Bill Emmott - International Author & Adviser


Is Britain in the midst of an economic crisis?
Corriere della Sera - March 3rd 2010

Is Britain in the midst of an economic crisis? We British have been asking ourselves that question ever since the global credit crunch began in mid-2007, and even more so since the global recession began, a little more than a year later. Now, with the value of the pound falling sharply as the week began, we are asking ourselves that same question again. Strangely, however, we still don´t know the answer. What we do know is that Britain is suffering a kind of political crisis.

            Actually, "crisis" is the wrong word both for our political problems and our economic worries, for it implies some dramatic and rapidly developing situation. Britain´s political problem arises, in truth, from the fact that our politics is developing too slowly and our economy is facing a fiscal squeeze, not a collapse. The country has had 13 years of government by Labour, and nearly three years with Gordon Brown as prime minister, and it has grown very tired of both. Most of all, though, it is becoming very tired of waiting for a general election. In effect, we have been enduring a non-stop election campaign for at least a year, and arguably even longer. Traditionally, our election campaigns last just three or four weeks.

            But Mr Brown has chosen to wait until almost the last legally possible moment to call an election, since the power to ask the Queen to dissolve Parliament and have a general election is one of the very few unchallenged rights that a British prime minister has. Legally, he can wait until the first week of June; everyone expects him to hold the election just one month ahead of that end of Parliament´s five-year term, on May 6th, in order to coincide with local elections.

            The main result is political paralysis and, what is more important, paralysis of fiscal policy. It is not that Britain has a fiscal crisis, like Greece: we don´t, even though our budget deficit this year is expected to remain more than 12% of GDP. The government can still borrow that money, both at home and from foreign investors. The problem is that those investors are waiting for some sort of clarity about how and when the government is planning to reduce its borrowing, by raising taxes or cutting public spending. And until the general election has taken place, Britain won´t really have a government, let alone a plan.

            Many have speculated that the reason why the pound sterling fell sharply this week is that new opinion polls were published which suggested that Britain might not have a strong government even after the election has taken place. The most dramatic poll, published in the Sunday Times and by the polling company YouGov, even implied that Gordon Brown could remain as prime minister, as leader of a minority government or in a coalition with the centrist Liberal Democrats. Another poll, also by YouGov, published in the Sun, immediately contradicted that finding by implying a Conservative victory, though one that possibly would also require a coalition.

            It is a confusing and frustrating political picture. But this explanation, that a coalition government might be likely and that the result would be a weak administration without a clear fiscal plan, is not really enough to explain the fall in sterling. The reasons why it is inadequate are, first, that the euro has also been falling quite sharply against the dollar, without any such electoral explanation; and, second, that the most important indicator of investors´ concern, which is the interest rate on British government bonds ("gilts"), had already been rising well before these recent polls called into question the common assumption of a clear victory by David Cameron and his Conservative Party.

            Britain´s fiscal dilemma is more acute than one just caused by the prospect of a weak government. It arises from a genuine uncertainty about how best to handle the huge budget deficit. Britain´s economic output has suffered roughly the same decline as Italy´s, and its unemployment rate is now also almost identical to Italy´s. But Britain took longer before it returned to positive growth, and its unemployment rose from an initially much lower level than Italy´s. So psychologically Britain feels a bit more affected by the global recession. And although our growth resumed in the fourth quarter of 2009 (when Italy´s dipped again), it still feels quite weak and uncertain.

            That means that neither Labour nor the Conservatives can really know whether the right fiscal policy will be to cut the deficit immediately or to wait until the recovery feels strong enough to withstand cuts. It is that uncertainty that must now be weighing heavily on the minds of investors. A further fall in the pound against the euro, following the 25% devaluation that has taken place since the global recession began, ought to be good for our exports. Indeed, there are some signs that exporters and manufacturing companies are feeling more confident. But it cannot provide a big boost unless the demand for exports also rises, and since about 60% of Britain´s trade is with the rest of the European Union, we are hurt also by the weakness of the eurozone economy. Meanwhile, a fall in the pound could raise our inflation rate, which would also complicate matters for both the Bank of England and the Treasury.

            There is no British economic crisis. What we do have, however, is an exhausting, wearying electoral process, combined with difficult economic-policy dilemmas. Britain is not alone in that. But you know us very well: we always like to pretend we are different.



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