Author: johnredwood

There are two types of austerity around in Europe today. The first is the type which cuts public sector wages, makes cash cuts in public spending, and forces rapid reductions in deficits. These rapid slimdown programmes are being imposed on the troubled countries of the Euro. Then there is the second type, the UK type, where current public spending overall continues to rise in cash terms, and even to rise a little in real terms, but is cut back from previous forecast levels. They are very different.

Both the UK and the Euro area countries have put up taxes to plug the deficits. Both are experiencing falls in real wages. The worst austerity in the UK is taking pace in the private sector, in the homes of individuals and families. Since the crisis first hit in 2007, UK real wages have on average fallen by 10%. The UK has suffered from higher inflation than many other countries, and private sector wage rises have slowed to almost nothing. Real wages have been badly mauled in Greece, Ireland and Portugal amongst others.

If the IMF and others are going to help find a way out of the current economic predicament in Europe they need first to be honest about which types of austerity different countries have experienced. They also need to grasp that a country without its own currency is in a very different position from one that still has its own currency. Maybe the Head of the IMF is becoming critical of deficit reduction strategies because she thinks a Euro country is the new norm.

An individual Euro country cannot devalue to price itself back into world markets. It cannot create new money to try to stimulate activity. This makes big fiscal adjustments that much more painful, as there is no reason to suppose the lost output created by the higher taxes and the lower spending will be supplanted by mroe private sector acivity.If it were a proper single currency, there would be much larger transfers of grant and loan money from the richer areas to the poorer areas, to make it all more tolerable.

In a country like the UK with its own currency and enthusiaism for looser money there is every chance of offsetting public cuts should these be made. It does, of course, also require mending the banks, so there is an easier mechanism to ensure some of the new money finds its way into productive private sector activities.

The Prime Minister’s claim on radio recently that we are all Thatcherites now is in one sense true, though of course unlikely to go down well with his opponents. I think what he meant was that over 13 years of Labour governments with large majorities they accepted the Thatcher settlement on ballots before strikes, on lower Income Tax rates, and private ownership of the leading energy, transport and industrial utilities. The country did not return to nationalised steel,elecriticity, gas and phones. The state owned banks were not properly nationalised.Top Income Tax stayed at 40% for almost the whole time, and standard rate income tax continued downwards as under the Conservatives.

Many have now written that yesterday marked the passing of an era. I do not see it that way. Margaret Thatcher’s hold and direction of power effectively ended the day her colleagues forced her into the Exchange Rate Mechansim against her better instincts and the advice of her (all too few)friends in government.I felt that her era ended on that day. Sometime later her Conservative opponents got her out of office, confirming the end of her era. In other words, the Thatcher era has been over for around a quarter of a century. We are well into the legacy. Indeed, the last government lived off the achievement of the Conservative years in curbing debts and deficits, and getting inflation down. We have the luxury to keep the best bits – wider ownership, the ending of the Cold War, the lower tax rates – whilst shedding the bad bits like the ERM and the unsuccesful bits like the Poll Tax.

Today it is a common pursuit for commentators and some in politics to ask What would Margaret do now, faced with today’s problems. All the time she was alive I thought this was a cruel question,not one I ever wished to attempt to answer. It was cruel because in her later years she was not in command of all the facts and the arguments in the way she was in her prime. She did not wish to answer that question most of the time for good political reasons, and was not in an informed position to do so. Anyone seeking to suggest her answer ran the risk of presuming too much. Putting words into the mouth of someone who could often not correct a false interpretation or answer back was I thought a most uncharitable thing to do.

Now she has died the twin constraints of good taste and the danger of the lady contradicting the speculator have been removed. I would nonetheless urge people to refrain from doing so. A few of her genuine political friends wish to be the custodians of the flame, distilling the essence of pure Thatcherism into an ever more exclusing brand. That is to misunderstand the lady at her best, where she recruited many non believers as well as believers to her colours, and showed great flexibility in how to use her power. Some of her political enemies will wish to ascribe to the worst features of modern policy as they see them the brand of Thatcherism, as a kind of evil spirit as they see it which they wish to warn us about years after the end of the era. That too is far from helpful, and may rebound against them as the public wearies of the continued attacks on a dead Prime Minister who cannot answer back.

