Month: January 2011

 

               Nick Clegg kindly sent me his New Year message. I think I get it, because I logged on to the Lib Dem site during the 2010 General Election to check their promises for that campaign. It is nice he stays in touch.

               He told his troops that many Lib Dem promsies and pledges have now been incorporated in the Coalition programme. He claims credit for the following:

Fairer taxes

Extra money for disadvantaged pupils

Green economic growth

New open politics

Taking more people out of Income Tax

Earnings link for pensioners

Pupil premia

Scrapping ID cards

Stopping a Third runway at Heathrow

Ending child detention

            He does not point out that lower Income Tax has been a long standing Conservative promise, from way back when Lib Dems had as their main Income Tax pledge an increase in the rate to spend more on state schools. The Conservatives promised extra money for disadvantaged pupils,  green economic growth, the restoration of the earnings link for pensioners, scrapping ID cards and stopping the Third runway. I appreciate that some of my readers do not agree with some of these policies. The only point I am making is that they were policies common to Lib Dems and the official Conservative view.

            Lib Dems also promised an In Out referendum on the EU which they no longer offer now they could do something about it, and pledged not to increase Student fees. Conservatives made no such pledges on either item.

           The interesting questions include what will Lib Dems do on the EU Bill which the government plans to debate once Parliament returns. Do I detect a second change of policy, backing away from an In/ Out referendum, just as they backed away from supporting a referendum on Lisbon when Conservatives tabled and backed one under the last government?

          I also see the Independent on Sunday has run a readers’ consultation on what to put in a Freedom Bill. They tell us such a Bill remains popular . Of course it does. But they should also follow the plot. As readers of this site will know, as we did a similar exercise months ago, Mr Clegg seems to be in no rush to bring out his Freedom Bill and seems to have  backtracked  to letting the Home Office produce a civil liberties bill only. What we want is a much larger and more ambitious peice of legislation after years of over bearing regulation.

 

             In 2001 I wrote a book about the rivalry between the USA and the EU, entitled “Stars and Strife”. In that I recognised the first signs of emerging Asian strength in world affairs, concluding that  “The UN will have to recognise the strength of numbers and force of arms point in the direction of the leading Asian countries playing  a bigger role in world affairs as this century advances. As India, Pakistan and China  start to flex their muscles,with the  capacity to raise and sustain huge armies, and now with some nuclear capability, we have to recognise they will have more influence in the world.”

       In 2005 I wrote an update, entitled “Superpower struggles: Mighty America, Faltering Europe, Rising Asia”. I stated in that ” In recent years the Chinese economy has grown at a staggering 9% per annum. It has already overtaken Italy to become the world’s  sixth largest economy, and will soon pass the size of France and the UK at market exchange rates. By the next decade (2010 ) it will be larger than Germany, in third place, poised to overtake Japan. ”

          The news came through in August 2010, just  a couple of quarters into the new decade, that China had overtaken Japan’s GDP at market exchange rates.  My forecasts now  need updating. The UK Treasury forecast in 2005  said it would take China until 2015 to reach $5 trillion of output, a level they achieved in half the time. The West has been good at underestimating China.

           The only comparative target for China  to hit now remains the GDP of the USA, the world’s number one. At the end of 2009 the US GDP was around $14 trillion, far out of sight of China’s $5 trillion. However, if you assume China can grow for another ten years at the astonishing 9% average she has achieved in the last three decades, and if the USA grows at 2.5% a year on average ( a little below her historic average to allow for the problems created by the debt overhang), China overtakes the USA’s GDP level by 2020, without a further revaluation of her currency. Even if we allow for some slowing of China’s growth rate as she becomes richer, it will still be not much more than ten years from  now that China will sport the world’s largest economy. This can also be speeded by some revaluation of the Chinese currency.  When she reaches that goal she will still enjoy an average standard of living of around one quarter of the USA’s.  There is no reason to suppose she runs out of growth when she reaches that point.

           In 2005 I summed up the Chinese evolution by saying ” One day China will turn her new found economic power into military power as well. For the time being her success will be heavily concentrated in industrial products and product markets,and her main impact on the west will be felt in the  rising commodity prices as Chinese demand surges. Unlike Jpapan, she will not remain neutral and lightly armed. As her economic success develops so too will her political and military might.” 

            The Chinese strategy rests on acquiring large commodity deposits and commodity production around the world, to fuel her factories and feed her population. It also is driven by the wish to emulate and surpass western technology in key areas. There is always someone willing to sell it to Chinese interests, a situation which will grow as the overborrowed West looks for easier ways to repay debt or cut their deficits.

                  China now uses 43% of the world’s steel output,  imports 45% of the world’s iron ore,  39% of the world’s copper sales and 42% of the world’s  cotton output. Her economy has a manufacturing sector which accounts for almost half the total economy, and is now dominant in many major areas of world trade. China is already the world’s largest exporter.

