his way to work.

But like thousands of his fellow countrymen, he's not getting paid.

It's what happens when a country goes bust.

Nasos works in Perama docks, part of the port of Piraeus

just outside Athens, one of the largest in Europe.

At its peak, thousands of men worked here

repairing and building ships.

Today the port is a ghost town.

This is the floating dock of Perama,

there are two actually, one here and the other there,

and as you can see, we have the infrastructure,

we are ready to go, but we don't have work here.

If you come in the morning you will see

people waiting to get some job,

although they know that there is no job here.

They have a big problem for survival.

Nasos isn't a dock worker, he's a highly-skilled engineer

who helped design and build the world's first

floating, wind-powered, desalination plant.

It makes drinking water from the sea,

a huge potential boon for the Greek tourist industry.

But funds have dried up.

Greeks are furious about what has happened to their country.

He's had to sack 14 of his 16 team,

and like many Greeks, his income has been slashed.

The problem is if you're not working, and I'm working, I'm your friend,

OK, we can manage somehow, I will lend you some money,

but if nobody is working then it is a huge problem.

Greece's lethal mistake was that its government borrowed more

than the entire value of what the country produces every year,

to finance a bloated public sector. Fighting back is very hard,

because its private sector is small, inefficient and in mortal combat

with the far bigger and more productive companies of Germany.

The moment when the European Union started sending us a lot of money,

for example to modernise agriculture,

well, we didn't modernise agriculture,

just distributed the money among the peasants and the agriculturals,

and they spent it in buying Mercedes cars

or, er, beautiful apartments...

then we had the facility of borrowing at the very low tariff,

so we borrowed a lot and had a very nice life.

But we did not produce enough

and that is the number one problem of Greece.

Greece could be a precursor for things to come.

So Greece was a weak link, of a much longer chain.

The problems of Greece as well as Portugal, Ireland, Italy and Spain

are threatening to tip the world economy back into recession.

Greece is a chilling example

of what happens when a country loses the support of its creditors.

It faces many, many years of high unemployment,

and crashing living standards.

So what about Britain? What economic fate awaits us?

Britain, too, is buckling under the weight of its debts.

Greece is the extreme version of the Western nightmare, which is...

you know, you've been living on the never-never for 30 years,

you've been running up deficits. It can't go on.

UK, like many other countries,

many of the people were living beyond their means,

that was the whole basis of debt.

This wasn't a normal recession,

it was a debt crisis.

It was caused by too much borrowing...

by individuals,

banks,

businesses and most of all, by governments.

It's a crisis which is happening in your town,

your street, and maybe even your home.

It's a crisis of the promises made over the last 30 years.

If you look at all debts, not just government debts,

Britain has borrowed more than Greece.

Adding together household, banking and business debts

we've borrowed almost five times the value

of everything we produce each year.

It's a record and it's still rising, especially the Government debt.

For almost the last 30 years, but especially the last 10 years,

we've been living beyond our means, spending much more than we earn,

with economic growth fuelled by ever increasing borrowing.

It's a habit we've got to cure, but there's no successful treatment,

unless we face up to our debt addiction.

There are some who believe

that the true scale of Britain's indebtedness, is yet to be revealed.

Terry Smith is head of one of the world's largest money brokers.

He fears our heads are in the sand.

How far do you think this denial about the scale of the debt burden

bearing down on the British economy goes? Do you think in Government,

there is any recognition of what needs to be done?

I don't think there is much recognition.

I engage with the people that you describe quite regularly,

people who are leaders of banks, erm...Government regulators,

and I actually think that they've got less acceptance of the problem,

or the scale of the problem, than many of the people in the street.

I think people in the street have figured out the game's up!

The Office Of Budget Responsibility, this forecasting body,

they've taken a look and said,

"Actually, because of the aging population

"and rising health care costs,

"this level of public sector debt is going to grow pretty rapidly,

"to over 100% of GDP in the coming decades."

-How bad will it get for people?

-Very bad indeed, I think, Robert,

because the Government debt people think we're shouldering now,

doesn't include a lot of off balance sheet items.

The things they've promised in terms of the National Health Service,

welfare and particularly pensions,

probably take the known debt that people are up

by three or four times. I think it will get very bad for people.

The Government has embarked on the toughest round

of expenditure cuts and tax rises for 60 years,

with the opposition saying their speed and size is reckless,

and undermining our recovery. Some are protesting,

and that's even before the cuts have bitten.

I remember meeting a government minister shortly after

the first round of spending cuts was announced and there was

a deep sense of shock and anger and he said that the thing that

had worried him was the cuts hadn't even started yet.

They hadn't even started filtering through and people were,

were in revolt and he said, well what's going to happen

when actually this becomes real?

It's been described as the new era of austerity

but do we know what that will mean?

Not much to be honest.

I have no idea.

