12/12/2011 Newsnight


In-depth investigation and analysis of the stories behind the day's headlines with Jeremy Paxman.

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For a lot of economists this is the most riveting and fascinating


most riveting and fascinating period we have lived through.


It was the uen usual, House of Commons performance on these sorts


of occasions, lots of baying and jeering from the people we choose


to speak our thoughts. But there was one notable absentee, where,


everyone wanted to know, was Nick Clegg, the Deputy Prime Minister,


who only yesterday described his friend Cameron's decision in ruls


as bad for Britain. Mr -- in Brussels as bad for Britain. Nick


Clegg said he thought it would be a distraction. Him not being there


made it even more of a distraction. Get up to much at the weekend?


Perhaps you just hung out with the family? Let's keep it moving, up


and down the door, instant blisters. Maybe you tackled a few jobs around


the house, or perhaps you radically hardened your view on the EU veto.


No? Oh, well, it was probably just the Lib Dem leader then, something,


certainly appears to have happened to him over the weekend. On Friday


he gave out a statement saying he was in full support of the


coalition's negotiating position in Brussels, that he thought that


David Cameron's demands were modest and reasonable. But then by


Saturday, his friends were supposedly briefing the newspapers


that he was privately furious, and then, on Sunday, he hit the sofa.


am bitterly disappoint by the outcome of last week's summit,


precisely because I think now there is a real danger of Britain being


isolated and marginalised within the European Union, that is good


for jobs in the glrb I don't think it is good for jobs or families up


and down the country or growth. As Nick Clegg left home, everyone


thought he had an hour or so awkwardly ahead of him sitting in


dutiful support of the Prime Minister. I went to Brussels with


one objective, to protect Britain's national interest. When Mr Cameron


started his Commons statement, explaining why he had used


Britain's veto, his deputy was not there. Nick Clegg, it seemed, had


exercised his own eat vow -- veto of sorts, the Labour benches kept


saying "Where'S Nick". We notice the absence of the Deputy Prime


Minister from his place. Miliband said the veto was all


about appeasing Conservative backbenchers. He didn't want to


deal because he couldn't deliver it through his party. He responded to


the biggest rebellion of his party in Europe in a generation, by


making the biggest mistake of Britain in Europe for a generation.


But a prosession of Conservative backbenchers saw things very


differently. Because he has stood up for democracy, he has stood up


for free trade, and he has stood up for free markets, this is to be


wonderfully commended. There seemed to be a sort of competition, who


could be most extravagant that their praise of the Prime Minister.


I would like to pass on the hugs, best wishes and kisses from people


in Macclesfield, who are very grateful for the stance the Prime


Minister took last week. But there were no hugs or kisses for Nick


Clegg from the Conservatives, oh no. The most cowardly and negative


attacks over the weekend did not come from the party opposite, who


are incapable of opposition, but unfortunately came from the Liberal


Democrats. Cowardice only to be surpassed by the absence of the


Deputy Prime Minister in the chamber today.


I'm afraid I don't agree with my honourable friend. I'm very


grateful for her support. We have to recognise, we are in a coalition,


and in a coalition parties cannot achieve all the things that they


want to achieve, and I think we have to praise each other in the


coalition, when we make sacrifices on behalf of the country. Look at


the glum faces on the Lib Dem benches, they were clearly not in


hugging mood. Some tried to cheer themselves up with tribal clothing,


others made measured digs a Lib Dem, it was noted, had led climate


change talks in South Africa, and a deal was done there. Would the


Prime Minister reflect that constructive and positive tkphrokcy


might be a better solution to British politics.


Some hadn't made it to the entrance, why wasn't Nick Clegg there,


afterwards he gave an interview. don't think people care too much


who sits where in the House of Commons. It would have been a


distraction if I was there. Because everybody knows that on this issue


the Prime Minister and I don't disagree, I have made my views


known. This is confusing, he and the Prime Minister don't disagree?,


except we know they do, don't they? Mr Clegg had another go? The Prime


Minister and I clearly do not agree on the outcome of the summit last


year, I made it very clear that I think -- last week, I made it very


clear that I think isolation in Europe, one against 26 is


potentially bad thing for jobs, for growth, and the livelihoods of


millions in this country. What happens now. Both party leaders are


clearly very committed to keeping the coalition together, but, as we


saw in the Commons today, their backbenchers are more willing than


usual to have a pop at each other. With every row a few more stitches


in the fabric that holds the coalition together are ripped apart.


