One Sunday in October 2008, then-British chancellor of the exchequer Alistair Darling flew back from Washington to find Britain on the brink of a banking meltdown. He was told by Treasury officials that unless a rescue plan was announced by the time the City opened for business the following morning, there was no guarantee that ATMs would work or that checks would be honored. The possibility of global financial implosion concentrated minds wonderfully; Bailout plans were announced that ensured disaster was averted. Coordinated and collective action meant there was no return to the 1930s and within six months most countries were recovering. China’s economy is now almost a third bigger than it was at the start of 2008, while India’s has grown by almost a quarter. The US and Germany have recouped all the ground lost in the Great Recession.
That’s the good news, and it needs to be borne in mind when you read what follows. Humans are good at solving problems; they have boundless creativity and ingenuity, and with their backs to the wall there is almost no limit to what they can do. Yet only rarely does this sense of purpose manifest itself and it takes an emergency to lift policy makers (and the public for that matter) out of the default setting of complacency and torpor. The prevailing belief is that the global economy had a narrow escape in late 2008, but has emerged pretty much unscathed. Job done. Time to go back to sleep. Only wake us again if there is another chance that the banks might run out of money.
Actually, as the news from the past few weeks has illustrated, it could be worse than that. It is not just that the global economy remains severely unbalanced or that it is business as usual in an unreformed financial sector. It is not even that the euro area could trigger the sort of mayhem last seen in the autumn of 2008. It is that oil prices have been rocketing and greenhouse gas emissions increased by a record amount last year. There is the potential there for not just one crisis but three: a situation where the ATMs freeze up, the planet warms up and the lights go out.
It is helpful to look at this triple crunch through the prism of Britain, a country peculiarly ill-prepared to deal with the new reality. Let’s start with the economy, where the UK — along with Japan, Spain and Italy — is one of the countries that has struggled to recover from the deep downturn of 2008 and 2009. There is a simple reason why output is still 4 percent below its peak and growing only slowly: the debt-driven model of economic growth deployed in the 25 years from the financial deregulation of the 1980s to the bank run at Northern Rock no longer delivers.
Economists at Tullet Prebon have calculated that six sectors — housing, finance, health, education, construction and public administration and defense — account for 58 percent of the UK economy. All relied heavily on private or public borrowing over the past decade, with finance expanding by 123 percent, construction by 27 percent, health by 35 percent and real estate by 26 percent. The real output of the other 42 percent of the economy is 5 percent lower than a decade ago.
There is a message here which goes beyond the wrangling about the speed at which the public sector money tap should be turned off: Britain has a broken-backed economy. Growth in the years leading up to the crisis was, in essence, borrowed from the future and it is now payback time, as it is for all the other countries where unsustainable private debt has been turned into unsustainable public debt. In a Guardian interview with British Business Secretary Vince Cable on May 20, he said the public was unaware of just how bad the structural problems of the economy were, and he’s quite right about that.
One of these structural problems is Britain’s growing reliance on imported energy. North Sea oil has been a great comfort blanket for politicians of all stripes since it was first pumped ashore in the mid-1970s: It has plugged the gap in the balance of payments caused by the relative decline of manufacturing as a share of the economy, and it has paid for Conservative tax cuts and Labour spending increases. Had Britain salted away the oil revenues, as Norway did, it would now have a whopping sovereign wealth fund that could be used to retool and rebalance the economy in the way that all politicians say is long overdue. However, the money was spent long ago and since 2005 Britain has imported more energy than it has exported.
This dependency could hardly have come at a worse time. Unraveling the reason for higher oil prices is tricky, but whether it has been stronger demand from the fast-growing emerging economies, the long-anticipated arrival of peak oil, speculation from hedge funds or a combination of all three, the era of easily available cheap crude is over for good. Hence the attempts to get oil out of dangerous deepwater fields or from the Canadian tar sands. In the long term, however, countries will have to find ways of making fossil fuels cleaner, going nuclear or investing heavily in renewables. All are expensive and potentially controversial, as Germany will find with its decision to abandon nuclear power altogether, but at least Berlin has been prepared to face up to issues which in Britain have been ducked.
Finally, there’s climate change. The reduction in greenhouse gas emissions lasted for only as long as the global slump cut industrial output and put the brakes on trade. With China and India growing at 10 percent a year or thereabouts, the latest data from the International Energy Agency show that 30.6 gigatonnes of carbon dioxide entered the atmosphere last year, a sharp increase on the recession year of 2009. British Prime Minister David Cameron’s government wants to be considered the greenest on record, but the policy choices have yet to live up to the rhetoric and the pre-election photo calls with the huskies. There is always a tension in UK government circles between the growth at all costs lobby and the environmentalists; on planning, on fuel duties, on the funding of the green investment bank it is clear who has won.
So that’s the triple crunch. It’s not pretty, but there are at least four possible choices.
Choice one: Do nothing because modern financial capitalism is robust and self-correcting, there is more oil in the ground than we think and global warming is a fantasy. Possible, but given that it is the same mindset that prevailed in financial markets pre-2007, fraught with risk.
Choice two: Argue that there is an incompatibility between growth and sustainability, so the big developing countries cannot hope to aspire to western levels of consumption, which need to be reduced anyway. Perhaps true, although the deep green road map for getting from A to B is somewhat sketchy and currently lacks political support in both the developed and developing worlds.
Choice three: Bring human ingenuity to bear by investing heavily in new forms of low-carbon green growth, while at the same time negotiating a binding global climate change deal. Tough, expensive and open to the objection that green growth is pie in the sky.
Choice four: File under “too difficult” and hope it is not too late to respond when the crisis breaks.
Personally, I’d go for choice three, while accepting that choice four looks most likely and that choice two may eventually be forced on us anyway.
Larry Elliott is the Guardian’s economics editor.
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