Pulling in the old belt a bit

and so on and so forth, not for the first time.

Make do and mend like I never have before really.

Having to be sensible,

which is quite difficult when you've never done it before.

So is 21st Century austerity a journey back into our past?

It will be about wearing shabbier clothes, not having a new car.

Going on camping holidays rather than going abroad.

And in case you're wondering why a dinghy needs a streamline trailer,

we should explain it's a collapsible caravan, believe it or not!

Even a moron, mechanically speaking, can fix it up in just minutes.

Downgrading one's expectations

and one's lifestyle and most people will get through it.

I mean we did in the 1930s, we will do again.

Or it could be quite drastic over periods of time that we find

that things that we've taken for granted both as individuals

and as a society, are no longer strictly affordable.

We thought we had it bad in the '70s and '80s, but today's

public spending cuts, low wages and inflation are squeezing

living standards more savagely than at any time since the 1930s.

The squeeze on real incomes at the moment is by some measures the worst,

since the early 1980s and possibly the worst since the great depression.

And in this economic crisis it's the young who pay the biggest price.

We're coming into the main supermarket.

This is our seasonal aisle, so all the things ready for Christmas now.

These are the main tills. This is our fruit and veg department

so we keep this all filled up and looking nice...hopefully.

-Vanessa is 27.

-Morning.

She has a part time job at the local supermarket,

working in the grocery section.

It's my responsibility to get the orders in from the market

and pack everything up, price it, put it out here for sale,

keep it looking tidy.

It's better in the summer than it is in the winter, I have to say.

She's been working here part time for two years, on minimum wage.

It's not enough to get by,

so she takes on as many other odd jobs as she can.

I'm kinda of the go-to-girl.

I house sit for my parents' friends when they go on holiday.

I do some dog walking, dog sitting, cat sitting, babysitting.

But it doesn't really accumulate to any more than £400 a month.

I can't put anything aside to save, I can't think about moving on,

moving out, buying a place or even renting.

It's not really what I dream of doing with the rest of my life.

And why should she?

She's a university graduate with a first in psychology.

-Can I help at all?

-Not really.

She enjoys what she does, but it was supposed to temporary.

Yeah, I was really hoping that after I'd worked really hard and got

a 1st class degree, that I wouldn't be stacking shelves and

stuck in a job that I'd been doing all the way through my studies.

It was supposed to be a stop gap job, it wasn't supposed to be

what you end up doing afterwards.

I've spent four years studying

and I'm still working in retail jobs that I could have done straight from school

and it, you know, it just makes you think why have I got myself

into this much debt, why have I spent the last four years not really

earning so, you know, I can now do something that I was doing anyway?

When Vanessa finished her degree and couldn't find work,

she did a post graduate course to improve her prospects,

but it didn't work.

I've applied for at least 30 jobs in the last three months.

Probably 15 actual paid positions and between 15 and 20 internships.

You lose count. You just fire off CV after CV after CV

to various agencies and quite often you don't even get a response

you know, not even a 'thanks, but no thanks', just absolutely nothing.

The economy is failing young people. That's MY generation's fault.

We mortgaged our economy in a dangerous way,

in the selfish short-term pursuit of higher living standards.

So how do we put it right? For Vanessa and her generation?

The economic model that generated the longest

period of uninterrupted rapid growth in our history is bust.

So how do we build a more robust economic model?

Well, perhaps we need to abandon our rampant consumerism,

to become less dependent on debt-fuelled consumer spending.

We have to learn that there's no such thing

as borrowing on the never-never.

When our debts fall due for repayment we should repay them

rather than replacing them with even bigger debts.

Our economy became far too dependent on consumer spending,

which is equivalent to two thirds of everything we produce in Britain.

I've never bought anything on higher purchase before,

I've always paid cash.

We call it deferred terms, Mrs Turner.

And where does HP go from here?

At the peak in 2008, UK households had borrowed more

than they ever had before.

A sum equal to 180% of their disposable incomes,

that's the money we have to spend.

And although some of the loans have been repaid,

our personal debts remain dangerously large.

Thrift and prudence and things which used to be quite important virtues,

it's like it was chucked out the window and we've moved towards

a culture that embraces consumption, spending and to an extent, excess.

We are actually going to have to get used to not be able to borrow

any amount of money to buy any amount of old rubbish

we never needed in the first place.

We've got to earn what we consume.

we haven't done that in this country for an awful long time.

But when we pay back our debts, we spend and consume less.

And because consumer spending is so disproportionately important

to the economy, that's a problem as well as a necessity.

Because if we reduce our spending too fast,

the entire economy grinds to a halt.

The great conundrum,

is getting away from a reliance upon consumer spending

and getting to something that we can actually export.

We can't export consumerism.

Quite a lot of growth,

not just in Britain but in other economies, is driven by consumption.