At some point, not necessary immediately, it might be beyond the


power of the leadership, to hold their respective parties in the


coalition. With us now is the former Liberal


Democrat leader and Godfather of the party faithful, secular saint,


I don't know, Paddy Ashdown, Lord Ashley! Did you ever think you


would belong to party which made possible something that was bad for


jobs, bad for growth and bad for the livelihoods of millions of


people in this country? To be honest, I never thought I would


belong to a liberal party that would be in Government, and had to


take the tough decisions. Let me address this directly, one, what is


the difference between ourselves and the Tories over this? By the


way, it was a joint negotiating position. Nick Clegg, not only made


sure that the demands that were made were reasonable ones not


unreasonable ones, but spent maybe 30 phone calls preparing the way


for success. Was he dismayed. couldn't be bothered to go,


prepared to be tucked up in bed in Sheffield? That is a position, it


is the Prime Minister to be there, and he wanted to be where he felt


it was important. If it was so potentially damaging why didn't he


go? We can talk about who was in which bed, where, I'm not getting


into that. The more important thing is this the joint position put


forward by both parties, in which Nick Clegg had a tremendous part in


making sure it was acceptable. Are we pleased with the outcome? No, we


are dismayed with it. That is the difference, Mr Cameron is pleased


with the outcome, we are not. it was a joint decision? No, the


negotiating position was a joint position put forward by both


parties in the coalition. But conduct of the negotiations was a


matter for the Prime Minister. He was pleased by the outcome, we are


not. It is as simple as that. had no idea in your party that this


was how it would end up? I don't think anybody had any idea how it


would end up. The origins of this go way back to the fact that you


have now got in Britain a Conservative Party that for so many


years have been so euro-sceptic, thats hadth has generated real


anti-British fervour on the continent. What is the point of


having you in the Government if that sort of happens, this is


crucial to the future of the nation, according to your leaders, and yet


he doesn't have any idea of how things will turn out. He didn't


turn up in the House of Commons today? He was right not to turn up


in the House of Commons today. Let's get down to the substance


before us. That is this, the difference between ourselves and


the stories is this ended up in a position that ended with success,


we think it is a failure. The question isn't how did you get here,


the question is what happens next. This is where I think we have now a


major role to play, again in the Liberal Democrats, which is to make


sure that Britain's isolation, Jeremy...You Thought you had major


role to play in this negotiation, you didn't, you were irrelevant?


That isn't true, as you well know, I have just covered with you...What


Relevance did you have in this judgment then? We put together a


joint negotiating deal. Which apparently was ignored? It was then


in Mr Cameron's hands to deliver. He didn't. We might go into why not


on a different occasion. Do we think the outcome is good or bad.


We think it is bad, he thinks it is good. The job at present, it seems


to me, is to get Britain out of isolation and back into the game.


That is a crucial role that we now have to play. Can we discuss how


you might do that. Is there any point in discussing any of this


with you, with the greatest respect, you are a distinguished figure in


your party, but your party is not he will vant in things that happen?


That is not true, can we cuss what happens next. It is -- Can we


discuss what happens next. You say you had nothing to d with the


outcome? We put together a joint negotiating position with the Prime


Minister. That's what he took to the negotiations. It is deeply


regretable that a negotiating position, which I think would have


been won by any other British Prime Minister, save for Mr Cameron of


recent times, was not won. That displays and disappoints us.


keep this uniquely inept man in office? I don't believe you can


describe the Prime Minister as inept. You say his position would


have been won by any other Prime Minister? On this occasion. But the


coalition is about taking this country through an economic crisis.


Do the Liberal Democrats and the Conservatives agree about Europe?


