12/12/2011 Newsnight


12/12/2011

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


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Transcript


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

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most riveting and fascinating period we have lived through.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Saturday, his friends were supposedly briefing the newspapers

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

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

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

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isolated and marginalised within the European Union, that is good

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

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

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

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

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

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started his Commons statement, explaining why he had used

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

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

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

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Minister from his place. Miliband said the veto was all

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about appeasing Conservative backbenchers. He didn't want to

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

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

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

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But a prosession of Conservative backbenchers saw things very

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

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

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

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

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

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

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

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

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

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are incapable of opposition, but unfortunately came from the Liberal

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

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Deputy Prime Minister in the chamber today.

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

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

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

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

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

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

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

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

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

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Prime Minister reflect that constructive and positive tkphrokcy

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might be a better solution to British politics.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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coalition. With us now is the former Liberal

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

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

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

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

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

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

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

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

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

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sure that the demands that were made were reasonable ones not

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

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

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

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

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

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

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

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

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

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

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

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negotiating position was a joint position put forward by both

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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regretable that a negotiating position, which I think would have

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

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

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

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

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

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coalition is about taking this country through an economic crisis.

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Do the Liberal Democrats and the Conservatives agree about Europe?

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

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

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

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out of the desperate isolation that a failure of negotiations in

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

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

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

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

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

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

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

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

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

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

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

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negotiating position between the Liberal Democrats and the

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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economic crisis. The fact that the Liberal Democrats and the

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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What happened in the heady hours of the night?

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

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

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

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

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this move was intended to prevent bankers and financial corporations

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

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

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and this goes for the financial sector as well.

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

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diplomatic gamble. The British draft for safeguarding the City

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

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

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

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time to canvas for other countries' support in Brussels.

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

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

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

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except by challenging that system of majority voting, as Britain

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

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of some kind of solution, these problems will continue.

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

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

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

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

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

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

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change to the supervision or regulation of financial houses, or

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to the location of the European banking authority, currently in

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

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

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reasons that baffle the Foreign Office, the European proposals were

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

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

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

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

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

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

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

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

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

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friendly Governments are hoping. Think that this whole situation has

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:18:11.:18:17.

been overdrama advertised. -- dramaised.

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

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

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

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

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Minister suggested again that European institutions, such as its

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

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

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

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German convention for the European institutions and tried to stop it

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

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

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

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

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

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

:19:25.:19:29.

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

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

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

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

:19:44.:19:54.
:19:54.:19:55.

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

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

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

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

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

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

:20:11.:20:14.

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

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

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

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

:20:27.:20:30.

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

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

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

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get the safeguards he needed, particularly in financial

:20:42.:20:46.

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

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

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

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

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

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

:21:07.:21:12.

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

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

:21:15.:21:20.

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

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

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everybody thinks this is very unfortunate. People were very

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

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

:21:38.:21:42.

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

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

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

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

:21:56.:21:59.

countries and prime ministers of other countries were equally

:21:59.:22:05.

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

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

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

:22:17.:22:20.

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

:22:20.:22:26.

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

:22:26.:22:32.

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

:22:32.:22:36.

humiliating climb-down from David Cameron. President Sarkozy said

:22:36.:22:40.

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

:22:40.:22:43.

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

:22:43.:22:48.

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

:22:48.:22:52.

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

:22:52.:22:55.

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

:22:55.:22:58.

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

:22:58.:23:02.

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

:23:02.:23:06.

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

:23:06.:23:10.

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

:23:10.:23:15.

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

:23:15.:23:19.

definitively crumbled. Britain is never going to join the monetary

:23:19.:23:23.

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

:23:23.:23:29.

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

:23:29.:23:32.

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

:23:32.:23:36.

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

:23:36.:23:41.

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

:23:41.:23:46.

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

:23:46.:23:49.

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

:23:49.:23:53.

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

:23:53.:23:58.

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

:23:58.:24:03.

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

:24:04.:24:08.

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

:24:08.:24:14.

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

:24:14.:24:17.

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

:24:18.:24:24.