But consumption requires, well, spending by consumers,

by households and it's hard to have spending if you're repaying debt.

As its currently structured, the UK economy may have no prospect

of recovering to the kind of prosperity

people enjoyed in the last 20 years.

It will need a fundamental restructuring and rebalancing

away from those sectors which it is currently relying on.

SHIP SOUNDS HORN

So what's the answer?

A clue can be found here in China. Unlike us, the Chinese produce

lots of the things the world wants to buy,

and also unlike us, they save a huge proportion of the money they earn.

It's the flaw in globalisation - they make and save,

we consume and borrow. What we need is a role reversal.

This kind of shopping by the Chinese is something that we in the West need to see a lot more of,

because although Chinese consumers are spending

a bit more than they did, as a share of the economy,

well, they spend about half as much as we do.

If they could only be persuaded to save less and spend more,

that'll provide opportunities for Western companies,

and that'll help the US, the UK,

much of the eurozone, get their excessive debts down.

But as the Chinese start to consume more,

that only helps us if we start making the stuff and selling the services

that the Chinese actually want to buy.

It requires an overhaul of our economy,

so that our businesses invest much more,

and start exporting much, much more.

We need to transform our economy

from one fuelled by borrowing and consumption

to one powered by investment and exports.

So where can we turn for guidance on how to do it right?

MUSIC: "Ride of the Valkyries" by Wagner

-Germans coming here?

-Just for a couple of days, Major.

-I don't care much for Germans.

-Well, I know what you mean, but...

Bunch of Krauts, that's what they are, all of 'em. Bad eggs!

Like the Major in Fawlty Towers, in popular culture and the media,

we traditionally mocked and denigrated the Germans for their famous efficiency...

-Good morning!

-..whilst celebrating our supposed superiority.

MUSIC: "The Dam Busters" theme

We're not laughing now.

Next year, I am 40 years in the company.

I am second generation. My father founded the company in 1919.

This is my father. He was born in 1888, died in 1972.

That's Plant No.1.

It was established in 1928. It was the first building my father built.

Nestling in the heart of Bavaria,

Kathrein started as a one-man enterprise

in a cellar after the First World War.

It's now a global operation,

exporting antennae to China, the US and the rest of Europe.

This is the Olympic Tower in Munich.

The new antenna we delivered, we have to install it by helicopter.

Every piece of this antenna is about five tonnes,

and only the Russian helicopter Kamov can hold this five tonnes,

so it was, yes, an experience.

We are the oldest antenna company worldwide.

We are also the biggest one.

The turnover this year will be EUR 1.4 billion.

But Kathrein is not an isolated success story.

It's part of a vitally important sector of the German economy,

known as the Mittelstand.

Mittelstand is a mindset. They are patient capitalists.

You're not in there for the short term.

You're in there for the long term.

You run your company not in the interest of short-term shareholders,

but you want to create long-term wealth for your company.

You work with your employees not in a way that you treat them as a disposable human resource,

but as a very valuable part of your company.

You integrate yourself into the community you're working in.

Mittelstand companies account for half of Germany's economy, and most of its exporters.

They employ almost 80% of German workers.

Most are family-owned,

and many produce highly specialised,

highly-engineered goods in hi-tech industries.

Being the best at making an unglamorous but vital component or machine is typical.

They focus on a specific area they're really good at.

Products you don't see usually as a consumer.

They're products who go inside other products.

Gut.

'As Mittelstand, we have to focus.'

We are not a grocery shop. I cannot do everything.

We are focusing since 92 years on our main business,

and this is the antenna business.

Gut.

Comparable British businesses are often listed on the stock market,

and owned by shareholders that have little corporate loyalty,

and tend to be interested in a quick buck.

'The stock market looks mostly on very short profits.'

They want to maximise the profit. We don't maximise the profit.

If we have a project and say, "OK, it takes five years,"

then we invest in this project.

One Mittelstand tradition is that businesses are very active in local communities.

They work closely with schools and universities in finding apprentices.

Education is tailored for the needs of the Mittelstand.

We have to invest in our brains.

Because, as you know, Germany has no natural resources.

This we are doing here, and I'm very happy that a lot of our young people

are coming back into the company, and then stay as technicians,

as engineers, as members of the company.

In two years, my son will come. He's third generation.

He plans to make an MBA, and then he will come to the company.

-And I'm waiting for him with a lot of work to do.

-HE CHUCKLES

German attitudes to money spread beyond the companies of the Mittelstand.

Most Germans don't borrow on credit cards, and have consistently saved more that 10% of their income,

while we periodically save nothing at all.

This thrift has its roots in a painful shared memory

of when German credit was worthless.

In 1923, we had this big hyper-inflation after World War One,

and it's still, as silly as it may sound,

a traumatising sentiment here.

During the hyper-inflation crisis,

the German exchange rate was one trillion marks to one dollar.