Manifestly we do not. The centre of the coalition is not about Europe,


it is how to carry the country through an economic crisis, that is


work still to be done. What is it we can now do to bring this country


out of the desperate isolation that a failure of negotiations in


Brussels has left it. The answer is there are some things that we can


do, and we can insist are done. Those, I think, will help to try to


reconnect Britain with what's happening in Europe, instead of


leaving it isolated. How can you insist they are done. You could


have insisted on this occasion that there was no walking away, but you


didn't? It was Mr Cameron who walked away. So you are not in a


position to insist upon anything, are you? I think it is perfectly


possible for the Liberal Democrats to say, for instance, that Britain


now needs to take a position where we do not act as a break from the


26, to use European institutions to put forward what now happens,


because it is in our interests to see this succeeds. I think a


negotiating position between the Liberal Democrats and the


Conservatives, which insists that we should not be a break to the 26


finding a solution to this, is exactly what can now be done. The


Prime Minister hinted today that was a line that could be taken. I


think we have to drive that forward. What matters now, and this is the


real thing that matters, Jeremy, is not what happened, and how do we


get here, but how do we reconnect Britain instead of leaving it


isolated. I suggest to you, how we got into this powerless position?


We have just been through this, can we concentrate on what happens next.


Would you ever say we will not collaberate in this Government any


longer if you continue to act in ways we think are not good for this


Government? If the Government was foolish enough to let the euro-


sceptics run riot with European policy in future, then I think you


would be in a very serious position as a Government in Britain. What we


have to now discuss is how can we step back from our position of


isolation. Would your party play a part in that Government? Don't take


me down a track which is too far away for me to speculate about. You


are never in something for all circumstances, but here is the


centre of the coalition. It is how you take this country through the


economic crisis. The fact that the Liberal Democrats and the


Conservatives don't agree about Europe can hardly be a surprise to


you or anybody else. We would have wished to see these negotiations


succeed, we think it is a disappointment, it is a dismaying


act, to use my leader's language, that it did not succeed. Now there


are reasons for that, I give you one, I think we have two leaders to


international leaders, two leaders of Britain and France, who are


probably not up to playing the parts they think they are playing.


You have Mr Sarkozy, the French President, who believes he's


General de Gaulle, and Mr Cameron who believes that he is Mrs


Thatcher. That is one of the ingredients that has brought us to


the situation. And Nick Clegg is Gladstone is he? What is clear to


me now is what happens next. How we get Britain back into the game and


the negotiations is what to do and the Liberal Democrats play an


important part in that. It is a liberal assumption that the rest of


the European Union is not nattering away about what David Cameron did


on Friday morning, there is the slight matter of whether they have


done enough for the euro to survive. Britain didn't wield a veto, not in


a meaningful sense, because those that wanted one got one.


What happened in the heady hours of the night?


The desire to remain venerable City interests was at the heart of what


happened last week. David Cameron sought to hold Britain's edge in a


globalised, regulated world. By ending up in a club of one, he left


EU officials implying he hadn't made the slightest difference.


this move was intended to prevent bankers and financial corporations


or the City from being regulated, that's not going to happen. We must


all draw the lessons from the on going crisis and help to solve it,


and this goes for the financial sector as well.


When the Prime Minister went to Brussels he was taking a big


diplomatic gamble. The British draft for safeguarding the City


hadn't been circulated in advance in the usual way. Very few Foreign


Office people, we understand, had seen it either. Instead, it was


kept on a tight Downing Street distribution, and there was little


time to canvas for other countries' support in Brussels.


In the end, what all of this has done is expose the limits of


Britain's influence, in a club of 27, and a system of qualified


majority voting. It is not easy to see how that can be dealt with,


except by challenging that system of majority voting, as Britain


tried to do on Friday in the early hours, and failed. In the absence


of some kind of solution, these problems will continue.


Britain's last-minute proposal, of which we have obtained a copy,


aimed to protect US and other foreign banks in the city from new


EU rules. It tried to stop those who want euro transactions to be


done only in eurozone countries. But in the key provisions Mr


Cameron asked for unanimity, rather than EU majority voting on transfer


of powers from national level to EU agencies. The same went for any


change to the supervision or regulation of financial houses, or


to the location of the European banking authority, currently in


London. This looked like trying to turn the clock back on majority


voting. The Government kept its cards close to its chest for


reasons that baffle the Foreign Office, the European proposals were


not given to our partners until the day of the summit. And because of


the way the summit was organised, the British protocol was discussed


at 2.00am, when everybody was fed up and tired and wanted sleep.