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

:24:24.:24:27.

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

:24:27.:24:31.

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

:24:31.:24:35.

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

:24:35.:24:42.

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

:24:42.:24:46.

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

:24:46.:24:52.

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

:24:52.:24:55.

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

:24:55.:24:59.

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

:24:59.:25:07.

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

:25:07.:25:13.

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

:25:13.:25:19.

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

:25:19.:25:23.

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

:25:23.:25:26.

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

:25:26.:25:31.

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

:25:31.:25:36.

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

:25:36.:25:39.

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

:25:39.:25:42.

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

:25:42.:25:46.

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

:25:46.:25:50.

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

:25:50.:25:53.

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

:25:53.:25:58.

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

:25:58.:26:02.

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

:26:02.:26:06.

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

:26:06.:26:10.

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

:26:10.:26:13.

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

:26:13.:26:16.

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

:26:16.:26:21.

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

:26:21.:26:25.

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

:26:25.:26:30.

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

:26:30.:26:34.

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

:26:34.:26:38.

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

:26:38.:26:43.

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

:26:43.:26:47.

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

:26:47.:26:53.

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

:26:54.:26:58.

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

:26:58.:27:03.

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

:27:03.:27:07.

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

:27:07.:27:11.

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

:27:11.:27:15.

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

:27:15.:27:18.

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

:27:18.:27:21.

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

:27:21.:27:23.

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

:27:24.:27:27.

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

:27:27.:27:31.

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

:27:31.:27:34.

order to exercise political influence, that has never been our

:27:34.:27:39.

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

:27:39.:27:44.

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

:27:44.:27:50.

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

:27:50.:27:56.

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

:27:56.:28:00.

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

:28:00.:28:04.

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

:28:04.:28:09.

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

:28:09.:28:14.

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

:28:14.:28:18.

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

:28:18.:28:24.

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

:28:24.:28:29.

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

:28:29.:28:32.

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

:28:32.:28:36.

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

:28:36.:28:44.

the periphery. But we thought wrong.

:28:44.:28:50.

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

:28:50.:28:55.

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

:28:55.:29:04.

growth. David Cameron had promised to rebalance Britain, through

:29:04.:29:09.

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

:29:09.:29:13.

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

:29:13.:29:17.

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

:29:17.:29:22.

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

:29:22.:29:27.

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

:29:27.:29:31.

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

:29:31.:29:36.

so did we. To boost growth, the authorities

:29:36.:29:42.

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

:29:43.:29:46.

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

:29:46.:29:51.

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

:29:51.:29:55.

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

:29:55.:30:00.

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

:30:00.:30:04.

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

:30:04.:30:08.

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

:30:08.:30:12.

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

:30:12.:30:19.

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

:30:19.:30:21.

alternatives. Would you have us raise interest rates by a

:30:21.:30:25.

significant amount to reduce a deeper recession, raise

:30:25.:30:30.

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

:30:30.:30:35.

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

:30:35.:30:40.

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

:30:40.:30:44.

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

:30:44.:30:49.

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

:30:49.:30:52.

protected to go positive again until 2013.

:30:52.:30:56.

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

:30:56.:31:00.

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

:31:00.:31:04.

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

:31:04.:31:09.

very differently. With wages squeezed, growth now

:31:09.:31:18.

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

:31:18.:31:22.

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

:31:22.:31:26.

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

:31:26.:31:33.

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

:31:33.:31:37.

fascinating period that we have ever experience lived through. In

:31:38.:31:42.

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

:31:42.:31:47.

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

:31:47.:31:52.

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

:31:52.:31:58.

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

:31:58.:32:02.

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

:32:02.:32:05.

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

:32:05.:32:10.

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

:32:10.:32:19.

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

:32:19.:32:24.

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

:32:24.:32:28.

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

:32:29.:32:32.

particularly the withdrawal of European banks from things like

:32:32.:32:38.

trade finance, aircraft financing and other substantial areas that

:32:38.:32:44.

