Julia Gillard facing a perfect storm

Wall Street

AUSTRALIA'S problem of toxic partisanship now on display is a mini variation of the North Atlantic political malaise that threatens Western economies with weaker growth, more bank failures and shot investor confidence.

The unifying theme among Western nations is political lethargy that cripples policy action. The idea of a crisis of governance in the West only gains more traction. Financial markets have lost confidence in political leadership.

On a scale of gravity Europe is worst, followed by the US, with Australia seemingly healthy in this company while exhibiting its own less severe yet discernible political dysfunction.

Consider the local situation at week's end. Julia Gillard confronts the first legislative defeat of her minority government; Tony Abbott has called on Gillard to resign because the defeat of her migration legislation means the collapse of Labor's border protection policy; the caucus increasingly thinks recovery under Gillard is remote and is being drawn into inevitable assessment about returning to Kevin Rudd; and Labor as an institution remains demoralised about the causes and resolution of the systemic crisis it faces.

The Coalition, however, has made a terrible tactical blunder this week: it advertised to the world its sheer desperation that any leadership switch to Rudd comes ASAP, thereby ensuring if Labor has any political brains left (and that's doubtful) it switches to Rudd only late in the cycle very close to an election. Will Labor see the obvious?

Gillard's parliamentary problem today is exactly the same as Rudd's in 2009. Her limited authority as PM is being shot by a combined Coalition-Green attack on her migration policy coming from Right and Left. In the same way Rudd's authority as PM was ruined in late 2009 when his carbon pollution reduction scheme was defeated on Coalition-Green votes, another assault from Right and Left.

This is the new structure of Australian politics. Labor is trapped in a weak centre ground that cannot hold. It has no experience of this dilemma and no strategic clue about how to manage this challenge. Rudd was destroyed, ultimately, because he was unable to fight successfully both Coalition and Greens. The same fate is befalling Gillard. It does not matter who becomes the next ALP leader, Rudd or anybody else, they will suffer the same fate unless Labor can devise a workable strategy.

The message is that when Coalition and Greens combine to assault Labor then Labor will lose in the parliament and in the nation.

The next pattern threatens to reoccur: once the leader's authority is fatally undermined the caucus panics and resorts to the easiest "solution" - merely changing the leader. It won't work. Yet talking leadership is easier than facing the problems that afflict Labor today.

The minority government is political poison for Labor. Yes, Gillard has been getting her bills through. But this misses the point: Labor is being destroyed as a viable force in the nation. It looks weak, the Labor-Green alliance is toxic, the corporate sector is disenchanted and Gillard's authority is undermined by this structure. The three problems Gillard inherited from Rudd and pledged to fix on becoming leader - the carbon issue, the boats and the mining tax - remain unresolved 15 months later in varying conditions of political or policy difficulty. Yet minority government is not the main problem.

The Labor Party faces a crisis of belief and structure. Since its 1996 election loss it has given priority to managing the 24-hour media cycle and short-term tactics hoping the bigger issues would resolve themselves. The one big new idea it embraced was carbon pricing. While a popular idea at first, Rudd and Gillard mismanaged the politics of carbon pricing. Rudd suffered a crisis of belief and Gillard then had to overcompensate.

The upshot is that Abbott now "owns" this issue electorally with his anti-carbon tax crusade.

The asylum-seeker issue is now prime exhibit for the latest crisis of Labor belief.

This week party legend John Faulkner rose in caucus to declare Gillard's policy was in breach of the platform, a significant charge from Labor's senior statesman. The ALP Left is agitated and alienated. Its fear is that the Greens look principled compared with Labor.

That "whatever it takes" operative Graham Richardson lamented in The Australian this week of the boat issue "where is this great party of principle?" When Richo lines up with Faulkner and the Left against offshoring processing then the Gillard-led Right is in strife. Yet Gillard is making this policy a defining test of her standing as PM.

Several weeks ago Labor intellectual Dennis Glover, in a column in this paper, argued the Tampa 2001 poll had damaged Labor for a generation by driving a wedge between the party and those idealistic reformers who mobilised on behalf of Labor faiths.