Perhaps if they had emerged at 2.30pm, then everyone could have


got down to negotiation on them. At the time they emerged people said


take them or leave them, Sarkozy said we won't have them, and there


was no discussion about which bits of the British proposal were good


and not so good. If the British proposal unravelled because of bad


tactic, Friday's reverse may be recoverable, that is what many


friendly Governments are hoping. Think that this whole situation has


been overdrama advertised. -- dramaised.


There will be an opportunity to meet some, if not all of the UK's


requests at some stage down the line. I think it will be to the


benefit of the whole of the European Union for that to happen.


And for the UK to be able to join at a later stage. Today the Prime


Minister suggested again that European institutions, such as its


Civil Service, couldn't be used without British agreement. There is


some legal sense in that, but it would ratchet the row to new


levels? Politically if Mr Cameron really tried to flaunt the Franco-


German convention for the European institutions and tried to stop it


through one court ace case after another, he would create ill will


towards the UK. There is already some of that. The real lesson of


the last few days is Britain has no friends and allies in Europe. In


the history of the European Union, since Britain joined in 197, I


can't recall a time when not a single other Government or country


was prepared to standby Britain and help us, we have lost all our


allies at the moment. Mr Cameron's attempt to protect the City may


have exposed more than just tactical shortcomings, if he is to


return to the attack on majority voting, opponents in Europe are


bound to question his commitment to the single market, one of the basic


tenets of Europe. We're joined by our guests now.


Nick Bowles, what do you make of the way the British Government


handle these negotiations? I can only think of two compassions how


they ended up where they did -- explanations of how they ended up


where they did. They didn't take competent steps to get allies on


side, they didn't announce it in time and set out what they were


trying to do. The other explanation is they were afraid of their own


backbenchers, and couldn't get a treaty through parliament, and


deliberately went for a failure. Nick Bowles what do you think went


wrong? The problem went wrong, it isn't true to say that the


proposals were not true to say. The entire piece of paper wasn't


released, but the Prime Minister, a few days before in the House of


Commons had said what he would be asking forks and said if he didn't


get the safeguards he needed, particularly in financial


regulation, he wouldn't be able to tack the treaty. It was clear what


he would do. They are all wrong? President Sarkozy is running for


election, and 15% behind in the poles, and he had a strong interest


in showing the French people. are playing the blame game? I'm not


saying there weren't contributory factors, everyone accepts it was


Sarkozy who was the driving force behind the rejection of every part


of the British proposals. You have to ask his benefit in all of this.