The sheer volume of paper money handled by industry and commerce

had to be collected almost daily in handcarts, taxis, lorries.

Every day was payday,

and wages were rushed to factories by the truckload.

And the same accounts for after World War Two.

Everything was reset, every German citizen got 40 marks, and could start from scratch.

So I think there's a relation, and this is the good German tradition,

that you basically spend what you earn, and not more.

This comes a little bit from this, you know, "Schaffe, schaffe, Hausle baue," yeah?

Just be serious and earn your money, put it well away,

save for the kids, and so on and so forth.

Germany is Europe's largest exporter of manufactured goods,

and the second biggest in the world.

Exports account for almost half of German national output.

Its companies make high quality, highly-priced goods,

and importantly, many of the complex widgets inside them.

Things that everyone wants and few others can replicate.

Even the Chinese.

So can we, indeed, should we, turn German with a British Mittelstand?

Someone at the top of government seems to think so.

We should all learn lessons from the successful Mittelstand model

which has operated in Germany for so many decades.

The medium-sized companies

that are such a source of strength for that country.

But it wasn't so long ago we thought we had it sussed. Britannia was supposedly cool.

We were creative and smart, and our economic model was trouncing even Germany's.

A third of our record-breaking growth was being generated

by our enormous banks and City of London firms.

We derided the sclerotic German economy and its leaders,

who were so mistrustful of British and American finance.

How foolish they were to make stuff you could hold,

rather than complicated financial products

that no-one could understand!

If you look today on Germany, you feel like Germany's really fine,

and wealthy and booming, and so on and so forth,

but you remember, for the early parts of this decade, Germany was the sick man of Europe,

and everybody was complaining about Germany, and the missing economic engine in the middle of Europe.

We would slightly deride them here in Britain,

and say, "oh, you know, old-fashioned Germans,

"think that bashing metal is still the route to wealth,

"can't they realise that wealth is to be found

"in front of a computer screen?"

Today we're not so smug, and we'd dearly love a piece of the manufacturing action.

British business will hope to sign deals worth more than £1 billion

when the Chinese Prime Minister Wen Jiabao attends a summit in Downing Street today.

He'll sign an agreement with David Cameron,

enabling British firms to branch out beyond Beijing and Shanghai...

A billion-pound deal with the Chinese looked great,

until we saw that the Chinese Prime Minister had gone on a plane,

flown to Germany, and signed a deal for £9 billion with the German Chancellor, Angela Merkel.

Germany ranks about sixth in terms of China's largest trading partners.

Well, Britain doesn't quite rank in the top 20.

The main reason is that Germany sells the kinds of things

that China wants to buy, which is high technology,

especially high-end capital goods.

Britain has great brands. Look at the car brands.

We're delivering, for example, the Rolls-Royce, we are proud of this.

Ok, Rolls-Royce is BMW now, but, OK, so there are companies in Britain also with a very good reputation,

and I think there is a chance to re-establish a Mittelstand.

We can work together. Our hands are open.

In the aftermath of the financial crisis,

suddenly, that manufacturing-driven German model looks great.

Because the German economy is doing well,

and it's doing well by exporting.

And exporting is back in fashion.

Exporting has become the centre of British foreign policy.

Cameron is going around the world trying to sell Britain, to sell British goods.

It's an uphill climb for us, trying to emulate the German model of investing and exporting

that's ingrained in their culture. Where do we begin?

We don't have very many facts, true facts, in economics,

but one of the very few is that tomorrow's growth

always comes from today's small firms, OK?

So the big firms of tomorrow are today's small firms.

That's as close as we get in economics to a fact of life.

And that means investing in that cohort if we are to deliver

on not just exports tomorrow, but growth tomorrow,

to facilitate this rebalancing process and paying down of debts.

Can we reinvent our distorted economy, so that more small firms

are nurtured to become the industrial giants of tomorrow?

We have a world-class business services sector, selling everything from advertising to architecture,

but that's only 14% of our GDP, and as for manufacturing,

well, that's even smaller, just 12% of the economy.

Britain has great companies that design and make things,

but, arguably, not enough of them. I've come to Malmesbury

to try and learn the secrets of success of one of them.

We've got here a lot of the things we've made.

This is our historical underground showcase here.

-Is there anything you have to license in from others?

-Absolutely nothing.

-It's all yours.

It's all here, all developed here, everything.

But there was a time when Dyson actually made its vacuum cleaners here.

They churned out not only the ideas, but the finished item.

Not any more.

NEWS REPORT: This fearsome advocate of UK manufacturing

said at least some production will go to the Far East.

Now, you used to make your stuff here,

and then you took this decision that for the good of the business,

manufacturing had to be located offshore.

-How difficult a decision was that?

-Well, it was very difficult,

and not least because we were making 500 people redundant,

which is not a nice thing to do.

