Grenfell Tower symbolises how social housing across Europe has suffered under austerity and the new financial calculus of many local governments (Image: ChiralJon, CC BY 2.0)

Guest post by Sebastian Möller

The crisis of housing in the UK became internationally apparent with the horrific Grenfell Tower fire in June 2017. British cities, London in particular, lack affordable homes, and the condition of the social housing stock in many local authorities at best leaves much to be desired, and at worst is hazardous for the health and life of residents. Grenfell is exemplary for the devastating state of social housing, reminiscent to some of the Victorian era, when Friedrich Engels wrote his impressive ethnography on the living conditions of workers in England.

Everywhere barbarous indifference, hard egotism on one hand, and nameless misery on the other, everywhere social warfare, every man’s house in a state of siege, everywhere reciprocal plundering under the protection of the law, and all so shameless, so openly avowed that one shrinks before the consequences of our social state as they manifest themselves here undisguised, and can only wonder that the whole crazy fabric still hangs together (Engels 1845)

Grenfell Tower´s fabric literally no longer hangs together. Irresponsible deregulation, a remarkable investment and maintenance backlog, and callous ignorance of resident´s complaints turned the tower in London’s rich Kensington and Chelsea borough into a death trap for at least 80 people. In Labour MP David Lammy’s assessment, far from having being an accident, the Grenfell Tower fire was “a crime of epic proportions”. A search for the causes of this tragedy is still under way, and must lead to a societal discussion about the value and meaning of decent housing as a right, rather than as an asset and a privilege for the better-off. Preventing a similar catastrophe from happening again in the future will involve reconsidering the financial priorities and practices of all the actors engaged in social housing provision, from city councils to regulators and contractors.

The UK housing crisis has a long history and strongly reflects rising inequalities between the rich and the poor, worsened by the persistence of austerity as a dominant policy paradigm. Clearly, the processes that have transformed social housing and local authority finance in the past two decades need to be addressed, as they formed the socioeconomic and political environment in which the Grenfell tragedy could take place. These changes in local government included marketization, a stronger affirmation of risk-taking, and new modes of governance including contractualisation (the outsourcing of core local government functions to corporations or Arms-Length Management Organizations and other Special Purpose Vehicles). UK local authorities have also embraced privatized urban regeneration and the use of highly contested Private Finance Initiatives.

It isn’t always a lack of money…

The Borough of Kensington and Chelsea, in which Grenfell is located, is reported to have accumulated financial reserves of £274m and to have granted tax rebates for high income residents. With this in mind, the argument that the council was unable to afford fire resistant thermal cladding for Grenfell Tower, when it was renovated as recently as last year, is hardly convincing.

Still, most local councils are under a huge (and rising) pressure to generate savings due to cuts introduced by the central government. Simultaneously, many local authorities are engaged in (local or non-local) property investments in order to generate future income. This seems to be rational because, under the Coalition and Tory government, councils are increasingly put into a position where they have to rely on generating revenues to uphold social service provision rather than on redistributed money from the Treasury.

Accordingly, a rising trend has been councils borrowing money to invest in commercial property, which is basically a speculation on rising values. This not only raises questions about proper and improper uses of public money, it also comes at a time of systemic neglect of social housing investments in Britain. Clearly, the ability of councils to borrow money and their leeway to make social housing investments are linked.

… it’s the management of money

Not merely the financial situation of councils has changed a lot over time, also the ways in they manage their debt. The very idea of “managing” debt entered local government only in the last two decades, originating in corporate finance. It is hardly a bad thing to “shop around” and seek out the best conditions and dates for taking on loans, and citizens rightly demand sound and prudent financial management from their councils. But the transformation of local authority finances is as much technical as it is political. So-called “active debt management” has introduced financial market logics into public administration while increasing councils’ dependence on external “expertise” due to the complexity of markets and the financial products, as well as staff cuts in town halls.

While some councils may have actually saved money through debt management, in many cases this new way of doing local finance has resulted in highly unfavorable deals for local government bodies. For instance, instead of taking money from the Public Works Loan Board (PWLB), a state agency that provides loans for councils at a rate just slightly above sovereign bonds, many councils have been borrowing directly from markets. British and foreign banks offer so-called LOBO (Lender Option Borrower Option) loans to councils and housing associations: ultra-long term loans with variable interest rates, usually sold at a low “teaser” rate for the first few years, and spiked with an embedded derivate that amplifies the risks from rising interest rates.

Across Europe, local government has become financialised

Since 2012, the LOBO market has more or less dried up on both the demand and the supply side. However, this is neither the beginning nor the end of the story. Only a stone´s throw away from Grenfell is Hammersmith & Fulham, another West London Borough. In the history of British local finance, the name of this particular council is closely tied to the emergence of derivative products. In the late 1980s, it entered into various derivative contracts, mostly interest rate swaps, and almost went bankrupt. Subsequently, those deals were declared “ultra vires” (beyond the powers of a council) and banned from UK local government.

Afterwards, the sellers of interest rate swaps as an instrument of local authority debt management moved onward from Britain to the continent, where their sales peaked just before the last global financial crisis, and caused considerable losses for local budgets. Cities in France, Italy, Austria, and Germany lost a fortune betting on the future development of interest rates (that were and continue to be highly unpredictable) with sometimes quite funky derivatives called interest rate swaps. In general, many local authorities across Europe have undergone astonishingly similar changes to their financing, suggesting variegated but ultimately universal character of local government financialization.

Financial market logics are rapidly penetrating local governance (and other tiers of government), not only driven by the financial industry but also a politics of austerity and new public management promoted by central government and other state actors. If we want to understand the Grenfell tragedy and the broader neglect of social housing, we need to look far closer at the financial practices of councils and housing associations.

This post is provided by guest blogger Sebastian Möller, who is a doctoral researcher in the Research Group “Transnational Political Ordering in Global Finance” at the University of Bremen (Germany). A longer version of the article was recently published in Discover Society (Issue 47).