I think probably he's facing re- election soon, it is a tough fight,


and standing up to England has never done the French President any


harm. Sophie Intveld, how does it seem in Strasbourg? I think


everybody thinks this is very unfortunate. People were very


surprised that things turned out the way they did. It is very


unusual as a situation. A veto is considered to be a deterrent, it is


a nuclear weapon. You are not actually supposed to use it. Unlike


the previous speaker I don't think you can blame exclusively Mr


Sarkozy. He might well want to be the most powerful man in Europe,


but there are 25 other countries as well. I know that some other


countries and prime ministers of other countries were equally


shocked. I think Paddy Ashdown was right when he said what we need to


focus on now is how we reconnect. Once the dust is settled, once all


the emotions are settled, then we need to restore calm. Let's engage


with that, how long lasting is the damage going to be, Jonathan Powell,


you are a veteran of numerous EU investigations? I think people are


underestimating how serious this is, there is no way back, apart from a


humiliating climb-down from David Cameron. President Sarkozy said


there are two Europes, there is no way back, he wanted inter-


governmentalism and we have played into that. There is a very clear


subtext, there has been a 40-year dream, shared by Jonathan, Paddy


Ashdown, Ed Milliband and Charles Grant on your programme, that 40-


year dream is Britain would at some point, catch up with the rest of


the EU and join that country, called Europe, that they are in the


business of creating. That is why we have always wanted us to retain


part of the EU treaties, even when we have an opt-out, as we do on


monetary union. The reason why there have been the howls of pain


from people like Jonathan over the last few days, is that dream has


definitively crumbled. Britain is never going to join the monetary


union, we are never going to join the fiscal union, we want to remain


part of the single market, but but we don't want to call the country


called Europe. Jonathan is right, there are two journies, we will


remain an enthusiastic part of the single market, and an enthusiastic


member of the EU, we will never join the eurozone, it has been his


ambition and Paddy's, and I hugely respect them for it to achieve that,


that has failed and that is why they are in such pain. You don't


speak for the whole of European politicians, but from where you see


it, in Europe, do you think you are deprived of anything by the British


absence? Yes, I think the European Union without the UK is not the


same European Union. I think, you know, we are very obsessed with


ourselves at the moment. It is worth having a look at the world


out there and ask yourself what position Europe should have in a


global economy. I think the British are very well placed to understand


the importance of global economy. Is there a way back for David


Cameron without eating his words? Yes, there always is. The European


Union has a long tradition of clashes and then they sit around


the table again and they will find a compromise, and compromises by


definition are not pretty or glamorous, thu work though. We


should give it a -- but they work. We should give it a bit of time,


let everyone vent their emotion and come back to the negotiating table


and talk like grown-ups. It is not that serious, the European Union is


well in the habit of making people to redo referendums if they produce


a decision they don't like. It is never the end? I fear it is, the


single market measures are in vast majority QMV, quality majority vote.


They will be taken at 26. There will be a group of 26 countries who


meet, make decisions, and then couldn't front Britain with them.


We will have no say in the -- confront Britain with them. We will


have no say in our lives now. We will be excluded from all the key


decision making in Europe. People are mission the point on that.


don't think that is right, we have had the eurozone for a while, and


the eurozone countries, I will admit, they have been meeting


separately in these eurozone plus meetings without us. Frankly, we


can't stop them picking up the phone to each other. There are


always going to be, in the 26 countries, who, on certain issues,


will agree with our position, in about the single market. About how


it will develop. You have heard from the Polish Finance Minister


he's clearly very keen. You have heard from the Dutch MEP with us,


she's very keen for Britain to still have a role. We will still


have a role, we will have to be part of a negotiation. Just because


you have a caucus, doesn't mean the caucus always comes to a unified


position. You think this was a great success, was it? No, as David


Cameron said today, we wanted to do a deal which had these safeguards


that would have enabled us to sign up to the treaty. It didn't need to


become clear that if we were going to agree to that we needed to have


protections that are not currently in the EU acts? I don't think it is


a betrayal of 50 years, it is a betrayal of 200 years, Britain has


spent huge amounts of blood and treasure to be involved in blin,


right back to the battle of Waterloo. You read the European


papers it is more sorrow and anger, Britain has turned away and they


are mystified by it. It is a hysterical overreaction, Britain is


the sixth or seventh largest economy in the world. We have the


fourth-largest military force, even after the defence cuts. We are a


permanent member of the Security Council of the UN, the idea of our


only way to exercise influence in the world is through the European


Union, we are members of the European Union, the British people


want to be members of it, because of the single market, because of


its economic benefits. We are not members of the European Union in


order to exercise political influence, that has never been our


purpose or what it has delivered to us. The idea this has been a 200-


year plan, seems to forget there were quite a few wars in those 200


years, not all about unified Europe. They were? About stopping it.


Thank you all very much. They say it is an ill wind that blows no-one


any good. This year's shambles in Greece, Ireland, Italy and much of


the rest of the eurozone, Maysoon have us all discovering the Joyce


of bread, dripping and gruel. They have been a godsend to economists


who have been shoved out of the dark corners of offices in the land,


to emerge blinking in the glare of the foot lights. Christmas began in


January. We have the first of a week of films about the dominating


stories of the years. We thought we had turned a corner,


the recovery had started and Britain's economy had begun to be


transformed. We thought too that Europe's crisis had been stemed at


the periphery. But we thought wrong.


It all started out so well, for the first three months of the year, the


economy grew half a percentage point. It was the right kind of


growth. David Cameron had promised to rebalance Britain, through


manufacturing. And exports, to replace the jobs lost in the public


sector with private sector jobs like these. And, for a while, the


facts fitted the narrative. With hindsight, though, things did not


turn out as scripted. It is very difficult to argue that we actually


produced any home-grown growth, we piggy backed off a global rebound.