What I've experienced over the last 30 years,

I think is the exact experience we've had of British manufacturing leaving Britain.

30 years ago, if I wanted components, I went to Birmingham,

and there were several companies who made those components,

so it was very easy to have a factory in Britain.

By the time I was making the vacuum cleaner,

I had to buy all my components from five and ten thousand miles away.

-So it became untenable.

-Is there any turning back?

Can you conceive of any circumstances which would make commercial sense

-for you to manufacture in the UK again?

-Well, how I would love that.

What we need to do is encourage components suppliers.

What happened, really, over the last 40 years, is we drove them out of business.

Is there anything that a government can do to encourage businesses

that are going to create wealth for the nation?

The really important thing, I think, is to concentrate on a sector,

which is technology, the high technology sector,

because it creates jobs, it creates wealth by exports.

And we shouldn't be frightened of spending money on this.

So we should encourage people to stay at university,

and we should pay them the sort of salaries they'd get in the City.

Because the work they're doing is extremely valuable for this country.

If the economy's going to recover, we need to do more high-value manufacturing.

One of our most successful companies is Rolls-Royce, which sells aircraft engines around the world.

They don't only sell engines - they provide a complete backup service.

An engine health monitoring unit collects data about the performance of every engine in flight,

and allows them to communicate with their customers in real time.

This kind of operation is often called a manu-service,

and many see it as the future of manufacturing.

But not every British company is so forward-looking.

We're not at the races in Britain.

We're being carved up in this new world,

and in a world where three fifths of American manufacturing companies

now describe themselves as manu-service companies,

you ask the same question to a sample of British manufacturing companies,

and they wouldn't even know what the term meant.

That's how far we are behind.

Vince Cable is the minister charged with trying to build up our exports.

He tours the country trying to learn what's needed.

But when will we again have the kind of strong economic growth

that we took for granted?

How long do you think it will take to reconstruct the British economy

so that we can have that kind of 3% growth on a sustainable basis?

Well, 3% growth on a sustainable basis is quite ambitious.

You know, we're talking...

Most of that growth has got to come from innovation

and technological change, and achieving that

would be very substantial. It's not going to happen within months.

-But years, we're talking years.

-We're talking years.

Five, ten years...?

There's no point artificially putting a deadline on it.

But two things are happening at the same time. We're having to sort out the country's finances,

and at the same time, we've got to do the investments in the technology,

the apprenticeships, the university training, to get the knowledge economy,

so that this kind of change can take place, and it certainly isn't going to happen quickly.

There are millions and millions of people in other parts of the world

who are educating themselves to a very high standard,

who are ready to work harder,

and with whom we are not competing effectively.

China's investing large amounts in their universities,

and committed to having 10 global-class universities

within the next 10 years.

Perhaps the most important battlefields in a globalised world are schools and universities,

where young people acquire the skills to create the wealth that they, and we, need.

China gets that.

Massive investment in education is the next great leap forward in China's economic development.

Cheers.

Good health. What do we say in Chinese?

-Kan Bei.

-Kan Bei.

In Shanghai, I met 15-year-old Lin Lin and her mother, Rena,

a manager in a lighting company.

Rena is ambitious for her daughter.

TRANSLATION: In China, we have an old saying -

"Don't let the child lose the race at the starting line."

Education is a long process.

People say it takes a hundred years to educate a person.

It's not something you can do in a day.

I don't want my daughter to go through what I went through as a kid.

I want my daughter to have an easier life than I had,

and to have a bright future.

That's why I want to give her a good education.

Like millions of Chinese young people,

Lin Lin studies six days a week to secure herself a prosperous future.

These are the extra classes she takes outside of school time.

TRANSLATION: On Saturday, I come here to get some extra studies in.

It's a chance to get ahead and study stuff not taught at my school.

It helps me to get to a higher level.

It also allows me to get a head start on work

that I'm going to learn again at school.

The first stage of China's phenomenal growth was based on cheap, unskilled labour.

Now, like us, it wants to win through brains, not brawn,

and like most of her classmates, Lin Lin is set on going to university.

China is pouring money into higher education,

because bicycles, books, students... well, they're an economic weapon.

China is churning out enough students every year to fill a city the size of London.

It's a sign of the country's determination to challenge,

not just in low-cost manufacturing, but also against us in other ways,

including taking on our precious businesses based on knowledge, research and expertise.

Engineers, programmers - these are the highly skilled areas

where Britain and the West once had a monopoly.

No longer.

We should be very worried,

because the Chinese produce half a million engineers every year

out of their universities, and we produce 21,000.

So they're producing 20 times as many.

There's quite a lot to be said about what economists can't measure,

which is the extent to which there's a great deal of entrepreneurship,

focus on education, there is a lot of that in China.

