In Government for all the right reasons: the David Laws interview

Yesterday I interviewed David Laws, on the day his book 22 Days in May was published. I asked him about the book, his views on the Coalition Government, as well as about the focus of his current work, plus his thoughts on the Ireland bailout.

In the introduction to the book, David Laws writes that its purpose is to “inform those who are interested in this important period of British politics, and to make sure that an accurate account is left of what really happened in May 2010, before memories fade, myths grow and evidence is lost.”

Why have you published this book now? You said you wanted to get matters on the record, but why not write it now and publish it in ten years? That’s the way memoirs used to work, so why so keen to publish after only six months? Isn’t history better judged from a distance?

I think it’s important for us now that people in the country understand how we made the decisions we made in May 2010, and what factors were uppermost in our minds. And also that we nail some of the misrepresentations that have come out from some of the others involved in the talks, particularly on the Labour side, where people have attempted to claim that we went into the negotiations with some sort of preconception about what type of deal we wanted. And actually what the book shows is that if we went in with any preconceptions at all, it was that a coalition with Labour would be considerably easier to deliver if the electoral maths enabled it, than a coalition with the Conservative party.

So I think that the book demonstrates that we went in without some sort of pre-agenda of who we would and who we wouldn’t deal with, and it’s very clear that we were putting the policies in our manifesto and what was right for the country as the key determinants of what we were going to do once we had discovered there was a hung Parliament.

Firstly it’s important to get down a historic record, given that this was a very important period in British politics, and having got the time to do it imposed on me in some ways, I have that opportunity.

And I think it’s also important for where we are now in politics, given how controversial the coalition has been with some people that people should understand the decision-making process, and should understand why we did what we did in May.

With cuts on the way, is this an expectation-management exercise, then?

I don’t think it’s expectation-management, but I think it’s fact-management in the sense that some people in the Labour party have claimed that we weren’t serious about the option of negotiating with Labour and I think that what this makes clear is that we did engage in a very serious way over that, and actually if there are any problems in terms of trying to get an agreement or make an agreement with Labour viable, it was really because of the lack of willingness of the Labour party rather than the Lib Dems to engage seriously in a negotiation; their lack of preparedness, the fact that their negotiating team was almost certainly split in their attitudes towards us. And the fact that on the main economic tack, the economic policy issues, that they didn’t make any of the concessions that would have been necessary in order to make coalition a viable option for us.

So the book performs two functions: it can inform the general public about the Lib Dems’ and Tories’ intentions, but it can also rebut the things that Labour are saying about us…

That’s right.

Was it your idea to write the book, or were you getting offers from publishers and newspapers?

No, it was entirely my idea, and I thought from the very earliest time, even while I was still in Government that it was important for us to get our version of this factually on the record. I clearly wouldn’t have had the opportunity to do that if I had been in Government, given how long it takes to do something like this. And I thought about it when I left the Government.

I originally decided that it probably wasn’t the right time, and then, in July when I thought about it again, people said “Yes, this would be useful from the party, and useful to make sure that the public record of all these events is correct.” And so I just used the time that I had, particularly in August, to get the account down.

The coalition negotiations were gruelling. Wouldn’t you have rather had a break before diving in? Many, including the media, were pushing for a quick resolution: what was it like being caught up in the pace of all of that?

I think we were always conscious that there would be a lot of pressure for a quick resolution.

Weren’t you exhausted after the General Election?

I wasn’t, no, because a) the pressures on most MPs are nothing like those on the party leaders – they must have been pretty exhausted, but for the rest of us it’s not the same scale of pressure. And b) undoubtedly there is a bit of an adrenaline rush when you suddenly find yourself pitched into something which is about forming a government and deciding upon which policies should and shouldn’t be implemented.

So I didn’t really find it all that tiring, and I thought that it was inevitable that there would be pressure to do things quickly. I thought that it would be a mistake to drag our heels and insist on doing things very slowly. And while you can’t create a government and sort out a policy agreement overnight, I always thought that if we failed to deliver one by about the Wednesday after the Thursday General Election, then we would begin to face a lot of criticism. And it would be inevitable that we as the third party, and the party with the greater democratic accountability, would be more likely to bear the burden of criticism from the other two parties.

For stalling, perhaps?

Yeah, it was more likely, I thought that we would be the ones blamed for not having a Government, and for any market instability that could follow. And obviously there was a lot of market nervousness and instability around that time, because of what was happening in Greece, Portugal and Spain, so I think we did have to do things quite quickly and not everybody on our negotiating team, as I report in the book, took that view. There were some others who took a different view and thought that we needed to take our time but I don’t think we had that option.