His message was that Labor must atone for its sins, retreat to a moral refugee policy and accept the cost may be a heavy election defeat.

Gillard and Immigration Minister Chris Bowen, of course, would dismiss such ideas.

Richardson invoked Gough Whitlam to suggest how out-of-touch was Gillard with true Labor faiths. This was a serious mistake. Having had several discussions with Whitlam as PM about boatpeople this author knows where Whitlam stood: he would have been all the way with Gillard and Bowen on offshore processing and backing the Malaysia deal.

On merit, Gillard is correct in moving migration amendments to enable parliament to restore executive discretion on offshore processing. If Gillard can get her bill through the lower house it will constitute a success within a larger defeat. The Coalition is destroying offshore processing, the policy it says it created. In office it will regret this folly and it will have no recourse. The saga testifies to the depth of partisan division in Australia and the unsatisfactory resolution to the 2010 election.

Meanwhile both Abbott and Greens leader Bob Brown were contemptuous of Gillard. In response to Gillard's demands that the Coalition support her legislation Abbott had the smart retort: go talk to your formal alliance partners, the Greens.

Brown did a political knife job on Gillard amid media speculation about Rudd. Fully aware the Greens alliance with Labor was a deal with Gillard and Wayne Swan (the only ministers who signed the document) Brown said: "Who Labor appoints as their leader is up to them" and stressed that the Greens deal was with the Labor government as such. Decoded, it meant Gillard was dispensable. Here is the contempt with which Labor is treated these days.

Labor's internal split on the boats goes to core belief. So does its split on same-sex marriage. There is a fault line within Labor between progressives and conservatives on many social and cultural issues including how to combat the Greens. It is only deepening.

On the economic front, growing troubles in the North Atlantic zone must impinge upon Australia and create more policy and political difficulties for Gillard and Swan. Labor's dilemma is highlighted by Euromoney's award to Swan as 2011 finance minister of the year. Frankly, given our economic performance, the only surprise is that it didn't come earlier.

The point is the Australian public doesn't back Euromoney's view. The last parliament showed that despite Australia's avoidance of recession Labor was unable to convert economic success into political capital. Doubts about Labor's economic reformism are now entrenched. Labor under Rudd and Gillard has sent too many conflicting messages. Within the corporate sector there is open scepticism about Labor's economic policy.

The economy will remain the paramount domestic issue. To say the world is scary is now an understatement. Europe faces a sovereign debt crisis. The tasks for Europe's leaders and central bank are to manage Greece's default, support vulnerable larger economies, Italy and Spain, keep the banking system viable and prevent a financial contagion. The euro is at risk unless, as The Economist says, there is "an act of supreme collective will" with Germany the pivotal player.

Chief economist of the International Monetary Fund Oliver Blanchard said this week after fund's latest outlook: "The global economy has entered a dangerous new phase. The recovery has weakened considerably and downside risks have increased sharply." European Commission head Jose Manuel Barroso warns: "We are facing the biggest crisis of this generation. It's a struggle for the political future of Europe, for European integration as a whole."

The problems are not limited to Europe. The New York Times oped columnist Thomas Friedman says the US now "faces a big choice: we can either have a hard decade or a bad century", fearing neither Republicans nor Democrats will rise to the task.

There are two golden rules about Australia's situation: we are in sound shape and tied to Asia's growth and we cannot be immune from any North Atlantic shakeout. Any crisis in financial markets will hit Australia along with any further weakening in global growth. It will intensify economic and political pressures on Gillard and Swan.

Swan admits that achieving Labor's budget surplus goal in 2012-13 is now "much tougher". But this goal transcends fiscal meaning. It has become the ultimate symbol of Labor's competence and its loss would be lethal politically.

Beyond this, Labor manages the two-speed economy amid poor productivity suggesting that for all its talk Labor's economic reform agenda is not working. This is the worst fate threatening Labor: that as a party it failed to pursue the pro-market disciplines that Australia needed at this point.