You certainly see that in terms of Chinese graduates moving overseas -

they're very competitive, very disciplined.

This is engineering. A lot of my time I spend here.

Practically, on average, about five, six hours a day, pretty much.

The impressive Chinese work ethic

has been brought to the UK by students of Chinese origin,

who frequently outperform their indigenous rivals.

Ben is in his second year at Warwick University,

one of the UK's leading engineering schools.

I'm doing general engineering. This is a pipe flow lab.

It's one of the labs we do in our module.

I was born in China. I went to primary school there.

The workloads are quite different.

During primary school, I did a lot of practice on maths questions,

and a lot of things, yeah, which wasn't...

..so evident over here in the UK sort of thing.

If it's not changing, then it means there's an air bubble.

We are measuring the pressure drop,

the temperature and the flow rate of these two different pipes.

The drive of Chinese students is fuelled by their determined parents.

My parents, obviously, are more driven for me to succeed,

so they sort of drive, make sure they're...

Well, my mum used to make sure that I'd do a lot of work.

Ben's mother brought him to Britain in 2003.

She's a molecular biologist who now works at Oxford University.

Bringing Ben here meant missing out

on great career opportunities for herself in China.

I came here only for him, because I can have a very good job in China.

But because of him, I really just want to sacrifice everything,

and then focus on him and just for his success,

and for his achievement.

His life is my life. This is in China.

Sometimes I really push him,

and go to his room and check what he's doing, and he wasn't so happy.

And he'd always say, "Why do you interrupt me all the time?"

But I really want to see if he's doing, you know...

He's not always playing on the computer or maybe doing other sorts of things.

-It gets annoying!

-HE LAUGHS

It gets annoying sometimes. It really does.

But I can see why she's doing it.

Education is pretty much everything to Chinese parents.

If you don't have, like, a really good education,

it somehow links to becoming a failure in life.

And also, because there's so many people

and huge competition for university places.

People concentrate a lot on just working hard.

The acquisition of knowledge and skills

is perhaps the single biggest challenge we face here in the UK.

In this globalised world, there are millions who are educating themselves to a high standard,

so our young people need to acquire even better skills and know-how

if we're to stand any chance of improving our living standards in the decades ahead.

We should all help and encourage school students to make the most of what they can be,

for their sake, and the sake of our economy.

All the best.

Where do we go?

-They're in there. They're all expectantly waiting.

-OK.

I'm Anthony, and at the moment, I'm studying business and drama.

-My main interest in the future is to get a degree as an economist.

-OK!

A lot of economics is up in the air at the moment

because of the great crisis we've been through.

And that means, actually, that, you know,

when everything's up in the air, you can go back to first principles,

and all that basic thinking isn't about maths, it's about,

you know, it's almost philosophy.

It's easy to underestimate our young people.

In my experience, they're determined and diligent.

So why, when we need to encourage them to study,

has the Government so greatly increased

the university fees they pay?

When I talk to young people, which I do quite a lot, they all say,

"why should I go to university now that it's become so much more expensive?"

How would you persuade them to invest in themselves?

I think they first need to understand

that when they go to university, they don't pay out any money,

there are no upfront fees. They pay later in life,

if they have a high income, in relation to their income.

It is, in effect, an additional tax on their income

if they benefit from a university education. That's how it works.

Intuitively, you must think that that's...

If... Since we're having a crisis about debt,

we're forcing students to take on debt.

A lot of them will then go off and seek ways to immediately pay back the debt,

by doing the, kind of, lucrative but not particularly socially useful things.

That must be a quite likely risk.

The City of London.

For graduates with big debts to repay,

or those who simply want to make a pile when they're young,

banks, hedge funds, finance - they're a seductive career path.

For years, many of our brightest graduates,

especially scientists and mathematicians,

have ended up in financial engineering rather than

the nuts-and-bolts kind.

The last 20 to 30 years, you've heard this enormous sucking noise

where the City of London has basically sucked in an enormous amount of talent.

And that's partly because if you come out of university with a decent science degree,

you can earn a fortune in a hedge fund,

-and rather less working for Rolls-Royce.

-That's right.

And if you look at other countries which have been highly successful

at manufacturing and export, for example in Japan,

you can be somebody who's got an engineering degree,

and becomes the best designer of car door mirrors in the world,

and be revered for that. Whereas here, you'd be regarded

as a schmuck because you didn't go into the City or a hedge fund.

I wish they wouldn't keep pinching scientists and engineers

who'd be much happier in industry, making real things.

It's partly, also, thinking at an individual level

about people investing their careers in things like engineering,

which, of course, don't produce the kind of short-term return to your education

that you'd get if you went into a City bank, for example,

but represent long-term careers for young people.

A bulging financial sector doesn't just suck in your best minds,

it inflates the currency.

And during the boom, a strong pound hurt manufacturers

by making British products that were sold overseas very expensive.