In future, when people get used to the process of coalition-forming it may be that there isn’t the same degree of pressure, but on this occasion, I think it was important to do it quite quickly. And I don’t think that much was sacrificed by doing it in the timescale we did.

You talk about people getting used to the process of coalition-forming – I was interested to read your article in the Telegraph: The Coalition must aim higher than merely balancing the books. I was dissecting it a bit; you keep on dropping in references to judging results over the next ten years: you said that a couple of times, and also talking about “stretching out the era of austerity throughout the entire decade,” I wondered: is that a hint? Are you hoping for or expecting a second term of coalition?

No, I think that’s highly uncertain, but I think that it’s inevitable that the parties will go into the next election fighting as independent parties with candidates in every seat. But my point in the article was firstly that we are doing the process of eliminating the deficit over a reasonably long period. People are saying it’s all rushed, but the fact is we’re taking five years to do it.

It’s hardly a rushed process, and I’m not sure that it would help the country or economic confidence if we were stretching out this process of austerity for 7, 8, 9, 10 years. I mean people want to see some kind of light at the end of the tunnel.

So it’s not with the General Election in mind..?

The reason I refer to 10 years on education and welfare reform was they just are very big pieces of work and if you expect to see some big impact on welfare reform and education, you are not going to see it just in one Parliament. I mean some of the welfare reform stuff won’t start until the end of the Parliament because of the cost of delivering, so that all this can only be judged over time and years. Who knows? In the five to ten year period, who will be running the country is highly uncertain and it could either be a coalition or it could be one party.

I know that overnight change can take five, ten years, and more. But I especially saw your article today as putting a Liberal Democrat stamp on what could have been just Conservative policies. Do you think the input on social policies is distinctly Liberal Democrat? Or do you think that actually the Conservatives are just as keen on the social side?

I think there clearly has been a strong strain of commitment to the social recovery, broken society element of policy in Conservative thinking, but it’s then translating that into the decisions that are made, and the hard commitments.

Later on in the Parliament there will be some choices to make when the deficit is brought back under control, about how we’re going to invest some of the proceeds of growth that there then are that don’t need to go to deficit reduction. All I’m trying to signal is that we then have to be ready to take action to make sure that there is enough money going into education, welfare reform, and the NHS, to make sure that those services are improved.

Do you think that there’ll be conflict further down the line if the Tories want to reduce the size of the State, will we be clawing things back for our agenda, or do you think there’s a will there ..?

I think there is the intention, at least the scope for making sure that the Coalition delivers on those priorities jointly, but we’ll have to cross that bridge when it comes, not least because at the moment everybody is focusing simply on the process of deficit reduction and therefore in a sense it’s almost easier to get both parties to agree on the big strategy.

The big strategy is deficit reduction, but we don’t want to lose sight over the Parliament of the fact that we’re not just in politics to reduce the deficit and to restore good economic management, but that we also want the education system to be improved and to see real social mobility in the country. We want the health system to get better and more responsive to consumers. We want a decent pension system and a welfare system that actually assists those people who want to get back into employment.

All those are very strong areas where there are Liberal Democrat commitments and where the policies may be slightly different from those of the Conservative Party.

After the unhappy events in May, are you still fully invested in politics? Do you hope to be more than a backbench MP in the future?

I leave the speculation for another day, really. I’ve had a difficult year, and I’m just focusing on the job I’m doing as a backbench MP, which I am really enjoying, I’ve got plenty of time to focus on lots of policy issues that I’m concerned about, and can lobby my colleagues about .

When you see the work they’re doing, aren’t you dying to get more involved?

My colleagues are doing a damn good job, so I can’t say that I’m sitting there thinking, “Goodness me, they should have done this, that and the other.”

The big judgements that Nick and Danny and the others are making, I think, are the right judgements. So that is a lot easier than it would be if I somehow felt that things were all going wrong.

Like all Lib Dem MPs I’ve got the opportunity to talk to Nick and others and communicate with them and they’re doing a good job of listening to the party.

What do you think of giving all £7bn we’re saving this year to Ireland, to bail them out?

Well, we’re not going to give it to them, we’re going to potentially advance a loan.