                 The West does not seem to have adjusted to the pace of China’s rise, or the speed and depth of her success. The West ignores the fact that in some ways China has a better tax and regulatory regime for new manufacturing than the older established centres in Europe and the USA. Governments should take heed and should understand how co-ordinated China’s strategy is. They seek control over raw materials, over production and over some market outlets. The Chinese government is determiend to raise domestic living standards and to power growth through international trade. The West needs to respond more quickly, more dramatically and more positively. The West is rapidly becoming uncompetitive in all too many areas of activity.

 

  Happy New Year to all my readers. Thank you for your New Year resolutions.

             I have suggested the government  resolve to get inflation down (December 30th) and to make it more worthwhile to grow a business here (December 29th) in the UK. There is a third resolution that  I propose to them if they wish to have a successful year handling the economy. They must avoid all further involvement in the gathering Euro crisis.  

              The government gave themselves some room to avoid more invovement in bail outs when they stressed that the Republic of Ireland was a very special case as a near neighbour sharing a land frontier with us, with substantial banking connections. None of the other Euroland members meet the first of those criteria.

               The Euro countries need work outs more than they need bail outs. Indeed, forcing them into IMF/EU packages of future borrowings may make the problems worse, not better. The Republic of Ireland may express disapproval when the electors go to the polls. There could be trouble forming a government which simply accepts all the conditions imposed on the Irish loan and accepts the package as presented which will be a straightjacket for the Irish economy for many months to come.

                  Spain needs to buttress its banks quickly and convincingly. The EU itself found five groups of Cajas did not meet its unstressful stress texts last summer. The UK should not fall for the argument that because there are cross holdings with UK banks we have some duty to help in this process. Nor is it necessarily the right thing to do to refinance the Spanish state on special terms so it in turn can finance the banks. If there are problems with any Spanish banks continuing to own UK banking interests, then let them sell those to new private sector owners. Governments need to get away from thinking they must act as lenders or share buyers of last resort to banks in trouble. There need to be market based solutions. In the meantime the European Central Bank should continue to act as the lender of last resort to Euroland banks, as Euroland regulators tell us they are all solvent.

            Nor should the UK be dragged into any refinancing of a governement which has been overspending. There may need to be a third package for Greece, still struggling under the weight of debt and the deflationary policies forced on it by the last two ackages.

               2011 could bring the next phases of the Euro crisis. The bail outs of Greece and Ireland have not mended those troubled economies. They needed work outs, not bail outs. The UK government should make sure it is not part of any future bail out party. We cannot afford to dish out more of  the wrong medicine to failing Euro economies.

                     In the New Year in Ireland it may prove difficult forming a government in the new Parliament of MPs who want to follow the letter and word of the EU/IMF  bail out agreement. Adding cuts and  tax rises to tight money and an overvalued currency is  not a great formula for fixing a distressed economy. Greece too might find the going tough under its revised terms from this autumn. The Greek economy is not growing, under the EU/IMF cosh.

                    The UK government said that Ireland was a very special case. If the officials seek to argue that Spain has strong common bank holdings and substantial links through the financial sector, Ministers should respond that the Spanish owned banks in the UK are solvent businesses which the Spanish banks can sell to new owners in the private sector should need arise. There is no need for the UK to ride to the rescue, to help refinance European Central Bank loans to Spanish banks.

                            Nor does it make sense for heavily indebted and high borrowing UK to borrow yet more to lend on to overstretched Euro member states governments. Those of us who fought long and hard to keep the UK out of the Euro did so in part to avoid UK taxpayers having to go to the rescue of  states in the Union who overdid the borrowing. It makes no sense to behave as if we had joined when it comes to paying the bills for this ill judged scheme.

                 The UK’s government finances are still stretched. Taxpayers will not take kindly to any further extension of the UK’s credit to lend on to Euro governments. The UK can help Euroland sort itself out by not offering an easy palliative in the form of more loans. Somehow Euroland has to learn to live within its means, and grow its means to get closer to its amibitions. Lending more without putting in place a currency and a monetary policy that allows recovery is not the right answer. The ECB was keen to scramble out of some of its lending to Ireland. It did not necessarily result in a policy for the Republic that will guarantee economic success.

               The Uk has to concentrate hard on getting its own spending under control and its deficit down. It needs a stronger growth strategy, to take advantage of the freedom it has by not belonging to the Euro to set a competitive level of its currency and a sensible monetary policy. The freedom so far has helped a bit with the growth, but at the expense of higher inflation. It is going to be a difficult year ahead getting the balance right.

                As the PM says, the heavy lift to cut the deficit gets underway in 2011. Readers should remember that as total public spending goes up every year in cash terms this Parliament, the heavy lift takes place through more tax revenue. That’s why 2011 starts with a hike in VAT and  petrol duty, not with spending cuts.