So does the City of London's international success

hobble the other vital parts of the economy?

This business, Tullett Prebon, in the heart of the City of London, is world class,

one of the two biggest brokers of its kind in the world.

On this floor alone, some 400 billion of transactions

is executed every single day.

So the question that's posed by the success of the City of London is,

has financial services become simply too big for the health of the British economy?

Is it possible to reconstruct the British economy in a positive way

-without shrinking the City?

-Um... Probably not.

I think the City, if you put it in perspective,

if the City were the same size to the British economy that Wall Street is to the American economy,

which is the other largest financial centre in the world, it would be about one sixth of the current size.

And so I think it's pretty unlikely that you can get the remainder of the economy

in any foreseeable timescale that we could rely on,

to grow at such a rate that it rebalances the economy away from the City.

The City is a major contributor to tax income,

to government income in this country.

It's a major source of the funding for schools,

hospitals, for the Welfare State.

So I think we should protect it and nurture it,

we should make sure it's properly regulated and controlled.

Most of our problems in the UK were centred on the banking sector,

which, frankly, did grow

disproportionately large for the UK economy,

balance sheets four times our GDP, one of the largest in the world,

-and that was a problem.

-So to be clear, your view would be,

banks became too big, but the City didn't become too big.

I think that's a fair summary.

Yes, it's those banks again.

Vital to any economy, and massive in Britain,

in the boom years they became bloated

by all that reckless lending.

If we hadn't rescued our big banks after the 2008 crash,

the economy would have been paralysed,

and the consequential losses would have bankrupted us.

Never again.

I think the banks really acted

pretty disgracefully over a period of time.

They are a powerful transmission mechanism for this to happen.

And the banks themselves borrowed a lot in order to lend to people,

so they were a very, very powerful mechanism for these unpleasant events to arise.

Have you had to revisit in a personal sense

how much good or bad you and your mates here do?

Yes, Robert, I have. Not at this moment, because it's been

striking me for quite some time before the crisis struck

that there was increasingly limited utility

or social usefulness to an awful lot of what went on.

And, yeah, it's reasonably convincing now

that some significant portion of the activity

is, at the very best, not contributing to social good, society,

wealth in the real sense of the word, not just additional cash, but...

And, in fact, at worst, it might be quite a lot worse than that.

What banks do, in theory, should have enormous social utility.

How do we get finance back to a place

where it is plainly serving the public interest?

Banking should be boring. Banking should be about taking deposits

from people who've got excess cash,

and lending it to people who want to borrow.

Gosh, remember when banking was calm and dull?

What's all this, then? Shakespeare's birthplace?

No, this is a bank, too.

Banks need to get back to their vital social and economic function

of turning our savings into the loans that businesses need for investment,

and that individuals need, to pay for a home, for example.

Money.

It keeps flowing round lie the circulation of the blood.

And the banks keep it flowing.

What's in it for the bankers themselves?

Well, they might turn from pariahs

into respected pillars of our communities again.

Opening time.

And here's the first customer, Mr Baker.

The village butcher, oddly enough.

-Morning, Jack.

-Hello, Vera.

-Lovely day.

-Beautiful, ain't it? Beautiful.

-Morning, son.

-Been busy?

You've got to pay in before you can draw out.

-True.

-Very true.

I think it's essential for banks

to get back to what they should be doing,

providing credit, especially to small and medium-sized enterprises,

for two reasons. If the lending function isn't restored,

the strength of the economy won't be restored.

And secondly, if these banks are too big to fail,

if they continue to engage in this risky activity,

knowing that they're too big to fail, knowing that the Government will bail them out,

we're going to have another crisis of the kind that we've seen already.

The banking system is being reformed,

though some would say not radically enough.

Such is the influence of the City,

don't expect any of our leaders to demand

that the financial sector should be shrunk.

As for the notorious bonus culture,

it's not quite as rapacious as it was, but it's still there.

If we're going to rebuild our economy on firmer,

sounder foundations, we're all going to have to make sacrifices.

But are we really all in this together?

Most people are enduring a really sharp squeeze

in their living standards, but the bankers,

who many blame for getting us into this mess,

well, they're still expecting big bonuses

and those who run our biggest companies,

they're enjoying an increase in their rewards of around 50%,

on top of the millions they already earn.

Given the scale of the taxpayer bailout of banks

and the role that banks played in causing this mess we're in,

do you think it would have been sensible for big banks to,

in general, declare quite a long moratorium on bonuses?

I can understand the moral position on that,

I think, completely.

I can actually understand it to a large extent

in relation to business drivers. If banks aren't performing well,

then, why would you pay people still large amounts of money?

The rock that it breaks on from my point of view is the pragmatic one

which is we need to employ people in a dynamic and competitive market

and we struggle to find ways that we can continue to employ people

if we're not paying what the rest of the market is.