At the moment because the coalition has restored confidence in our economic prospects, we’re having no problems at all raising finance. Our interest rates are incredibly low, even though we have a large deficit, we can’t afford to take that for granted, but it does mean that we’re in a stronger position than we might otherwise be. And I think that the biggest threat to our economy at the moment is not the difficult position that we’re having to deal with within the UK – there are problems and pressures there – but that I think is gradually going to work itself out over time. The biggest threat would be if the world economy and the European economy in particular the people we’re trading with, took a big downturn again, and so stopping the financial chaos and contagion from spreading, I think is incredibly important.

Do you think we’ll have to bail out anyone else, in that case?

I don’t think so, but I think what we learnt from 2008 and 2009 is that if you don’t act quickly to protect big organisations – banks, countries – when these things happen, you can pay a very big price down the line. And so this time I think we are being proactive in not allowing countries like Ireland and the banking system to go down the pan.

We’ve got, as you know, a huge economic network of interests with Ireland and the Irish banks, and if that was allowed to topple over I think it would be extremely bad for our economy and it would then lead to people saying, “Well what’s the next target we can go for?” And that then would be the type of environment where we would risk the economic recovery that we’re now seeing. It’s just essential that that doesn’t happen.

So, however frustrating it is, at a time when we’re having to borrow a lot of money, we’re also having to help other countries. I think it is terribly important that we don’t allow any major country or bank to topple over.

The meme is that we’re overly sympathetic [to Ireland] and that charity should begin at home. Is that just a tabloid construct?

Yeah, and probably more over things like overseas development, whereas over Ireland, it’s not as if the Irish have been crying out for the money – for the best part of the last couple of weeks they’ve been resisting taking these loans from the EU and the IMF.

So I think people can see that what’s been done is not just in the Irish interest but it’s actually been done by all these countries because we think it’s in the European interest, including Britain.

Sometimes you get what you want;
Sometimes you get what you need;
Sometimes you get what you get:
What are you overall thoughts on the way the Liberal Democrats entered a coalition with the Conservatives?

The book shows that there was no great plot to go with one party or the other, that we were genuinely making a decision as a party on what was best for the country and what was most likely to advance the prospects of getting the policies that we stood on in the election manifesto into government, and obviously a lot of people will criticise us for the decisions that we made.

The honest truth is that we didn’t have a great deal of choice. A coalition with the Conservatives not only offered us the best prospect of delivering many of the Lib Dem policies that we regarded as important, but it was probably the only prospect of having a stable government that could deliver for Britain and the British economy.

Had we not been willing to go into coalition with the Conservatives I suspect that there would have been a lot of economic instability. There would have been higher interest rates, there would have been more speculation about the UK. And ultimately there would have had to be a second General Election, which I think would have resulted in us doing quite badly if we were seen to be to blame for there being no Government, which I think there probably would have been.

We would then have had an outright Conservative majority with no Lib Dem voice in it. Which I think most people in the country would regard as definitely an inferior option to the one that we’ve got.

So this is the government that we’ve now formed for all the right reasons, and we’ve got to be active in making it as successful as possible and ensuring that it delivers as much Liberal policy as possible. And if you were going to choose your moment to go into government, not having been in for 70 years, you wouldn’t choose a borrowing requirement of £150bn. But we can’t choose our time. These are the circumstances thrown into our lap and we can only do our best for the country and the party with the hand that we’ve been dealt .

People are giving us some credit for having established a coalition which does seem to be able to make decisions, which is so far viewed by many people as quite successful . The opinion polling seems to suggest that people do believe that Lib Dem involvement has made a difference to the nature of the Coalition in the things we’re doing.

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40 Comments

  • Mike(The Labour one) 23rd Nov '10 - 6:51pm

    Posted this link in a less relevent post before this one was up-

    ‘This is interesting-

    http://twitter.com/julian_glover/statuses/7109925108977664

    “David laws at Institute for Govt: libdems working with Tories in power means ‘oranging process going on at a rapid rate’. As in Orange Bk”

    Lib Dems, you’ve been tango’d.’

  • Mike,

    Personally I’d be very pleased to see elements of Orange Book thinking advanced.

    Better than the ‘philosophy’ of some who seem to think a country can fling borrowed money around on focusgrouped projects with no thought to long term sustainability.

  • Mike(The Labour one) 23rd Nov '10 - 7:07pm

    Also- there were clearly pre-conceived ideas about who to go into government with.

    In that ’5 Days’ documentary Nick Clegg said during the first half that a deal was impossible if Gordon Brown remained leader. During the second half after Brown resigned he said his response was ‘Well now we don’t know who’s going to lead the Labour party it’s impossible to make a deal with them.’ Try and square that circle.

