Britannia Radio

I'm not a great fan of David Owen but he talks sense here.  The 
devaluation of sterling will lead to catastrophe when our government 
tries to sell its bonds -'gilts' - mat the same time as Italy and 
Greece do their major refinancing in mis-summer.

Elsewhere Mandelson tells Sky News that there will be "No quick fix 
from G20 summit"      Indeed government ministers have been crawling 
all over the broadcast media this morning  - The foreign secretary 
was reduced to waffling about 'measures that will make a difference', 
Yvette Cooper  says 'ministers will not be writing budgets at the 
G20', and Darling says there will be 'no global stimulus package' .  
Any wiser ?   And that's without the lunchtime political programmes!

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SUNDAY TELEGRAPH  29.3.09
If Gordon Brown won't get a grip, we could be calling in the IMF again
There is an air of breathtaking unreality in Westminster and 
Whitehall that reminds me of 1975, writes David Owen.n

In all the talk about a world economic crisis and the need for global 
solutions at the G20, we in the UK are ignoring the critical fact: 
our own economy is in a dire situation. Unemployment is over two 
million and rising fast; household wealth dropped last year by 17 per 
cent; house prices have fallen by 17.6 per cent in the past year and 
the FTSE 100 has dropped 46 per cent in the past two years. Sterling 
has depreciated by 25 per cent. Overseas demand for government gilts 
appears to be weakening at a time when gilt issues are set to rise to 
£150 billion or more in 2009/10.

Serious commentators fear there could soon be a catastrophic loss of 
confidence in Britain's economic prospects. A recent report from the 
Monetary Policy Forum calculates that only 10 per cent of sterling's 
decline is due to the progressive reduction in UK interest rates. 
Thirty per cent derives from the widespread sense that the UK will no 
longer be able to rely on the financial services industry, and fully 
60 per cent of sterling's decline, the forum argues, can probably be 
attributed to a rise in the risk premium - the extra reward, over and 
above the rate of interest, which overseas investors require if they 
are to take the risk of holding on to sterling.

The idea that the risk premium could be anywhere near as high as 60 
per cent should have raised alarm bells months ago. Now we know that 
if the Government is to sell the large number of gilts necessary to 
cover its borrowing it will have to restore investor confidence and 
offer better rates of interest.

What is it about Britain's economy that scares investors? Inflation 
is clearly a major concern. The Government has rightly been 
criticised for being "dangerously blasé about the potential damage of 
a declining currency". It is essential that the Prime Minister 
restores confidence, among foreign investors in sterling, that the 
Government will not breach its long-standing 2 per cent inflation 
target, otherwise 1976 IMF disciplines might be needed to halt a 
precipitate loss of confidence.

Devaluation can be a significant opportunity. Britain used that 
opportunity when sterling depreciated on leaving the ERM in September 
1992 and achieved 15 years of economic growth. But the Government ran 
deficits at a time of boom and introduced all too few measures to 
build up the underlying competitiveness of industry or to target 
particular sectors. As a result, the UK is much more vulnerable than 
the Government admits. The IMF has already underlined specific UK 
weaknesses. That warning is one which it would be folly to ignore.

The Chancellor of the Exchequer must therefore make it crystal clear 
that banks shored up with taxpayers' money will give priority to the 
growth of British industry and commerce and lend at fair rates to 
consumers. They must not be allowed to seek high returns in the short 
term so that the Government can offload its new banking business as 
quickly as possible. The fact that the country has taken such a 
dominating position in failing banks must be used for the public 
good, not just to allow bankers to rebuild their profits and return 
to wholly private ownership - bloodied but unbowed. The public/
private mix of ownership of UK banks may need to be retained for up 
to 10 years if we are to achieve the right balance in our economy.
When the participants of the G20 Summit have packed their bags, the 
Chancellor will have to present his annual Budget.

Alistair Darling has already wisely indicated that, at the end of the 
year, he will restore the 2.5 per cent cut in VAT that was introduced 
as a fiscal stimulus. Gordon Brown, despite wanting to keep open the 
prospect of a further stimulus, has been forced by market reaction to 
back off. What the UK needs now is a far greater discrimination 
within the already announced fiscal and monetary stimulus packages. 
The imperative is to make depreciation of the pound work for us by 
expanding our export and foreign exchange earnings.

There is also precious little evidence that the Government is 
preparing public opinion for the essential slowing of public 
expenditure when economic recovery gets underway. Nor are ministers 
starting to slow expenditure in areas that, by any stretch of the 
imagination, do not contribute to economic growth. Sacrifice and 
stringency are alien words in Whitehall. But we must face up to the 
reality, which we continue to ignore, that we cannot afford present 
levels of public pension provision into the future. Nor can the 
reality of our public debt be evaded by off-balance-sheet devices 
such as the Private Finance Initiative. There is no escape from the 
national political discipline of building up our Treasury finances 
and improving our underlying competitiveness.

There is an air of breathtaking unreality in Westminster and 
Whitehall that reminds me of 1975. Hard choices need to be taken now, 
not postponed until after an election in 2010.
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Lord Owen was foreign secretary, 1977-79