When the global rebound began to lose momentum and run out of steam,


so did we. To boost growth, the authorities


had tacitly encouraged the pound to fall. That sucked in inflation


which went way above target, but the Bank of England did not raise


interest rates. Now, questions were asked. REPORTER: Who was it who


revelled in the fall of sterling, who was it that printed �200


billion of quanative easing, who was it who took interest rates to


zero, it was this committee. Therefore, you can't sit there and


say we have missed the target by factor of 100% and there is nothing


to do about it? What would you have done about it REPORTER: Put me on


the committee and I will tell you? The governor spelled out the harsh


alternatives. Would you have us raise interest rates by a


significant amount to reduce a deeper recession, raise


unemployment to push money wages down, in the way it has happened in


Ireland, Greece and Portugal. mid-year, CPI inflation had reached


5%, that was squeezing people's spending power. Real earnings had


been ahead of inflation at the start of 2010, now they moved


sharply negative, real wages fell by 1.1% this year and are not


protected to go positive again until 2013.


By now, the story we thought we might be telling ourselves was one


of growth rebounding and an economy rebalancing and the worst of the


economy crisis behind us. As it is, things have turned out


very differently. With wages squeezed, growth now


faltered, from an expected.1% to 0.9%, if -- 2.1% to 0.9% f we're


lucky. George Magnus has been writing about the economy since the


1970s,'s the senior economist at UBS bank. For me personally and for


a lot of economists, this is probably the most riveting and


fascinating period that we have ever experience lived through. In


some case, it is -- experienced and lived through. In some ways it is


bigger than 2008. A lot of things we are seeing in 2011 is so close


to home. By high summer, the euro was in crisis, Greece in a spiral


of falling growth and rising debt. The world facing a Lehman scale


event if it went bust. You are looking at the frontline of the


world's financial system. Many people in authority believe if


Greece defaults on its debts, as the people here want it to, that


will echo across the world, in the same way Lehman Brothers did. Then,


month after month of indecision by Mrs Merkel and Mr Sarkozy. I think


the financial crunch in Europe during the second half of 2011,


particularly the withdrawal of European banks from things like


trade finance, aircraft financing and other substantial areas that


fix the world's financial plumbing actually has had a very dramatic


affect on confidence and on spending and lending. That is


essentially what drives economic growth. In America too there was


paralysis over debt, the President and Congress took it to the wire to


set a budget, and then, the USA lost its AAA credit rating. And now


across the world, a slow credit crunch began.


It was like a chain reaction, the failure to stablise Greece hit


confidence, disrupted the finance system and then rebounded into the


real economy. We already knew bankers could cause crises, now we


found out politicians can cause them too. In the emerging world,


which was always looked upon as being the saviour of the planet,


economic growth has slowed down quite presip tusly in some --


presippously,ly because they have lost some markets to Europe and


partly as a response to their own inflation because of tightening.


Britain, buffeted by Europe, then another thing, its own statistician


thought it had shrunk more than we had thought. Bad news for growth,


worse news for the public finances. So you are going into the next


election, promising further billions of bounds in cuts in


public spending. That is what you will say in your manifesto at the


next election. I'm afraid so, yes. Instead of rapid rebalancing and a


returning to growth, Britain faces a long uphill slog, that has begun


to raise questions beyond mainstream politics. There is 400


years of economic history in this landscape, you can reduce it all to


two kinds of tall building. One, devoted to making money, the other


devoted to keeping people moral and civilised, while they make money.


And this was a year we started to think carefully about the balance


between the two. I think the protests resonate with


people, because they strike at questions that we are all asking


which is really about where do the rights and responsibilities of


citizens and the state, how do they change? Though Britain's Occupy


movement, found scant support in the mainstream, its moral critque


of capitalism has been given a new urgency by the deteriorating


economic news. This may go on for a decade, it may go on for longer, it


is very difficult to tell. I think when that begins to sink into


people's consciousness, that actually things seem relatively


homeless and we don't have solutions, people start to look for


different kinds of answers. That may involve a rebalancing of our


ideas about markets versus the state.