    And Nick Clegg’s self-indulgent pledge to favour the largest party, knowing it would be the Conservatives. There was no reason for him to do so, I think he was just working on the Lib Dems to make them more easily accept it. Try and pose as a man keeping a pledge (!) not a man choosing to give the Tories the most attention.

    I’d like to know how David Cameron got the impression that Labour had offered AV without a referendum and whether the Lib Dems were open to the Tories that they wanted early cuts, or kept pretending in order to get the Tories to bargain them into early cuts. If those two things aren’t there the book isn’t worth wasting time on.

  • Mike(The Labour one) 23rd Nov '10 - 7:11pm

    @creqegwyn: You’re perfectly free to do so (your characterisation of the opposition is crude and I imagine someone from the Beveridge wing will call you out on it, but that’s not my job). I wonder what your voters would think, having voted for a party that didn’t stress it’s Orange Bookism except to the likes of the Spectator. The 47% of them that are left anyway, I think we can guess what the 53% who wouldn’t vote Lib Dem again think.

    I don’t get why Orange Bookers can’t just say ‘Blairism’ like the rest of us though.

  • John Fraser 23rd Nov '10 - 7:42pm

    Like Clegg .. Laws seems to have this strange belief that SOCIAL MOBILITY is enough . this idea that its ok if some poor get a chance to escape their lot while others get to suffer all the more is surely pure right wiong neo con thinking !

  • John Fraser 23rd Nov '10 - 7:43pm

    @geoff payne
    Wish you did the interview your questions are excellent .

  • I think the coalition with the Tories was the only realistic game in town. My worry is that the Lib Dem negotiating line with Labour was in direct contradiction with the promises they made during the election regarding the pace of cuts. I voted Lib Dem and therefore for a slower pace of cuts yet the moment the party I voted for began negotiating they demanded the polar opposite from Labour.

    My view is that the coalition was used by some elements within the party, Clegg Laws etc, to ditch those pesky policies that the democratic nature of the party had insisted upon in the manifesto. The other mistake was to get too close. In making his own views clear on Labour, Clegg diminished his position with the Tories.

    Political expediency should be the basis of coalition not the attempt to make everyone feel it is a love in (and I would feel the same if the result had led to a Labour / Lib Dem coalition). Lib Dem ministers seem unable to put any distance between themselves and the Tories. I believe Clegg and Cable are already lost in terms of credibility but the others can lead the way back.

    If coalition is to become the norm, I would suggest all negotiations are attended by a civil servant who will minute the details. These minutes can then be published allowing us to see just how much those we vote for are keeping their end of the bargain.

    Memoirs by a participant can never be truly objective. I would also suggest that, in the case of the Lib Dems those responsible for policy in the party shoudl also have a seat at the negotiating table.

  • As a gay man just one question – are you going to pay back your expenses?

  • It shows how coalitions cannot work in FPTP as we here see the contradiction that the 63% who voted for parties against the rapid cuts were left without the realistic probability of that wish being acted upon (notwithstanding the duplicity of the LD leadership on this issue).

    There is now this paradox where we will not get proper Government by the People until we have a proper PR system and that is not likely as neither of the main parties will go for it. The LD let us down in not pushing harder for STV to be a referendum option and now we will probably see a return to two party politics with a rump of fringe parties – I really do believe that Clegg (and Laws) have made a mess of their opportunity to cement coalition and multi-party politics by their lack of steel in backing the LD manifesto

    And for all the apologists going on about ‘smallest party etc’ – noone forced them to form such a strong coalition with the Tories – in fact a looser agreement could and should should have been put in place allowing at least some of the principles of liberal democracy to be sustained. I am also not convinced by this second GE threat we hear about all the time – if the Tories couldn’t get a majority the first time what makes everyone so convinced they would get one a second time!

  • Tony Dawson 23rd Nov '10 - 8:57pm

    It was indeed a good time to write the book. It was, in my opinion, a bad time to publish it. The book released now is commentary rather than history, and clearly from a certain perspective. What purpose does its publication NOW achieve?

  • He is a liability more concerned with wooing the Tory right with talk of tax cuts during public sector cuts and flogging a tell all book out in record time, rather than maintaining a dignified silence while serious and incredibly damaging personal misconduct is being investigated.

    This is the man George Osborne approached to get to cross the floor to the Conservatives not that long ago and it should be painfully obvious by now why.