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

:32:44.:32:47.

affect on confidence and on spending and lending. That is

:32:47.:32:51.

essentially what drives economic growth. In America too there was

:32:51.:32:55.

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

:32:55.:33:01.

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

:33:01.:33:05.

across the world, a slow credit crunch began.

:33:05.:33:11.

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

:33:11.:33:14.

confidence, disrupted the finance system and then rebounded into the

:33:15.:33:19.

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

:33:19.:33:23.

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

:33:23.:33:28.

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

:33:28.:33:38.
:33:38.:33:38.

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

:33:38.:33:41.

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

:33:41.:33:49.

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

:33:49.:33:55.

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

:33:55.:33:58.

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

:33:58.:34:03.

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

:34:03.:34:07.

election, promising further billions of bounds in cuts in

:34:07.:34:11.

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

:34:11.:34:15.

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

:34:15.:34:21.

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

:34:21.:34:25.

to raise questions beyond mainstream politics. There is 400

:34:25.:34:28.

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

:34:28.:34:34.

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

:34:34.:34:37.

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

:34:37.:34:41.

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

:34:41.:34:48.

between the two. I think the protests resonate with

:34:48.:34:53.

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

:34:53.:34:58.

which is really about where do the rights and responsibilities of

:34:58.:35:04.

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

:35:04.:35:08.

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

:35:08.:35:12.

of capitalism has been given a new urgency by the deteriorating

:35:12.:35:17.

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

:35:17.:35:22.

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

:35:22.:35:25.

people's consciousness, that actually things seem relatively

:35:25.:35:28.

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

:35:28.:35:32.

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

:35:32.:35:35.

ideas about markets versus the state.

:35:35.:35:42.

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

:35:42.:35:47.

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

:35:48.:35:53.

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

:35:53.:35:58.

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

:35:58.:36:05.

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

:36:05.:36:10.

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

:36:10.:36:14.

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

:36:14.:36:18.

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

:36:18.:36:28.

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

:36:28.:36:33.

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

:36:33.:36:40.

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

:36:40.:36:49.

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

:36:49.:36:52.

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

:36:52.:36:56.

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

:36:56.:36:59.

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

:36:59.:37:04.

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

:37:04.:37:07.

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

:37:07.:37:12.

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

:37:12.:37:18.

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

:37:18.:37:23.

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

:37:23.:37:27.

Tokyo and he was talking about balance sheet recessions, for

:37:27.:37:30.

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

:37:30.:37:35.

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

:37:35.:37:40.

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

:37:40.:37:46.

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

:37:46.:37:52.

tightening and a lot of stagnation with accompanying social tensions.

:37:52.:37:57.

Japan has enough social cohesion to make sure the society hangs

:37:57.:38:02.

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

:38:02.:38:12.
:38:12.:38:14.

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

:38:14.:38:18.

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

:38:18.:38:21.

sound from Stanford rather brilliantly. We will get back to

:38:21.:38:26.

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

:38:26.:38:30.

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

:38:30.:38:34.

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

:38:34.:38:41.

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

:38:41.:38:45.

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

:38:45.:38:49.

ufpl states and Europe have decision making systems that

:38:49.:38:54.

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

:38:54.:38:58.

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

:38:58.:39:02.

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

:39:02.:39:09.

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

:39:09.:39:14.

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

:39:14.:39:19.

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

:39:19.:39:23.

difficult process. Implicit indeed, explicit is the idea that

:39:23.:39:28.

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

:39:28.:39:35.

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

:39:35.:39:40.

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

:39:40.:39:44.

technical world were talking about this morning, people thought

:39:44.:39:48.

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

:39:48.:39:53.

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

:39:53.:39:58.

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

:39:58.:40:03.

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

:40:03.:40:09.

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

:40:09.:40:14.

The question is there cohesion across Europe as a whole to

:40:14.:40:20.

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

:40:20.:40:29.

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

:40:29.:40:33.

profit, minimiseing losses. University has never trained us for

:40:33.:40:40.

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

:40:40.:40:45.

whole thing you learn is the private sector maximising profit,

:40:45.:40:50.

