By William Keegan
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To echo John Donne, the economy presided over by George Osborne is not ‘an island, entire of itself’.
The famous quotation goes on: ‘every man is a piece of the Continent, a part of the main; if a clod be washed away by the sea, Europe is the less...’
One wonders whether our Chancellor had the great poet’s words in mind when complaining on the Today Programme last week that the eurozone crisis ‘has caused enormous damage to the British economy, and will continue to do so.’
Worried: Osborne knocked the economy on the head, and now the euro crisis is bringing body blows, says William Keegan
Of course, since Osborne’s Plan A for the economy â€" ‘austerity-led growth’ â€" has hit the rocks, he has a vested interest in blaming, when it comes, the inevitable need for a major U-turn on the travails of ‘the Continent’.
It would be more accurate to say that the existential crisis, and possibly tragedy, in the eurozone is merely aggravating that element of the British economic crisis which is home grown.
For what we are witnessing is the conjuncture of the world financial crisis, the crisis in the eurozone, and a line of British chickens coming home to roost, as a result of mistakes in economic policy by both Conservatives and Labour.
Thus, under Mrs Thatcher, John Major, Tony Blair and Gordon Brown, the needs of manufacturing were downplayed, and too much reliance was placed on services in general and financial services in particular.
For much of that period, the pound was chronically overvalued, so that the competitiveness of British industry suffered. Thus, when the financial crisis began in 2007-2008, what had previously been a torrent of tax revenues from the City turned into a trickle.
The effect of that, and of the depression caused by the banking sector, was to magnify what were undoubtedly budgetary problems, but relatively minor ones.
Now, I believe that I was one of the first economic commentators to use the word ‘depression’ about the state of the economy. This is a word that my generation thought we should never have to apply to advanced economies which were supposed to have learned the lessons of the 1920s and 1930s.
Alas, the echoes of that interwar period have been all too audible: a classic financial ‘boom and bust’; a European banking crisis; and the strains of a fixed exchange rate system â€" the gold standard in those days, the single currency smore recently.
Although the eurozone was badly constructed â€" as is now widely conceded â€" and was bound to run into trouble at some stage, it is by no means certain that this would have occurred so soon.
It is the banking crisis that has brought to the surface deficiencies in a monetary union that is not also a political union. The crisis has induced recognition that other key members have become uncompetitive vis à vis Germany, with consequent balance of payments problems.
However, unlike the UK, they have lost the freedom to devalue their currencies against Germany, and thus regain competitiveness.
Pace Mrs Merkel and her finance ministry, it was not fiscal profligacy that caused the financing problems now confronting Spain and Italy. Greece was the exception. But neither in the case of Greece nor the others is the current strategy of 1930s-style deflation going to solve the underlying problems.
On the contrary, it is aggravating deficiency of demand. Which brings us back to why Mr Osborne is so worried.
We may have the freedom to devalue, and have certainly taken advantage of it. But John Donne’s Continent is our main export market, and is threatening to implode.
However, it remains true that, until Mr Osborne took over, the British economy was recovering, albeit slowly. He knocked the economy on the head, and now the euro crisis is bringing body blows. No wonder he is so worried.
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William Keegan is an economic commentator and a former deputy City Editor of the Daily Mail.
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I agree with the article totally. I think the loss of low skill manufacturing to China etc has been a disaster. UK workers of lower skill abilities have been thrown on to benefits, their erstwhile employers import goods made by serf labour, while the rest of the UK pays financially socially for mass unemployment. We must re establish low medium skill manufacturing, while continuing to excel at the high end, which has survived quite well.
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There is no real rule book for Capitalism. There would definately not be a chapter in that rule book if it existed which highlighted how good capitalism is for the man in the street. Capitalism advances to the the top of a high pyrimid, the top of which are the people who made gains, and the lower reaches everyone else. We were just too willing to farm our industry abroad along with our expertise for a saving in wages and now it's come back to haunt us. Whilst lending money to people and making money from money is easy, it's also something that all the devloping countries can now do themselves without our help now. Like an Anne Summers franchise which has too many people trying to sell the same product to the same people. Ok for those first-in, not so good for those with £500 of stock they can't sell to anyone.
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The aim of the EU was to provide a heavily populated single market bloc that protected itself from the downside of globalisation (the $1 a day competitor) by stringent enforcement of EU regulations. Instead of embracing it we poked fun at it, things like the straight banana rule that never was and other such hyperbole by the men in the media --- It become the monster we all feared it would because of the accusations rather than despite them --- Those critical of the single currency clamour for a return to the gold standard seemingly oblivious to the similarity of the constraints each offer --- We're now left with the worst of all worlds, our manufacturing weakened, our wide boys in the city with nowhere to go, an aliented Europe and a plethora of useless politicians. Welcome to Britain 2012 - Long to rain down on us.
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Italy had GDP of -1.30% in Q1 2012.......The Euro would collapse if China were not supporting it to protect export markets......the Eurozone IS in recession overall.....still, let's not allow the facts to get in the way
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Osborne's performance has been very bad. He cannot blame EU, when Germany/Italy and France have better growth than UK. If EU was the problem, then the pound would have been much higher compared to the euro and our growth would be much better than the European countries. Therefore the problem is not EU but Osborne/Banks/MPC commitee of BoE. Now if BoE had done something about the inflation which we had over 5 years, then perhaps we would be over the recession and into growth.. But BoE/Goverment is too scared to let the banks fail.
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At last, a DM article which doesn't blame all of our economic ills on Gordon Brown. What is the world coming to???
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What nonsense Keegan, more of your political views being used to distort economic reality. Shameful, really
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The eurozone is no longer our main export market. It has been overtaken by non-European countries. Of course, the Observr doesn't want to know that.
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One of the many but most important changes to the UK in my life time,has been the demise of manufacturing. North Surrey, where I grew up would not widely be regarded as a hive of industry but in the early 60's the big majority of the fathers of my school mates were employed in that capacity. Not only in the adjacent Vickers aircraft factory and related component suppliers but also in a wide range of light industries. Well my old school has been demolished and so I suspect has most of the industry.As Mr Keegan points out this has been an ongoing process, presided over by sucessive governments. Now all the main parties are talking about rebalancing the economy ( more manufacturing). It took sometime to dismantle our industrial base and rebuilding it will be far harder in the doing than the saying, but do it we must.
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Point made and accepted. But, as an important aspect of the job of a Chancellor is to win the next election, you can't blame George Osborne for using the Euro crisis as an excuse.
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