  • Mike(The drunk Lab) 24th Nov '10 - 1:14am

    ‘There is now this paradox where we will not get proper Government by the People until we have a proper PR system and that is not likely as neither of the main parties will go for it.’

    YES. PR would be ideal, we could have a true left (Lab+Greens, each keeping tabs on the other) and a true right (Con+Lib) and it would just be the far better system, even if it helps the despicable Lib Dems. I’m going to try my hardest at getting AV through as a first step, despite the Lib Dems. It isn’t going to pass, though, because of the Lib Dems, but we can try.

  • Hasn’t Mr Laws recently been complaining about the cuts being imposed by Tory-controlled Somerset County Council (which include the possible axeing of 50% of local bus services) and the effect they will have on his constituents?

    A classic example of wanting spending cuts in general but flinching from the specifics. My guess is we will see a lot more of this over the next few months from Coalition MPs – “I support the spending cuts but…” (can’t this particular local service be spared?)

  • Alex Sabine 24th Nov '10 - 8:05pm

    Clearly there are disagreements between David Laws and Lord Adonis on some key aspects of the Lib-Lab negotiations, such as Labour’s seriousness of intent, whether or not there was a split in their negotiating team, and whether the Labour team had the authority to negotiate on tax and spending without reference to Alistair Darling, who was not present.

    They spoke in detail about the coalition negotiations when they attended the Political and Constitutional Reform Committee last month: http://news.bbc.co.uk/democracylive/hi/house_of_commons/newsid_9081000/9081779.stm

    I have no way of judging whose account is correct – but it does seem clear that the tone of the negotiations was less constructive than the Lib-Con ones; that the Labour negotiating team was less well-prepared and, unlike the Tory one, hadn’t done their homework on the scope for overlap with Lib Dem priorities; and that the electoral arithmetic (inconvenient as it may have been for some Lib Dem members) anyway made a coalition with Labour a much more remote prospect. On top of that there was the ‘Brown factor’ – the uncertainty over how long he would remain PM, how the public would react to his doing so, and the poor personal chemistry between Clegg and Brown.

    For all those reasons it’s hardly surprising that the Lib Dem negotiating team (not just Laws) became convinced that a deal with the Tories was the only realistic option – not due to a pre-conceived plan cooked up before the election, but as a rational response to a combination of the election result, the way the negotiations proceeded and the other factors I mentioned above.

    I personally think the policy agenda that the coalition is pursuing is preferable to the one that would have been likely to emerge from a Lib-Lab deal. Others will disagree; but, given the parliamentary arithmetic, surely they must recognise the serious practical obstacles there would have been to stable government.

    Not only would such a coalition have been vulnerable to the smallest revolt by Labour backbenchers, but it would have had to be sustained by minority parties who would have huge bargaining power to demand that Scotland and/or Northern Ireland be exempted from many of the austerity measures – an outcome that would have been hugely divisive for the UK and made the government hugely unpopular with the English majority.

    It would have been highly unlikely to last more than a year, let alone a full five years. And since market credibility in countries’ multi-year deficit reduction plans depends on political stability – and a belief that the announced policies will actually be implemented – such a short horizon for a Lib-Lab government would have been economically damaging, at the very least pushing up interest rates and leaving us in the firing line of the bond markets.

  • Alex Sabine 24th Nov '10 - 8:07pm

    Geoffrey, I will attempt brief answers to a few of your questions:

    Quote: “Surely you understand why Labour were taken by surprise when you suddenly asked them to agree to immediate cuts?”.

    You could argue that it was understandable for Labour to be taken by surprise that the Lib Dems wanted earlier action on deficit reduction than they had argued for during the election campaign. Equally, the Lib Dem negotiating team might have found it surprising that Labour didn’t think the mounting market pressures in Europe had changed the balance of risks and meant making a small ‘down payment’ in 2010-11 was now a sensible precaution.

    Especially since this would be Britain’s first peacetime coalition government, and an inevitably precarious one at that – in that context, pledging action in a year’s time but doing nothing in the interim would inevitably have been viewed with scepticism by the people who we rely on to finance these gargantuan deficits.

    (Also, as I have noted before, public spending is still growing significantly, in cash and real terms, in 2010-11, rising from £669bn to £697bn. And in fact, revisions to the fiscal forecasts make the differences in planned spending growth in 2010-11 even more trivial: Darling’s last Budget projected spending growth of £30bn in 2010-11 compared to 2009-10, while the OBR’s Budget forecast showed spending growing by £27.5bn under the Osborne plan.)