Margaret Thatcher’s thought and actions changed substantially in many important areas over time. They can no longer change. Anyone who suggests he knows her mind on today’s problems has to make it up.

I am a realist. I understand others will continue to argue over her period in office, and some will seek to enlist her for their cause. In a later post I will examine what we do know of her views on current politics, from the words she said and wrote before she died.

European car sales continue to fall. There was a 10.7% decline in March, led by a 17.1% annual fall in Germany. France was down 16.2% and Spain 13.9%. UK sales were up 5.9%.

We have witnessed 18 months of falling European car sales (excluding the UK), with the latest figures showing an acceleration of the decline. The IMF has warned that Eurozone GDP will fall by 0.3% this year, which may prove optimistic. The Euro is forcing austerity policies onto the south and west of the zone. It is also impeding monetary growth in the weak countries. The Cyprus bank bankruptcy has n ot helped confidence, and has revealed the dangers of depositing money in weak banks in weak countries in the zone.

Meanwhile, after a period of good growth in employment in the UK, last month saw an unwelcome rise in unemployment, though the claimant count fell in March. Private sector pay is scarcely growing, at just 0.5%. Total pay is just 0.8% higher than a year earlier, with public sector pay continuing to rise faster than private sector. Public sector pay is up by 1.7%.

It looks as if the considerable attempts to ease money in the UK are still being held back by tough regulatory requirements on banks, and by delays to sorting out the balance sheets and loanbooks of the troubled banks with state involvement. Some money is now getting into the residential property sector, but some banks remain unwilling to lend new money for commercial property. The UK has scope to do more to ease the position, as it still has its own currency and monetary policy. It needs to sort out the troubled banks more quickly and thoroughly.

The IMF is going through a very bad period for economic forecasting, constantly forecasting second half recoveries in advanced countries that do not materialise. It is also at war with it self over whether spending cuts help or hinder economic progress. The IMF used to believe that high deficit countries had to cut. Now some of its people are querying this. They are finding it very difficult to understand and forecast the Eurozone, regularly being too optimistic on output and incomes.

As some of you wish to move on from the thoughts prompted by the funeral of Margaret Thatcher, let me give you this opportunity to do so.

In recent days gold has plunged in value. Some see this as the predictable decline of a barbarous relic. Why should it be so highly priced, they ask, when it only has value for adornment? Others see this as an unwelcome interruption to the steady climb of true money’s value, serving to highlight the way many Central Banks around the world actively debase their currencies in the now famous race to the bottom, the attempt to get trade advantage from competitive devaluation.

Gold’s critics say its high volatility show it is unsuited to return to a monetary role. Gold’s advocates claim its long rise in recent years has shown that the world would be a less inflationary place if gold returned to a role in our monetary system.

What are your thoughts now on the future role of gold? How do you explain the extreme price actions both on the way up and now on the way down?

         If there is one gift that Margaret Thatcher could give to her successors, it would for me be the gift of her honesty.

          Margaret was that rare and brave politician who told people how she thought things were, regardless of how that polled. She spent most of her long waking hours wrestling with the problems of the public. She mainly asked herself how she could right wrongs and make things work better.

          Of course she understood the need to present well. She spent endless hours trying to perfect each main speech. She cared about how the photos would look, and chose a good ad agency. All that came at the end of a project. It came after much work on how to solve the problem. If the answer to a trouble was politically difficult you did not drop the answer. You just had to argue an even better case.

           She was conscious of the polls but not ruled by them. She was told daily what the press and her  opponents were saying about her. We did not hold back the criticisms. She did not usually read it herself. She would think about whether a line of criticism was fair or worrying, whether she needed to do something about it or change the policy. She normally spared herself the unpleasant personal bitterness of much of the criticism in the form of the original article or cartoon. When Ministers suffered from sharp and unpleasant attacks, she always advsied them not to read them.

          She was well aware of the dangers of her forthright approach. She once told me that she was prepared for it by an old friend who had warned her that she would suffer  a barrage of personal abuse and criticism for what she was trying to do. Somehow knowing in advance allowed her to handle it when it came.

       She was also very brave. When she returned from one trip abroad she was asked why she was wearing sunglasses, as the critic thought they spoiled the pictures. Without affectation or flinching she said she had been warned to expect an attack during the walkabout. She simply said she  feared they would throw acid in her eyes, and she needed her   eyes to do her job.