It's a trap, frankly, that everybody's in

because a lot of people would say what I say is that, objectively,

a lot of this doesn't make much sense,

but it is where the market takes it.

As for the job market experienced by Vanessa,

well, it couldn't be more different.

These top executives don't even have an idea of what it's like

for someone sort of average.

I'm probably middle class, if you had to define it,

but, you know, my parents can't afford to support me indefinitely

and, you know, I don't want to be supported.

I want to be able to be an independent adult

and I don't think that these top executives

have any idea what it's like to live on sort of £25,000 a year.

The big question will be asked - why?

Why is this happening? Is it fair that it's happening?

Is it legitimate that, actually, I'm in these circumstances

where the people who actually caused the crisis are, in many respects,

living high on the hog or suffered nothing?

That, I think, is going to be...

There's going to be big political kickback on this.

CROWD CHANT: We got sold out!

What's your own view of the Occupy Wall Street

and related popular campaigns around the world

to criticise banks and the financial sector?

I'm actually slightly surprised it's taken so long, really.

The financial crisis and the failure of banks and so on

has been going on for three years

and most people think it's going to go on for a bit longer.

No, I absolutely feel the sense of outrage about what happened in the banking sector.

I think it is absolutely disgraceful that British banks,

for the first time in 300 years of British banking,

needed massive taxpayer bailouts.

And with our economy so weak, this sense of injustice,

that those who caused the mess haven't been properly punished,

is growing.

The boom years won't return any time soon.

As we repay our public and private debts,

there's less money available for spending

and that makes it really hard for the economy to grow.

But there's another huge threat looming over us

which could snuff out even what little growth we manage to achieve.

It's almost two years since Europe's debt crisis first erupted.

What started out as worries

over the Greek government's ability to repay its massive debts

has spread like a virus throughout the eurozone.

I was in Athens, talking to people and one of the Greeks said to me,

"There's something very wrong with the world economy

"if the collapse of a couple of Greek banks

"could cause another global financial crisis".

And maybe he's right.

Maybe we are now so interconnected

to a sense that it's really got dangerously out of control.

The kind of Armageddon scenario is you have sort of disintegration.

I think that's unlikely. The more likely negative scenario

is that, you know, one or two countries peel off

because they can't cope.

You'll get the gradual fall in sort of confidence

and endless attempts to kick the can down the road

and not really succeeding - a very negative effect on growth.

But I mean, I'm optimistic that the political leaders of Europe

who, in the past, have always risen to the challenges we've had, I think they will again.

The world is, once again, on the brink of financial disaster.

This time, the most imminent danger is the break-up of the Euro.

At their umpteenth emergency summit,

eurozone leaders said the future of the euro was safe.

But someone forgot to tell the financial markets.

The eurozone crisis is weighing heavily on the world economy.

Next year's crunch time.

That's when the huge debts taken out by banks

and governments in the boom years come up for repayment.

Now, if any of them fail to pay what they owe,

the ensuing losses could lead to a devastating banking crisis

and even the possible break-up of the eurozone.

That's why the Treasury and Bank of England

are working on emergency procedures for a possible financial Armageddon.

Will the eurozone survive?

Er, no. Not as it's currently constituted.

Greece will certainly default and leave the eurozone.

I think one of the many, many problems with the eurozone is,

to quote a great aphorism - he who defends everything defends nothing

and it's possible that the German-French axis, that is really Germany,

will spend so much of themselves defending the indefensible

in keeping Greece in that they won't have the fire power

to defend what they should be defending which is probably Italy.

If the eurozone avoids collapse,

the challenge faced by Britain is big but not insuperable.

We're not insolvent like Greece.

Nor are we like Italy with a government living in daily fear

that no-one will lend to it.

We're still a very rich country, whose people's incomes

are still almost ten times those of most Chinese.

The most likely scenario is that we'll end up

with many years of low growth, a bit like what happened in Japan.

Who knows what the average rate of growth will be over the next decade,

but, you know, it might be nearer to one per cent.

-Is that really such a disaster?

-One per cent isn't so bad.

It means we're still... It means we're still growing.

People point sometimes to the Japanese experience in the 1990s

as having been shocking how terrible it was

that growth in Japan flatlined for,

you know, the better part of a decade.

But if you look at the Japanese population,

they weren't unhappy with their lot. They were perfectly content.

What we didn't have was a huge boom

but nor did we have...were we going through a huge bust.

The best we can hope for may be many years of one per cent growth,

versus the three per cent a year we enjoyed

during the 16 years before the crash.

Living within our means, paying our way in the world

will force us to relearn the virtues of deferring gratification.

Politics will no longer be about sharing out an ever-growing cake,

but will be about allocating scarce resources to the public services

that really matter to us. The presumption of the boom years -

that we could have it all, well, that's gone.

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