    Quote: “If the cuts are not ideological, how can you also say that public services will get better anyway?”.

    The point is that there isn’t a simple and inevitable link between the money spent on public services and the outcome: if there was, then we would have seen much bigger improvements in the past decade, which was the largest sustained period of spending increases in modern history. Productivity in public services (insofar as it can be measured) appears to have been flat or declining, and large amounts of the extra money simply pushed up costs (for example the GP contract in the NHS, procurement costs in defence etc) rather than improving the service to the public.

    The concept of getting ‘more for less’ is not a fiction, it is a daily reality in the competitive parts of the private sector and in many charities and voluntary organisations. To believe this will always happen would be absurd: clearly, it does not follow that if you cut 90% of the funding to a service overnight, it can still do everything it did before and do it better. But let’s ground this debate in reality: the average cut in the funding of government departments is around 11% in real terms over four years, requiring annual savings of less than 3%.

    The huge fiscal deficit makes sizeable cuts in DEL funding unavoidable (as they would have been under Labour) – so given that starting point, it seems reasonable for the government to look harder than ever at ways to improve the performance, accountability and responsiveness of services it will continue to spend huge amounts of taxpayers’ money on. In some areas this involves building on the more successful Blairite reforms, in others loosening the grip of the central state (eg central administration of local government, prescriptive directives from the education department etc), in others giving people direct personal control over the money spent on their behalf (eg personal care budgets). Some of these reforms will work better than others – but the budget cuts make reforms more, not less, necessary.

    Quote: “Surely cutting housing benefits by 10% will make people homeless?”.

    The assumption that the housing benefit reforms will lead to a big rise in homelessness assumes no behavioural response, either by landlords or tenants, which I think is implausible. Since tenants in receipt of housing benefit make up such a large chunk of the rental market, I cannot see how landlords will not have to lower the exorbitant rents they have been charging (a key reason for which is that neither they nor the tenants had an incentive to keep rents down).

    On the other hand, I don’t deny that there will be some people who have to move to less expensive areas as a result of housing benefit cuts (although probably less than expected due to downward pressure on market rent levels). What I don’t see is how the current system is either just or affordable, whereby landlords pocket a vast private return at the taxpayers’ expense and housing benefit claimants can expect to live in much more expensive areas than the taxpayers who are financing the system.

  • Alex Sabine 24th Nov '10 - 8:12pm

    And I apologise in advance for the length of this final answer…

    Geoffrey wrote: “Every time Ireland agrees to more austerity, it’s economy get worse. Do you really think that by forcing Ireland to agree to more austerity that we are going to get our loan back?”.

    Ireland did not get into its current mess through excessive austerity, but through a rampant property bubble that was fuelled by a combination of poor bank regulation and interest rates set by the European Central Bank that were far too low for its booming economy. Whether it would have made the same monetary policy mistakes had it not been part of the euro is moot, but I suspect that the Irish central bank would have spotted that negative real interest rates (ie, rates that actually paid you to borrow, and charged you to save) were not a recipe for economic stability. And it was the ability to borrow very cheaply in a strong currency that allowed the Irish banks to go on a much bigger borrowing binge than they could have done under the punt.

    It’s also not true that the latest phase of the crisis in Ireland has been triggered by the government’s austerity programme leading to declining GDP. In fact Ireland has no immediate need to borrow from the markets, having covered its deficit until midway through next year, its economy is starting to grow again, and it has a current account surplus reflecting solid demand for its exports. A couple of months ago there was increasing confidence that it would not need a bailout, and its sovereign bond yields were falling. The reason that confidence has now dissipated has nothing to do with its austerity measures.

    The underlying cause of its latest woes is the scale of the banking boom and bust, and the consequences of the Irish government’s decision in the autumn of 2008 to issue guarantee not deposits (with no upper limit) but all the debts of its banks, which amounted to many times the country’s GDP.

    The proximate cause is that there has been a steady withdrawal of deposits from these banks (a so-called ‘silent run’) in recent weeks, so they have become increasingly dependent on European Central Bank funding. (Ireland’s reliance on ECB cash has grown by 30% in the past three months, and it is now borrowing almost twice as much as Spain, which has a much bigger banking system.)

    The aim of this ECB funding is to support banks through liquidity problems, but there is a fine line between a bank needing liquidity and being insolvent, and the ECB has been stepping up the pressure behind the scenes to reduce the Irish banks’ reliance on its funds. The Irish government cannot step into the breach, hence the need for the bailout.

