TELEGRAPH 29.9.09
1. Governments can survive recessions, but not in this case
Democratically elected leaders can and do survive recessions. For proof, just look at Angela Merkel, the German chancellor. Does her example offer any hope to Britain's beleaguered Prime Minister, Gordon Brown?
Jeremy Warner
Precious little, I'm afraid. Ms Merkel has been re-elected in part because she's not been blamed for the downturn.
Germany voters instead prefer to think the root cause is wicked Anglo-Saxon bankers and speculators. She has also won plaudits for the way in which German workers have been protected from the full force of the economic contraction. Rightly or wrongly, Germans believe their economic and social model has been vindicated by the recession, not exposed by it.
Similarly, though for entirely different reasons, John Major was able to win an election into the teeth of the recession of the early 1990s, and before him, Margaret Thatcher at the end of what still ranks as Britain's worst ever post war downturn (1979-83).
Yet these precedents offer no more than a slender reed for Gordon Brown, almost hopelessly down in the polls, to cling to as he faces up to the Labour faithful in Brighton. Unlike Angela Merkel, John Major and Margaret Thatcher, he is very much blamed. The light touch financial regulation which allowed reckless banking to run riot was his invention, and he's blamed too for a public spending binge which has left Britain singularly ill equipped to withstand the resulting downturn.
What's more, the prime minister's claim to have "led the world", or "saved" it as a slip of the tongue once had it, with decisive policy action that others have been forced to emulate, is widely and deservedly regarded with incredulity.
I don't want to belittle the boldness of the policy response, but saving the banks was out of necessity, not choice. Only a Government of quite breath taking incompetence could have failed to act given the circumstances.
Ministers deserve credit for putting out the flames, but then it is part of their job to send in the fire brigade. By the same token, it is also our right to hold them culpable for allowing the inferno to burn out of control in the first place. There were in truth few alternatives to what the Government eventually did. Policymakers gravitated to the least worst solution.
As it is, the manner in which the crisis was handled was never the unambiguous triumph ministers like to pretend. For a start, they should have acted much earlier. The whole thing would have ended up costing a good deal less had they done so. They had already had the outrider of Northern Rock to serve as a warning of what was to come.
There should also have been much more aggressive liquidity support for the banking system from the outset of the crisis, while the decision to waive competition laws so that Lloyds TSB could take over HBOS has plainly been a disaster for all concerned. Lloyds almost certainly wouldn't have needed to be recapitalised by the Government but for taking on the toxic legacy of HBOS. The upshot of Mr Brown's "decisiveness" in this case was that the taxpayer was eventually forced to semi-nationalise three major banks rather than two.
All these things are obvious with the benefit of hindsight, and to be fair, not many of them were said at the time. These were uncharted waters, and to put tax pounds on the line in the manner required was never going to be an easy decision politically. Yet crisis resolution is a large part of what governments are there for. In an advanced economy it's reasonable to take it for granted.
The debate over fiscal consolidation is for the time being equally one of political rhetoric over underlying substance. The Government has already been forced to retreat from the ridiculous mantra of "Labour investment versus Tory cuts".
The leak of confidential Treasury papers showing that Labour too will have to cut departmental spending sharply to meet even its own, somewhat unambitious plans for fiscal consolidation, rendered the language untenable.
Alistair Darling, the Chancellor, yesterday sought to recalibrate the message as a choice between "cuts driven by ideology" against "what's right for the country", of "maturity and experience over the policies of the playground".
As things stand, this too is a disingenuous and largely spurious distinction.
We know very little about how either of the two main political parties plan to address the road crash in the public finances, but since it is Labour that presided over it, "maturity and experience versus the policies of the playground" hardly makes a convincing sound bite either.
For the time being, the only substantive point of differentiation is how quickly to apply the brakes. There is only so far they will allow the Government to go with the policy of borrowing and spending its way out of recession. [The present ease of national borrowing will - I suggest - last until the first national budget after our next election. After that who knows? -cs]
The idea that a decade of public and private overspending can be magically spirited away "without", as Lord Mandelson put it yesterday, "eating into the fabric of people's lives", is sadly unrealistic. Desperate as they are to put clear water between them, convergence is more visible than differentiation.