After two failed euro summits and one that succeeded in a diplomatic


schism, Britain's future and the eurozone's are tied together,


although unwillingly. Finally, question how will 2011 go down in


economic history? As a bad year, and the precursor of what will be a


worse year in 2012, I'm afraid to say.


That's it for 2011, not much, the collapse of an illusion about rapid


growth, wage stagnation, mass protests and a whole new world of


uncertainty about Europe. And, there is a few more days of this


storm-fosed year still left. -- storm-tossed year still left.


I'm joined by Gillian Tett and the chief economist, Richard Koo, and


from Stanford political analyst from Stanford. This will go on a


long time yet? Once the balance sheets are under water and that is


realised, and we are paying down debt even with the record interest


rates. People are not supposed to pay debts when interest rates are


low, they should borrow money. But the same is happening in this


country, the US, in Spain, Portugal and other places, they are paying


down debt with low interest rates. That is what happened to us in


Japan 15 years earlier. When everybody is paying down debt and


no-one is paying for the economy, it won't do too well until private


sector balance sheets are well again. I med Richard 15 years in


Tokyo and he was talking about balance sheet recessions, for


example, you have so much debt you can't get out of it through normal


means. Back then people thought it was a weird idea, it was just Japan,


it would never happen anywhere else? The tragedy is what we saw


unfold in Japan is playing out. It means a long period of belt


tightening and a lot of stagnation with accompanying social tensions.


Japan has enough social cohesion to make sure the society hangs


together. The big question is does Europe, does the UK, does the US


Francis Fukuyama, what is your assessment of that? (inaudible)


going to have to interrupt you there, we seem to have lost the


sound from Stanford rather brilliantly. We will get back to


you just a second. There you are, are you back with us. I was asking,


the discussion Gillian Tett made was that it would take a lot of


social cohesion to come through these times, she doubted whether we


all had it, what do you think? think that the social cohesion is a


problem, the basic problem is in the political systems, both the


ufpl states and Europe have decision making systems that


provide a lot of vetos to people who are hurt by any particular


decision made. That has paralysed the budget process in Washington.


That is really what has paralysed the decision-making process in


Europe. Where we have an EU with 27 potentially veto wielding groups,


and a smaller group of 17, each with its own domestic politics and


audiences that have to be brought along. That is a long-term and


difficult process. Implicit indeed, explicit is the idea that


democracies can't cope, they can't agree a budget, or agrow it in


Europe. Unless you put in -- agree in Europe, unless you put in gofpls


of technocrats. -- Governments of technocrats. No-one in the


technical world were talking about this morning, people thought


economics was about putting in numbers and spread sheets. Japan is


a country with lots of social cohesion, America was founded by


pilgrims, who thought you never run out of resources, you keep making


it bigger so you don't have to think about it. Some countries like


Ireland appear to have high levels of social cohesion, other parts do.


The question is there cohesion across Europe as a whole to


allocate pain. What is your assessment? Gillian was nice enough


to mention my balance sheet. Learn this in university, maximising


profit, minimiseing losses. University has never trained us for


this, where the private sector is lowering down interest rates. The


whole thing you learn is the private sector maximising profit,


this doesn't work if they have negative equity and pay down debts.


If everyone does it for a long time, the economy will be very weak,


except from the Government help. If they spend on top of t you can


maintain the GDP. That is part of the Japanese story. Don't go below


the bubble in the entire period, employment rate never went higher


than 5.5%. Because the Government was saving in the private sector,


that is what kept the Japanese society going. That is not how it


is playing out in the US and UK. Let me bring in Francis Fukuyama,


and ask, are youle life we upbeat, these are -- relatively upbeat,


these are unprecedented circumstances and many say they


will only be solved by a fundamental sorting out of the


imbalance geen developing nations and the developed nations.


There is problems on multiple levels, even before you get to the


structural imbalances in the global economy for which we have really no


solution. You have these EU wide split kal obstacles, in terms of


the -- with the Germans in their own welfare state may feel an


obligation towards poor Germans, they have no sense of obligation


towards Greeks and other people who think they are behaving


irresponsibly. It means that there has been, in a sense, a deeper


problem in the EU, that there is no common sense of citizenship, there


is no sense of identity that extends obligation across the whole


of an area that is, in many ways, comparable to the United States in


terms of the size of the population, and the size of the overall economy.