    Another trigger of the panic was the intervention by Angela Merkel – who is under great political pressure from German voters to stop bailing out what they see as spendthrift European neighbours. So, late last month, Merkel spoke out – saying that when problems arose banks and investors should not just be bailed out by taxpayers but should take some of the hit themselves (a ‘haircut’ in the jargon). She was talking about how sovereign debt in the eurozone might be restructured in the event of further crises after 2013 – but investors, naturally enough, started to worry that they might lose money on the Irish and southern European debt they were currently holding, and sent bond yields right back up again for the ‘periphery’ of the eurozone.

    To simplify, then, the Irish government’s solvency is under threat because its banks are deemed to be insolvent and they are either nationalised or guaranteed by the state. The reason the deficit is now projected to be a staggering 32% of GDP this year is that Ireland has brought its bank bailout costs onto its own balance sheet, which the UK and other European countries have not done. The markets no longer believe Ireland has the means to pay off its sovereign debt AND the debts of its banks as they fall due.

    What this sorry tale teaches us, among other things, is how quickly the markets can turn against countries when they judge they have become too risky a bet. It’s all very well to rail against irrational market psychology but, as Keynes recognised, markets can remain irrational longer than you can stay solvent. And if you are borrowing upwards of 10% of GDP per year you are in no position to lecture creditors. As the sensible Hamish McRae writes in today’s Independent:

    “You can see this as predatory behaviour by investors: once they have devoured one victim, that merely whets their appetite for the next. There is doubtless something in that. But you can see it also as fear, a fear that a country to whom you lent money in good faith will be unable or unwilling to repay it in full. So the savings of the pensioners whom you represent will be lost. Better get out before the paella hits the fan.”

    Also: “Whatever the outcome of the euro, politicians the world over are having a crash course in economics. It is brutal. They are being forced to grasp not only that there are finite limits to their ability to borrow but that those limits may change in an arbitrary and sudden way. A few weeks ago confidence that Ireland would not need a bailout was rising, then suddenly a chance remark by Angela Merkel regarding bond guarantees beyond 2013 and, bang, game over.”

    This brings us back to the first point on the charge sheet against David Laws and his colleagues: that they somehow ‘betrayed’ the party by agreeing to faster cuts than we set out at the election. It seems to me more likely that what the coalition did was recognise the risks of contagion and turn sterling and UK gilts into something of a safe haven, giving us precious leeway to continue borrowing on favourable terms. Given that we are still going to be borrowing massively over the next four years, we cannot take that credibility for granted and must not put it at risk.

  • Red Trev – Who is the recent Rochdale Councillor to leave? I can’t see any reference to it.

  • A doctor who fiddled his or her expenses would be struck off, be dismissed from his or her job and would have no realistic possibility of returning to the same post.

    Just thought I would mention it.

  • Mike(The Labour one) 24th Nov '10 - 10:37pm

    ‘If the Conservatives were planning to cut education services, they should have had the honesty to make this clear in their manifesto just nine months ago.’ – David Laws, hypocrite.

  • Ireland did everything the IMF asked of them and more.
    And now Irealand are raising taxes and slashing welfare yet again.
    If their banks were far more precarious than they first thought then not only did the IMF or the politicians not spot it, but it highlights the fact that our banks may also be far from ‘safe’ if economic conditions keep worsening.
    The resultant contagion is not stopping with Ireland either and is spreading to Portugal and Spain. Those who think markets and speculators can be placated with austerity measures are going to be in for a bumpy ride.

    Cutting hard and fast is one strategy and it was always the Conservatives favoured strategy as they are idealogicallty wed to it, but it is not the only one. Those who cry “there is no alternative” betray their Thatcherite leanings. Chris Huhne let the cat out of the bag when he said the cuts and tax measures could be adjusted to suit the conditions.
    It is always a choice.
    Where, when and by how much are not inevitabilities but decisions made by those in power who have their own favoured ratio for tax/cuts and which government departments or income groups should feel the most pain.

    Laws was convinced a deal with the Tories was the only realistic option because he is a Conservative in all but name.