Where was the Tory leadership, until it was too late, to oppose Labour profligacy on spending, and where were they, when it might have made a difference, to warn about wreckless lending and an underregulated banking system? Instead, they were off hugging hoodies or husky sledding across the Northern wastes in search of touchy feely social and environmental policy.
Having conceded the need for cuts, Labour now seems destined to adopt something very similar to another recent tenet of Conservative thinking - a "Fiscal Responsability Act" to lend credibility to plans for cutting the national debt.
On economic policy, the two main parties seem ever more inclined to bend with the wind. Maybe the remaining months before the election will bring some definition. I for one won't be holding my breath. In the meantime, Labour seems finally to have learnt to love Peter Mandelson, but not even he can save them now. The Government will lose because reasonably it is blamed for the economic mess, not because the Opposition offers an obviously better cure.
2. Germany's protectionist bombshell
By Edmund Conway
The trouble with protectionism is that both the efforts to prevent it and the disastrous effects it can have have been painted as boring. So often do politicians around the world drone on about confronting the threat that it has become increasingly difficult to convince people of its importance. I can tell you that protectionism is, as I see it, the biggest worry I have about the next couple of years, both economically and diplomatically. I just worry that we’ve become anaesthetised to such comments.
I wrote about protectionism in my column last week, so no need to repeat myself, except to give an update. I mentioned that although there are growing examples of the rise in “traditional” protectionism - stuff like trade barriers, subsidies for domestic companies and so on - the real threat remains the more invisible, insidious element of financial protectionism. This works in two ways: first, that governments around the world, by dint of supporting their banks, are (by helping them survive) giving them anti-competitive support to the detriment of foreign competitors (particularly those with less generous governments ). Second, that governments are invariably ordering their banks to withdraw cash and operations from overseas in order to fund more lending for domestic businesses and consumers.
The first is perhaps unavoidable; the second is inexcusable in a globalised world.
And yet it is happening at alarming pace. There is anecdotal evidence: there were explicit clauses when Royal Bank of Scotland that stipulated that it should ensure more cash was lent to domestic customers. There is statistical evidence. The latest Bank for International Settlements quarterly report showed that the flows of cash around the world have continued to slide.
But I fear that far worse is yet to come. Take Germany as an example. Following the election result, it looks rather likely that the new government will order an overhaul of the way the country’s Landesbank system works. These banks expanded rather too far and too fast into Eastern Europe and Britain (remember West LB and how it became a major player in the world of property finance not so long ago?). According to Hans Redeker of BNP Paribas, one of the likely stipulations the new government will impose is for the banks to withdraw their capital from UK assets and spend the proceeds on financing domestic companies. The amount could be very substantial, if this chart below is anything to go by. It shows that although lending activity throughout the eurozone has dropped like a stone, this hasn’t coincided (yet) with any cutting of foreign assets.
EMU: Imploding credit growth suggest net external assets to decline
Redeker’s insight (as a currency buff) is that this will cause the pound to fall even further against the euro (until, that is, people realise next year how much of a mess the continent’s own economy is in) but my concern is more deep-seated.
If Redeker’s prediction about Germany is the case for other countries around the world, the likelihood is that we are only halfway through this collective purge of overseas assets. And as country after country follows suit, it will result in broader protectionism. As the BIS said in its annual report a few months ago, “after seeing foreign-owned banks pare back activity during the crisis, host country governments may become less sanguine about allowing outsiders to operate on their soil… And, by reducing the ease with which capital moves across borders, financial protectionism would shrink trade in goods and services and thus moderate growth and development.”
What I still find staggering is that governments around the world are being allowed to get away with this kind of protectionism without any apparent resistence from either companies or economic institutions like the IMF or OECD. [And I would suspect that all of this would be Greek to the politicians assembled for their photo-op in Pittsburgh last week -cs]
As it happens I am off to the IMF’s annual meeting this week so will be sending through plenty of updates around the events this week. It promises to be a very interesting meeting indeed. The US used last week’s G20 to pledge to ensure the international monetary system is no longer allowed to generate the imbalances that caused this crisis. But precisely how do they do this? Hopefully we might get some answers this week.
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