The political systems really do not force, they haven't been able to


take advantage of this crisis to force a decision. That is really


what gives the terrible irony of the last three years. Gillian Tett?


Another way of saying it, the key question for the rest is how to


allocate pain. There is too much debt, there will have to be


cutbacks. Are you going to stuff it on to the weakest members of


society, the debtors and creditors. Can our country do what Japan has


done, share out the pain in manner everyone continues to buy in. That


is a key question. Congress and the great fights going on with the


budget is really about how you actually allocate the pain, nobody


really want to talk about it openly, because guess what it is not the


kind of thing that gets politicians elected.


Richard Koo? Let me bring in Francis Fukuyama there? In a


certain sense, Japan hasn't faced up to certain structural problems


in its economy. The fact it is not really experiencing a real


recession, or a real drop in growth that has been prolonged, has


allowed politicians to dither on certain basic issues like


liberalisation of its ago cultural section, it is a co--- its


agricultural section, it is a cohesion that helps them face up to


the structural problems they have. Structural problems are for


everyone, everybody has structural problems. They are those -- those


are people who can't explain what happened to the Japanese economy in


the last 20 years, right up to the 1980s, bang, the bubble burst and


the momentum was lost, same in the UK, the US and large parts of


Europe. That is not a structural problem, it is a balance sheet


problem. The private sector, once every several decades go caidzy


about the bubble. Once the -- crazy about the bubble. Once the bubble


bursts they realise they are underwater, they have to repair the


balance sheets at the same time, if everyone tries to re repair the


balance sheets all of the same time, it is very hard, the economy


weakens because everybody is saving money, nobody borrowing money, even


with zero interest rates, there is no way the economy can move forward.


Paul in his clip earlier put it nicely in the sea change of mind


set that is going on. Economists used to refer to pre200 era, as the


low and stable growth, economists understood the world and predicted


the future. Now we are living in a period of great angst, not


moderation. The economyists are increasingly at sea. There is a


Israelisingation there is no way to resolve it.


-- realisation, there is no way to resolve it right now.


Dramatic developments in the world of science, but first a look at the


papers. The Mail, the big sulk is Nick Clegg's response to the mess


Nick Clegg's response to the mess in Europe.


The Guardian has news, that apparently is a photograph of the


missing stag in Exmoor, that may be hanging on the wall in a hotel. The


There is a beautiful trailer for BBC wildlife programmes going out,


David Attenborough and Wonderful world, here at the cheerful end of


tele, we have to make do with the euro crisis.


# I see tree s of green # Red roses too


# I see them bloom # For me and you


# And I think to myself # What a wonderful world


# The colours of the rainbow # So pretty in the sky


# Are also on the faces # Of people going by


# I see friends shaking hands # Saying how do you do?


# They are really saying It is a wet and windy night out


there. The rain still clinging across the south-east earlier on. A


blustery day on Tuesday, strong winds making it feel cold, and the


showers turning increasingly wintry across northern Britain, some snow


covering at low levels across parts of North West England. A few


centimeters by the end of the day. Not too many showers in


Lincolnshire and East Anglia, a sunny afternoon. Some showers in


the south-east, having a wintry flavour about them, sleet mixed in,


across the south west of England, sleet or snow over the moors and


over the hills and mountains of Wales. Even at low levels across


parts of North Wales, snow building up. Same across Northern Ireland,


with the snow showers coming here by the end of the day. By the end


of the afternoon a covering in some places, a windy end to the day


across Northern Ireland and western Scotland, where the snow showers


continue to feed in across the Highlands. As we go through into


Wednesday, it is still looking showery and chilly, but maybe not


so many showers, a better chance of seeing more in the way of sunshine.


Further south, a bit more sunshine, not so many showers around on


Wednesday, still feeling chilly, eventhough the winds will be


lighter. There will be some snow on Wednesday, chiefly over the hills


of western Scotland, Northern Ireland, but also the hills of


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