    “In late January 2006, when the Liberal Democrats were at a dangerous crossroads after the resignation of Charles Kennedy and sexual shenanigans of leadership candidates, a long-term friend of new Conservative leader David Cameron gleefully predicted the third party of British politics could split in half – with the brightest stars defecting to the Conservatives.
    In the Ways and Means corridor that leads to the members’ lobby of the Commons, the MP said: “We think David Laws is a brilliant talent. He would make an excellent Chief Secretary to the Treasury under Prime Minister David Cameron.”
    When, later that day, Laws was told of the remark, he said: “This is drivel of the first order and a cack-handed attempt by the Conservatives to try to destabilise the party.”

    You don’t see Laws complaining he is destabalising the Party now, do you ?
    And you certainly don’t see Cameron complaining that his plan is coming to fruition.

  • Red Trev – Please be more careful with what you post. There is no sign of any further resignation from the LD Group at Rochdale. What has happened is that Councillor Irene Davidson, the Group Leader (who is recovering in hospital, by the way), has resigned as Leader of the Council, accepting the numerical situation after the earlier resignations. These earlier ones seem, from comment by their spokesperson, and in the local paper, to be very much motivated by a deselection dispute. It can’t be at all good for her recovery with all this going on – hope she continues well.

  • David Laws – please come back soon. We need you.

  • toryboysnevergrowup 25th Nov '10 - 5:34pm

    So “fact management” is the euphemism for rewriting history. One thing that history does tell us is that interested parties who claim they are setting out the facts in a neutral fashion are usually doing no such thing.

  • Patrick Smith 25th Nov '10 - 7:41pm

    I rate David Laws as a superstar and his zeal and expertise is much required by the `Coalition Government’ that he spent `22 Days in May’ creating as a main negotiation architect.

    Why is it taking until 17/12 for my copy of the David Laws book to arrive from Amazon?

  • I find David Laws a bit of an enigma. An analysis of his pronouncements would put him to the right of Clegg (and pretty much every other leading Lib Dem figure). His views on economics and the public sector are firmly Thatcherite, he has socially authoritarian tendencies and is mildly Eurosecptic. Yet he is a very committed Liberal Democrat – and a very effective constituency MP. Perhaps he is more politically honest than Clegg, and doesn’t feel comfortable pretending to be things he isn’t. If Clegg told us what he really thought about the poor and the Health Service, we’d likely recoil in horror. Laws is also more intelligent and more able than Clegg – though that may not be saying much! – and he has a more introverted personality than most of his colleagues. I think at the bottom of it Laws feels himself in his gut to be a Liberal, even if it doesn’t necessarily appear that way to others. Doubtless, the intense homophobia of most Tories repels him, certainly the Colonel Blimps, blue rinses and judgmental busybodies who infest that terrible party.

  • Sesenco – I fall into pretty much all the same categories as you’ve ascribed to DL above. And I, too, am a fully committed Liberal who has fought (and won) several campaigns against Conservative candidates. This is why I get so upset at the hysterical labelling of Lib Dem members of the coalition as “closet Tories”. We are a broad church and yet there seems to be a degree of Orwellian thought control going on form the “left” (I use this term hesitatingly) about what it means to be a Liberal and a Lib Dem.

  • Alex Sabine 27th Nov '10 - 1:04am

    Sesenco, I agree with some of your assessment of David Laws – I think he is instinctively a radical reformer of public services (born of a genuine desire to make them serve people, and especially the poor, better), believes in serious welfare reform to address inter-generational poverty, and supports a liberal economy in which competition is the engine of progress. But if believing these things necessarily makes you a Tory then liberalism has come to a sad pass.

    But I don’t see any evidence that he is socially authoritarian. Indeed, it’s often said that the socially authoritarian tendencies of the Tories (especially in the 1980s and 1990s) was a key reason he didn’t join that party. I would say he is sound on personal freedoms – certainly if the reference point is other Lib Dem MPs – and indeed in the Orange Book he mildly rebuked the Lib Dems for drifting into ‘nanny-state liberalism’ and ‘liberalism a la carte’, urging the party to resist the reflexive urge to ban things.

  • Ian Sanderson (RM3) 28th Nov '10 - 9:15pm

    There has been comment in this about the Irish crisis. One point rarely mentioned is that two big players in retail banking throughout Ireland have headquarters in Belfast in the UK. One is the Danish-owned Northern Bank.
    The other, more significantly, is the Ulster Bank, long-time subsidiary of Natwest, which is of course, owned by RBS and thus part-owned by the British taxpayer!
    Economic troubles in Southern Ireland are very definitely a matter of utmost concern to the UK, not only through our banks, as above, but because of its closeness (300 mile land frontier), its trade links and it having the UK as a prime target for economic migrants.

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