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

:40:50.:40:55.

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

:40:55.:41:00.

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

:41:00.:41:06.

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

:41:06.:41:12.

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

:41:12.:41:15.

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

:41:15.:41:18.

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

:41:18.:41:23.

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

:41:23.:41:29.

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

:41:29.:41:32.

these are unprecedented circumstances and many say they

:41:32.:41:35.

will only be solved by a fundamental sorting out of the

:41:35.:41:42.

imbalance geen developing nations and the developed nations.

:41:42.:41:46.

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

:41:46.:41:53.

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

:41:53.:42:00.

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

:42:00.:42:09.

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

:42:09.:42:13.

obligation towards poor Germans, they have no sense of obligation

:42:13.:42:16.

towards Greeks and other people who think they are behaving

:42:16.:42:20.

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

:42:20.:42:24.

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

:42:24.:42:28.

is no sense of identity that extends obligation across the whole

:42:28.:42:33.

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

:42:33.:42:37.

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

:42:37.:42:42.

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

:42:42.:42:48.

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

:42:48.:42:55.

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

:42:55.:42:59.

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

:42:59.:43:03.

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

:43:03.:43:06.

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

:43:07.:43:12.

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

:43:12.:43:16.

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

:43:16.:43:20.

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

:43:20.:43:23.

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

:43:23.:43:27.

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

:43:27.:43:33.

kind of thing that gets politicians elected.

:43:33.:43:39.

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

:43:39.:43:45.

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

:43:45.:43:50.

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

:43:50.:43:55.

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

:43:55.:44:04.

allowed politicians to dither on certain basic issues like

:44:04.:44:11.

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

:44:11.:44:15.

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

:44:15.:44:21.

the structural problems they have. Structural problems are for

:44:21.:44:27.

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

:44:27.:44:30.

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

:44:30.:44:37.

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

:44:37.:44:41.

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

:44:41.:44:44.

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

:44:44.:44:48.

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

:44:49.:44:55.

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

:44:55.:44:59.

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

:44:59.:45:05.

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

:45:05.:45:10.

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

:45:10.:45:14.

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

:45:14.:45:19.

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

:45:19.:45:24.

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

:45:24.:45:33.

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

:45:33.:45:37.

low and stable growth, economists understood the world and predicted

:45:37.:45:42.

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

:45:42.:45:48.

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

:45:48.:45:51.

Israelisingation there is no way to resolve it.

:45:51.:45:56.

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

:45:57.:46:00.

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

:46:00.:46:05.

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

:46:05.:46:12.

Nick Clegg's response to the mess in Europe.

:46:12.:46:18.

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

:46:18.:46:22.

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

:46:22.:46:32.
:46:32.:46:36.

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

:46:36.:46:41.

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

:46:41.:46:47.

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

:46:47.:46:53.

# I see tree s of green # Red roses too

:46:53.:46:57.

# I see them bloom # For me and you

:46:57.:47:07.
:47:07.:47:13.

# And I think to myself # What a wonderful world

:47:13.:47:19.

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

:47:19.:47:25.

# Are also on the faces # Of people going by

:47:25.:47:34.

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

:47:34.:47:44.
:47:44.:47:47.

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

:47:47.:47:50.

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

:47:50.:47:55.

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

:47:55.:47:58.

showers turning increasingly wintry across northern Britain, some snow

:47:58.:48:02.

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

:48:02.:48:06.

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

:48:06.:48:11.

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

:48:11.:48:14.

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

:48:14.:48:18.

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

:48:18.:48:23.

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

:48:23.:48:26.

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

:48:26.:48:29.

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

:48:29.:48:33.

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

:48:33.:48:36.

across Northern Ireland and western Scotland, where the snow showers

:48:36.:48:40.

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

:48:40.:48:43.

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

:48:43.:48:48.

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

:48:48.:48:51.

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

:48:51.:48:54.

Wednesday, still feeling chilly, eventhough the winds will be

:48:54.:48:57.

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

:48:57.:49:00.

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

:49:00.:49:05.

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