Between the Devil and the Deep Blue Sea

The slender hope of an economic revival under Starmer and Reeves has got even more threadbare with the prospect of a second Trump presidency.  With the avoidance of anything truly radical being the watchword of Labour policy, Don Flynn argues the choices look bleak. 

You’re gonna have to serve somebody”, said Bob Dylan at the height of his evangelical phase.  “It may be the Devil or it maybe the Lord, but you’re gonna have to serve somebody.” 

This seems to be especially the case for a smallish, relatively prosperous country like the UK which lives or dies by the terms of its open economy.  With a median annual salary of just over £31,000, it easy to get the impression that British people are reasonably well provided for in terms of life’s essential needs. But the more sobering fact is that only 34% of the population earn this figure or above. The real mood for so many wage earners is that their personal finances are tight and likely to get tighter. 

The Labour government has a number of commitments on wage levels, summed up by the intention that its reforms will ensure that “work will always pay”, meaning that, in the words of a Department for Business and Trade policy paper, “No one working full time should be struggling to pay bills and afford essentials.”   

This is not the case at the present time. The Financial Fairness Trust reports that one-in-five middle income earners say they are struggling to afford food and other essentials, while others are “running down savings or running up debt” to cover day-to-day expenses.  Hardship grows exponentially for the sizeable proportion who earn below the middle-income bracket. 

The November elections in the United States have shown how incumbent governments can be threatened with voter rejection if there is a widespread perception that the lot of the average wage earner is not getting better, and much worse if it is actually deteriorating. In the UK, Labour has declared that its strategy for ‘making work pay’ is bound up with a return to the sort of GDP growth which can only come through large-scale investment and the modernisation of industry and services.   

Keep it tight 

Starmer’s most over-riding commitment is to do nothing that might scare the horses of global capitalism, understood as institutional investors and billionaire venture capital fund managers.  The assurance he has been so anxious to give to global markets is that there will be no radical departure from the standard rules of the game – with national budgets kept tight and tax regimes considered competitive when measured against international benchmarks.     

In theory, the delivery of the tight ship which chancellor Rachel Reeves is so keen to run is within the gift of a national government. To continue the nautical theme, with a fair wind and favourable tides the safe harbour of a well-balanced economy might be reached as the final destination. But it is more realistic to see the period ahead as one of unpredictable storms and dangerous crosscurrents which threaten the ‘steady as she goes’ strategy at all points. 

Which brings us back to Bob Dylan’s entreaty. The world economy since the Great Recession has been gutted of the hope that it might be run through the application of neutral, objective rules, overseen by the IMF and WTO, which could be relied on to divi up the benefits of well-run global markets to everyone who played the game fairly.  It is increasingly being replaced by a top table of predators who get what they want by following the principles outlined in Donald Trump’s ‘Art of the Deal’ (principle number one: attack, attack, attack). 

 The UK has its seat – just – in this elite company but is finding it increasingly difficult to get its voice heard among the growling of the big beasts. With a limited range of options, the country has manoeuvred itself into a position where the one significant decision it has to make is, who does it serve?  The Devil or the Lord?  

Trumpian tariffs 

As Starmer and Reeves look out onto the world they find themselves in the realm of the known and not-so-known, as well as the not particularly well-understood unknowns. Trump is talking about a regime of tariff restrictions which come out of the playbook of nineteenth century mercantilism. Can he be serious? Or is it a bluff intended to get the European and southeast Asian states to line up as vassals in the economic war he intends to wage with China?  

Economic commentary on behalf of all the big players (i.e. global investment funds) seems hesitant when it comes to deciding how much of Trump’s election pitch was rhetoric or a determined programme for government.  Most agree that it will lead to a new round of inflation. Promised curbs on immigration together with substantially higher tariffs and tax cuts (if they happen) will put pressure on prices and probably keep bank interest rates at higher levels.  All this amounts to a very different economic context for Trump’s second term in comparison to his first, when the economic stimulus of Obama’s quantitative easing was still a factor.  It is not out of the question that a bumpier ride will open up space for a more effective challenge to Trump’s pro-business policies than the mainstream Democrats were ever able to manage. 

What the world is really looking towards is the impact that the Trump II presidency will have in terms of trade and the mechanics of doing business for the rest of the world.  Notoriously transactional in his dealings, the mantra of America First will be read into every aspect of his work, with disproportionate gains expected to accrue on the US side of the balance sheet.  The prospect that a recession will be triggered across countries in the Americas cannot be ruled out, with Canada and Mexico looking particularly vulnerable if tariffs are levied at rates of 25% as has been threatened.  

Trump’s beef with Europe extends across many issues, with resentment against non-tariff barriers to the import of chemically treated foodstuffs and the penetration of US pharmaceuticals and healthcare services into public health services being to the forefront.  His success in getting European countries to push up their defence spending is read by some as a measure of the success of his hardnosed approach to dealing with the people who are supposed to be his friends. Will the threat of a giant increase in tariffs on imported goods from the EU bring about a similar buckling? 

The EU tools up 

There is no sign of that in the European capitals at the moment. A response hanging around a three-point bargaining plan seems to be being formulated in the EU institutions. Namely, employing a credible threat of retaliation if tariffs are imposed; building a coalition of Global North nations acting in defence of a rules-based approach to trade; and expanding the EU network of bilateral and regional preferential trade agreements, covering the South American Mercosur countries, the Indo-Pacific region, and Africa, as well as improved trade relations with Switzerland and the UK.  The best outcome for Europe’s centrist-conservative mainstream would be to get Trump to moderate his tariff plans. If that fails, to be ready to fight fire with fire. 

The UK is too small to stand up on its own account as the giants of the world shape up to battle the issues out. Starmer holds out the forlorn hope of a special relationship existing that will allow the UK to bargain on its own behalf as the sumo wrestlers on opposite sides of the Atlantic square up to each other.  The claim that the country can ‘have its cake and eat it’, instead of shaming the dimwit who offered it up as a response, seems to be regarded as a credible negotiating stance.   

Starmer’s belief that the tepid economic and political mainstream will provide his government with all the tools it needs to facilitate a return to growth and modest prosperity, always a flawed presumption given the extent of the doldrums the country has been landed in by 40 years of neoliberal policies, will be tested to breaking point once Trump is ensconced back in the White House.   

The minimal role he has allowed for state initiative in building a UK economy that tackles stagnation across productivity and wage growth, investment in infrastructure and public services, and deals with the scourge of inequality, will weaken his government in terms of the deals that need to be done with both the US and the EU.  Unless his government confronts that failing in its approach to economic policy, the options before it as the US and EU shape up for their necessary battle will be limited to choosing who you serve – with the notion of the Devil or the Lord being good enough synonyms for what is at play.